Foreign Agents and American Nonprofits

Casey Michel’s book explores, among other things, the growing problem of foreign funding of U.S. nonprofits in order to exert political influence. Addressing this issue might be the best initial opportunity for cross-ideological, bipartisan cooperation toward meaningful nonprofit-sector reform—perhaps leading to broader, bolder efforts against Big Philanthropy and its increasingly stretched definitions of charity.

The below review essay, republished with permission, originally appeared in the Winter 2024 print edition of American Affairs and online here.

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Establishment philanthropy finds itself on the defensive, as it should. More and more activities of the largest tax-incentivized nonprofits are coming into question. Populist progressives are against Big Philanthropy’s exercise of power on behalf of an oligarchy that benefits from and protects the sector’s status and legal structure. More and more populist conservatives are also taking stances against the same concentrations of power, as well as the largest philanthropies’ overwhelmingly progressive bias and its political consequences.

In theory, at least, progressives and conservatives could work in parallel, either separately or together, as unorthodox allies to check this subsidized grantmaking power. There are several potential areas of bipartisan concern across the domains of nonprofitdom, all of which involve behaviors that violate policymakers’ original intent in creating the laws governing nonprofits. The solutions would likely involve clarifying the very definition of “charity” on which the sector’s tax-exemption is based, and better enforcing its boundaries. Policymakers might well conclude that more conditions should be attached to the benefit of tax exemption.

Various nonprofit activities are already attracting closer scrutiny: nonprofit hospitals that generate a lot of income and compete with non-exempt, for-profit hospitals; nonprofit colleges and universities with massive endowments that seem to prioritize income generation over other, arguably more charitable activities; nonprofit donor-advised funds (DAFs) that also seem more concerned with maximizing their assets under management and less focused on getting donations to actual working charities; nonprofits, including private foundations, funding or participating in political activity; and foreign funding of nonprofits, including in higher education.¹

Casey Michel’s Foreign Agents: How American Lobbyists and Lawmakers Threaten Democracy around the World explores that last item, the growing problem of foreign funding of U.S. nonprofits in order to exert political influence.² Addressing this issue might be the best initial opportunity for cross-ideological, bipartisan cooperation toward meaningful nonprofit-sector reform—perhaps leading to broader, bolder efforts against Big Philanthropy and its increasingly stretched definitions of charity.

Foreign Agents

Michel directs the Human Rights Foundation’s Combating Kleptocracy Program. He previously wrote American Kleptocracy: How the U.S. Created the World’s Greatest Money Laundering Scheme in History.³ His latest, Foreign Agents, features three principal “characters”: Ivy Lee, Paul Manafort, and the Foreign Agents Registration Act (FARA).⁴

American lobbyists Lee and Manafort, in practicing their elite-influencing craft in different eras, each contributed to nothing less than “the transformation of American industries,” Michel writes. For each, that influence also came to include parts of the nonprofit sector. Their work made industries and tax-exempt nonprofits “into platforms for foreign governments trying to upend and redirect American policy.”⁵

Lee is considered the founder of the modern public relations industry. In the early 1900s, his many high-profile clients included members of the Rockefeller family (whom he assisted in setting up a philanthropic foundation) and Standard Oil. His primary task was to fend off negative publicity. Upton Sinclair nicknamed Lee, who also defended large railroads, “Poison Ivy.” As Lee’s celebrity grew, he started to work for foreign clients with an interest in improving their or their countries’ reputations in America, including among U.S. policymakers. He advised Benito Mussolini, the Soviet government, and a German conglomerate with close ties to the Nazi regime, among others.

Manafort is better known today. A longtime Republican political consultant and lobbyist, he often worked for foreign leaders as well. In 2017, he was indicted on multiple charges arising from work he had done for Viktor Yanukovych in Ukraine, before Yanukovych was overthrown in 2014.

In dramatic detail, Michel’s Foreign Agents paints unflattering pictures of Lee and Manafort. They are the book’s antagonistic foreign agents. Yet the “third central character in this book is not a person,” Michel writes, “but a piece of legislation,” FARA. The book’s FARA “character,” is decidedly less plucky than Lee and Manafort—statutes are rarely so swashbuckling—but Michel’s study is informative nevertheless.

Passed in 1938 in the wake of an aggressive congressional investigation of Lee’s foreign-funded activities, FARA “aimed at bringing transparency to the burgeoning world of foreign lobbying.” According to Michel, FARA “was the single most progressive piece of lobbying regulation the country had ever seen—and would see for decades to come.”⁶ FARA is the book’s potential heroic protagonist—but, Michel argues, it’s currently broken and needs reform.

