graeme_orr cloistersBy GRAEME ORR

On the Thursday before Good Friday, the New South Wales Electoral Commission (‘NSWEC’), through its chairperson Keith Mason QC, issued an extraordinary statement condemning the NSW Liberal Party for failing to disclose the identity of major donors in 2010-11. These donations, totaling over $690,000, occurred in the lead up to the 2011 State election. By the Liberal Party’s admission, these included donations in excess of the cap on donations to NSW parties, and prohibited property developer donations. As a result the Commission is withholding about $4.4m in public funding to the Party.

In themselves, these findings are significant but not new. These issues, and others, were ventilated in ‘Operation Spicer’ hearings before ICAC, NSW’s anti-corruption commission, in 2013-14. These hearings led to the parliamentary resignation, party suspension or loss of pre-selection of upwards of ten State MPs. The NSWEC’s actions may yet imperil the Assistant Treasurer of the Commonwealth and former Liberal party treasurer, Senator Sinodinos, for the second time. (Sinodinos continues to deny any knowledge of wrongdoing.)

What is the legal basis and consequence of all this? And what might it say about the trajectory of political finance regulation and enforcement, a key area of flux in the law of politics?

The Legal Background

Political finance law, focusing on party and election campaign financing, has long roots in this country. Despite much public discussion in recent decades, it has remained relatively laissez-faire at the Commonwealth level. But innovation at state level has offset the enervation at national level.

Belying – and reacting to – its reputation as corruption-prone, NSW has generally been the leader in political finance law in Australia. It introduced the first public funding and donation disclosure laws in 1981 in the Electoral Funding, Expenditure and Disclosures Act 1981 (NSW). And since 2009, governments of both hues have erected the most comprehensive election finance regime yet seen on these shores. The regime includes limits on donations (now $5,800 per annum to a party), limits on electoral expenditure by parties and others, and bans on donations from property developers and alcohol, tobacco or gaming interests. It also includes increasingly regular disclosure of donations above $1000. In comparison, the national disclosure threshold at the relevant time was $11,500.

‘Hydraulics’ is a metaphor often used in this branch of the law: flows of money are hard to contain. The ‘water bed’ is a related metaphor: push down in one area and the money appears in another. ‘Cat and mouse game’ is another analogy. Opponents of regulation believe either that in a free market everything, including political influence, should be subject to market forces. Or that the ‘game’ is not worth the candle: money will find its way through the pores in the system. And, besides, other forms of political influence (for example, ‘the Murdoch Problem’) are at least as pernicious.

Supporters of broad regulation, especially caps on donations or expenditure, counter that when money speaks, it sometimes screams (witness how the infant Palmer United Party leveraged power on the back of one timely, multi-million dollar campaign). Policing money in politics is not just a matter of accountancy and disclosure. Unrestricted flows of money threaten the fundamental promise of equality of voice and respect which universal suffrage is meant to emblemise.

The Free Enterprise Foundation – a Trust to be Trusted?

Into this web, in 2010, elements in the NSW Liberal Party appear to have tried to circumvent the law or game the system. According to the NSWEC and evidence before ICAC, one aspect of this involved the use of an existing trust, The Free Enterprise Foundation, as a conduit for donations. The Foundation was established in 1981 – curiously also the year NSW first introduced donation disclosure laws. In relevant times, a Mr Nicolaou was paid commission to solicit gifts to the Foundation. Nicolaou was then a chief fund-raiser for the NSW Liberal Party, including as chairman of the party’s Millennium Fund (a vehicle to attract business donors by facilitating access and networking with political figures).

A ‘major part’ of the Foundation’s activities, the NSWEC found, was to seek to offer anonymity to those who wanted to contribute funds to the party. The Foundation was settled as a discretionary trust, whose two trustees could direct monies raised to promote ‘free enterprise’, and ‘individual … freedom of enquiry choice association and trade’. Through this simple mechanism it was assumed that monies could be donated to the Foundation on the understanding that they would be channeled to the NSW Liberal Party, but that there was no strict legal obligation to so do.

The Foundation had opened the financial year in question, 2010-11, with just $3,443.23 in its coffers. Within six months, it had passed on $787,000 to the NSW Liberal Party. The quadrennial NSW election was held in March of 2011. In the same half-year, a further $294,000 was paid to the Liberal Party National Division, most of it just prior to the August 2010 national election.

Interpreting the Act: Private Law versus Public Purposes

In 2013, the NSW Crown Solicitor gave advice to the NSWEC that the trust was a successful method of avoiding NSW election funding limits and disclosure law. The Election Funding, Expenditure and Disclosure Act defines ‘political donations’ as including ‘a gift made to … an entity … the whole or part of which was used or is intended to be used by the entity’ to make a donation to a party or candidate or incur electoral expenditure. Donors had given money to the Foundation after approaches from a Liberal fundraiser, with letters stating the Foundation ‘may like to’ or ‘may care to consider’ passing the gift on to the NSW party. Crown Solicitor Knight concluded it was ‘unlikely’ this amounted to ‘political donations’ under the Act.

Even at the time, counsel assisting ICAC and others (I was one) felt that advice was weak. It took an essentially private law approach to a question rather than adopting the obvious purposive interpretation of the Act. (In doing so, it was hardly the first time such a clash of public and private law values has occurred). The best that can be said of the advice is that, if correct, it exposed a gaping loophole in electoral law. A loophole broader than the related practice of parties using fundraising arms to muddy the disclosure trail. In that practice, a party-controlled entity collects donations and passes on the net benefits to the party. The party discloses merely the formal receipt from the entity. The entity itself, whether as an ‘associated’ entity of the party or simply as a ‘political expender’, then discloses the sources of its gifts – often themselves corporate intermediaries.

