Political finance is influenced by, and influences, relations between parties,
politicians, party membership and the electorate. Money matters for democracy
because much of democratic political activity simply could not occur without it.
Narrow definitions of political finance tend to focus on ‘campaign and party
funding’.1 In fact, many extra-party actors are involved in political competition
with the objective of shaping public policy agenda, influencing legislation or
electoral debates and outcomes. A primary example was the Fujimori-
Montesinos case in Peru. In mid-September 2000, a videotape was released that
showed Vladimiro Montesinos, the head of Peru’s National Intelligence
Service, apparently engaging in vote-buying by handing some US $15,000 to
opposition congressman Luis Alberto Kouri to switch sides and give the
government a majority in parliament. The scandal led to the resignation of
Alberto Fujimori as President of Peru.
According to a typology developed by Vifredo Pareto, there are three
motives for providing political funds: 1) idealistic or ideological, 2) social,
aiming at social honours or access, and 3) financial, striving for material
benefits.2 The latter comes as no surprise, but it can have major political
consequences: in Germany, in July 2002, Rudolf Scharping, Germany’s defense
minister, was replaced after the magazine Stern reported that he had taken DM
140,000 from Moritz Hunzinger, a PR consultant with links to the arms industry.
German cabinet members are prohibited from earning anything other than their
salaries. Scharping admitted to taking the payments, but said most of the money
had gone to charity or had been used for ‘political work’.3 In another case,
Kimitaka Kuze, head of the Japanese Financial Reconstruction Commission,
was forced to step down in July 2000 following revelations he had received
nearly US $2.1 million from Mitsubishi Trust and Banking Corp. between 1989
and 1994.4
Problems of political finance are at the heart of the debate on political
corruption. Yet the meaning of political finance-related corruption is often
unclear. In general, ‘corrupt’ political finance involves behaviour on the part of a
candidate or a party, in which they improperly or unlawfully conduct financial
operations for the gain of a political party, interest group, or of an individual
candidate.
First, against the general perception among public opinion, it should be
stressed that political finance and political corruption are separate notions. Only
when their valences overlap does the zone of corrupt political funding emerge.
Second, the narrow definitions of political corruption, such as “the use of public
office for unauthorized private gain”, do not include many forms of political
finance-related corruption. Mainly because high positions within political
parties are often not included into definition of public office and the abuse of
money as a political resource can often benefit parties or organizations as well
as individuals.5
Thirdly, there is an important difference between political finance
regulations and actual practices, and the meaning of ‘corrupt’ political financing
should not limit itself to the term ‘illegal political finance’. Illegal political
finance refers to contributions or use of money that contravene existing laws on
political financing. The concept is based on legalistic criteria and assumes that a
political act is corrupt when it violates formal standards of behaviour set down
by a political system. Such a definition of corrupt political finance is generally
clear; however, certain problems emerge. Laws are not necessarily consistent in
interpretation or application across different countries. Furthermore, this
definition suffers from being simultaneously too narrow and too broad in scope;
some illegal acts are not necessarily corrupt (foreign funding of democratic
opposition, such as Polish Solidarity Trade Union in the 1980s) and some
corrupt acts are not necessarily illegal (campaign contributions from organised
crime).
Illegality is crucial to many definitions of political corruption; however,
some legally sanctioned but dubious uses of state resources in semi-authoritarian
and authoritarian regimes cannot be defined as corruption
according to this approach. Thus, the law is not a proper guide not only because
it is not perfect with regard to encompassing all cases widely perceived as
corrupt, but also because the law itself may be a result of political corruption.
Indeed, the range and scope of illegal political funding depends on country-specific
funding regulations, while irregular political finance emerges in the
gap between a country’s legal provisions and the reality of its corrupt political
funding practices. In this case, the irregular or ‘informal political finance
system’ refers to legal contributions from disreputable sources or acceptance of
money in return for favours.
The restrictions imposed on political parties and individual candidates by
funding regulations often create loopholes allowing for irregular political
finance. As an example of a legal but questionable donation, in 2001, Indian
billionaire Lakshmi Mittal had donated £125,000 to Labour Party funds prior
to receiving British Prime Minister Tony Blair’s backing for the takeover of the
Romanian Sidex steel plant.