The FARA Way

“[F]or three-quarters of a century” following FARA’s passage, Michel writes, it was “all but forgotten and ignored,” and “that lack of enforcement ushered in an explosion of foreign agents who saturated Washington, all in the secret service of foreign benefactors around the world.”⁷ FARA became “the most disappointing—and most frustrating, and neglected—piece of lobbying restrictions the nation had ever known.”⁸ Perhaps relatedly, it may also be understudied by scholars. “Legal scholarship on FARA is generally dated and has frequently been driven by student notes” in law reviews, according to a 2020 Duke Law Journal article by Nick Robinson of the International Center for Not-for-Profit Law.⁹

“Initially, FARA was geared toward one thing alone: propaganda,” notes Michel. It did not ban foreign-funded propaganda efforts outright; it required disclosure of such efforts’ funding sources to the Department of State. Items requiring disclosure included meetings held, contracts signed, payments, and publications related to any and all foreign funding. “[T]he State Department would organize and disclose that information to Congress—and to the American people.”¹⁰

“By the early 1940s, just a few years after being introduced,” how­ever, “FARA had already become effectively a ‘dead letter,’” Michel observes.¹¹ The State Department was either unable or unwilling to implement it effectively. “To take just one data point, the State Department didn’t even have resources to alphabetize the disclosures coming in, let alone track down any missing or suspect information.”¹² So, in 1942, authority for administering FARA was transferred to the Depart­ment of Justice (DOJ).

These reforms seemed to work at first, according to Michel, but over time, it “became clear that FARA was falling short of its promise.”¹³ He quotes a 1965 Senate report, which finds that “The place of the old foreign agent has been taken by the lawyer-lobbyist and public relations counsel whose object is . . . to influence its policies to the satisfaction of his particular client.” The report continues, “The Constitution, which protects the right of citizens to petition their Government, does not afford the same protection to the citizen who exercises that right at the direction of or in the interests of a foreign principal. Not only does he no longer have the same protection of the Constitution, but he has also placed himself in a most sensitive position between his own government institutions and a foreign principal.”¹⁴

In 1966, a still dissatisfied Congress amended FARA. “[R]ather than center on propaganda, FARA would now focus on something called ‘political activities,’” Michel explains. Undisclosed foreign funding of political and politically adjacent activity was considered particularly corrosive of the American political system. The applicability of FARA’s registration and disclosure requirements was broadened to include work for foreign regimes, companies, and politicians by domestic public relations counsels, publicity agents, political consultants, and what Michel calls “the ‘lawyer-lobbyists’ suddenly sniffing around Washington.”¹⁵

There were many exceptions to the requirements, though, and they “would only grow more glaring in the years to come.” Such exceptions included, for instance, foreign-owned news organizations, diplomats, those engaged in “private and nonpolitical activities” like “scholarly researchers and scientists,” and lawyers “acting in the course of legal representation.”¹⁶ Moreover, Michel notes, there were no additional resources given by Congress to DOJ to perform its administrative responsibilities, including to monitor the exceptions.

As a result, “dead-letter” underenforcement of FARA continued in the following decades, as documented in General Accounting Office (GAO) reports in 1974, 1980, and 1990. “Since enactment of the 1966 amendments, the Department has not adequately monitored foreign agents’ activities nor adequately enforced the act and related regulations,” the 1974 report found.¹⁷ The 1980 and 1990 GAO reports came to the same basic conclusions. “Once again,” Michel concludes, “FARA became more and more of a forgotten entity.”¹⁸

“[B]y the end of the Cold War—fully a half-century after FARA promised to finally shine light on the foreign lobbying and foreign influ­ence campaigns targeting Americans—FARA was little more than a shell of its former self,” Michel writes. “It was an afterthought. A backwater. Something the DOJ rarely considered, let alone enforced. Few were even familiar with FARA, or why successfully implementing and en­forcing it would actually matter.”¹⁹

Amend and Pretend

In 2014, as Michel summarizes in Foreign Agents, private reports from the Project on Government Oversight (POGO) and Sunlight Foundation also found the implementation of the Foreign Agents Registration Act to be far from its congressional intent, despite further amendments. “We found a pattern of lax enforcement of FARA requirements by the Justice Department,” the POGO report said, adding that the office “responsible for administering the law is a record-keeping mess.”²⁰ The Sunlight Foundation’s report bemoaned the “extremely poor quality” of FARA filings, which were often “gibberish.”²¹

Spurred by some policymakers’ interest in the wake of these sobering private analyses, DOJ’s Inspector General (IG) conducted an audit of its own—“the first time U.S. officials had examined foreign lobbying regu­lations in decades, since the waning days of the Cold War,” according to Michel.²² The IG released its report in 2016, acknowledging that its findings and recommendations mirrored those of the GAO, POGO, and Sunlight reports.²³ One difficulty, according to the IG’s 2016 report, “relates to the breadth and scope of existing exemptions to the FARA registration requirement and determining whether activities performed by certain groups, such as think tanks, non-governmental organizations, university and college campus groups, foreign media entities, and grassroots organizations that may receive funding from foreign governments fall within or outside those exemptions.”²⁴

Another exemption to FARA registration was added via 1995’s Lobbying Disclosure Act (LDA)—which, the IG report said, “may have contributed to the recent decline in FARA registrations.”²⁵ Filing an LDA registration exempts one from also having to register under FARA, and LDA’s requirements are far less stringent. LDA “gutted FARA even further,” as Michel starkly puts it.²⁶

