What Are Pay to Play Statutes?
Pay to play laws generally require companies to make disclosures about those who support politicians or other decision-makers in order to do business with them. Pay to play laws are primarily applied to political campaigns for federal and state office and to payments made by sports agents to collegiate coaches for using their student athletes. These laws also apply to public and private entities that award lucrative contracts that have an indirect but significant influence on the operations of the entity .
A common example of a pay to play law is the SEC’s rule (Rule 206(4)-5) which bars investment advisers from paying, in certain circumstances, third parties to solicit government officials on their behalf. This rule was adopted in 2010 to limit the use of investment advisers’ client assets for political bribery. Other examples of pay to play laws include campaign finance laws and gamesmanship laws that apply to college sports.
A Brief History of Pay to Play Statutes
As businesses, especially those operating in heavily regulated sectors such as government contracting, have grown more sophisticated in their political contributions, pay to play laws have proliferated. The law in this area has developed rapidly, often expanding to fill a gap left by the existing code. For example, § 1334 of the Code of Maryland Regulation was amended in 1999 to include the definition of "covered procurement action." The definition is the key to determining whether an agency must adopt "pay to play" laws, as it provides that certain state entities are required to enact "pay to play laws" when expenditures to a campaign account exceed $200 in a calendar year.
The term "pay to play" is thought to have originated after the 1975 Abscam sting operation when federal undercover agents posed as representatives for an Arab nation in order to arrest members of congress who had accepted bribes in exchange for political favors. This scandal drew national media attention which focused on the subsequent bribery and conspiracy charges as opposed to the fact that the actions described in the indictments constituted violations of campaign contribution limits. As a result, various congressional committees worked to expand the federal prohibition on bribery into campaign contribution limits.
Eventually, in the mid-1980s, a series of Supreme Court cases changed the landscape of campaign finance. The Supreme Court initially stated in Buckley v. Valeo, 424 U.S. 1 (1976), that the danger of corruption which justified contribution limitations did not exist "to the same degree" as it did for campaign contribution limits. Nevertheless, Congress enacted the Federal Election Campaign Act and imposed overall limits on contributions. In 1979, the United States District Court for the District of Columbia struck down those limits as unconstitutional. The D.C. District Court found that contribution limits "violate[ed] [the] First Amendment right of citizens to pool their resources and to equal protection guarantees."
In light of the D.C. District Court ruling, Congress attempted to craft a new act. The Supreme Court again rejected the law and, relying on their decision in Arizona Free Enterprise Club’s Freedom Club PAC, stated that "the First Amendment permits legislatures to regulate contributions to candidates. That is because contributions, as a historic and express medium of political expression, pass through Committee treasuries but usually not into political debate." New campaign contribution limits were accepted after the Congressional effort failed, but the Supreme Court rejected the limits. This rejection led to several other Supreme Court decisions, and a shift from limits to disclosure.
Gradually the era of contribution limits transitioned into some new laws passed during the mid-1990s, such as the Lobbyist Disclosure Act and the Honest Leadership and Open Government Act. The LDA broadened the definition of lobbyists, levied financial penalties and provided public disclosure outlets while the HLOGA reduced the reporting thresholds, imposed a two-year ban on former senior members of Congress becoming lobbyists and ensured that all committee votes were available online.
Pay to Play Statutes: Provisions and Compliance
Pay to play laws generally prohibit government contractors from making campaign contributions to campaign committees or candidates of governmental entities with which they or a related entity, such as a subsidiary, have business dealings. In addition to prohibiting campaign contributions, pay to play laws may also restrict government contractors from making expenditures to electioneering communication entities.
Although pay to play laws generally apply to all level of government, from local to state to national elections, the most robust and mature pay to play regime is at the federal level. The majority of provisions in federal pay to play laws are found in the Federal Election Campaign Act ("FECA") 52 U.S.C § 30101 et seq., however, federal pay to play laws also stem from the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78a-78nn ("Exchange Act"), and the Internal Revenue Code, 26 U.S.C. § 1524 et seq.
