Corruption and the Funding of UK Political Parties

Transparency International (UK)

TRANSPARENCY INTERNATIONAL (UK) the coalition against corruption

Corruption and the Funding of UK Political Parties

October 2006

Transparency International (UK)

Transparency International (TI) has been at the forefront of the anti-corruption movement since it was formed in 1993. TI is a non-profit making, independent, nongovernmental organisation, dedicated to increasing government accountability and curbing both international and national corruption. TI(UK) is part of a network of 90 national chapters carrying out the TI mission around the world. TI works in a nonconfrontational way with governments, companies, development agencies, NGOs and international organisations to seek a consensus to combat corruption. For more information on TI(UK) please see www.transparency.org.uk Published by: Transparency International (UK) Downstream Building 1 London Bridge London SE1 9BG Electronic copies of this report can be obtained from: info@transparency.org.uk and from the web site: www.transparency.org.uk Š Transparency International (UK)

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Table of contents Page 1

Introduction

4

2

Executive Summary

5

3

Context

6

4

Current UK Law and Practice

8

5

Good Practice in Political Party Funding

9

6

Fighting Corruption in Political Party Funding – Current Limitations and Recommendations

11

7

Conclusion and Summary of TI(UK) Recommendations

18

Annex 1

Political Parties Elections and Referendum Act 2000

20

Annex 2

Schedules Comparing Criminal Penalties

22

Notes and References

23

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1

Introduction

1.

TI(UK) is the UK national chapter of Transparency International, the global coalition against corruption. Because of the perceived low extent of corruption in the UK, TI(UK) is chiefly interested in sectors where corruption is exported from the UK to developing countries. Our work therefore focuses on the official arms trade; the construction and engineering sector; the money markets; extractive industries; and UK legislation relating to global treaties on corruption. However, TI(UK) is also concerned to explore issues of corruption taking place within the UK and this paper is our response to the ongoing “loans for peerages” matter.

2.

This paper sets out TI(UK)’s position on the suspicions of ongoing corruption in political funding in the UK. In the context of widespread debate about the funding of political parties by expert bodies such as the Electoral Commission and formal enquires such as that led by Sir Hayden Phillips, TI(UK) does not claim expertise in the detail of funding systems. Our interest instead lies with the means of reducing the exposure of the system to corrupt practice. Therefore, TI(UK)’s findings and recommendations are not intended to be detailed, definitive statements about a new system, but a vision of how principles could be applied to provide a more robust defence against corrupt practice.1 3.

TI(UK) welcomes the detailed review by the Electoral Commission into the workings of the current regime and calls for further research into the impact of some of the proposed recommendations in this paper. For example, analysis is required to assess the impact of a cap on donations and spending and on the implications of any greater state funding, including such possible measures as a tax credit on small donations.

4.

TI(UK) would like to thank Kate Wilson and Daniel Wilsher, who are the authors of this paper, and Catherine Stansbury for her contribution to its drafting. We would also like to thank the following for sharing their insights with us: • Sam Younger, Chairman of the Electoral Commission • Lord David Shutt, Chief Whip of the Liberal Democrats in the House of Lords • Malcolm Rawling, Mark Williams, Emma Fisher, Policy Team at the Electoral Commission • Roger Creedon, former Chief Executive, Electoral Commission • Professor Keith Ewing, School of Law, Kings College, London • Dr Amanda Olsson, anti-corruption expert and academic • Diana Rodriguez, TI Secretariat • Ingrid van Biezen, University of Birmingham

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This paper considers elections to the Westminster Parliament. The political party spending rules also apply to elections to the European and Scottish Parliaments and Welsh and Northern Ireland Assemblies. Limits to spending in Westminster suggested in this paper imply consequential reductions in spending limits in other parliaments and assemblies but are not dealt with in this paper.

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2

Executive Summary

5.

In 2001, a new disclosure regime was introduced as part of the Political Parties Elections and Referendum Act 2000 (PPERA) to give transparency to and to regulate the funding and expenditure of political parties. It has been only partially successful in reducing the exposure of the UK political system to corrupt practice.

6.

Public cynicism concerning the integrity of political parties has recently been aggravated by the exposure of doubtful practice in relation to postal votes. The “loans for peerages” affair, which broke in March 2006, has reinforced this cynicism. Trust in politics and politicians is low and the UK political establishment is perceived by the public to be the most corrupt of any UK institutioni.

7.

The PPERA and resulting Electoral Commission have served chiefly to illuminate, but not reform sufficiently, the difficulties of political funding in the UK. The so-called ‘arms-race’ approach to election spending, combined with decreasing party and trade union membership, puts financial pressure on politicians and parties. In recent years, this has meant that the main political organisations are operating with significant deficits. A high dependence on very large individual donations has resulted, increasing the risk of corruption and exacerbating public unease about influence over politicians.

8.

The recent ‘Power’ii enquiry into the state of Britain’s democracy found that “there is a widespread perception that donations to parties can buy influence or position. It is clear that a system of party funding that relies increasingly on very sizeable donations from a handful of wealthy individuals or organisations creates an environment in which the perception spreads that democracy can be bought.”

9.

Experts and politicians are examining political funding regimes elsewhere.

