Can corporations and labor unions hide how much money they spend on campaign-related ads by funneling money through other corporations that don’t have to disclose the identities of the original donors? That question is at the heart of a lawsuit brought by Rep. Chris Van Hollen, who is challenging a Federal Elections Commission regulation that fatally weakened the donor disclosure requirement mandated by the Bipartisan Campaign Finance Reform Act (BCRA). The case is scheduled for argument on January 11th, 2012, before a D.C. federal district court.

Until 2007, federal law prohibited corporations (including non-profits and labor unions) from spending money on “electioneering communications” — ads regarding a clearly identified federal candidate aired in the immediate run up to an election via broadcast, cable, or satellite communications. Federal law did not restrict the ability of private individuals to buy air time, but did require that an individual’s identity be disclosed if $1,000 or more was spent. The Supreme Court opened the door to corporate electioneering communications in 2007 in FEC v. Wisconsin Right to Life, as long as corporations stick to issue ads and don’t expressly call for the election or defeat of a particular candidate.

After the Court’s decision, the FEC revised its regulations. How would existing law about disclosure of donations apply to corporations making electioneering communications?

The FEC decided to split the baby, requiring corporations and labor unions to disclose donations, but only when they were “made for the purpose of furthering electioneering communications.” While reasonable-sounding, this regulation in effect has been a disaster for disclosure and undermined BCRA. Why not require corporations who make these expenditures to report all donors? (The law permits corporations to set up a special “segregated” fund from which funds can be drawn so they don’t have to disclose all donations to the general treasury.) How can you tell what a corporation’s “purpose” is? The FEC’s swiss-cheese standard leaves plenty of room to circumvent Congress’s intent.

According to the Van Hollen complaint, evasion is rampant. “Persons making ‘electioneering communications’ disclosed the sources of less than 10% of their $79.9 million in ‘electioneering communication’ spending.” For example, the Chamber of Commerce spent $32.9 million in electioneering communications in 2010, but did not disclose a single contributor. A cottage industry has sprung up of corporations establishing nice-sounding non-profits through which they funnel money while anonymizing corporate campaign activity. The amount of dark money can only increase.

The court has an opportunity to address this problem, but ultimately Congress needs to look at strengthening disclosure requirements across the board.