Without adequate enforcement, political finance regulations " whether they involve limits, bans or simply disclosure require- ments " have little meaning and are unlikely to be respected. Because a lack of enforcement brings the entire political finance regulatory regime into question, the integrity of the process is at stake. And just as enforcement is key to maintaining the legitima- cy of political finance regulations, so the latter are integral to the democratic process.
Diane R. Davidson, deputy chief electoral officer and chief legal counsel, Elections Canada, 2004
Justice John Gomery’s hearings have thrown a harsh light on Canada’s political finance regime. Day after day, we have heard allegations about improper financial transactions between individuals associated with the Liberal Party of Canada in Quebec (LPCQ) and advertising executives who may have profited excessively from spon- sorship contracts. If even some of these claims are substan- tiated, ”œAdscam” will go down in history alongside the 1873 Pacific Scandal and the Beauharnois affair of 1930. This arti- cle does not assume that any particular allegation or set of allegations is factually true; that is a matter for Justice Gomery to determine. Instead, my purpose is to consider the implications of the testimony for the Canada Elections Act (CEA), and to draw some broader lessons about political finance and the rule of law.
A recent comparative study for the Institute for Democracy and Electoral Assistance in Stockholm named Canada as a world leader in ”œthe monitoring of political money and the enforcement of political finance regulation.” While followers of the Gomery testimony could be forgiven for dismissing this assessment as hope- lessly naïve, they would be incorrect. In most respects, the CEA is rightly regarded as a model of ”œbest practices.” No law, by itself, can eliminate politi- cal corruption altogether. Wherever power, money and ambition meet (as they do routinely, in every political system), improprieties often follow. The one major flaw in the CEA, as in all political finance laws, is the weakness of its enforcement provisions. That flaw has been starkly revealed at the Gomery Inquiry. But that does not necessarily mean that we should rush to amend the CEA. Governments often adopt ”œget tough” amendments in the wake of scandal. As we will see, such provisions are the political equivalent of a fig leaf: they may provide some useful cover, but otherwise they serve no practical purpose whatsoever.
At Confederation, federal law con- cerning political finance dealt only with the simplest forms of corrup- tion: bribing public officials and ”œtreat- ing” voters. That changed after the Pacific Scandal of 1873, which destroyed the Conservative govern- ment of Sir John A. Macdonald and brought the Liberals to power for the first time. Shortly after the 1872 gener- al election, it was revealed that the company which held the government contract to build the national railroad had donated generously to the Conservative Party at the direct behest of the prime minister. The new Liberal government, prompted as much by political advantage as by reforming zeal, passed the Dominion Elections Act, 1874. The law applied to candidates in federal elections, but not to political parties per se. Candidates had to appoint official agents. The latter were required to report how much money they had spent during a campaign, and how they had spent it. They were not required to disclose who had provided the money or how much each donor had given. Nor did the law establish an effective mechanism for enforcement, relying instead on the initiative of individual citizens to investigate and pursue infractions. In the absence of any real sanctions for non-compliance, the law had little if any effect on estab- lished political finance practices.
The next bout of reform followed the 1891 McGreevy ”œtoll-gating” scan- dal, which revealed ”œa system operating in federal elections in Quebec whereby contractors gave kickbacks on govern- ment contracts to finance government candidates.” Khayyam Paltiel’s observa- tions on the scandal bear repeating here: ”œThe opportunity which the gov- ernment had thus seized was not of course unique to the eighteen-nineties [or, one might add, to Quebec]: it is a natural result of a political system which allows governments to give valuable contracts to private interests and, at the same time, compels them to seek funds for re-election.” The Dominion Elections Act was promptly amended to forbid assisting a candi- date in exchange for a promise of per- sonal benefit. The law, typically, was impossible to enforce.