Specifically, they are considering the need for greater restrictions on donations to political parties and expenditure on elections, possibly combined with increased state funding in order to reduce the risk that political influence is for sale.

10.

The imperative for change in the financing regime presents an excellent opportunity for reform. However, this should not overshadow the possibility that crimes may have been committed in the course of recently reported events. Nor should systemic reform divert attention from a perceived reluctance to prosecute ‘white collar’ crime.

11.

In the interests of reducing the vulnerability of the UK political system to corrupt practice, TI(UK) is calling for caps on donations to political parties; a ban on all loans to political parties other than those on commercial terms from recognised commercial institutions; a lower ceiling on overall election spending by parties at the national level; research into the impact of extending aspects of state funding of parties; and strengthening of the regulations and penalties relating to party funding and nominations for honours. We also welcome the Scotland Yard enquiry into possible crimes that may have been committed if the allegations concerning the “loans for peerages” matter are 5

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sustained. We also challenge the media to be less complacent about aspects of ‘white collar’ crime.

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Context

3.1

The high cost of elections, large sums from donors

12.

Political campaigning in the media age has become expensive by choice.

Large-scale campaigns are the norm for the two main parties, costing millions in advertising agency fees, national billboards, and the cost of travelling up and down the country to appear on multiple regional television spots daily. Political parties are increasingly struggling to meet expenditure and getting into debt to fund these campaigns. (Labour’s accounts in July 2006 show a £27 million deficit following the 2005 general election and the Conservatives a deficit of £18 million.)

13.

Such a financial predicament is largely self-induced with the two major parties aspiring to at least match each other’s spending, generating an ‘arms race’ effect. The two main parties spent £40 million each during the 1997 electioniii. This led to calls for a cap on spending, introduced under the PPERA rules, at a limit of the equivalent of £30,000 per constituency contested for the Westminster Parliament (excluding actual constituency level spending by parties for their local candidates which is capped at around £10,000 per candidate depending on constituency size and type). This formula for a national figure amounts to just under £20 million per party if every Westminster seat is contested.

14.

For party fundraisers, the choice between securing a single large donation of £1million and persuading many thousands to join a political party is stark and obvious.

Therefore, donations of hundreds of thousands of pounds are not unusual with many donors giving over £1 million.

15.

The reliance on very large individual donations to fund these elections is extreme in comparison to party systems in other developed democracies. By contrast, restrictions on the value of annual donations by individuals in other countries range from pound sterling equivalent of approximately £4,000 (Ireland), £3,000 (France), £2,200 (Canada), £1,400 (Belgium), to £550 (USA).iv 16.

This makes the UK political party system particularly prone to corrupt practice by those seeking to buy or sell influence (whether through access to politicians, changes in legislation, fast-tracking of planning decisions, or favourable tendering decisions), in return for contributions to party coffers. While it is not always easy to connect policy outcomes directly to donations by individuals, TI(UK) believes that the very possibility of such a link is in itself corrosive to a healthy democracy.

3.2

Calls for reform

17.

Until 2000, the UK had one of the world’s least regulated political financing regimes. Calls for reform and draft legislation had been on the parliamentary agenda 6

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from the time of the Houghton Committee in the 1970s; the Home Affairs Select Committee in the 1990s; followed by the Committee on Standards in Public Life led initially by Lord Nolan, then Lord Neill. A series of critical press stories suggesting the exercise of political influence in favour of rich individuals added to the pressure to reform the system. The result was the PPERA, 2000. Annex 1 of this paper summarises the PPERA’s key provisions.

3.3

Ongoing allegations and public cynicism

18.

The fact that further critical stories about political funding (see the box on page 8 on the ‘“loans for peerages” affair) have occurred since the establishment of a widelylauded new regime under the PPERA has added to pressure for more far-reaching reforms. The current investigation may find that crimes have been committed or that actions were taken deliberately to circumvent the existing law. This raises questions about integrity within our political parties, as well as the adequacy of existing rules and their enforcement. It also raises questions as to how to regulate such activity in the future, in particular about how political activity should be financed. It suggests the need to consider limits on donations and spending and revisit alternative sources of funding for political parties such as increased state funding.

19.

The answers to these questions are influenced by the value the public places on having a multi-party democracy where parties and politicians are accountable for their actions, and where funding and expenditure of political parties is adequately transparent and regulated.

20.

TI’s Corruption Barometerv in 2005 showed that political parties were perceived by the public as the most corrupt institutions in the UK. Party membership has been in long-term decline since the 1960s. The Labour Party’s 1997 manifesto promised to clean up political party financing. The Labour government introduced the PPERA to oblige political parties to declare the source of all donations above a minimum figure and to ban foreign donations to political parties. This was a positive development, but transparency alone is not enough to counteract the public’s cynicism about donors’ motives when giving such large sums.

21.

