Conduit Contributions – Where Money Laundering and Politics Mix

 

Conduit contributions

The following is a reprint of an article written by former Suffern Trustee and Mayoral Candidate, Charles Falciglia, in December of 2011, for the ACAMS TODAY Magazine. Charles is a Banker and Certified Anti-Money Laundering Specialist.  ACAMS TODAY is the prominent Anti-Money Laundering and Economic Crime Magazine in the world, with over 20,000 international readers. Charles is a featured writer and former Chairman of the Magazine’s Editorial Task Force. The fact that this was written almost three years ago underscores that this is a longsatnding campaign financing trick, well known to politicians and law enforcement alike. The article is a tutorial on the scheme for Banks and Credit Unions to be on guard for, certainly relevant based on recent developments in Rockland County. 

A conduit contribution is a political donation made through someone else. The individual making the contribution acts as a straw donor in order to conceal the identity of the real donor and the true source of the funds. In most instances the true source of the funds is simply the legitimate wealth of the real donor.

The scheme is designed to circumvent political contribution limits, which were established for the purpose of reducing influence on incumbent and potential public officials. In many cases the real donor will make his own contribution along with the straw donor(s), but often he will not. This allows him to stay out of the public eye, avoiding any connection with a candidate who may suffer unwanted public scrutiny and/or disapproval because of the relationship.

Conduit contributions are a violation of the Federal Election Campaign Act and a felony, with possible additional charges for money laundering being brought. Title 2 of the United States Code, chapter 14 – Federal Election Campaigns – section 441f, states: No person shall make a contribution in the name of another person or knowingly permit his name to be used to effect such a contribution, and no person shall knowingly accept a contribution made by one person in the name of another.

Since words can have multiple meanings, to be precise, the same title and chapter, specifically 441a (a) (8), defines a conduit contributor in an altogether different light, referencing an individual who collects donations (acting as a conduit or intermediary) and then remits them to the campaign. The difference in this scenario is that the conduit is acting legally, providing documentation to the campaign about the donors and amounts, a practice commonly referred to as bundling. And while there is no mention of the word in section 441f, its meaning is clear to those in politics, law enforcement and the media.

While the above speaks to federal law, conduit contribution schemes can be found from the federal to the local level. States have their own laws regarding donations in the name of another, most similar to the federal one with penalties that vary. A website check with the department of elections of your state, or a phone call, will provide the exact law, penalties and contribution limits.

At the federal level, the Federal Election Commission is charged with initially investigating complaints of campaign finance violations. On the state level it is the department of elections. The complaints generally arise from the camp of the opposing candidate. This does not mean that complaints cannot be filed directly with the local District Attorney, FBI, or United States Attorney.

With the tremendous number of local elections that take place in America, most banks will have political accounts in their portfolio. The threat of a conduit contribution scheme alone is reason enough to place political accounts on a watch list and perform enhanced due diligence.

The reasons
Candidates and their supporters resort to conduit contributions for one main reason. No matter what their motive for running, money and politics is an inseparable toxic mix. The more you outspend your opponent the greater your chances of winning. It is a powerful lure to ignore if the opportunity presents itself. Many view the risk of getting caught and/or the penalty so minimal (particularly at the state level) that it emboldens even the most honest candidate and supporter(s) to condone and participate. Lack of public prosecution, and prosecution in general, helps alleviate any lingering fear. In some instances the participants may even believe they have simply found an innocent way to bypass the limits.

At the federal level, a candidate will usually be far removed from the daily operation of the campaign, unable to control the actions of every campaign worker who may have decided to go the extra mile. This is in direct contrast to the local candidate who may in fact have firsthand knowledge of the scheme and/or be one of the architects of it.

For the real donor, while the reasons may range from friendship to a rabid partisan ideological bond with a candidate, it is no secret that for many the overriding reason is what the public knows all too well: money brings political influence that is returned in the form of patronage, favors, influence peddling and “Yes” votes for lucrative government contracts. Donations from those in the construction development industry are particularly suspect because of the need for favorable rulings on land use and/or zoning changes. Quite frankly, many wealthy donors do not care which party is in power with donations often crossing party lines. They only want the candidate who will serve their best interests.