After another series of scandals, the Act was further amended in 1908. The amendments prohibited corporate donations to candidates; but since par- ties remained immune from the law, there was no way to police the flow of money from business interests into elec- toral politics. No one was ever prosecut- ed for violating the revised law. In 1920 the ban on corporate donations was expanded to include labour unions and other associations. The restrictions on the sources of donations was deleted in 1930, after sustained opposition by Labour and CCF MPs.
The 1931-32 Beauharnois scandal graphically demonstrated the weakness of the existing laws. The Liberal Party of Canada, desperate for funds to fight its doomed 1930 campaign against the Con- servatives, had accepted a $700,000 con- tribution from the head of the Beauharnois Power Corpora- tion. After the contribution became public knowledge, an investigation revealed that ”œthe Beauharnois Corpora- tion had built up a symbiotic relationship with the Liberal Party, establishing firm links at various points to Liberal figures of various ranks and stations.” As Reg Whitaker noted in The Government Party: Organizing and Financing the Liberal Party of Canada, these included a former official in the Prime Minister’s Office, a former national secretary of the party, and an erstwhile cabinet minister, all of whom had served under Mackenzie King. Despite the manifest inadequacy of a law that ignored the existence of polit- ical parties, no further amendments were made until 1973.
By the mid-1960s, far-reaching change to the election finance laws had become all but inevitable. The ris- ing cost of electioneering, exacerbated by the deadlock between the major par- ties and the resulting frequency of gen- eral elections, reconciled the parties to apparently strict regulations in return for spending limits and public subsi- dies. After the 1962 and 1963 elections had drained party coffers, Prime Minister Pearson appointed a commit- tee on election expenses (the Barbeau Committee). In 1966 the Committee issued a long list of recommendations. These included the legal recognition and registration of political parties; campaign spending limits for candi- dates; more complete and timely disclo- sure of spending and donations by candidates’ agents; effective sanctions for non-compliance, enforced by an independent body (Elections Canada); tax credits for political donations, to encourage individuals to give money and thus reduce the parties’ depend- ence on corporate funding; and partial reimbursement of election expenses. The disclosure rules and spending lim- its for parties were looser than those imposed on candidates. No legislative action followed until 1970, when the renamed Canada Elections Act was amended to provide for the registration of political parties. The remaining rec- ommendations were referred to a House of Commons committee (the Chappell Committee). In its 1971 report, the Chappell Committee endorsed most of the Barbeau recommendations, although it demanded that both parties and candidates be sub- jected to spending limits.
The Election Expenses Act was finally introduced in 1973. While much of the credit belongs to the New Democratic Party, which forced the minority Liberal government to reform the political finance laws in exchange for support in the House, the timing also owes much to the fallout from the Watergate scandal in the United States. The Act applied the rules of agency and disclosure to registered political parties. It also introduced spending limits and direct public subsidies for both parties and can- didates. Finally, it established an enforcement regime which was sup- posed to be more effective than the old ”œhonour” system. While the CEA has been amended several times since, the most significant changes occurred in 2003. Bill C-24, which took effect at the beginning of 2004, extended the political finance regime to constituen- cy associations, nomination cam- paigns and leadership contests. This brief summary of Canada’s political finance regime will focus only on those aspects of the CEA (before and after Bill C-24) which are most rele- vant to the Gomery testimony.
Under the CEA, political parties and candidates are required to register with Elections Canada and designate an official agent before they can contest a federal election. Registration entitles a party or candidate to partial reimburse- ment of their election expenses, if it can meet the vote threshold set out in the legislation, and empowers the agent to issue tax receipts for donations. A regis- tered party or candidate must assign responsibility for financial transactions to a single individual or entity (e.g. the Federal Liberal Agency of Canada). The official agent records all donations and expenditures. At the end of every fiscal year, the official agent of a registered party must file an audited financial report with the chief electoral officer; separate reports must be submitted after each general election. Candidates’ agents only file financial reports for the campaign period.