A further reason for the public’s cynicism about politicians and political parties is a perception encouraged by the media that they consider themselves to be above the law. Allegations concerning illegal fundraising and abuses of the honours system are widely described as ‘sleazy’ but are rarely investigated as potential crimes. There is a danger that calls for reform from within the system will be used as a convenient smokescreen by politicians to deflect attention from problems (and possible crimes) they themselves may have generated by saying it is the system that is broken, not those who abuse it. Thus, it is necessary to ensure, first, that the enthusiasm for reform does not overshadow the need to ensure that any wrongdoer involved in the current incidents is properly dealt with, and second, that reform includes both reform of the funding system and more rigorous enforcement of that system. This will serve both to reduce the risk of corruption and to demonstrate to the public that politicians are equal with others in the eyes of the law.

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“LOANS FOR PEERAGES” 2006

According to press reports, in March 2006, a number of men who had been nominated for peerages were rejected by the House of Lords Appointments Commission. It was reported that they had all provided funding to the Labour Party during the previous year for the election campaign. Such funds had allegedly not been disclosed under the PPERA rules on the basis that they were ‘commercial’ loans. The Labour Party Treasurer has reportedly claimed he was not told about these funds. Questions have been raised about these loans and a number of loans to the Conservative Party. Such questions include whether funds may have been given or intended as donations or soft loans but were described as loans on commercial terms so as to avoid the need to disclose them to the Electoral Commission. Crimes may have been committed if there had been deception in concealing the true nature of donations or loans and/or if loans or donations were offered in return for peerage nominations or vice versa which would be in breach of the Honours (Prevention of Abuses) Act 1925. TI (UK) submitted a paper to the Metropolitan Police detailing a number of other offences which, depending on further investigation, may have been committed including bribery, fraud, false accounting and deception offences. The Metropolitan Police are investigating whether crimes have been committed by one or both of the two main political parties.vi

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Current UK Law and Practice

4.1

The legal position pre-2000

22.

Party funding was very lightly regulated before the PPERA. There were, and continue to be, several laws which had some bearing on political finance: • Corrupt and Illegal Practices Prevention Act 1883 - broadly seeks to reduce the impact of money and scope for bribery. It places restrictions on expenditure by candidates and provides the basis for the Representation of the People Act (see below).

• Honours (Prevention of Abuses) Act 1925 – makes it an offence to grant or obtain an honour in exchange for cash or other benefit and was introduced following the sale of honours when Prime Minister Lloyd George was in office.

• Representation of the People Act (RPA) 1983 – places limits on spending by or on behalf of individual candidates for office.

• Companies Act 1985 – requires companies to disclose donations of more than £200 in their accounts.

• Trade Union and Labour Relations (Consolidation) Act 1992 – allows trade union members to contract out of subscribing to political funds.

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4.2

Proposals for Change pre-2000

23.

Pressure for change existed in the form of parliamentary committees in the years leading up to the PPERA but they were not wholly successful in effecting reform: • Houghton Committee (1975). A majority recommended public funding tied to a party’s share of the vote at previous general elections in recognition of the rising costs and falling membership of parties. They proposed a limit of 20 per cent of income from the state.

• Hansard Society (1981). This report noted that the heavy dependence on narrow sources of funding was against the public interest because it distorted electoral choices; militated against participation; gave great privileges to interest groups; and disadvantaged smaller parties. It advocated matched funding from the state (subject to a fixed limit in order to maintain a preponderance of private financing for parties).

• Home Affairs Select Committee Report (1994). This committee split along party lines with the casting vote to the Conservative chair. It suggested little change was appropriate in British circumstances but called for adoption of a code of practice to make clear to donors that money did not buy influence. Chris Mullin drafted a separate minority report which argued for disclosure of the identity of donors, limits on spending in campaigns and banning foreign donations, among other measures.

• Labour Party Manifesto (1997). This featured a commitment to require disclosure of sources of larger donations, to ban foreign donations, and to ask the Committee on Standards in Public Life to review party funding.

• Neill Committee (1998). This produced a report, in response to the government’s request, which called for the establishment of an Electoral Commission; reporting of donations; a ban on foreign donations; shareholder approval of company donations; and modest funding for policy development. The government accepted most of these with the notable exception of tax relief on donations. These were embedded in the PPERA, as detailed in Annex 1.

24.

In many respects, the PPERA sets out an impressive and comprehensive scheme. The Electoral Commission gives every appearance of being independent and unbiased. The scheme, as far as it goes, compares well with European standards in most respects. The publication of donations to parties has provoked robust debate in the media about the motivation of donors, thereby providing a check on the motivation to buy influence through political donations. However, there are deficiencies in the PPERA. These are discussed, together with proposed reforms, in section 6.

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Good Practice in Political Party Funding

25.

There are a growing number of international standards which aim to guide good practice in the field of political finance. For example, the UN Convention against 9

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Corruption recommends control over party finances alongside the regulation of public officials.vii The African Union Convention on Preventing and Combating Corruptionviii includes provisions requiring transparency in political party finance. This trend reflects the perception that unchecked private finance of parties represents a threat to healthy democracies through corruption.

26.

The Council of Europe (COE) has been particularly active in recent years by providing Common Rules. These recognise that there should be a balance in funding between private and state sources such that no one source undermines the integrity of parties: “The state should provide support to political parties. State support should be limited to reasonable contributions. State support may be financial. States should ensure that any support from the state and/or citizens does not interfere with the independence of political parties.” ix 27.

