Citizen United Decision Does Open a Major Loophole for Foreign Interests to Participate in Federal Elections Through Domestic-Controlled Corporations, Congress Needs to Act Quickly to Close the Loophole

Last night in his State of the Union address, President Obama called on Congress to enact legislation to correct the problems caused by the Supreme Court’s recent decision in Citizens United v. FEC. The President said that the decision “reversed a century of law to open the floodgates for special interests – including foreign corporations – to spend without limit in our elections.”

The policy to ban corporations from using their corporate wealth to influence federal elections, whether by making contributions or expenditures, dates back to 1907, as Democracy 21 explained in an earlier release today.

According to press reports, Justice Alito, who was present at the address, shook his head and mouthed “Not true” in response to the President’s statement about spending by foreign corporations.

In contrast with Justice Alito’s reported reaction, many others have expressed the same concern as the President – that the Court’s action in striking down the longstanding ban on corporate expenditures has opened the door to foreign interests participating in federal campaigns.

Some have argued that this will not happen because there remains a separate federal law that prohibits contributions and expenditures to be made by any “foreign national” in connection with any Federal, State or local election. The Court in Citizens United did not review this separate law – section 441e – and it remains in effect.

Section 441e prohibits contributions or expenditures by any “foreign national” – which is defined to include any corporation “organized under the laws of or having its principal place of business in a foreign corporation.”

Thus, a corporation organized in Germany, or with its headquarters in China, remains subject to a ban on spending in U.S. elections.

But there are domestic corporations – those organized under state law in the United States – which are and can be controlled by foreign interests.

Those kinds of corporations – domestic corporations owned by or controlled by foreign governments, foreign corporations or foreign individuals – are not in any way prevented by section 441e from spending corporate treasury funds to influence U.S. elections.

Prior to the Citizens United decision, these corporations were prevented from spending their funds on expenditures to influence federal campaigns by the general prohibition on corporate campaign spending. But now that that prohibition has been struck down, these foreign-controlled domestic companies are free to spend their treasury funds directly to influence U.S. elections.

Thus, there is no statutory prohibition against foreign-controlled domestic corporations from making expenditures to influence federal elections, following the Citizens United decision.

The Federal Election Commission has a regulation in this area, but it is inadequate and does not provide effective protection for the public against foreign involvement in federal elections.

The FEC regulation prohibits any foreign national from directing, controlling or directly or indirectly participating in “the decision-making process” of any person, including a domestic corporation, with regard to that person’s “election-related activities,” including any decisions about making expenditures.

The regulation does not prevent foreign owners from making their views known to their American domestic subsidiaries about the governmental and political interests of the controlling foreign entity; it just prevents them from directly or indirectly participating in the formal “decision-making process.”

Those who manage the domestic subsidiaries, furthermore, can be expected to know the governmental and political interests and needs of their foreign owners, and to be responsive to the needs of their owners, even absent any participation by the foreign owners in the formal “decision-making” process regarding expenditures in federal elections.

In other words, the existing FEC regulation is an inadequate and ineffective safeguard, by itself, to prevent foreign nationals from exerting influence on U.S. elections through the use of election-related expenditures made by domestic corporations which they own or control.

Thus, following the Supreme Court’s invalidation of the ban on corporate expenditures, section 441e does not address at all the problem of expenditures made by domestic subsidiaries of foreign companies or domestic corporations controlled by foreign nationals, and there is no statutory prohibition on foreign nationals being directly involved in expenditure decisions made by foreign owned domestic corporations.

The only restriction here is an ineffective FEC regulation administered by an agency that is widely recognized as an abject failure in carrying out its responsibilities to enforce the nation’s campaign finance laws.

Congress should move quickly to address this problem by enacting a statute to prevent foreign-owned or controlled domestic corporations from making expenditures in federal campaigns.