Under FECA, government contractors are prohibited from making contributions to candidates seeking federal office. To further promote the integrity in government procurement, FECA bans not only contributions to federal candidates, but also contributions made to state and local government candidates by the employees of federal contractors who solicit contributions from their employers. Because some individuals may be reluctant to solicit contributions, give contributions, or both when they are uncertain about the legality of their actions, Congress believes that unscrupulous persons can be deterred from making contributions by the prospect of criminal prosecution. See 2 U.S.C. § 441f.
The Exchange Act, particularly 15 U.S.C. §§ 78m(f) and 78n(f) and its accompanying regulations 17 C.F.R. § 240.14-1, extends this prohibition to employees of publicly-traded companies by precluding registered issuers from making contributions from corporate treasury funds to candidates for federal, state or local office. The penalty for violating the Exchange Act’s prohibition on corporate contributions or donations is to be fined not more than $100,000 for each such violation or, if a partnership, not more than $200,000.
The Internal Revenue Code requires charitable organizations to make available to the public, upon written request, the names and addresses of every person to whom the organization made a direct or indirect political expenditure that equals or exceeds $100 since the previous tax year. 26 U.S.C. § 6104(c) (2). Such rules are meant to comply with the disclosure requirement of FECA. For a particular year, 26 U.S.C. § 4958 and applicable regulations also require a public charity to disclose to the IRS certain distributions that it makes to an organization that is prohibited from receiving a deductible contribution and, among other things, that is permitted to engage in political campaigns.
In addition to federal rules, many state and local governments also have enacted pay to play regulations. These regulations include both prohibition on campaign contributions as well as expenditures to electioneering communications entities, and may apply to officers, directors, employees, and affiliated individuals. Where states regulate campaign contributions, the penalties for violations generally involve triple damages, suspension or rescission of contract, or debarment or suspension from contracting.
As seen in a number of recent high-profile campaigns, violations of pay to play laws can result in stiff legal consequences. It is therefore very important to ensure compliance with state and federal pay to play regulations.
Pay to Play Scandals: Notable Cases
Prominent scandals have rocked the political arena on a number of occasions. These incidents occurred at both the state and federal levels, from government contracting to Senate races. The following are some of the more notable occurrences.
In 2005 and 2006, Florida Governor Jeb Bush’s administration came under fire for awarding a $350 million prison contract to BI Incorporated, a company the state determined was not the lowest responsible bidder. In a grand jury indictment following the scandal, the Governor’s former chief of staff (who had also been a business lobbyist) was accused of suborning perjury of witnesses and conspiring to commit perjury in violation of a state law designed to eliminate corruption in the public contracting process. Ultimately, the case against the former chief of staff ended in a hung jury.
Additional allegations of impropriety were brought to light in a civil suit filed by an unsuccessful bidder for the contract. This claim alleged that BI Incorporated paid the chief of staff’s daughter $3,500 to influence the Governor. In collaboration with a former BI executive, the chief of staff allegedly launched a campaign to "water down" by amending the bid requirements, thereby allowing the company to be awarded the contract regardless of the high mark-up. The complaint submitted does not allege any violations of the Bribery Act.
Following this scandal, Florida strengthened its anti-pay to pay laws to include the 2006 vote requiring that all construction contracts worth over $100,000 be competitively awarded to the lowest responsible bidder, with no exceptions. The law also requires all contracts involving public funds to contain a clause explicitly prohibiting illegal lobbying activities. Violations of the law carry with them civil penalties and debarments for up to three years.
Former Illinois Governor Rod Blagojevich was convicted of attempting to sell President Obama’s vacant Senate seat to the highest bidder. Some of the "offers" to the former governor included campaign donations and appointments to various boards and commissions. He was ultimately charged with 16 counts of corruption, including wire fraud and attempted extortion. Three years following his indictment in December of 2008, Illinois made significant changes to their state campaign financing laws.
These changes include limits on the amount of contributions a candidate may receive during a single election cycle, increased disclosure of campaign financing sources, a ban on the use of state planes, cars and public funds for campaigning purposes, and a ban on "pay to play" for contracts for grant money. These changes reflect a major effort by the state to clean up their election process.