The Rules also advocate tighter regulation of donations: “Measures taken by states governing donations to political parties should provide specific rules to: • avoid conflicts of interests; • ensure transparency of donations and avoid secret donations; • avoid prejudice to the activities of political parties; and • ensure the independence of political parties.”x

28.

The United Kingdom rules arguably fail to meet these objectives because they allow parties to become too dependent upon a small number of large donors potentially threatening their independence. This makes the UK system much closer in nature to that of the United States where there is widespread concern about allegations of abuses in party funding. There is ongoing debate in relation to the McCain bill in Congress about how to reduce the influence of big money and special interests in lawmaking.

29.

The COE Rules also recommend that States should: • “provide that donations to political parties are made public, in particular donations exceeding a fixed ceiling; • consider the possibility of introducing rules limiting the value of donations to political parties; • adopt measures to prevent established ceilings from being circumvented.” xi

30.

Under the PPERA, the UK has a relatively sophisticated system for ensuring transparency. However, the “loans for peerages” affair shows that further reforms are necessary to increase transparency and limit the size of donations. Large individual donations have the potential to corrupt because they may give individual donors much more influence and power than their real level of support would justify.

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31.

The Council of Europe has also published Guidelines that provide a commentary on best practice for avoiding corruption in political party funding. These note that, to foster direct accountability to citizens, private finance should be the primary source of party funding, but add a cautionary note which is apt in the UK context: “Private contributions are more desirable than public subsidies provided that they are donated in relatively small amounts by individual electors. It is therefore important that legislation is adopted which counteracts the imbalance in opportunities for political participation and in competition generated by unequal access to private donations, and which also curtails the potentially corrupting effects of private funding.”xii 32.

The Guidelines recommend that a “combination of both a maximum threshold on the amounts per donor and the total sum of donations per year is advisable”.

33.

The Guidelines also suggest that a tightly controlled system of state funding should be used to supplement, but not replace, private finance. The Guidelines note that many Western European parties are financially dependent on state subsidies to varying degrees. Concern is expressed at the uncoupling of parties from grass-roots membership in favour of closer ties with state funding bodies. The Guidelines therefore note with approval the Portuguese system of a legal maximum to the level of state support which is linked to the state minimum wage2. They also endorse the matching funds arrangements in Germany. Both these examples guard against over-reliance upon state funding.

34.

The UK Electoral Commission has also developed a set of key principles which it believes should underpin any system for the funding of political parties. These are all perfectly consistent with the spirit of the Council of Europe’s view and include: • • • • • •

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encouraging smaller contributions from a larger number of people; ensuring that no single funding source can exert undue influence; neither entrenching the existing party system nor inhibiting the development of new parties; clear and fair rules for how parties qualify for any public funds; taking account of the needs of parties at all levels and in all parts of the United Kingdom; and building public confidence in the integrity of the system.

Fighting Corruption in Political Party Funding – Current Limitations and Recommendations

35.

There are long-standing general debates about the merits and demerits of the UK’s political funding system. TI(UK) is chiefly concerned about the current system being prone to corrupt practice. This section considers measures that should be taken to combat corrupt practices and corruption risk in party funding in the UK. 2

The Portuguese state pays parties 1/225 of the monthly minimum wage per vote obtained in the previous elections to parliament to cover running costs.

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6.1

Anti-corruption measures relating to expenditure

36.

Before the PPERA, there was no limit on election spending at national party level. This led to ‘arms-race’ spending by the two main parties, which reached a peak during the 1997 election campaign. The PPERA introduced a limit of £19.23 million on national level spending per party per election. In 2001, both the Conservatives and Labour spent £13 million and £11 million respectively, representing 85% and 72% of the maximum spending limits3. This level of spending significantly exceeds the next closest party (the Liberal Democrats), who spent less than £1.5m in 2001. In 2005, the first full election cycle after the introduction of the national spending cap, the Conservatives and Labour spent nearly £18m each compared with £4.3m by the Liberal Democrats.

37.

In 2001, the two main parties spent more than a third of their national campaigning budgets on advertising (Conservatives 35%, Labour 46%). Despite this, research by MORI as well as studies by the Electoral Commission and othersxiii shows that the electorate say they are deterred from participating in elections by large-scale advertising campaigns by political parties. By contrast, the activity most likely to persuade the electorate to vote is doorstep visits by local politicians. Active engagement by the public with politics is one of the best safeguards against corruption.

Current expenditure allocation does not encourage this and appears even to alienate sections of the public.

38.

Ever higher spending on national election campaigns increases the demand for funds. This makes parties vulnerable to large donor influence which can take the form of corruption. A significantly reduced cap on the amount of spending on elections at national level might therefore reduce the potential for corruption.

39.

Limits on spending by individual parliamentary candidates at local level have existed since 1883xiv and are considered to be one of the most successful aspects of the regulatory system in limiting the potential for corrupt practice at constituency level.

The cap is revised by Parliament to reflect inflation and varies depending on the nature of the constituency (e.g. urban or rural). The average cap in 2006 was around £10,000 per candidatexv.

40.

