Dark Money

What Is Dark Money?

Dark money refers to contributions to political groups that are received from donors whose identities are not disclosed and that are used to influence elections. Dark money can have significant influence on elections, particularly when used by “independent expenditure” groups — generally characterized as Super PACs — that are legally permitted to receive and spend an unlimited amount of contributions.

Understanding Dark Money

Transparency has become a standard for many organizations and endeavors affecting the public, including funding of elections for public office. Both federal and state governments have enacted regulatory regimes intended to make elections more open and honest by requiring disclosure of the identities of contributors to political candidates and parties. When the source of such political funding is unknown — whether because disclosure rules do not apply, are avoided through “loopholes,” or are deliberately evaded — the funds from the unidentified contributors are characterized as “dark money.”

Funding Vehicles for Political Contributions

Except for campaign funding coming from a candidate’s own pocket, political candidates and parties rely on contributions and expenditures by third parties to support elections financially. A variety of political committees or organizations, subject to different degrees of legal regulations, are authorized to collect and expend contributions. Three principal types of funding mechanisms or organizations are involved in elections: traditional political action committees (PACS); social welfare organizations, often called “(c)(4)s,” a reference to their designation section in the tax code; and Super PACs. Traditional PACs are transparent about their contributors and do not attract dark money. Social welfare organizations comprise the category that is most frequently identified as a dark money source. Super PACs, although subject to contributor disclosure requirements, increasingly receive funds from “shell corporations” that facilitate anonymity for their owners’ dark money contributions.

Traditional PACs

PACS can contribute funds directly to candidates and campaign committees. They are the most transparent funding source and are not associated with dark money. Many corporate PACs — for example, Comcast, Corp. and AT&T, Inc. — bear the company’s name. They must file reports that include the identity and contribution amount for all donors of $200 or more with the Federal Election Commission (FEC). PACs can receive contributions of up to $5000 per year from individual donors, often corporate employees or union members, and can give up to $5000 to a candidate and $15,000 to a party committee per election. PACs also can make unlimited expenditures independent of a party. In the 2020 elections, PACs made approximately 5% of total election expenditures of $14 billion.

 Social Welfare Organizations

For a long period, dark money was associated primarily with social welfare organizations, which are regulated by the Internal Revenue Service. Social welfare organizations are not required to disclose their contributors. Accordingly, donors to these organizations enjoy anonymity. 

Social welfare organizations are required to engage primarily in promoting the common good and general welfare. These organizations generally have taken the position that so long as involvement in elections is not their “primary activity,” they can contribute to campaigns for, or in opposition to, political candidates.

Most tax advisors caution social welfare organizations — which are tax-exempt — that compliance with the primary purpose test requires that more than 50% of their activities, usually measured by their expenditures, should be nonpolitical.

The requirement that social welfare organizations be primarily nonpolitical may be too great a burden for some donors seeking anonymity. This operational rule may account for these organizations’ contributions declining to 4% of total 2020 spending and for the increase in Super PAC funding, discussed below**.**

Nonetheless, this interpretation of the social welfare organization regulation with respect to a “primary purpose” has resulted in significant spending in elections by anonymous donors. Often characterized as a “loophole,” this position has aroused criticism of IRS enforcement of the social welfare regulations. The IRS’ own “watchdog,” the Treasury Inspector General for Tax Administration, issued an audit report in January 2020 asserting that the IRS has failed to identify 9,774 nonprofits that are politically active, have failed to register as required as “social welfare” organizations and should be assessed millions of dollars in penalties and fees.

The political orientation — and even the names of donors of some social welfare organizations — are publicly available. Tax-exempt charitable organizations that have associated “(c)(4)s” usually include the charity’s name in that of the social welfare organization, e.g., NRDC Action Fund, Inc., the NAACP National Voter Fund and NARAL Pro-Choice America. Other social welfare organizations have established public identities, e.g., Americans for Prosperity and the Club for Growth.

While social welfare organizations are not required to disclose their donors, some identify at least some contributors. The Lincoln Project and the Club for Growth, among others, indicate that they disclose all donors. However, other groups — for example, the American Liberty Fund — are reported as not disclosing any contributors.

Because many social welfare organizations involved in elections collect substantial funds and make expenditures that are not coordinated with candidates or parties, they often are referred to as “Super PACs.” However, for purposes of this article, because of their unique structure and status, “(c)(4)” social welfare organizations are discussed separately from Super PACs which are organized under section 527 of the tax code. Below, more on Super PACs.

