Risk Management

Legal Liability Looms under New Lobbying Bill

Like Sarbox, legislation that could become law this week would require senior executives to certify the truthfulness of their corporations' reports.
David KatzSeptember 11, 2007

Scene: a CFO suddenly learns that she must personally sign off on her company’s compliance with a certain law. If what she certifies isn’t true, she could go to jail or pay a whopping fine. So she insists that the company install an elaborate due-diligence procedure—at great cost—to make sure that what she signs is fully supported by the facts.

Those circumstances will sound familiar to any finance chief who has worked at a publicly traded company for the last five years, since they clearly apply to the Sarbanes-Oxley Act’s certification provisions. Unfortunately for many CFOs, however, they’re likely also to apply to another area of corporate life as early as this week: political lobbying.

Indeed, in the highly likely event that President Bush signs the Honest Leadership and Open Government Act, the new lobbying bill passed overwhelmingly by Congress earlier this summer, many senior executives will find themselves certifying the facts about the gifts their employers give to politicians. The executives would also be assuming scads of new criminal liability along the way. The bill would amend the Lobbying Disclosure Act of 1995, which contains the Senate rules governing gifts to senators and staff members, as well providing criminal penalties for lobbying infractions by former government employees.

Among much else, the new law would wipe out the current LDA exception that permits members of Congress and staffers to accept gifts worth under $50. More importantly from a corporate-reporting perspective, executives of companies that register under the LDA must attest twice a year that the companies haven’t violated Congressional gift rules.

The bill echoes Sarbox in its extensive reporting requirements. Corporate lobbying reports now filed twice a year would have to be filed on a quarterly basis, within 20 days of the end of the quarter. Besides the quarterly reports, companies and their lobbyists would have to file new ones twice a year that identify their political contributions, the federal candidates they support, and their political action committees, as well as report how much money the dole out to legislative and executive-branch officials and much else.

Most alarmingly, the legislation, which Congress sent to the president on Sept. 4, would “dramatically increase corporate civil and criminal exposure related to government lobbying activities,” Robert Kelner, chair of the election and political law practice group at Covington & Burling, a Washington law firm, told CFO.com. “This represents a sea-change in the regulation of corporate lobbying.” Currently, companies have no legal liability for such things as violations of Congressional corporate-gift rules.

What’s more, the bill could intensify federal scrutiny of corporate lobbying. “Various provisions of the new [legislation] seem designed to goad the Department of Justice into
much more zealous enforcement of the heretofore loosely enforced LDA,” according to a report to clients that Kelner wrote last month. “Most notably, it requires the Department of Justice to report to Congress twice annually on the number of enforcement actions taken by the Department under the LDA.”

To be sure, the person who would sign off on the lobbying disclosure reports needn’t be the CFO. “But as lobbying disclosure becomes more complicated, including from an accounting/financial [standpoint], we could see finance more involved,” says Kelner.

With the new risks faced by corporations if the bill becomes law, finance folks could become more involved in choosing how the company defines “lobbying” for tax and reporting purposes. Tax laws require corporations to track lobbying costs because it’s not deductible, and therefore have to be excluded when they take business-expense deductions, Kelner notes.

Under current law, companies can choose between definitions of lobbying contained in tax law and under the LDA. Depending on the kind of political activity the company’s engaged in, either regime can yield a better number, according to the attorney. In most cases, companies will want to lower their expense for tax purposes, he says. But some will want to show that they have “a big footprint in Washington, D.C.”

Although the tax-law definition of lobbying includes state-level and grass-roots political action, it excludes activities involving all but the highest federal executive-branch officials from the definition. In contrast, the LDA definition excludes broad-based activity aimed at mobilizing voters but covers activities involving much lower-ranked executive-branch officials than the tax laws do. For example, the tax laws wouldn’t treat a company’s contact with an Assistant Secretary of Defense as reportable lobbying, while the LDA would, according to Kelner.

Such “judgments involve running the numbers, which isn’t something lobbyists are good at, says Kelner. But with the increased scrutiny of their political largesse that companies are likely to be facing, they will want someone who is good at it. In many cases, that could end up being the CFO.

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