LDA focused on those lobbying only on behalf of corporate clients, as opposed to those lobbying on behalf of any foreign entity. Upon LDA’s passage in 1995, FARA itself was amended to link it with the narrower LDA definition. More specifically, the FARA amendment exempted “those who represent foreign companies or individuals if the work is not intended to benefit a foreign government or political party,” as a 2018 POGO report characterizes it. As long as the lobbyist could claim his or her client was engaged in “bona fide commercial, industrial, or financial operations,” he or she need only “register under the far less stringent LDA.”²⁷

According to the 2016 DOJ IG report, post-LDA FARA registrations declined by nearly two-thirds—“an unprecedented collapse, never before seen in FARA’s history,” Michel observes. He writes, “American legislators apparently missed the memo. But foreign lobbyists, and their clients, didn’t. Suddenly, rather than having the lobbyists busy spinning foreign corporations register with FARA, they could hop over to the skeletal LDA and still be following the law. Legislators—who were hardly enforcing lobbying regulations, anyway—had suddenly created a loophole that entire regimes could now barge through. . . .”²⁸

Since 2015, however—just before the IG report—prominent FARA lawyers have noted an uptick in its enforcement. “This surge in enforce­ment is manifest not only in an increase in criminal prosecutions for FARA violations, but also in more aggressive, day-to-day administrative enforcement,” according to a 2021 report on FARA by an American Bar Association task force. “Accordingly, heightened importance now at­taches to compliance with FARA by companies, nonprofit institutions, and others whose activities come within the scope of FARA.”²⁹

In 2022 and 2023 alone, “FARA registrants reported $14.3 million in political contributions and nearly 130,000 political activities,” according to a 2024 Quincy Institute report.³⁰ Perhaps of particular note, in 2023, Newsweek reported on hundreds of thousands of dollars in donations to leading New York politicians by dozens of U.S.-based community groups and their leaders with ties to the United Front Work Department (UFWD) or to a wider “united front system” operated globally by the Chinese Communist Party. UFWD “reports directly to the Central Committee of the CCP,” Newsweek makes clear.³¹

Relevant, Not Dispositive

Although only part of Foreign Agents, many instances of wrongdoing involving FARA and its lax enforcement implicate the nonprofit sector. The book presents some of these that have previously been uncovered and, to the small degree possible, catalogued elsewhere.

For example, Michel includes the nonprofit Clinton Foundation, founded in 2001 by former president Bill and then senator and potential future president Hillary Clinton. “Rather than limit accepted donations to democratic allies, rather than turn away funds linked to some of the most repulsive regimes on the planet,” according to Michel, “the Clin­ton Foundation time and again welcomed all manner of kleptocratic, dictatorial wealth. Funds that would, in any other context, be considered dirty . . . were routinely spun through the Clinton Foundation, opening up untold doors in the process.”³² These doors were opened for, among others, Ukrainian oligarch Victor Pinchuk, Kazakhstani oligarch Kenes Rakishev, a company overseen by Russian oligarch Viktor Vekselberg, and Nigerian billionaire Gilbert Chagoury. In 2009, Hillary Clinton be­came secretary of state.

Michel describes a 2013 congressional trip to Azerbaijan funded by “a pair of American nonprofits—which, as later investigations would uncover, were little more than fronts for the Azeri regime itself.” The nonprofits were “cut-outs in order to whitewash Azerbaijan’s ruling dictator.” Many of the House members who were on the trip, Michel notes, subsequently called for closer ties between the U.S. and Azerbaijan; some urged that Azerbaijan be exempted from certain sanctions that otherwise would have applied. The incident became high-profile mostly because of its brazenness, but “[t]his wasn’t the first time that nonprofits had been involved in funding schemes for these kinds of congressional trips,” he also notes.³³

As Michel chronicles, the nonprofit Atlantic Council, the nonprofit Brookings Institution, and the nonprofit Center for American Progress have raised substantial financial support from international sources. These sources include Azerbaijan, Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. As the policymakers who originally created FARA believed at the time, such support is at least worth knowing about—relevant to, though not dispositive of, any fair and complete evaluation of these influential institutions’ work product.³⁴

Many nonprofit elite institutions of higher education in America receive support from foreign sources, as well, meriting mention in Foreign Agents. These colleges and universities include Boston University, Georgetown, Harvard, Johns Hopkins, the Massachusetts Institute of Technology, Northwestern, Stanford, and Yale. The foreign sources have included China, Qatar, Saudi Arabia, Turkey, Uganda, the United Arab Emirates, and Vietnam—again, worth knowing.

Nonenforcement in the Nonprofit Sector

With respect to nonprofits, the decades-long nonenforcement of FARA is compounded by and comparable to the equally underenforced—or simply unenforced—Internal Revenue Code provisions attaching certain conditions to tax exemption for nonprofit groups. These include the stipulation that exempt charities agree to not engage in specific “political activities.” (Michel uses the same term in Foreign Agents when describing the 1966 amendments to refocus FARA.)

Since 1954, according to the Code’s section 501(c)(3), a charitable nonprofit, foundation, or religious organization may “not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”³⁵ The language is known as the Johnson Amendment, since proposed by then senator Lyndon Johnson of Texas.

