How very flawed this law is

The committee stage of the Electoral Finance Bill is over, and the likely third reading is Tuesday 19 December 2007 – an entire three days before the effective holiday shut-down.

This is an opportune time to highlight some massive flaws in the Bill – not the deliberate flaws in cracking down on criticism, but the inadvertent ones which undermine the claims about stopping anonymous and trust donations and the Brethren.

You see as often is the case with any attempt to regulate election finances, the solution proves worse than the problem. Just look at McCain-Feingold in the US. And this Wired article (hat tip: Gonzo) and photo show what happens when you have bad law (and the EFB takes us much closer to US law – not further away)

Here are some of loopholes the Government have introduced due to rushing this process, and being more concerned about advantaging Labour than having a good law:

One can still donate $250,000 a year anonymously

The worst thing about the Greens/Labour compromise to protect Labour’s anonymous donations is that they have said you can donate $1,000 anonymously to a party [Clause 25A(2)] and it does not have to be declared. They should have banned anonymity (which is different to non disclosure) for all donations except petty cash/raffle tickets etc.

You see someone could arrange for $1,000 a day to be donated anonymously through bank cheques. So long as they do not tell the party they are doing it, and the party does not know it is the same donor, then that money can be received and even worse not even disclosed. So $1,000 a day is $250,000 a year or $750,000 an election cycle.

This makes the law worse than the status quo. If someone wanted to donate $20,000 anonymously at present, they would simply make a one off $20,000 anonymous donation. And that donation would be disclosed on the party’s return – so the public would at least see they have received that $20,000, even if not from whom.

Now they are motivated to make 20 $1,000 anonymous donations over time, and the party takes the money, and the electoral commission don’t even learn about the donations, let alone have them count as part of the $240,000 cap. Again – I repeat – no one at all outside the party will know about these donations. The Electoral Commission and the public will have no idea if there have been 20 $1,000 anon donations or 1,500 $1,000 anon donations. It will be totally below the radar.

The way to avoid this was banning all non-trivial anonymous donations, but having a reasonable disclosure limit. But the desperation to protect Labour’s anonymous donations gives us this gaping loophole. They also could have fixed this by stating a person can not make multiple anonymous donations.
One can more easily give $66,000 and not be disclosed

Another loophole, brought about to protect Labour’s donors, is that you can receive not only up to $30,000 over three years [Clause 22A(1)(b)] in undisclosed donations from a donor, plus they can give $36,000 anonymously [Clause 28C(3)] through the Electoral Commission. This is because the law allows for both undisclosed donations and anonymous donations. So the Greens and Labour are allowing $66,000 to be donated to a party without the identity being known.

Trusts can still make donations

The bill which came out of the select committee had a huge gaping loophole in it. One could donate say $100,000 to Trust A, have Trust A donate it to Trust B and Trust B donate it to Party C. The only obligation was on Trust B to reveal Trust A gave it to them, and not on Trust A to reveal who they got it from.

Now this loophole got fixed at the last second (SOP 162) , but it is still relatively easy to still have trust donations – you just collect money from donors without guaranteeing (or having an understanding or agreement) to pass it on to a particular party or parties.

Here’s an example. You set up the Free Market Trust and the Trust (not any Party) seeks donors. It explains it wants to support free market policies in NZ and will use any money received for a variety of activities – it conducts some research, some advertising. The trustees of that Trust independently decide what proportion of their income gets spent on what. They may collect $1.0 million, spend $50K on admin, $80K on research, $70k on publicity and $800k on donations to parties with free market policies. If the Trust can pass a test that there was no knowledge or expectation from its donor, that the Trust would make a donation.

Trusts can donate from their earnings

Here’s another loophole. A trust collects donations. It invests all the donations it collects in various activities. Say they collect $2 million in donations. The trustees are smart people and get a 15% return of $300,000 a year on that money. They donate that $300,000 a year or $900,000 over three years to political parties. Now so long as they never donate the capital which in turn was donated to them, they should never have to disclose who their original donors were.

The Exclusive Brethren can still spend $840,000 or more

The Exclusive Brethren will be able to spend a million dollars again if they so wish. How? Because many of their members are rich, and even the main secret seven could register as third parties and spend $120,000 each which is a total of $840,000. Ten of them could spend $1.2 million.

The law stops one rich person giving money to six poor people, so that he or she can not spend $840,000 through proxies. But the EB tend to be wealthy business owners who can each spend $120,000.

And the secret seven could even run joint ads for a total of $840,000 – the EFB in Clause 105A(3) allows for ads to be apportioned between third parties. Yes the law specifically allows third parties to pool resources and run joint advertisements.

On the other hand – a reputable lobby group such as the Automobile Association is restricted to spending $120,000 on behalf of its 1 million members if it wishes to advocate for or against parties with motorist friendly policies. They can only spend 12c per member, while individual members of the EB can spend $120,000 each.

Lobby Groups can easily become parties

Because political parties only need 500 members, and they have much much higher spending limits, a number of lobby groups may become political parties so they can spend more than $3,000 a week on advocacy such as “Support parties who support Kyoto” or “Punish MPs who voted for the Electoral Finance Bill”. They will need to have at least one candidate but that won’t be a barrier.

Remember the section on donations was cooked up in secret between Labour and the Greens. They showed it to the Select Committee at the very last minute. Despite what the Greens claim, it is primarily about protecting Labour’s anonymous donations and the loopholes they have put into the law is actually going to drive anonymous donations underground so that the public won’t even know about them anymore.

They could have avoided many of these problems if they had adopted a principled approach and had proper public consultation on the policy principles for the Bill. That would have found widespread support for banning all anonymous donations, and a law could have been drawn up which reflected that. Instead though we have a shabby self serving law full of loopholes, and which will undermine, not enhance, the integrity of our electoral legislation.