Disclosure is the cornerstone of the political finance regime. The offi- cial agent is required by law to report the full value of every contribution, whether monetary or non-monetary, together with the name and address of the contributor. The annual and post- election reports must be accompanied by an auditor’s statement attesting to the accuracy and completeness of the disclosure. Most such statements are carefully hedged. A typical example is from the 2002 fiscal period return of the Liberal Party of Canada: ”œIn com- mon with many not-for-profit organi- zations, the [National Liberal] Agency derives revenue from contributions and other sources, the completeness of which is not susceptible of satisfactory audit verification.” (The fiscal period returns for all registered parties are available at www.elections.ca) Since a 1983 amendment to the Act, the auditor is no longer required to affirm that the report discloses the actual finan- cial transactions of the party or candidate; in effect, he or she must only declare " as William T. Stanbury wrote in Money in Politics, a 1991 research volume for the Royal Commission on Electoral Reform " that the report reflects the records which he or she was given to review. The penalty for an official agent who inadvertently submits an incomplete report is a $1000 fine and/or three months in prison; the party on whose behalf the report was prepared is liable for a fine of $25,000. An agent who knowingly conceals financial transactions risks a $5,000 fine or five years in jail, and his or her party could face deregistration and liquidation.
The legislated spending limits for registered parties and candidates are based on the assumption that official agents will disclose every dollar spent. The maximum limit for a party in the 2004 election was $17,593,925; candi- date limits ranged from $60,000 to over $90,000, averaging around $80,000. There were no limits on contributions until 2004, and no restrictions on the source of political donations (apart from the ban on accepting money from unknown or foreign contributors).
Under Bill C-24, registered parties may only accept contributions from individ- uals. Constituency associations, nomi- nation contestants and candidates may accept small donations from corpora- tions, unions or other associations, as well as from individuals. Donations to a registered party from a particular indi- vidual are capped at $5,000 per year. To compensate parties for the loss of cor- porate and union donations, the Bill established a new system of annual allowances. Every registered party that meets the vote threshold receives a yearly public subsidy equivalent to $1.75 per valid vote received in the pre- vious general election.
For the most part, the system appears to work well. The CEA provides clear incentives for parties, candidates and agents to comply with its adminis- trative requirements. For example, party and candidate reimbursements are withheld (in whole or in part) until after the official agent submits the post- election report. A registered party which fails to provide timely and accu- rate information to Elections Canada risks suspension or de-registration, with the attendant loss of benefits. Should these incentives prove insufficient to ensure compliance, the Act provides an impressive array of enforcement provi- sions. There were 66 separate finance- related offences in the 2000 version of the Act; following the 2004 amend- ments, the Act lists 173 such offences. The most serious punishment for a reg- istered party, as noted previously, is to be struck from the register and put out of business permanently.
The commissioner of Canada Elec- tions is the official responsible for investigating and prosecuting alleged infractions of the political finance laws. He has a staff of 26 investigators across the country to follow up on complaints of infractions. When an infraction is confirmed, the commissioner has two options: he can initiate a prosecution in the criminal courts, or attempt to nego- tiate a compliance agreement with the offender. The latter option is by far the more frequent. Most of the offences which go to court are relatively minor, e.g failing to file fiscal reports by the statutory deadline. The majority of compliance agreements also involve minor infractions, such as distributing election pamphlets which do not con- tain the required authorization by a candidate’s official agent. (The Elec- tions Canada Web site includes a sen- tencing digest and a complete list of compliance agreements: go to www.elections.ca and click on ”œElec- toral Law and Policy.”) Since 1974, when the position of commissioner was created, no one has gone to jail for vio- lating the Canada Elections Act.
As previously described, Bill C-24 is the most far-reaching reform to the political finance regime since 1973. The Bill was adopted in 2003 and took effect at the beginning of 2004. At Second Reading, some opposition MPs dis- missed the Bill as an attempt to immu- nize the Liberal Party from the political fallout of the sponsorship scandal.