Such use of corporate veils and conduits is problematic enough. But the ‘discretionary trust’ approach, if upheld, drove a highway through not just disclosure law but the possibility of enforceable donations and expenditure limits in a federation with porous borders.

The NSWEC, applying its civil law mandate, however has declared ‘thus far, and no further’. It reasoned that the Foundation ‘was never a validly constituted charitable trust’ because pure politicking is not charity. ‘One consequence is that [the Foundation] did not have lawful authority to exercise any independent discretion … Accordingly, even if (which is denied by the Commission) “donors” to the Foundation purported to arm the Foundation with unfettered authority … the true legal position was that the money remained under the control of the “donors” because of a resulting trust upon invalidity.’ Hence, in passing the money on to the NSW Liberals, the Foundation was merely ‘acting as agent for the donors’. The NSWEC, thus, rejected even the private law reasoning of the Crown Solicitor. In any event, the NSWEC also found that the Act’s definition of political donation was clearly enlivened, since the donors and the Foundation always intended to benefit the state party.

Consequences: the NSWEC Reveals Itself a Robust Regulator

What follows? First and foremost, the NSWEC is obliged under the Act to withhold all public funding payments to a party whilst that party is in breach of its disclosure obligations. Almost $4.4m is at stake, a mix of funding outstanding from the Liberal’s successful 2015 election campaign and this year’s ‘administration’ funding. The party had been banking on this money. In correspondence from its solicitors to the NSWEC on the morning of the findings, the Party said the money was ‘critical [to] its operations’ and flagged ‘emergency measures’ including ‘retrenchment of staff’. It even pled for $3.7m to be released, reasoning that only around $700,000 of undisclosed donations were in issue. The Act however clearly requires the NSWEC to withhold all public funding.

Could the NSW Liberal Party challenge the NSWEC in the Supreme Court? It might press a claim that promoting ‘free markets’ or ‘individual freedoms’ could be, at least on its face, charitable and that, on the basis of the High Court in the AidWatch case, political activities did not taint that status. But this is not an easy argument to mount given the facts. The party might also seek to argue some ambiguity in the concept or agency or ‘intention’ to benefit, in the definition of a state ‘political donation’. It might even seek to question aspects of due process or fact-finding by the NSWEC.

Premier Baird however has told the Party’s State Director to declare the donations and admit the party machine has ‘done the wrong thing’. The Foundation could take action. After all, it might say it is protecting its honour, having led donors to believe it could keep their anonymity. If it does not take action, that will reinforce the impression that the Foundation was never more than a wing of the party.

However common such administrative law gambits are when corporations confront governments, in this instance the regulator – the NSWEC – holds the upper hand. NSW parties are now heavily dependent on public funding. And the law – to its credit – now requires a significant level of disclosure and even probity in the financial affairs of parties. The NSWEC’s statement is important less for its findings of facts (mostly already ventilated) but its forthright pursuit of the matter and willingness to act as a robust regulator. In the past electoral commissions have seen their role as mere administrators of the law. For too long, electoral law in Australia has been subject to limited enforcement and minimal interpretive development, because commissions tend to lack the resources or powers to pursue infringements, and referrals to police or prosecutors meet a dead-end of time limitations and low penalties.

That said, no prosecutions will result from the NSWEC’s findings. At most, the Liberal Party and some donors, including property developers, will be embarrassed over four-year-old contributions engineered to avoid NSW’s stricter disclosure laws and ban on prohibited source donations. But the time bar for prosecuting such offences was just three years at the time. Only after ICAC’s hearings were these time bars extended to 10 years, and penalties toughened, including a new offence of seeking to ‘circumvent’ the law.

In this case, the teeth of the law in NSW have been bared. In response, Liberal Premier Mike Baird took just one day to instruct his party administration to make full disclosure. For this, the Premier is to be commended. Certainly, Mr Baird’s motivations may in part be to seize the moral high ground and declare ‘I’ll fix it’ (in this he is reminiscent of Queensland Premier Peter Beattie, before him, confronted with electoral rorting in the Queensland Labor party). It may also be that his party is pincered between its bankers, the difficulties of raising large scale donations in the current climate and laws in the state, and its dependency on public funding. But Baird, who has previously called for more clean public funding and a national approach to limiting donations and expenditure, has been consistently strong in this area.

As mentioned, NSW is sometimes stereotyped as having never escaped the fiscal and public miscreancy of the Rum Corps. Scandal begets regulation, and regulation can beget scandal. Libertarians will look at the 63 page Election Funding, Expenditure and Disclosures Act – the only such free-standing Act in Australia – and fret. That it will continue to grow in complexity. That smaller parties without advice may be trapped in its web. That larger parties will rely on legal advice, as The Free Enterprise Foundation surely did, to their peril, and find that they have breached the letter of the law whilst trying to avoid its spirit.

But in pursuing this matter, and using clean public funding as leverage to an outcome where parties will think twice about resorting to formalities of trust law to hide donations, the NSWEC is to be congratulated.

Graeme Orr is professor of law at the University of Queensland. By way of disclosure: Graeme prepared a report for the NSWEC on principled-based drafting on the centenary of the Parliamentary Electorates and Elections Act 1912 (NSW). He has not, however, worked with that Commission on political finance issues.

Suggested citation: Graeme Orr, ‘Never too Late to Regulate: Political Finance and the Electoral Commission and Liberal Party of NSW’ on AUSPUBLAW (29 March 2016) <https://auspublaw.org/2016/03/never-too-late-to-regulate/>