The regulation of nonprofits was more systematically codified by certain provisions of the 1969 Tax Reform Act, still the foundational piece of legislation governing nonprofits today.³⁶ The 1969 Act has been characterized as a “Grand Bargain” between government and philanthropy in a recent book by law professors Dana Brakman Reiser and Steven A. Dean.³⁷ The bargain’s terms include the conditions attached to the preferred tax status benefiting philanthropy and all nonprofitdom. Brakman Reiser and Dean suggest that this bargain is essentially broken, too, and in need of reform. Many of the 1969 Act’s important provisions—including those originally intended to define charitable activity—are (and have been) essentially unenforced.

Leading up to the Grand Bargain of the 1969 Act, Congress grew concerned with partisan—in fact, candidate-specific—political activity, particularly that funded by the Ford Foundation.³⁸ “[P]rivate foundations had become increasingly active in political and legislative activities,” according to the General Explanation of the Tax Reform Act of 1969 prepared by the staff of the Joint Committee on Internal Revenue Taxation. It continues:

In several instances called to Congress’ attention, funds were spent in ways clearly designed to favor certain candidates. In some cases, this was done by financing registration campaigns in certain areas. . . .

Congress determined that a tax should be imposed upon expenditures by private foundations for activities that should not be carried on by exempt organizations (such as lobbying, election­eering, and “grass roots” campaigning). . . .

In general, the Congress’ decisions reflect the concept that private foundations are stewards of public trusts and their assets are no longer in the same status as the assets of individuals who may dispose of their own money in any lawful way they see fit. . . .

The Act forbids private foundations to spend money for lobbying, electioneering (unless certain standards are met, this includes voter registration drives) . . . and for any purpose other than the exempt purposes of private foundations. Any improper expenditure is subject to tax.³⁹

Since the 1969 Act’s passage, however, the distinction in law, as well as in Internal Revenue Service (IRS) instructions and guidance, between politics and charity has been “honored in the breach,” at best. At worst, it’s widely considered, well, something of a joke.⁴⁰ As former Joyce Foundation and German Marshall Fund of the United States president Craig Kennedy has written, “smart lawyers and weak enforcement by the Internal Revenue Service have blurred the line between charitable and political activities.”⁴¹ Law professors Ellen P. Aprill and Lloyd Hi­toshi Mayer have called for an investigation of charities’ involvement in politics by the GAO⁴²—which, recall, at least thrice documented “the FARA way” of laxity. Like FARA, the 1969 Tax Reform Act remains far from full enforcement, too, whether by an IRS skittish about involv­ing itself in administering the distinction after the Tea Party scandal of the 2010s or by state attorneys general and charity officials charged with overseeing regulation of exempt nonprofits.

Furthermore, just as the Lobbying Disclosure Act was either pur­posely intended as a workaround of FARA, or somehow just inadvertently became one, the rise of donor-advised funds is serving the same function for some of the 1969 Tax Reform Act’s requirements. Risking oversimplification, a DAF is a private account opened by an organization, family, or individual at a provider to manage and distribute charitable donations. A DAF provider is itself a tax-exempt charity; donations to DAF accounts are immediately tax-deductible by the donor—who can later “advise” the provider to direct a donation, in turn, to an actual, working charity. The donor-adviser usually does not have to do so within any particular time limit, despite the immediate deduction. Many DAF providers, or sponsors, are affiliated with com­mercial money-management companies, which manage most, if not all, of the money in the affiliated DAF accounts in the meantime, almost always for a fee.

Among those terms of the 1969 Act’s “Grand Bargain” that DAFs can work around include the obligation of private foundations to (1) publicly disclose those charities to which they make grants and (2) pay out 5 percent of their assets in grants every year. DAFs can also help nonprofit grant recipient charities circumvent requirements to demonstrate wide public support.

Private foundation grants to DAFs—first defined in law by the 2006 Pension Protection Act,⁴³ decades after the 1969 Act, which did not contemplate them—can “keep controversial donations private,” as Brak­man Reiser and Dean accurately note. “The foundation will need to report the distribution to the DAF on its public informational” tax return. If and when a donor advises the making of any actual, in-turn grant, the “DAF sponsor will include the distribution on its aggregate reporting on grants from its many funds. Neither the foundation’s nor the sponsor’s disclosures, however, will link the identity of the donor and the ultimate recipient.” Brakman Reiser and Dean correctly con­clude that “[s]hielding the identity of foundation donors appears to fly in the face of the transparency and accountability the Grand Bargain traded for private foundations’ tax advantages.”⁴⁴

Moreover, “the payout requirement forces private foundations to pay at least some tax-benefited assets out to operating charities so they can be used to benefit worthy causes currently, rather than invested for perpetuity,” write Brakman Reiser and Dean. “A foundation that complies with this mandate through distributions to DAFs that can themselves languish untouched makes a mockery of the rules carefully crafted in 1969.”⁴⁵

On the other side of the DAF, the IRS requires grant recipients who are 501(c)(3) public charities to satisfy what’s known as the “public-support test.” Again risking oversimplification, the test is meant to ensure that nonprofits are broadly supported and not merely the instru­ments of one or a few big supporters. Yet, in theory at least, a private foundation could support a single recipient directly with a grant and then also indirectly through a grant to a DAF account, from which it then advises a grant to the same group. Should this occur—and while there’s no way to know, of course, it’s likely this occurs often and increasingly—this frustrates the public-support term of the 1969 Act’s bargain.

