Avoiding Chinagate 2.0

By Belinda Li

Russian interference in the 2016 elections has taken the media by storm, arguably undermining public confidence in the political system. But twenty years ago, China also tried to influence a U.S. presidential campaign, highlighting weaknesses in our campaign finance laws.

In 1996, claims about the Chinese government interfering in Bill Clinton’s reelection campaign led to several investigations into fundraising efforts by the Democratic National Committee and the Clinton administration. The investigations uncovered what the Senate Committee on Homeland Security and Governmental Affairs called the “China plan,” a scheme orchestrated by the Chinese government to influence U.S-China policy. These operations relied influential business people with ties to the U.S. government, including a businessman named John Huang who eventually became a political appointee under Clinton.

As the U.S. government learned more about China’s intentions to influence our political processes, plans were formed to prevent such a scandal from happening again. The final report in the investigation on illegal activities in connection with the 1996 federal election campaign issued by the Senate Committee on Homeland Security and Governmental Affairs included recommendations to strengthen prohibitions on foreign contributions. But more than twenty years later, it seems as though we have still not learned from our mistakes.

Loopholes for Foreign Influence

After Supreme Court decisions such as Citizens United v. FEC and SpeechNow.org v. FEC, restrictions on independent political expenditures from both non-profit and for-profit corporations were lifted. This gave rise to super PACs—political action committees that can raise unlimited sums of money to overtly advocate for or against political candidates, as long as their spending does not contribute to or coordinate directly with parties or candidates. In 2016, super PACs raised almost $1.8 billion.

Given the ease with which donors’ identities can be hidden through corporate and nonprofit entities, it is possible that contributions by foreign nationals could be a part of these vast sums of money. The Federal Election Campaign Act (FECA)[1] explicitly bans any campaign donations from foreign nationals, but certain loopholes still exist—especially in regards to independent expenditures—that can make foreign money extremely difficult to recognize.

One of these loopholes involve 501(c)(4) social welfare organizations, which are regulated by the IRS. Although they generally cannot contribute more than half of their total expenditures to political activities, they do not have to include the names of their donors in their IRS filings—an attractive feature for foreigners wishing to conceal their identities. There are also no rules clearly defining what constitutes as a “political activity” by a social welfare organization, so this ambiguity, combined with the appeal of anonymity for donors, has made social welfare groups a popular vehicle for political spending. In 2012, political expenditures from 501(c)(4)s reached over $240 million.

501(c)(4)s have, in fact, been used to conceal foreign donations in the past. The same investigation that covered Chinagate revealed that the Republican National Committee (RNC) chair, Haley Barbour, used a phony think tank called the National Policy Forum to funnel $2.2 million from Hong Kong businessman Ambrous Young to the RNC for the 1994 and 1996 elections. The National Policy Forum was organized under a 501(c)(4) status—the benefits of which were not lost upon its leadership. When questioned about Young’s donations, the fundraising consultant for NPF, Fred Volcansek, testified that “because [NPF] was a 501(c)(4) corporation, the source of those funds, whether they be foreign or domestic, was irrelevant from a legal perspective. And so, therefore, any discussions that we had on it, nobody focused on it because we didn’t consider it to… be an issue.”

The use of Limited Liability Companies (LLCs) is also popular for obfuscating sources of political contributions. In contrast to corporations, LLCs do not have to be organized for profit or have a director-shareholder structure. Instead, they have a direct ownership and partner structure, in which those who found an LLC may fully participate in governing and managing the entity. More importantly, LLCs are governed by state law, and most states do not require disclosure of beneficial ownership. Thus, LLCs are commonly used for concealing the ownership of funds, for purposes that range from political spending to money laundering and terrorist financing.

In recent years, LLCs have become major donors to super PACs. In 2016, the number of super PACs that received more than 10 percent of their total funds from LLCs was seven times greater than in 2010. Both campaign finance reform groups and the media have highlighted the danger of anonymous LLC donations. Washington Post, for example, noted that one out of every eight dollars collected by super PACs this election cycle has come from corporate coffers, including millions flowing from opaque and hard-to-trace entities. In October 2016, an undercover reporter from The Telegraph, posing as a representative for a Chinese businessman, approached Great America PAC, claiming that his Chinese client wished to donate to the PAC to support Trump’s campaign. A self-proclaimed “consultant” for the super PAC suggested to the reporter that the Chinese businessman’s funds could be channeled through multiple LLCs and 501(c)(4)s to bypass the prohibition on foreign donations.

Foreign Influence through U.S. Subsidiaries

The complexity of campaign finance laws has also created legal gray areas that can provide opportunities for foreign influence. For example, while foreign corporations are banned from contributing to political campaigns[2], their U.S. subsidiaries can form political action committees (PACs) and collect contributions from their American employees. Foreign-connected PACs, in fact, contributed more than $18 million during the 2016 election cycle.