Presently, it is possible for political parties to spend disproportionately large parts of their national funds in specific constituencies but this must not pay for candidate-specific literature. With the main parties focusing their election campaign efforts on a limited number of marginal seats, this tends to result in heavy use of national funds at local level in particularly keenly contested seats, often in the months before the local campaigning period (for accounting purposes) begins. It is also possible for election expenditure to be incurred outside the current periods for which expenditure is limited by law, and so evade the caps that are set on expenditure.

3

The actual overall spending limit in 2001 was £15.38m because the regulated period was shorter than the normal maximum that allows for £19.23m maximum expenditure.

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41.

Given the already significant sums that can be spent by candidates at local level (£6.4 million per party in aggregate), we recommend that national election expenditure limits be significantly reduced to a figure which would accommodate reasonable expenditure, possibly to half the current cap, that is to £10 million per party per election.

We further recommend a review be undertaken to consider whether the period during which expenditure is limited should be extended and whether particularly aggressive spending by national campaigns in local areas might be included in the limits for constituency spending. This could help stem the allocation of national funds to unfairly advantaged local candidates.

6.2

Anti-corruption measures relating to funding

42.

Presently, there are no caps on donations from individuals to political parties.

This puts the UK out of step with practice elsewhere in developed democracies and may have exposed the party system to a measure of capture by donors. Caps on donations, services and benefits to political parties should be introduced so as to limit the risk of undue influence by donors over parties.

43.

However, a cap on donations to political parties is worthwhile only if the effect is to allay public fears that donations buy influence and therefore have a corrupting influence. Most commentators in favour of caps recommend that these be set at a low level. Many experts, academics and think-tanks suggest a cap of between £5,000 and £50,000 per individual donation. These recommendations are in line with practice in developed democracies elsewhere. This would have a significant impact on parties’ finances in the short term, given the heavy reliance of the two main parties on donations of over £1 million. However, if it was combined with significant caps on spending, and possibly financial incentives towards mass membership, the impact would be reduced.

44.

TI(UK) recognises the particular concerns of the Labour party in relation to caps on donations and the current arrangements with the trade unions. However, we note that in a 2006 poll of political party activists, a majority of Labour activists supported the idea of trade unions acting as brokers, encouraging members to make contributions to political parties directly and treating these as individual donations.xvi 45.

As discussed above, the link made by the public between large donations and undue political influence is so strong as to make it imperative for a low cap on donations to be established to break the association. A political compromise on a donation cap in relation to trade unions is a necessary part of reform of political financing in the UK, and in the context of a package of reforms, might be achievable.

46.

The recent ‘“loans for peerages”’ affair has raised issues which demonstrate that legislation should provide for disclosure of all loans. Up until the recent Electoral Administration Act (passed in summer 2006), only loans made ‘otherwise than on commercial terms’ were required to be disclosed. This could make it easier to conceal ‘soft loans’ from the Electoral Commission. The Neill Committee recommended disclosure of all loans but parties urged an exception of loans on ‘commercial terms’.

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Subsequent events emphasise that the original recommendation was correct and that all loans must be disclosed. The Electoral Administration Act amends the PPERA to require disclosure only of any loan, credit facility, or specified security arrangement in excess of a value of £5,000 where it is entered into by a political party centrally, or in excess of £1,000 where it is entered into locally.

47.

Against this background, we make the following recommendations: •

A cap on donations, gifts and other benefits to a political party such that they do not exceed a total value of £10,000 per donor in any financial year.

•

A ban on all loans, credit facilities and security arrangements provided to a political party other than those on commercial terms from recognised commercial institutions.

•

Disclosure to the Electoral Commission of all loans, credit facilities and security arrangements provided to a political party.

•

Disclosure to the Electoral Commission of those documents under which loans, credit facilities, or security arrangements provided to a political party are made.

Such disclosure, which is not currently required under the 2006 Electoral Administration Act, should be required in order to reduce the potential for fraud in the provision of information or terms in relation to those transactions. These documents should also be made available for public inspection in order to reduce further the possibility of corruption, and help to restore public confidence.

6.3

Anti-corruption measures relating to granting of honours

48.

The issues raised in the ongoing “loans for peerages” matter demonstrate the vulnerability of the UK political funding system to corrupt practice because of the numerous rewards available through the honours system. We recommend the following measures be adopted to reduce the risk of corruption in the granting of honours in relation to funding of parties: •

•

If, contrary to our recommendation in paragraph 47, no cap is placed on donations to political parties, then a political party should be prohibited from nominating a person for honours where that person has provided financial or other support of more than a total value of £10,000 in any one year, to that party or to a person or organisation associated with that party. Similarly, a person who has been nominated for honours by a political party should be prohibited from providing financial or other support to that party in excess of a total value of £10,000 in any one year.

The House of Lords Appointments Commission should vet the suitability of partypolitical, as well as non-party-political, nominees. Currently the Commission’s policy is that it “plays no part in assessing the suitability of those nominated by the political parties, that being a matter for the parties themselves”.

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•

•

• •

The House of Lords Appointments Commission should publish details of how each successful nominee (both party-political and non-party-political) has satisfied the criteria set out by the Commission for assessing nominees. Currently, such criteria are applied only to non-party-political nominees.