In light of all of these and other lapses in implementation and enforcement, many have proposed transferring IRS authority to either the Federal Election Commission or even a newly created, independent regulatory entity—much like FARA enforcement was previously trans­ferred to the DOJ. For example, Marc Owens, former head of the IRS Exempt Organization Division, has long recommended a new public-private body modeled on the Financial Industry Regulatory Authority, which regulates securities firms and is overseen by the Securities and Exchange Commission.⁴⁶

Reform Proposals

The 2021 American Bar Association task force on FARA made fourteen recommendations to help improve its “enforcement and administration.” The task force report acknowledges that its recommendations are similar to those made earlier by GAO and private organizations.⁴⁷ “Congress should narrow the statute’s ‘foreign principal’ definition to focus on foreign governments, foreign political parties, and those acting on their behalf,” according to one recommendation, and “harmonize” the FARA and Lobbying Disclosure Act regimes “by requiring addi­tional detailed information from filers under the LDA and by mandating that potential ‘agents’ who want to avail themselves of the FARA exemption for LDA registrants to affirmatively check a box indicating that they intend to do so on the LDA registration form,” according to another.⁴⁸

Interestingly, and perhaps understandably from their and their clients’ standpoint, the lawyers’ first recommendation is that “Congress should rename FARA and otherwise replace the term ‘agent of a foreign principal’ with a term that elicits less stigma and causes less confusion.”⁴⁹ The International Center for Not-for-Profit Law’s Nick Robinson ex­presses a similar concern; after generally cautioning that “FARA’s broad language makes it particularly susceptible to politicized enforcement, he writes that “[a]lthough ostensibly a transparency statute, FARA can be ‘weaponized,’ using the stigmatizing—and frequently misleading or inaccurate—label of ‘foreign agent’ and the burdens of registration to punish dissenting or controversial views.”⁵⁰

Robinson recommends that any FARA reform narrowly focus on furthering transparency, and not try to address “disinformation,” which risks politicization of the kind seen in other countries’ versions of FARA. “Amidst concern about ‘foreign influence’ in the United States, it is important to better target FARA against foreign influence that is a true threat to democracy,” he concludes his Duke Law Journal article. A “focused transparency approach both protects U.S. civil society and public officials from politicized attack and sets a positive example in a world where similar laws are being used to undermine democracy and civic engagement.”⁵¹

The ABA and Robinson’s standpoints differ from that of Michel’s, who is clientless and seemingly less concerned with any stigma. First, he wonders whether foreign lobbying, or at least lobbying from certain adversarial countries, should just be outright banned, as in the proposed Stop Helping Adversaries Manipulate Everything (shame) Act.⁵² That would be a non-narrow, “bright-line” rule easy for regulators to apply and judges to interpret. “Why should Americans be allowed to offer their constitutional rights, including this right to lobby,” he rightly asks, “to the highest foreign bidders they can find—including the fascistic, authoritarian, and tyrannical regimes now circling the world?”⁵³

In the context of foreign funding of nonprofits in particular, Michel touts the proposed⁵⁴ Fighting Foreign Influence Act: “The legislation contains some of boldest proposals the country has ever seen.” Among other things, it would condition certain nonprofits’ tax-exempt status on disclosure of any significant donations from foreign governments or foreign political parties, including the sources and amounts. “Think tanks, universities, foundations, all those American nonprofits processing millions (and potentially more) in wealth linked to foreign regimes, all as a means of opening doors to U.S. policymakers, would finally have to disclose how much they’ve taken in,” he writes. “[I]t is Congress that stands as arguably the last, best hope at preventing Washington from drowning in this flood of foreign lobbying.”⁵⁵

Other relevant legislation has also recently been introduced. In 2023, Senator Charles Grassley of Iowa sponsored the Think Tank Transparency Act.⁵⁶ It would condition the tax exemption of think tanks and other nonprofits that study and engage in public education about U.S. policy to disclose donations from any “foreign principal.” To that extent, its application would be wider than the Fighting Foreign Influence Act. The bolder Grassley bill cites a 2020 Center for International Policy study finding that think tanks focused on federal policy received at least $174 million in funding from foreign governmental entities between 2014 and 2018.⁵⁷

In May 2024, the House Ways and Means Committee also sought to address these issues, passing the American Donor Privacy and Foreign Funding Transparency Act by a vote of 23–16.⁵⁸ As a condition on exemption, it would have required all nonprofits to report the source countries and aggregate amount of money received from foreign entities. It would not have required disclosure of the actual foreign donors, and it includes other provisions meant to protect donor privacy. These softer provisions are likely in response to nonprofit sector lobbying following recent DOJ guidance. In 2020, after the Justice Department issued an advisory opinion clarifying the rules about when a nonprofit that re­ceives foreign-government funding must register as a foreign agent under FARA—specifically finding that “political activities” include those activities that “directly advance . . . practices that are in the politi­cal and public interests of, and are the policies of,” a foreign government⁵⁹—many of the nation’s nonprofit-industry advocacy groups argued that FARA registration is a potential threat to free speech and could threaten nonprofits’ missions.