Whether or not this is true, at least three elements of the Bill lend credibility to this claim. For the first time since 1930, political contributions from corpora- tions and labour unions were prohibited (with some minor exceptions). Second, Bill C-24 created several new offences, including a ban on collusion to circum- vent contribution limits (section 405.2 (2) of the amended Act). Finally, the Bill redefined ”œelection expenses” to include ”œthe payment of remuneration and expenses to or on behalf of a person for their services as an official agent, regis- tered agent or in any other capacity.” Such payments are classified as ”œnon- monetary contributions.” Under the law, the party must disclose the commercial value of those services both as a contri- bution and as an election expense.
There is no necessary connection between the sponsorship scandal and the ban on corporate contributions. As for- mer prime minister Jean Chrétien point- ed out in his speech at Second Reading, Quebec and Manitoba had already banned political donations from corporations and unions. His claim that the prohibition in Bill C-24 was inspired by those provincial precedents, and by public perceptions of excessive corporate influence in politics, are prima facie plausible. But the other two provisions raise interesting questions. Was the former prime minis- ter, or someone else responsible for draft- ing Bill C-24, privy to the details of the alleged improprieties subsequently revealed to Justice Gomery? And if so, are the new offences in the Bill " some of which bear an eerie similarity to those alleged improprieties " tailor-made to deflect blame from Mr. Chrétien and his inner circle? Whatever their origin, the new offences do not apply retroactively; should any of the allegations before the Inquiry be substantiated, none will result in prosecution.
Inquiry-watchers should be careful to distinguish between alleged acts which were illegal at the time when they are said to have occurred, and those which would be illegal if committed today. For example, corporate donations to registered parties were perfectly legal before January 1, 2004. A properly dis- closed contribution from an advertising agency to the LPCQ in 1997 cannot trig- ger a prosecution in 2005. Contrariwise, the failure by a registered party to dis- close such a contribution, and the use of subterfuge to conceal its true source, have been illegal since 1974. Similarly, it is an offence under both the pre- and post-2004 versions of the CEA to ”œmake a contribution to a registered party that comes from money, property or the serv- ices of another person or entity” (section 405 (1) of the old Act, section 405.3 (1) of the amended Act). Jean Brault told Justice Gomery that he had instructed his employees to donate money to the LPCQ under their own names, and reim- bursed them from company funds. Such a deliberate circumvention of the law should result in a charge under the CEA; upon conviction, a $1000 fine or three months’ imprisonment should follow.
The good news for Brault is the seven- year time limit on the prosecution of offences under the Act. Therefore, any such donations made before or during the 1997 election campaign are immune from prosecution. The bad news is that Brault could still face charges for any post-1998 donations which he may have shielded in this way. The really bad news is that Jean Brault appears to be that rarest of creatures: a person who deliber- ately circumvented the Canada Elections Act and got caught.
Corrupt political practices range from the simple bribery of a public offi- cial, or the straightforward exchange of money or goods for votes (”œtreating”), to more complex and persistent arrangements for the exchange of money and influence. The simpler methods are char- acteristic of an underdeveloped state without effective rules against political corruption; the intricate webs of wealth and influence tend to emerge after the more obvious practices have been driven underground. A classic example is the political contribution tacitly (or overtly) exchanged, as Michael Pinto-Duchinsky wrote in the Journal of Democracy in October 2002, for ”œan unauthorized favour or the promise of a favour in the event of election to an office.”
This rather cumbersome phrase captures the essence of the Gomery alle- gations: that certain individuals associ- ated with the LPCQ acted as middlemen between the sponsorship program at Public Works, on the one hand, and a handful of Montreal-based advertising agencies on the other. The middlemen supposedly brokered the assignment of contracts to those particular firms, in exchange for past or anticipated contri- butions to the Liberal Party. Such arrangements, variously called ”œtoll- gating” or kickbacks, seem to be fairly common: ”œVariations of these schemes are probably the most traditional means of graft used by incumbents to reinforce their financial positions,” observes Karl- Heinz Nassmacher in IDEA’s 2004 Funding of Political Parties and Election Campaigns Handbook. ”œPublic inquiries and judicial prosecutions have time and again revealed details of these processes in different jurisdictions.”