The members of the House of Lords Appointments Commission should be entirely independent of any political party. At present, it is permitted to have members nominated by political parties.

There should be public disclosure of all nominations and reasons for nominations.

Penalties under the Honours (Prevention of Abuses) Act should be increased so that they are equivalent to those under other bribery legislation (the current disparities are shown in Annex 2).

6.4

Improved enforcement of anti-corruption measures

49.

Under the PPERA, the Electoral Commission has no power to impose penalties, whether criminal or civil. It can approach the civil courts for financial penalties (such as fines) and must go through the police for criminal prosecutions. There are modest civil penalties upon a party for breach of duty to give timely reports but not for false or misleading reports. There is a need for civil offences to cover these situations with civil penalties that can be imposed by the Commission. The ultimate sanction in extreme cases should be de-registration for serious breaches of the rules by a party. This would deny the party access to elections.

50.

The Electoral Commission is challenged by the requirement to perform the multiple roles of adviser to parties and monitor of parties’ compliance with the PPERA. In addition to the proposed new civil offences and power to de-register, it needs to develop a culture of enforcement to ensure that its desire to help parties to comply does not impede its regulatory and enforcement roles.

51.

There should be more substantial criminal penalties for individuals (including party treasurers) who knowingly or recklessly breach the rules. These are serious matters which undermine democracy in the UK. Such offences should therefore attract sentences on a par with false accounting, fraud and deception offences rather than the modest sentences in the PPERA (see Annex 2). We recognise that party treasurers at the local level are often volunteers and it is difficult for political parties to secure expertise on this basis. Therefore, we recommend that parties discourage constituency organisations from receiving funds until they have sufficient capacity for accounting and financial reporting. This is similar to rules applying to charities. The implication here is that treasurers may need to be paid for their work. We recommend that research be undertaken by the Electoral Commission about the feasibility of introducing regional or central treasurer resources to reduce the overall cost of this work and make it more cost effective.

52.

There must also be clear duties on the Electoral Commission and any other body responsible for monitoring compliance with funding regulations to report promptly any suspicion of criminal activity to the police and to provide all support and cooperation to those authorities in their investigations.

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53.

We recommend that the PPERA be amended in the following ways: •

Auditors should have a duty to report to the Electoral Commission any suspicion of breach of accounting or expenditure rules or of criminal activity by a political party (or any connected individual).

•

The Electoral Commission should have the following additional duties: o to make random inspections of a political party’s accounts and other information as part of its duty to monitor a party’s compliance with its obligations under the PPERA; o to take appropriate civil action in respect of suspected breaches of the PPERA; and o to report to the criminal authorities any suspicion of criminal activity by a political party (or any connected individual).

•

• •

6.5

There should be provision for civil and criminal offences in respect of any deliberate or reckless provision of false or misleading information to, or concealment of information from the party treasurer, the party auditors, or the Electoral Commission.

More serious civil penalties should be imposed, including deregistration of a party in an extreme case.

Criminal penalties should be increased to make them equivalent to those for other similar criminal offences. At present, offences under the PPERA, which may involve false accounting, deception or conspiracy to defraud, invoke a maximum penalty of 1 year imprisonment. In contrast, such offences under other criminal legislation invoke maximum penalties of 7 to 10 years imprisonment.

Broader anti-corruption reforms: fostering a healthy democracy

54.

A healthy democracy requires healthy political parties.

Declining party memberships and the current system do not promote political integrity because parties are reliant on large donors. However, banning large donations may itself lead indirectly to corruption of a different sort. If the party system is undermined by insufficient funding there may be a monopolisation of power. Corruption thrives where power is concentrated in the hands of one party or group. If parties are unfit to provide proper opposition to hold governments to account then the risk of corruption increases.

55.

There is a real danger that caps on donations to parties may have unintended consequences of this kind if parties are thereby starved of funds. However, the effect of a cap on donations is hard to prejudge because party behaviour would have to change in response to caps on spending and funding. For example, the focus of fundraising activities would shift to the recruitment of new members and campaigns to gather smaller donations on a mass scale.

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56.

The specific proposals for curbs on party funding set out above point to the need to review the level of state funding of political parties. State subsidies may have to assume a more prominent place in party funding if new forms of corruption are not to thrive in the reformed system. However, state funding systems are themselves potentially corrosive of political integrity if not designed carefully. Parties could lose touch with the electorate and become unaccountable bureaucracies, with their MPs voting for periodic increases in state funding. For this reason, any move towards state funding must be shown to be essential and should remain modest.

57.

Existing state funding of political parties in the UK is limited to activities related to advertising, research, and to opposition in parliament. Air time is given to parties free of charge during elections along with free postage and free meeting rooms for candidates. Where the UK differs from most other European democracies, however, is that there is no funding of parties based directly on election results.

58.

A study on attitudes towards funding of political parties in the UKxvii shows that taxpayers’ reluctance to support state funding tends to reverse when the public is informed about the benefits of state funding in upholding democratic systems. The study found ‘the public, after deliberation, to be broadly in favour of increased or total public funding of political parties even if this would necessarily be funded through the tax system’. The reasons given by the public for this change of opinion included the anticipation of less sleaze, a fairer system for smaller parties, and the fact that the public considered the low costs involved to be a small price to pay for the resulting benefits. The significant public perception that politics in the UK is corrupt may therefore be reduced through greater state-funding where this is shown to be essential to maintain effective democracy.