A September 2011 civil suit filed against the Alabama Republican Party Chair alleges that the political party violated the state’s pay to play law by accepting a $1,000 donation from operator of a bingo gambling facility, VictoryLand. Under the Alabama law, any entity or individual that contracts, or anticipates contracting, directly with the state or a state agency is forbidden from making campaign contributions worth over $250 at any time. The action against the GOP Chair has yet to be resolved.
The Effect of Pay to Play Statutes on Corporations
Pay to play laws can present a host of operational, public relations and legal challenges for businesses. In the most extreme cases, a violation of a pay to play law can result in criminal prosecution, or a permanent bar from government contracting. But even in situations where a company has not violated the letter of an applicable pay to play law, public revelations of such violations can have a significant impact on public trust in that company, potentially causing reputational and financial harm. Leaders of businesses should therefore ensure that they familiarize themselves with the scope of their applicable state and municipal pay to play laws and have robust compliance programs in place to facilitate regular review of contributions . Compliance programs should include procedures for identifying and vetting potential contributions, tracking contributions, and a process for ensuring that such procedures are appropriately documented.
Because the circumstances of each business are unique, there is no one-size-fits-all solution for implementing and maintaining a pay to play law compliance program. However, as a minimum, every pay to play law compliance program should include the following steps:
Specific program requirements and implementation strategies will vary according to the business in question and the relevant pay to play law, and should be discussed with the business’s counsel.
Ensuring Compliance with Pay to Play Statutes
Organizations can better navigate the intricacies of the pay to play regulatory landscape by implementing risk-based compliance programs. Training employees to conduct thorough due diligence, meeting with vendors regularly to discuss pay to play updates and reporting pay to play issues promptly and appropriately are just some of the ways compliance personnel and company executives can ensure their organization is remaining compliant with applicable laws. In an effort to create compliance programs that yield positive results, organizations should ensure their compliance programs are appropriately scaled based on the organization’s pay to play vulnerabilities. For example, an organization engaging in governmental external affairs activities in jurisdictions with stringent pay to play laws may want to revamp their vetting procedures to ensure they incorporate effective due diligence measures. Ideally, organizations will work with experienced legal counsel to ensure that their compliance programs are comprehensive and equip them to appropriately address pay to play issues as they arise.
Pay to Play Statutes Moving Forward
As pay to play laws continue to evolve and become increasingly complex, the future landscape of these regulations is an important consideration for all parties involved in the process. It is widely accepted that the current political climate in the U.S. is subject to rapid change, which will inevitably have a substantial impact on the legislative framework for pay to play laws and regulations. As such, it is crucial for those subject to such rules to keep a close eye on upcoming decisions to know what to expect in the coming months and years. Future pay to play regulations will likely be influenced, ironically, by some of the biggest criticisms the system is currently facing. Many stakeholders in the political process, regardless of industry, are expressing a desire for more transparency in the process. By shining a light on the issues driving the pay to play laws, it is possible to introduce measures that will improve transparency while protecting the interests of all parties. In particular, a potential great equalizer in terms of preventing questionable pay to play practices is the increased public availability of government contracts. Currently, most contracts are available via state websites, but it is common for this information to be hard to find , both for those disclosing and those searching for potential conflicts of interest. Greater accessibility to these documents would go a long way toward exposing the type of influence corporations allegedly have on the political process. In addition, it could help companies and individuals protecting their own interests understand the rules that apply to them and avoid potentially damaging violations. In order to make pay to play laws truly effective, consolidating them into one federal rule, as opposed to the myriad of state-by-state and industry-to-industry regulations in place now, is fundamental. By creating one uniform set of rules, it would be easier for all stakeholders to develop a clear understanding of the implications of these regulations and how to operate effectively within them. As changes to pay to play laws are made in the future, businesses and individuals should stay current on new information and be prepared to respond accordingly. The changes to these laws can vary greatly from one industry to another, so there is no one-size-fits-all solution to navigating the requirements. It’s imperative to consult with experienced attorneys who have successfully guided clients through previous iterations of these laws in order to understand how to best deal with the nuances of each regulation.