There are important restrictions that govern donations by U.S. subsidiaries to ensure that contributions only serve the interests of U.S. employees[3], but such restrictions are difficult to enforce. In 2015, Gordon Tang and Huaidan Chen, a wealthy Chinese couple, donated $1.3 million to Right to Rise USA, the super PAC supporting Jeb Bush. The donation was through their company based in California—American Pacific International Capital (APIC)—so initially, the donation did not set off any alarms.

However, in August 2016, The Intercept published an expose on the background of the company’s donation that caught the attention of campaign finance watchdogs. That same month, the Campaign Legal Center filed a complaint pointing out that Gordon Chang and Huaidan Chen likely violated FECA’s ban on foreign nationals being involved with any decision-making process regarding participation in elections[4]. Chang and Chen, who are Chinese nationals, both sit on the board of APIC, which ultimately approved the decision to donate to Right to Rise. Furthermore, it is illegal for anyone to provide substantial assistance in the making of a contribution from a foreign national[5], and Wilson Chen, the brother of Huaidan Chen and president of APIC, allegedly solicited his sister and brother-in-law to contribute to the super PAC.

The Federal Election Commission (FEC) also took notice of the potential legal issues regarding APIC’s donation, and Commissioner Ann Ravel cited The Intercept’s report in her proposal to rescind the provision allowing domestic subsidiaries of foreign corporations to make contributions to federal, state, and local elections. Ellen Weintraub, another member of the FEC, has also written on the dangers of foreign influence on U.S. elections under the current laws, noting that American corporations are “an inseparable mix of citizens and noncitizens.”

The Case of China

 Criticism of foreign corporations’ ability to influence U.S. politics tends to be tied in with arguments against corporate money drowning out the voices of average citizens. However, unlike domestic donations, foreign contributions not only undermine our democracy but also pose serious national security threats. In the case of Chinese companies’ U.S. subsidiaries, the likelihood of parent companies having close ties to the government is much greater due to its hybrid market structure. When Chinese companies contribute to U.S. elections, they likely do so under Beijing’s guidance, or at least with its approval.

The businessmen implicated in Chinagate investigations willingly aided the Chinese government in funneling donations to the DNC, but none were revealed to have held any position within the Chinese government. Recently, however, it was discovered that a Chinese businessman named Wang Wenliang was still a delegate to China’s legislative house when his U.S. companies donated $120,000 to Governor Terry McAuliffe of Virginia in 2012 and $2 million to the Clinton Foundation in 2013.

He was eventually expelled from the legislative house in September 2016 for allegedly buying the votes required to become a delegate, but his separation from the Chinese government occurred only after he had met with McAuliffe three times and Bill Clinton twice, according to TIME. Additionally, Wang’s influence extends past state elections. He and his companies spent $1.4 million from 2012 to 2015 to lobby Congress and the State Department, according to CBS’s estimate. He donates generously to universities and think tanks, creating the Center for U.S.-China Relations at New York University and the Brzezinski Institute of Geostrategy at the Center for Strategic and International Studies, and sits on the external advisory committee for Harvard University.

Despite his considerable influence, Wang’s donations were only scrutinized after the FBI and Department of Justice began to investigate McAuliffe’s campaign finances last year. Because he is a permanent resident of the U.S., however, his donations are considered legal[6].  The results of the investigation are yet to be released, but Wang’s example may provide a small window into the vast potential for foreigners to influence policymaking in the U.S. With the lack of consensus within the FEC on which campaign finance laws to enforce, collusion between U.S. businesses and foreign governments to influence elections is an alarming but realistic possibility.

Lessons Learned

While Gordon Tang, Huaidan Chen, and Wang Wenliang have not been convicted of any wrongdoing, their influence on U.S. politics reminds us that Chinagate 2.0 is not a distant possibility. Now, more than ever, it is clear that enforcing existing laws and closing the loopholes that allow for foreign contributions are crucial to safeguarding our election system. There are serious challenges standing in the way of achieving these objectives—the outgoing chairman of the FEC, Ann Ravel, calls the agency “beyond dysfunctional,” and changing campaign finance regulations will undoubtedly be a long process—but if we do not work towards reform with a sense of urgency, history is likely to repeat itself.

Back in the 1990s, China realized that colluding with businesspeople was a relatively simple and effective way of influencing U.S. policy. Today, with the number of billionaires and successful businesspeople overseas on the rise, China has an even greater ability to influence U.S. politics than ever before. Russia’s hacking of the DNC was a wakeup call for Americans to recognize the threat that foreign influence poses to the integrity of the U.S. political system—and it is time we take China’s ability to undermine our democracy just as seriously.

Belinda Li is a Research Associate at Hudson Institute’s Kleptocracy Initiative. Follow her @BLi_Hudson. James Allen and Alexandra Fricke assisted with research.

[1] 52 U.S.C. § 30101 et seq.

[2] 11 CFR 110.20(f)

[3] 11 CFR 110.20(i)

[4] 11 CFR 110.20(i)

[5] Treas. Reg. § 1.954-4(b)(2)(ii). 11 CFR 110.20(h)

[6] 2 U.S.C. 441(e)