Regarding nonprofits’ political activity even more specifically, the No Foreign Election Interference Act would have imposed severe financial penalties on tax-exempt, nonprofit groups that receive foreign funding and then transfer some or all of that money to super PACs.⁶⁰ While federal law currently prohibits foreign nationals from donating money directly to American political campaigns, there is no ban on foreign nationals influencing elections by giving to nonprofits that can then give the money to Super PACs for a candidate’s benefit—another nonprofit “workaround.” Under the proposed, narrowly focused legislation, a nonprofit’s third violation would have resulted in automatic revocation of its exempt status. The House Ways and Means Committee approved the bill by a vote of 39–1 last May, but it failed to pass in the full House last October because the 218–181 vote fell below the re­quired two-thirds threshold. More generally, there is continued interest in reform that would prevent or restrict private philanthropic funding of public election administration, at both the federal and state levels, including both legislatively and by referenda.⁶¹

Turning to nonprofit DAFs, the Treasury Department and IRS proposed new regulations on these funds in late 2023.⁶² The proposed rules define DAFs and DAF-sponsoring organizations in more depth than the Pension Protection Act, provide exceptions to those definitions, and detail when and what excise taxes would be assessed on “taxable distributions” that are basically not charitable under the definitions. They reflect a concern on the part of the Treasury Department that fees paid to DAF sponsors’ wealth advisers cause conflicts of interest and provide incentives to keep money from going to working charities.

The nation’s nonprofit-industry advocacy groups aligned with finan­cial services companies and their defenders to argue against the proposed rules. Ohio State University accounting professor Brian Mittendorf called it an “interesting partnership.” In his view, it is “either a sign that, ‘Wow, these strange bedfellows are together, they must have a point.’ Or, ‘These strange bedfellows are together, the blurred boundaries between the charity world and the financial world are a problem.’”⁶³

More broadly, the Accelerating Charitable Efforts (ACE) Act intro­duced by Senators Grassley and Angus King of Maine in 2021 and in the House in 2022 would have sought to prevent DAFs from working around some terms of the 1969 Tax Reform Act’s “Grand Bargain,” regarding both payout and the public-support test.⁶⁴ Among other things, the ACE Act would condition the charitable deduction for money placed in a DAF to specific timelines for its actual distribution to a working charity, depending on various options chosen by the account­holder. It would also require a recipient charity to identify a DAF gift’s actual, original donor for purposes of applying the public-support test.

In the higher-ed context, section 117 of 1965’s Higher Education Act, as amended in 2019, already requires private nonprofit and public colleges and universities to report to the Department of Education contributions exceeding $250,000 a year from a foreign source.⁶⁵ That doesn’t always happen, however. The implementation and enforcement of this provision is, to a large extent, comparable with the historical “FARA way” of laxity. “Our colleges and universities regularly fail to report billions of dollars of gifts from foreign sources—and by so doing, prove the thesis that foreign money corrupts these institutions,” the National Association of Scholars (NAS) lamented in 2023.⁶⁶ A 2024 NAS report estimates that from 2010 to 2016, universities failed to disclose some 54 percent of all reportable funds from gifts.⁶⁷

In 2023, following the October 7 Hamas attack on Israel and all that followed in its wake on college campuses, the House passed the Defending Education Transparency and Ending Rogue Regimes Engaging in Nefarious Transactions (deterrent) Act.⁶⁸ The deterrent Act would have required all higher-ed institutions to disclose any foreign gifts and contracts exceeding $50,000. And in 2024, two House members introduced the No Foreign Gifts Act, which would outright prohibit gifts to colleges and universities from foreign nations that have provided financial support to foreign terrorist organizations.⁶⁹

In addition to regulating foreign funding, higher-ed reforms that would more aggressively tax the value of, or income generated by, America’s wealthiest private nonprofit college and university endowments, which are collectively larger than those of private foundations, is likely to continue to attract congressional interest.⁷⁰

Foreboding

It seems inevitable that, during the coming years, there will be a(nother) scandal arising out of foreign funding of nonprofits. Casey Michel’s Foreign Agents shows how FARA’s current weakness encourages questionable activity. These problems are further compounded by, and comparable to, loopholes in and loose interpretations of the decades-old legislation governing nonprofits more generally.

FARA reform would rightly put foreign agents on the defensive. It arguably represents the “lowest-hanging fruit” for those concerned with the lack of transparency in the funding of nonprofits. But it should also point toward broader reforms of the laws governing tax-incentivized charity, many of which should find support on right and left alike.

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This article first appeared in the Winter 2024 print edition of American Affairs.

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Notes

¹   See “An Again-Updated Collection of Various Recent Ideas to Reform Philanthropy,” Giving Review, October 17, 2022.

²   Casey Michel, Foreign Agents: How American Lobbyists and Lawmakers Threaten Democracy around the World (New York: St. Martin’s Press, 2024).

³   Casey Michel, American Kleptocracy: How the U.S. Created the World’s Greatest Money Laundering Scheme in History (New York: St. Martin’s Press, 2021).

⁴   22 U.S. Code § 611.

⁵   Michel, Foreign Agents, 8.

⁶   Michel, Foreign Agents, 80.