59.

In contrast to concerns that state funding might distance parties from their electorate leading to more corruption, there are ways of introducing subsidies that in fact support greater contact with the electorate. For example, a system of tax incentives, whereby credits and tax relief apply to small donations, should encourage grass roots membership campaigns. This would foster political involvement by local electors and help to provide accountability to combat corruption.

• We therefore suggest that a careful evaluation be undertaken of the likely effect of a system of capping donations and expenditures on the financial stability and effectiveness of political parties.

• Modest state support should be considered where it is essential to maintain effective democracy and to prevent corruption in the political system.

• Research should be undertaken into the effect of a tax credit system for small donations on the level of engagement with political parties by the electorate.

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Conclusion and Summary of TI(UK) Recommendations

60.

TI(UK)’s interest lies in reducing as far as possible the vulnerability of our system for funding political parties to corrupt practice. Transparency is the best initial response in seeking to prevent bad practice in any system. The current system in principle provides a good measure of transparency. However, greater transparency and regulation are required to reduce the potential for concealing corruption.

Nonetheless, even if the current system were reformed and enforced there would still be serious corruption risks. Transparency alone is not enough to prevent the perception of corruption in UK party funding. Dependence on large individual donations is incompatible with a system that wishes to be, and to be seen to be, clean.

61.

TI(UK) therefore believes there is a need to adopt more effective anti-corruption measures which increase effective regulation and transparency. This includes a change in the culture of political funding activities that would ban large donations and turn parties back to traditional sources of funding, the grass-roots electorate themselves. We call for a cap on individual donations of £10,000 per financial year. A much lower cap on election spending would help prevent the ‘arms-race’ spending on elections that contributed to the problem of over-reliance on large donations without being cost effective in terms of voter turnout. However, we recognise that reliance on membership funding alone may jeopardise much of the important work of political parties. Therefore, we encourage specific research by the Electoral Commission on the impact of caps on spending and donations on the financial health of parties and a review of the level of state funding of political parties in the light of this.

62.

We would support consideration of a limited increase in state funding through a tax credit system for small donations if this was shown to be effective in maintaining the health of the democratic system as well as securing the financial health of the parties.

63.

Our main recommendations are summarised below:

Expenditure • Restrictions on overall spending on elections to £10 million (from the current level of just under £20 million) for a party where all Westminster constituencies are contested.

• A review be undertaken to consider whether the period during which election expenditure is limited should be extended and whether particularly aggressive spending by national campaigns in local areas might be included in the limits for constituency spending.

Donations and Funding • A cap on donations, gifts and other benefits to a political party, such that they do not exceed a total value of £10,000 per donor in any financial year.

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• A ban on all loans, credit facilities and security arrangements provided to a political party other than those on commercial terms from recognised commercial institutions.

• Disclosure to the Electoral Commission of all loans, credit facilities and security arrangements provided to a political party.

• Disclosure to the Electoral Commission of those documents under which loans, credit facilities, or security arrangements provided to a political party are made.

• A modest increase in state support to political parties should be considered where it is essential to maintain effective democracy and to help prevent corruption. A detailed examination should be undertaken by the Electoral Commission of the impact of the following two measures designed to increase participation by the electorate in party activities including funding: o o

match-funding by the state for constituency-level activities through a tax credit system; and progressive tax relief on individual donations under £200 – to encourage political parties to rely more on small donors and therefore to re-engage in grass-roots activities (e.g. a £50 donation attracts 100% tax relief for a party, whereas a £100 donation attracts 30%).

Granting of Honours • If a cap is not placed on donations to political parties, a political party should be prohibited from nominating a person for honours where that person has provided financial or other support of more than a total value of £10,000 in any one year, to that party or to a person or organisation associated with that party. Similarly, a person who has been nominated for honours by a political party should be prohibited from providing financial or other support to that party in excess of a total value of £10,000 in any one year.

• The members of the House of Lords Appointments Commission should be entirely independent of any political party.

• The House of Lords Appointments Commission should vet the suitability of partypolitical, as well as non-party-political, nominees.

• There should be public disclosure of all nominations and reasons for nominations.

• Penalties under the Honours (Prevention of Abuses) Act should be increased so that they are equivalent to those under other bribery legislation.

Enforcement • The provisions of the PPERA should be strengthened in relation to the duties of auditors and the Electoral Commission and in relation to civil and criminal offences.

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Annex 1 PPERA (as amended by the Electoral Administration Act 2006 (EAA)) Summary of provisions relating to political party accounts, donations, expenditure and regulated transactions The Electoral Commission • The Electoral Commission was established under the PPERA. • It must monitor compliance by political parties with the PPERA provisions relating to political party financing and expenditure.

• It must receive, review, and publish parties’ statements of accounts, returns of campaign expenditure (with supporting documentation), and information relating to donations and regulated transactions.

Policy Development Grants • A Policy Development Grant was introduced permitting a maximum grant to political parties of £2 million per annum. (Under the EAA 2006, such grants are now deemed to be donations.)