Unraveling the scheme
Unraveling a conduit contribution scheme requires a review of the political account, identifying the red flags associated with the scheme, then following the money trail. A political account is usually in the form of an individual candidate’s account, a slate of candidates (normally referred to as multi- candidate or political committee account) or a political action committee. An account that starts with “Friends of” followed by the name(s) of the candidate(s) is a common title. Although not commonplace, a local candidate may decide to use his personal account for his campaign, which presents the additional challenge of determining if one of your customers is a candidate.

Upon reviewing an account, if any of the donations are from checks drawn on accounts housed at your institution (normally referred to as on-us checks) it would make the investigation much more straightforward. As an example, donor A and donor B make individual donations with donor B banking at your institution. The review of B’s account shows that he deposited the same amount in cash, or better yet a check, several days prior to issuing his check for the donation. The check turns out to be from donor A, which now provides you with a smoking gun. Donor A has not only made his own contribution but funded donor B’s donation. Both checks from donor A are almost guaranteed to be drawn on the same financial institution and same account. You may even find they are consecutively numbered. In a perfect scenario there would be multiple accounts at your institution with the same exact script. The difficulty of course is that many of the donations will be drawn on institutions other than your own, making it near impossible to check the previous activity. If the previous activity is cash, it is not the smoking gun we would all like, but there are several other red flags in connection with the cash that may indicate a scheme is being perpetrated.

If you reverse the above example you may discover additional evidence that would point to donor B as the true donor. In this scenario donor B not only funded donor A’s donation, but since his account is housed at your institution you may find checks written to individuals C, D and E, who also donated the same amount to the political account; their checks all drawn on their bank accounts reflected on the back of B’s cancelled checks. In lieu of checks you may find a cash withdrawal equal to the amount of the checks deposited from C, D and E.

The Red Flags:
Contribution amount
In many instances the contribution amount will be the maximum contribution allowed by law for that particular election, or an amount in that general vicinity. Most people do not make a maximum contribution so you can start with those individuals who do, but beware, it does not mean that smaller donations have not been intentionally made to obfuscate the attention a maximum donation would bring. A local election is much easier to review because the number of contributors who make large donations is generally far less than those at the state or federal level. The reason the maximum amount is often used is that there may be a limited number of willing participants who will agree to act as straw donors. With the narrow window of time between fundraising and campaign expenditures, attempting to break up the funds into smaller amounts through more people may have the individual orchestrating the scheme fall short of the amount he wishes to place.

Patience is rarely a virtue for those who deal in economic crime with politics being no different.

An additional red flag regarding the timing of conduit contributions is that they may be intentionally made very late in the campaign cycle, even after the election, since some expenditures may not be due immediately. Candidates want to win by spending the least amount of money they can. This especially holds true in a primary where every nickel saved can go toward a general election.

In addition, why engage in something illegal unless absolutely necessary? Another reason revolves around the practice of viewing the financial disclosure of an opponent. Candidates, once again predominantly local, are eager to view their opponent’s initial filing since it often comprises the bulk of the funds a candidate will raise. That’s because the first disclosure date usually coincides with the period the campaign is getting into full swing. Candidates not only want to see how much they are up against, which allows them to manage their own funds wisely, but to also see who donated. In a small town the information can be sometimes humorous while at the same time demoralizing – a candidate seeing donations to his adversary from people who promised him their vote. As the campaign drags on, the participants become less enthusiastic about viewing the filings since they are wrapped-up in the final lap of the race. Contributions have a better chance of flying under the radar at that point.

The office being sought, monetary limits, and the dynamics of the race in general, will ultimately dictate how the contribution pattern unfolds.

The straw donor
Put yourself in the shoes of a wealthy individual who has a reason for donating. Who would you look to recruit as a straw donor and why would someone want to participate in a crime? Straw donors usually come from a circle of close friends, relatives, acquaintances and/or business associates connected to the real donor or the architect(s) of the scheme. There may be a tight-knit connection between the straw donors or the common denominator may only be their relationship to the real donor or the architect(s).