The apparent frequency of such practices attests to the difficulty of enforcing political finance laws. On the one hand, politics is an expensive proposition. In the heat of electoral competition, the urgent need for money can outweigh ethical considerations, the fear of public exposure, even the prospect of administrative or criminal sanctions. Under those circumstances, as Diane Davidson, an Elections Canada official, put it, ”œLawmakers must antici- pate that parties and candidates will seek ways to get around limits and dis- closure requirements.”
This is easier said than done. The fatal flaw in all political finance laws, including the CEA, is the impossibility of verifying the disclosures on which the entire edifice rests. Unless someone blows the whistle, the enforcement agency has no way of knowing whether a particular party or candidate has reported all of its contributions and expenditures for a given year. Political parties in a majority of states are required by law to disclose their financial transactions to the government. In principle, as Lisa Young observed in a research volume for the 1991 Royal Commission on Electoral reform, the full, accurate and timely disclosure of contributions and expenditures ensures a transparent and effective political finance regime. In practice, as Michael Pinto-Duchinsky writes, disclosure laws are honoured as much in the breach as in the observance: ”œscholars of political funding have almost exhausted the vocabulary of contempt in describing the ineffectiveness of these rules.” Across the globe, the official financial reports of political parties are dismissed as ”œthe tip of the iceberg” and ”œworks of fiction.”
Much of the testimony before Justice Gomery suggests that the same is true in Canada. Several wit- nesses have described brown envelopes stuffed with tens of thou- sands of dollars in cash. Under-the- table cash donations leave no paper trail for agents to disclose or auditors to review. As noted previously, former Groupaction president Jean Brault claimed that he laundered some of his donations to the Liberal Party through his employees’ chequing accounts. He also admitted that he had put Liberal campaign workers on his payroll, to ”œmake them available” to work for the LPCQ at no charge to the party. These alleged ruses allowed a company which profited from government con- tracts to give thousands of dollars to the ruling party without being pub- licly identified as the source.
It might be tempting to try to beef up the disclosure requirements, in an effort to sniff out corruption which would otherwise remain hidden. At pres- ent, our federal parties and candidates must disclose the name and address of every donor who gives more than $200. During the parliamentary debate on Bill C-24, Michel Gauthier of the Bloc Québécois argued that the name of the donor’s employer should also be dis- closed: ”œIt could happen that 25 employ- ees from one engineering firm or any professional firm, each decide to give $10,000 to a political party. This would result in a very significant contribution of $250,000 and there would be no way to find out where these people work unless you did some cross-checking.” (It is not clear whether Gauthier was refer- ring specifically to Groupaction.)
Such temptations should be resis- ted. Excessive regulation can do more harm than good. In the first place, unrealistic laws are impossible to enforce. Requiring additional informa- tion would increase the regulatory bur- den on parties and candidates (or, more accurately, their official agents). Under Bill C-24, the agency and dis- closure rules also apply to constituen- cy associations, leadership contestants, and aspiring candidates. For some agents, the task of recording, verifying and reporting the employers of con- tributors could prove too onerous. Every election could produce hun- dreds or thousands of inadvertent infractions. Little would be accom- plished, except to bring the political finance regime into further disrepute.
In the second place, overly-complex laws provide ample opportunity for deliberate evasion. As Karl- Heinz Nassmacher writes: ”œElab- orate restrictions designed to control the flow of money into the political process have encouraged professional politi- cians to engage in a creative search for potential loopholes either in the application of the existing law or when drafting necessary amendments.” When- ever the incentive to win power (if necessary, by circumventing the law) outweighs the fear of sanctions, as Nassmacher observes, ”œAs soon as one chan- nel of political money is blocked, other channels will be used to take its place.” No law can pre- vent donors who wish to curry favour with the government and to pre- serve their anonymity " including those who, like Jean Brault, benefit from government contracts " from resorting to untraceable cash donations.
