By Brendan Fischer on November 05, 2012

"Dark money groups" that do not disclose their donors not only refuse to be transparent about where they get their money, in many cases they are not transparent about how they spend it. Dark money only accounts for about one-quarter of the over $1 billion in outside election spending reported to the Federal Election Commission, but because of gaps in reporting requirements, the actual percentages -- and the actual totals for outside spending -- are certainly much higher.

According to some estimates dark money groups have spent at least $416 million and as much as $500 million so far this election, but have reported only $257.9 million. And they continue finding new ways to further cloak their activities in a veil of secrecy.

Dark Money Groups Avoid Disclosure

Unlike PACs or Super PACs formed exclusively for electoral purposes and which report all of their expenditures to the Federal Elections Commission (FEC), "dark money" groups are officially organized as social welfare nonprofits under section 501(c)(4) of the tax code or as trade associations under section 501(c)(6). Because these groups are supposed to primarily advance some sort of social welfare, or in the case of a 501(c)(6) the interests of a particular industry, they need only report their electoral expenditures to the FEC, rather than all of their spending.

But electoral activities have been narrowly construed to only require reporting of expenditures on ads that explicitly call for the election or defeat of a candidate, allowing these groups to avoid disclosure by running "issue ads" that criticize a candidate on issues like taxes or healthcare but stop short of explicitly telling viewers to vote for or against. The omission of an explicit call for a candidate's defeat or victory allows the groups to claim with a wink-and-a-nod the ads were about "issues," despite clearly being intended to influence the election.

The amount spent on "issue ads" (but not the source of those funds) must only be reported if the ads run within 60 days of a general election or 30 days of a primary -- which is why the $257.9 million reported to the FEC by dark money groups is incomplete. For example, the estimated $44 million that Karl Rove's Crossroads GPS spent between January 2011 and June of 2012 on "issue ads" in the presidential and congressional races was never reported.

And even when dark money groups do report their spending, they continue hiding their funders because of a loophole in campaign finance law only requiring disclosure of donations made for the purpose of funding specific issue ads. This loophole was challenged in federal court in the VanHollen v. FEC case, and briefly closed by a federal court in March (during which time the groups shifted to express advocacy) but that decision was reversed on appeal.

Americans for Job Security Keeps Some Spending Secret

A new loophole in reporting has also emerged in the digital age. Online ads and web-only videos are exempt from these "issue ad" reporting requirements, even if they appear in the days before an election. Under FEC rules, "issue ads" aired within 60 days of an election are subject to reporting only when they are broadcast on TV or radio.

A mysterious dark money group called "Americans for Job Security," for example, has produced three "issue ads" in recent weeks attacking Wisconsin's Democratic candidate for U.S. Senate, Tammy Baldwin, and has promoted the ads through the internet. Even though the Baldwin "issue ads" have been promoted and broadcast online within the 60 day reporting period, the amount spent on the ads have not been disclosed anywhere because they appear to have aired only on the internet rather than TV or radio. AJS has reported spending $15.6 million on the election, almost all of it on ads attacking President Barack Obama, such as their latest ad featuring a woman pushing a baby in a jogging stroller who claims she "runs to forget" and that "the future is getting worse under Obama."

Other spending in the Wisconsin Senate race has also not been reported. David Koch's Americans for Prosperity, for example, has reported $2 million in anti-Baldwin ads in recent weeks, but did not report the "issue ads" it ran in June -- outside of the reporting period -- framing the results of Governor Scott Walker's recall election as a statewide consensus on wasteful spending and describing Baldwin as "part of the problem." According to some sources, the ads cost $400,000 to air, but this spending was not reported to the FEC. The millions spent by AFP and its allies on get-out-the-vote activities are also not reported.

All of this means that any available reports on spending in the Wisconsin race, and races around the country, are incomplete.

Making Mockery of Tax Code

AJS is officially registered as a 501(c)(6) nonprofit "trade association" like the U.S. Chamber of Commerce or PhRMA, but does not appear to advance the interests of any particular industry or trade. Rove's Crossroads GPS is involved in a similar scheme -- that group is organized as a 501(c)(4) social welfare nonprofit, but focuses entirely on running election ads rather than promoting any sort of social welfare.

So even though these groups appear to be operating primarily as political committees, they are escaping the reporting and disclosure requirements of PACs by virtue of their non-profit status.

The groups share more than tactics. According to a New York Times report from 2010, the groups work out of the same office building. AJS appears to be coordinating some ad buys with Rove's Super PAC, American Crossroads -- in Pennsylvania, for instance, AJS spent $1.2 million on ads in Philadelphia at the same time American Crossroads spent the same amount on ads across the rest of the state. AJS has also paid the related Crossroads Media to produce and place its ads, and for an unknown reason has disbursed nearly $1 million directly to Crossroads GPS.

Reform Needed

The U.S. Supreme Court opened the door to this unlimited spending in a series of decisions culminating in Citizens United v. FEC in 2010. But while that ruling lifted bans on corporate political spending, the court also observed that "the First Amendment protects political speech, and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages."

Despite this, the 2012 election is not only the most expensive, but also the most secretive in modern history.

Brendan Fischer

Brendan Fischer is CMD's General Counsel. He graduated with honors from the University of Wisconsin Law School.