The participants run the gamut from the indifferent to the rabid, some duped, coerced or cajoled into participating. They may be the campaign workers, members of a country club, employees of a company or individuals linked by profession. While the average person is certainly not familiar with the scheme, or that it may be a felony, many will clearly understand they are acting as a front, leading to further questions, income tax concerns and their refusal to participate. Others will be all too anxious to assist, falling victim to their own partisan beliefs or desire to curry favor with the real donor or candidate. Still others may be pressured or forced into participating fearing job retaliation or professional scorn. Someone with a lower socio-economic work force under their control may find that they have a fertile recruiting ground. One of the sad by-products of the scheme is that it often ensnarls innocent individuals who may be good friends or loved ones of the real donor/architect(s) simply because of loyalty, naivety or trust.

Ironically, the candidate alone can be a straw donor. Candidates generally have no restrictions on the amount they can contribute to their own campaign, but most people who run for local office are not extremely wealthy and/or cheapskates. A review of a candidate’s political account should also entail a review of the candidate’s personal account, if housed at your institution, for the same pass through transactions from the real donor.

Straw donor KYC (Know Your Customer)
A straw donor can be anyone, but his or her socio-economic profile, if you can draw one, may be a tip-off to a conduit contribution scheme. A deposit for the exact amount will almost immediately precede the check written for the donation by the straw donor. As discussed earlier, a check will easily lead to the next layer, either the real donor or the architect(s). If it is cash, what you might find is that it is the largest cash deposit the straw donor has ever made – or maybe at all – for as far back as you can research. People make cash deposits all the time for the exact amount of the check they write against that deposit, but it is normally to purchase consumer goods or for an emergency. Very few individuals go through the trouble of raising cash to make a political donation.

Further analysis may reveal that the straw donor does not fit the profile of someone who may be politically active, such as a retired grandmother on a modest fixed income in comparison to a lawyer. If the account shows a person living from paycheck to paycheck, or even a comfortable middle class existence, you would have to question why someone would squander a four-digit figure on a political campaign. This becomes even more suspicious if you find that the donor has either a limited history, or no history, of donating to political campaigns. Chances are if you asked the straw donor the office the candidate he donated to is seeking, you might get a blank stare; that’s even if he knows the name of the candidate.

Another bit of obfuscation to look for is that sometimes the straw donor will be reimbursed after the donation, provided the straw donor has the funds available to advance. The intent here is to make the transaction pattern less discernible. The reimbursement may be made in the month following the donation in the hopes that the investigator will stop with the straw donor’s month end statement. The law makes no differentiation for reimbursements.

It should be noted that corporations are prohibited from donating in federal elections but states are a different story. Do not be misled by contributions from business entities, which may lead to the discovery of a shell company.

Conclusion
When done correctly – structured contributions, all the participants banking at different financial institutions and cash reimbursements never deposited – a conduit contribution scheme can be successfully executed. Fortunately, as previously mentioned, the people involved generally do not act in a well thought out manner.

Like every other economic crime, once again financial institutions are uniquely positioned to expose this particular violation of the law. It may someday be worthy of a checkbox all to itself on the suspicious activity report – CAMPAIGN FINANCE VIOLATIONS.

The Association of Certified Anti-Money Laundering Specialists is an organization that provides training and certification, runs conferences and disseminates information on detection and prevention of money laundering.  ACAMS is the largest membership organization dedicated to enhancing the knowledge and skills of financial crime detection and prevention professionals worldwide. Its CAMS certification is the most widely recognized anti-money laundering certification among compliance professionals.

EDITORIAL NOTE: What should one do if one has been pressured to be a straw donor, or if one has become a straw donor not realizing the legal jeopardy such activity entails?  Speak immediately with your local District Attorney.  Once the District Attorney knocks on your door it is generally too late to avoid criminal prosecution.

About Charles Falciglia

Charles is a former Suffern Village Trustee and 2013 Mayoral Candidate for the Village of Suffern.

About the Author
Charles is a former Suffern Village Trustee and 2013 Mayoral Candidate for the Village of Suffern.

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