Third, overly-intrusive disclosure laws could run into trouble if subject- ed to judicial review. Canadian courts have struck down several election laws which infringe the Charter guarantees of free expression and association, and the right to play a meaningful role in the election of representatives.
Would-be reformers thus find Scylla of unrestrained political spend- ing and the Charybdis of unenforce- able and possibly unconstitutional regulations. This dilemma becomes particularly acute in the wake of a scandal, when public pressure to clean out the stables forces politicians to appear to be doing something. As noted earlier, laws crafted in the wake of scandal are often more symbolic than real. The recurring bouts of ”œreform” in democratic states demon- strate the futility of attempting to leg- islate against the abuse of power and money in politics. Almost a century ago, George R. Parkin, in his biography Sir John A. Macdonald made the follow- ing observation: ”œThe necessity for a party fund may be freely admitted, but the methods employed in its collec- tion and distribution put a severe strain too often upon political morali- ty.” Le plus ça change…
Karl-Heinz Nassmacher writes: ”œThe application of statute law must be embedded in social and legal rou- tines, most of all the rule of law… Laws and regulations are of little value if they are widely disregarded and if offences go undetected and unsanc- tioned. In the field of political financ- ing, enforcement has proved an especially severe problem.”
At this writing, no present or for- mer Liberal cabinet minister, official or volunteer has been charged with an offence under the CEA. Conservative and BQ taunts about ”œLiberal crimi- nals” are worse than unfounded: they are unconstitutional, because the Charter guarantees the right to be pre- sumed innocent until proven guilty according to law. They nonetheless reflect a widespread public perception: that a few persons associated with the governing party have broken the law with impunity. Whether or not this perception is substantiated, by Justice
Gomery or anyone else, it is troubling to contemplate its long-term effects on our political system. The belief that a few well-connected individuals engaged in corrupt practices, perhaps with the tacit consent of a former prime minister, undermines the legiti- macy of the political system. It casts the electoral process into further disre- pute, which Canada can ill-afford after a decade of declining voter turnout. Most fundamentally, the auditor gen- eral’s reports and the Gomery Inquiry into the sponsorship scandal portray a blatant disregard for the rule of law on the part of those who should be most scrupulous in its preservation.
The rule-of-law principle aspires to government, not by fallible and self-interested human beings, but by rational and impartially applied laws. No one is above the law, not even the men and women who make it. Politicians and civil servants must exer- cise their public functions in accordance with statute, and in conformity with the Constitution. The late Justice Rand of the Supreme Court of Canada summarized the principle in the famous Roncarelli v. Duplessis case in 1959: ”œthat an administration accord- ing to law is to be superseded by action dictated by and according to the arbi- trary likes, dislikes and irrelevant pur- poses of public officers acting beyond their duty, would signalize [sic] the beginning of disintegration of the rule of law as a funda- mental postulate of our con- stitutional structure.”
Aristotle first identified the rule of law as a prerequi- site for good government. He argued that the best safe- guard against tyranny was to ensure that no man or group of men exercised political power for more than a brief period. In turn, the rotation of rulers and ruled is only possible when everyone obeys the same laws. Therefore, the rule of law is both the cause and the effect of regular alternation in power. Although the democratic system of which Aristotle wrote is very differ- ent from our own, his ideas are strik- ingly relevant to modern political finance. Most corruption scandals, in Europe, Asia and the Americas, arise in parties which have spent years in gov- ernment. To coin a phrase, power cor- rupts. Long exposure to it seems to convince members of a dominant party that they are above the law, or at least that they will never have to answer for their misdeeds. So Aristotle had a point: regular rotation in power is the best way to preserve a democra- cy " a consoling thought for Canadians appalled by the prospect of yearly federal elections for the foreseeable future.