Super PACs

Super PACs can collect unlimited contributions and spend unlimited funds. But, they cannot contribute directly to candidates or political parties and must not “coordinate” their expenditures with candidates or parties. Super PACs’ independent expenditures now account for the largest share of independent political funding. In the 2020 election, it is estimated that Super PACs spent 63% of the $2.6 billion of independent expenditures made by political parties, social welfare organizations and Super PACs.

Many Super PACs provide some measure of transparency with respect to their purpose and contributors. The political orientation of Super PACs often is evident from their names, e.g., ActBlue which supports Democrats and GOPAC which has long supported Republicans. Super PACs are required to include the names of their contributors and their respective contribution amounts in FEC filings. However, these filings do not always reveal the actual source of their funds. Some contributions are made through “shell corporations” whose owners are not disclosed.

Although corporations and labor unions may organize PACs, federal law does not allow them to use their general treasury funds for election contributions to candidates or national party committees. However, they are allowed to make unlimited contributions to "independent expenditure"' committees, i.e. "Super PACs."

A growing number of contributors are making their political contributions to Super PACs, as well as directly to campaigns, through limited liability companies, “LLCs.” Many LLCs’ spokesmen contend that their ultimate sources need not be disclosed. In two recent Florida state senate races, a controversy has developed with respect to the undisclosed source or sources of the sole contributions — of $360,000 in one contest and $180,000 in a second — made through an LLC to nominally “unaffiliated” and generally unknown candidates. Florida Democrats question whether the two candidates were recruited in order to cut into the Democratic Party candidates’ votes. In one contest, the unaffiliated candidate — who has the same surname, Rodriguez, as the Democratic candidate — won 6,974 (2.96%) of the votes and the incumbent Democrat lost by 20 votes.

The use of LLCs to provide donor anonymity for US citizens has been controversial; an even greater concern on the part of some is the possibility that foreign contributions, which are wholly barred by law, might be directed to American elections through such shell companies. Thus, Super PACS that have received contributions from LLCs and other shell entities constitute another source of “dark money.”

Details on these three funding vehicles for political contributions are available online.

Legislative Action to Bar Dark Money

On March 8, 2019, the House of Representatives passed new prohibitions and disclosure requirements for political spending in the “Democracy is Strengthened by Casting Light on Spending in Elections Act or 2019” or the “DISCLOSE Act,” as part of HR 1. The Senate version of the DISCLOSE Act is co-sponsored by 44 Democratic Senators but has not advanced in the legislative process.

The bill also would impose additional restrictions on foreign nationals’ involvement in elections and election decision-making; it would expressly prohibit the use of foreign money in elections including ballot initiatives and referenda. It would require disclosure of the identity of contributors of $10,000 or more, including the direct and indirect beneficial owners of entities making such large contributions.

Beyond Elections: Lobbying and Lawsuits

Increasingly, political figures and legal scholars are advocating greater transparency for expenditures to influence legislative actions and to pursue strategic litigation to obtain court rulings, including Supreme Court decisions, favorable to the groups funding the litigation. Although legislative and administrative lobbying is subject to extensive federal and state disclosure requirements, the filings may be made in uninformative names of coalitions or associations that effectively shield the identities of the actual interested parties. A listing for, e.g., “Citizens for Healthcare” might appear to be a grassroots effort, but in fact may be funded by a single wealthy individual.

A November 11, 2020, New York Times article reported that an organization named “Texans for Natural Gas,” which describes itself as a grassroots organization, was created, and is run by, a multinational business and consulting firm and is supported by three leading energy companies.

Depending on filing schedules for lobbying reports, some disclosures may occur “after the fact,” with officials left in the dark while weighing their decisions. Moreover, in many cases, articles and promotional materials are written carefully to qualify as “educational” material and thereby avoid lobbying characterization and registration requirements.   

Rhode Island Senator Sheldon Whitehouse highlighted concerns about strategic, or special interest, litigation during the Senate Judiciary Committee hearings on the Supreme Court nomination of Amy Coney Barrett. Senator Whitehouse, who has written about this subject for the Harvard Journal on Legislation, argued that targeted litigation sponsored by nonprofit organizations with overlapping directors, officers, and funding sources has resulted in activist judicial decisions favorable to corporate and anti-regulatory interests, some reaching the Supreme Court.