⁷   Michel, Foreign Agents, 9.

⁸   Michel, Foreign Agents, 80.

⁹   Nick Robinson, “Foreign Agents in an Interconnected World: FARA and the Weaponization of Transparency,” Duke Law Journal 69, no. 5 (2020): 1078, note 5.

¹⁰  Michel, Foreign Agents, 90–91; Tarun Krishnakumar, “Propaganda by Permission: Examining ‘Political Activities’ Under the Foreign Agents Registration Act,” Journal of Legislation 47, no. 2 (2011): 55.

¹¹  Michel, Foreign Agents, 82; Ava Marion Plakins, “Heat Not Light: The Foreign Agents Registration Act After Meese v. Keene,” Fordham International Law Journal 11, no. 1 (1987): 191.

¹²  Michel, Foreign Agents, 82.

¹³  Michel, Foreign Agents, 84.

¹⁴  “Foreign Agents Registration Act Amendments,” Report No. 143, April 1, 1965, U.S. Senate, 89th Cong. (1965), 4.

¹⁵  Michel, Foreign Agents, 86.

¹⁶  Michel, Foreign Agents, 87.

¹⁷  Comptroller General of the United States, “Effectiveness of the Foreign Agents Registration Act of 1938, as Amended, and Its Administration by the Department of Justice,” Report to the Committee on Foreign Relations, U.S. Senate, B-177551, March 1974; quoted in Michel, Foreign Agents, 88.

¹⁸  Michel, Foreign Agents, 89.

¹⁹  Michel, Foreign Agents, 90.

²⁰  Ben Friedman and Lydia Dennett, “Loopholes, Filing Failures, and Lax Enforcement: How the Foreign Agents Registration Act Falls Short,” Project on Government Oversight, December 16, 2014; quoted in Michel, Foreign Agents, 210.

²¹  “Sunlight Foundation Recommendations to the Dept. of Justice Regarding the Foreign Agents Registration Act,” Sunlight Foundation, December 2014; quoted in Michel, Foreign Agents, 210.

²²  Michel, Foreign Agents, 211.

²³  Office of the Inspector General, U.S. Department of Justice, “Audit of the National Security Division’s Enforcement and Administration of the Foreign Agents Registration Act,” September 2016, iii.

²⁴  Office of the Inspector General, “Audit.”

²⁵  Office of the Inspector General, “Audit.”

²⁶  Michel, Foreign Agents, 139.

²⁷  Lydia Dennett, “Closing the Loophole on Foreign Influence,” Project on Government Oversight, April 13, 2018; quoted in Michel, Foreign Agents, 139.

²⁸  Michel, Foreign Agents, 140–41.

²⁹  Task Force on the Foreign Agents Registration Act, FARA: Issues and Recommendations for Reform, International Law Section, American Bar Association, July 16, 2021, 1.

³⁰  Ben Freeman and Nick Cleveland-Stout, “Foreign Lobbying in the U.S.,” Quincy Institute for Responsible Statecraft, July 3, 2024.

³¹  Didi Kirsten Tatlow and John Feng, “Exclusive: How $1M from China-Linked Groups Oiled New York Politics,” Newsweek, September 28, 2023.

³²  Michel, Foreign Agents, 193–94.

³³  Michel, Foreign Agents, 198–200.

³⁴  See, for example, “Foreign Funding and Public Trust in the Think Tank Sector,” Quincy Institute for Responsible Statecraft, October 25, 2022.

³⁵  26 U.S. Code § 501(c)(3).

³⁶  Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 487 (1969).

³⁷  See Dana Brakman Reiser and Steven A. Dean, For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving (New York: Oxford University Press, 2023); reviewed in Michael E. Hartmann, “Big Philanthropy and the Benefits—and Limits—of the Bygone ‘Grand Bargain,’” American Affairs, December 12, 2022.

³⁸  See, for example, James Allen Smith, “From Populist Crusade to Comprehensive Regulation: the Tax Reform Act of 1969,” RE:source (Rockefeller Archive Center), December 20, 2019; Michael E. Hartmann, “The Ford Foundation, the 1967 Cleveland Mayoral Election, and the 1969 Tax Reform Act,” Giving Review, February 3, 2021.

³⁹  Staff of the Joint Committee on Internal Revenue Taxation, General Explanation of the Tax Reform Act of 1969 (Washington, D.C.: U.S. Government Printing Office, 1970), 48.

⁴⁰  Rev. Rul. 2007-41, 2007-25 I.R.B. (June 18, 2007); “Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations,” Internal Revenue Service, updated August 20, 2024; “Frequently Asked Questions About the Ban on Political Campaign Intervention by 501(c)(3) Organizations: Get-Out-The-Vote Activities,” Internal Revenue Service, updated August 19, 2024; see, for example, “A Selection of Quotes About Nonprofit Law’s Distinction Between Politics and Charity,” Giving Review, April 26, 2022.

⁴¹  Craig Kennedy, “Politics and Charity in 2024: Why It’s Time to Draw a Hard Line,” Chronicle of Philanthropy, January 18, 2024.