Accounting requirements • A party treasurer must maintain accounting records which show the party’s financial position (including assets and liabilities) at any one time.

• An annual statement of account must be prepared by a party treasurer, audited (where annual gross income or total expenditure exceeds £250,000), and submitted by the party treasurer to the Electoral Commission within specified periods.

• The Electoral Commission must make all statements of accounts available for public inspection.

Donations • “Donations” include gifts of money or other property, sponsorship, party membership fees, payment of expenses, and provision of property, services or facilities on non-commercial terms. (Non-commercial loans are no longer included in this definition by virtue of the EAA 2006.)

• Anonymous donations to a political party are prohibited (save for those of £200 or less in certain circumstances).

• Foreign donations to a political party are prohibited.

• Company donations to a political party require shareholder approval.

• There is no financial limit on individual donations to a political party.

• Details of a donation must be reported, within specified periods, to the Electoral Commission if the donation is received by a political party centrally and is in excess of £5000, or if it is received locally and is in excess of £1000. Reporting details must include name and address of the donor, and the value and date of the donation.

• The Electoral Commission must record information relating to donations in a donations register as soon as is reasonably practicable, and must make the donations register available for public inspection.

Campaign expenditure • “Campaign expenditure” includes expenses in respect of political broadcasts, advertising, unsolicited material sent to electors, preparation or dissemination of any manifesto or policy

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• • •

document, market research, press conferences, transport and rallies. It also includes certain expenditure deemed to have been spent by a political party.

Limits are imposed on election campaign expenditure.

A return of campaign expenditure must be prepared by the party treasurer, audited (if expenditure exceeds £250,000), and submitted, with supporting documentation, by the party treasurer to the Electoral Commission within specified periods.

The Electoral Commission must make a copy of the return and supporting documentation available for public inspection.

Regulated transactions (introduced by EAA 2006) • Any regulated transaction (namely, any loan, credit facility or specified security arrangement entered into by a political party) must be reported within specified periods by a political party to the Electoral Commission if it is entered into by a party centrally and its value is in excess of £5000, or if it is entered into locally and its value is in excess of £1000.

• The Electoral Commission must record such information in a register of recordable transactions, and must make that register available for public inspection.

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Annex 2 Schedules Comparing Criminal Penalties (1) Comparison of penalties imposed by Honours (Prevention of Abuses) Act 1925 and other bribery legislation Honours (Prevention of Abuses) Act

Other bribery legislationxviii

Maximum penalty on summary conviction

3 months imprisonment; £50 fine

6 months imprisonment; Fine not exceeding stat. max.

Maximum penalty on conviction on indictment

2 years imprisonment; £500 fine

7 years imprisonment; Unlimited fine.

(2) Comparison of penalties imposed by PPERA and other legislation

Maximum penalty on conviction on indictment

PPERA Offences (as listed in Schedule 20 –many of which may involve false accounting, deception or conspiracy to defraud)

Offences of false accounting, obtaining by deception, conspiracy to defraudxix

1 year imprisonment or fine.

7 to 10 years imprisonment

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NOTES AND REFERENCES i ii

iii iv v vi vii viii ix

x xi xii xiii xiv xv xvi xvii xviii

xix

Transparency International Corruption Barometer 2005 ‘Power to the People’ An independent Inquiry into Britain’s Democracy - the Centenary project of the Joseph Rowntree Charitable Trust and the Joseph Rowntree Reform Trust, March 2006 ‘Keeping it clean: the way forward for state funding of political parties’ Institute for Public Policy Research (IPPR), 2002 From the International Institute for Democracy and Electoral Assistance Handbook, ‘Funding of Political Parties and Election Campaigns’ TI’s Corruption Barometer is an annual international survey of attitudes and expectations on corruption developed with Gallup’s Voice of the People survey The Labour Party has published a full list of undisclosed loans made to it in 2005, which amounted to £13,950,000 from 12 large individual lenders Article 7(3) Article 10 Article 1, Council of Europe, Recommendation Rec(2003)4 of the Committee of Ministers on Common Rules against Corruption in the funding of Political Parties and Electoral Campaigns Article 3 Article 3 Financing Political parties and Election Campaigns – Guidelines, Council of Europe (2003).

Bartle, Mortimore and Atkinson, ‘Political Communications: The General Election Campaign of 2001’. (2002). (Uses data from MORI’s 2001 panel survey.)

1883 Corrupt and Illegal Practices Act New Politics Network Policy Briefing: Funding of Political Parties, June 2006 New Political Network Policy Briefing: Funding of Political Parties, June 2006 ‘Attitudes towards the funding of political parties’. A Report by Cragg Ross Dawson for the Electoral Commission. December 2004.

Bribery legislation includes the Public Bodies Corrupt Practices Act 1889, Prevention of Corruption Act 1906, Prevention of Corruption Act 1916, Anti-Terrorism, Crime and Security Act 2001.

The relevant law governing these offences is as follows: false accounting offences (Theft Act 1968, section 17); obtaining by deception offences (Theft Act 1968 sections 15, 15A and 16; Theft Act 1978 section 1), and conspiracy to defraud offence (common law).

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