⁴²  Ellen P. Aprill and Lloyd Hitoshi Mayer, “21st Century Churches and Federal Tax Law,” University of Illinois Law Review 2024, no. 3 (2024): 939–84.

⁴³  Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780 (2006).

⁴⁴  Brakman Reiser and Dean, For-Profit Philanthropy, 76.

⁴⁵  Brakman Reiser and Dean, For-Profit Philanthropy, 76.

⁴⁶  See Grant Williams, “Former IRS Nonprofit Watchdog Seeks to Retool Government Oversight of Charities,” Chronicle of Philanthropy, October 29, 2009.

⁴⁷  Task Force on the Foreign Agents Registration Act, FARA: Issues and Recommendations for Reform, iii.

⁴⁸  Task Force on the Foreign Agents Registration Act, FARA: Issues and Recommendations for Reform, 2. There are also state versions of FARA; strengthening some of those has been proposed at that level.

⁴⁹  Task Force on the Foreign Agents Registration Act, FARA: Issues and Recommendations for Reform, 2.

⁵⁰  Robinson, “‘Foreign Agents’ in an Interconnected World,” 1081.

⁵¹  Robinson, “‘Foreign Agents’ in an Interconnected World,” 1147.

⁵²  Stop Helping Adversaries Manipulate Everything Act, H.R. 9140, 117th Cong. (2022).

⁵³  Michel, Foreign Agents, 284.

⁵⁴  Fighting Foreign Influence Act, H.R. 8176, 118th Cong. (2024).

⁵⁵  Michel, Foreign Agents, 284–86.

⁵⁶  “Grassley Reintroduces Think Tank Transparency Act to Expose Foreign Influence Campaigns,” Office of Senator Charles Grassley, March 30, 2023.

⁵⁷  Ben Freeman, Foreign Funding of Think Tanks in America, Foreign Influence Transparency Initiative, Center for International Policy, January 2020.

⁵⁸  American Donor Privacy and Foreign Funding Transparency Act, H.R. 8293, 118th Cong. (2024).

⁵⁹  Brandon L. Van Grack to [Redacted], March 13, 2020, delivered via FedEx and email, U.S. Department of Justice, 2–3. At the time of the letter’s writing, Van Grack was chief of the FARA Unit, Counterintelligence and Export Control Section, National Security Division, U.S. Department of Justice.

⁶⁰  No Foreign Election Interference Act, H.R. 8314, 118th Cong. (2024).

⁶¹  See End Zuckerbucks Act, H.R. 8291, 118th Cong. (2024); see also Sarah Lee, Jon Rodeback, and Hayden Ludwig, “States Banning or Restricting ‘Zuck Bucks,’” Capital Research Center, April 10, 2024.

⁶²  “Taxes on Taxable Distributions from Donor Advised Funds under Section 4966,” Federal Register 88, no. 218, (November 14, 2023): 77922, proposed 26 CFR Part 53 [REG-142338-07].

⁶³  Richard Rubin, “Wealth Managers, Charities Defend Fees From Donor-Advised Funds,” Wall Street Journal, May 12, 2024.

⁶⁴  Accelerating Charitable Efforts Act, S. 1981, 117th Cong. (2021); Accelerating Charitable Efforts Act, H.R. 6595, 117th Cong. (2021).

⁶⁵  20 U.S. Code § 1011f.

⁶⁶  “Congress Asks Dept of Education to Enforce Foreign Gift Disclosure Laws,” National Association of Scholars, April 7, 2023. On the basis of public-records requests of public higher-ed institutions, NAS maintains a database of their foreign funding: see Neetu Arnold, “About the Foreign Funds Database,” National Association of Scholars, August 15, 2024.

⁶⁷  Neetu Arnold, Shadows of Influence: Uncovering Hidden Foreign Funds to American Universities, National Association of Scholars, September 29, 2024, 17.

⁶⁸      Defending Education Transparency and Ending Rogue Regimes Engaging in Nefarious Transactions Act, H.R. 5933, 118th Cong. (2023).

⁶⁹  “New York Congressmen Ritchie Torres and Andrew Garbarino Introduce the ‘No Foreign Gifts Act,’” Office of U.S. Rep. Ritchie Torres, September 24, 2024.

⁷⁰  See, for example, Ivory Tower Tax Act, S. 1547, 117th Cong. (2021), which would impose an additional one-percent tax on the value of the wealthiest private higher-ed endowments to specifically be used for support of vocational education and training; Higher Education Accountability Tax Act, H.R. 8883, 117th Cong. (2022), which would raise the excise tax on certain private higher-ed endowments from what is now 1.4 percent to 10 percent; and impose a tax of up to 20 percent on universities that increase net price of attendance by more than rate of inflation over a three-taxable-year period; see also Michael E. Hartmann, “Legislation Proposed to Increase Taxes on Large University Endowments,” Giving Review, December 14, 2023, on the College Endowment Accountability Act, which would increase excise tax to 35 percent on private higher-ed endowments with at least $10 billion in assets under management; Michael E. Hartmann, “Comparing Higher-Ed and Foundation Endowments With at Least $10 Billion in Assets under Management,” Giving Review, January 30, 2024.

Source: https://capitalresearch.org/article/foreign-agents-and-american-nonprofits/