Political finance scandals might initially consist of simple criminality by
politicians, or may be more overtly concerned with corruption in political
finance. A problem in definition arises from the fact that money obtained
corruptly by politicians for their private use may well be used to fund their
campaign, in which case we have a case of political finance corruption. Such
was the case with the Elf affair: in 2003, 37 defendants were accused of
accepting nearly €400 million from Elf Aquitaine, the former state oil group,
for personal enrichment and political kickbacks during the late 1980s and early
1990s. Elf created an elaborate system of politically endorsed ‘commissions’
and ‘subscriptions’ used to pay off African Heads of State in return for exclusive
access to oil reserves and political influence. Elf also made illegal donations to
former German chancellor Helmut Kohl’s Christian Democrat Union in order
to buy the Leuna oil refinery in East Germany. The company’s top executives
admitted that Elf money was regularly used to finance French political parties
and presidential candidates, as well as to pay for late Socialist president
Francois Mitterrand’s divorce (which costs the equivalent of €5 million).6
Examples from post-Communist countries highlight the private character
of political corruption. For example in Poland and Ukraine, out of five per cent
kickbacks, 0.5 per cent goes to party coffers and 4.5 per cent ends up in private
accounts.7 Yet ‘personal’ gain, in the case of a politician, does not necessarily
have the aim of improving his or her material position; it can be intended to
maintain a political position.
Furthermore, a fragmented and non-institutionalised party system
encourages big business (in Central and Eastern Europe, ‘the oligarchs’) to form
client circles and establish their own political parties, set up parliamentary
factions or become media-owners. Examples from Ukraine illustrate how
informal political actors financial/industrial groups and political oligarchs
can dominate the political spectrum by forming business-oriented parties. The
best examples of such parties include Social Democratic Party of Ukraine
(United), Party ‘Democratic Union, Party ‘Labour Ukraine’, Ukraine’s Green
Party, Party of the Regions (PR), together with Batkivshchyna. In recent years,
these parties had a clear majority in the Ukrainian parliament.8 In addition,
these parties control most of the national media, including major TV channels
and the national newspapers.
Politics in such countries is, to a large extent, a combination of business
projects run by powerful oligarchs enjoying political immunity and individuals
using office as a means for gaining wealth. Thus, there is no obvious boundary
between individual criminality and systemic corruption of political finance. In
1999, a Geneva court convicted former Ukrainian Prime Minister Pavlo
Lazarenko of money laundering and confiscated US $6.6 million from his
Swiss bank account. Lazarenko accepted two charges of money laundering.
According to his lawyer, he confused his public office of regional governor and
his private commercial interests. The government of Antigua and Barbuda
announced that Lazarenko’s bank accounts had been used for laundering US
$80 million. Now in jail in San Francisco, Lazarenko faces charges of
laundering US $114 million allegedly stolen while in office.9
It is easier to describe the hundreds of political funding scandals than to
analyse their character. Money matters for democracy because much of its
political activity simply could not occur without it. However, when discussing
its costs and benefits one should stress that the misuse of money in politics can
create some major problems for a political regime. Since the nineteenth
century, most of the democracies have managed to eliminate the buying of
votes and associated methods of electoral bribery. Yet, even those regimes face
a situation where a number of different problems related to money in politics
still remains to be solved. The remaining secrecy in political finance systems
often results in: 1) funding from undesirable sources; 2) improper influence of
the money over policy outcomes; and 3) financial barriers for average citizens
against standing for political office.
However, a system that prohibits corrupt electoral practices in the funding
of parties and election campaigns should be designed differently from a system
that promotes political equality. The unfair electoral advantages of some parties
or candidates in democratic regimes are not classified here as political finance
related corruption as they result from the unequal distribution of income and
wealth among the public into the political process. However, the abuse of state
resources giving a baseless electoral advantage would be a different case. The
major types of political finance-related corruption are described in Table 1,
though there are ambiguities as to whether a particular case of political
corruption is directly related to party and campaign finance.
The most advanced consolidated democracies and consolidated
autocracies10 have low levels of illegal private political finance. In consolidated
democracies, progress in liberalising the economy, strengthening bureaucratic
accountability and promoting transparency in political finance might be
expected to place some, albeit still imperfect, constraints on the extent to which
individual firms can be directly affected by illegal political finance. However,
regimes in consolidated autocracies are often based on strong presidential
systems or one party systems, with the opposition political parties having only
weak power. In these regimes, economic power is also derived from political
patronage. Most people engaged in economic activity in consolidated
autocracies are closely linked to the president and his inner circle; thus, there is
no interest in supporting opposition political parties. This, plus the
concentration of economic resources in the executive branch and the lack of
foreign investment limit financial resources for political parties gradually wipes
out the opposition political parties, as they simply cannot rely on the financial
support of their members or controlled interest groups. At the same time the vast
public resources available to officeholders are deliberately used for sustaining
the authoritarian regime.
In many societies, the role of large donors raises concerns about the
operation of representative government. This issue of private donors is also
relevant in newly established democracies. In one of its surveys of the transition
countries of Central and Eastern Europe, the World Bank uses ‘illegal political
finance’ as one of six dimensions of the ‘state capture’ phenomenon.11 The
resulting Illegal Private Political Finance Index measures the percentage of
firms that consider themselves directly affected by illegal political donations.12
The index does not give a full picture of corrupt political finance. It fails to
take into consideration many forms of irregular political finance, including
misappropriation of public funds (unauthorised use of public resources for
political purposes such as a ruling party using its influence to embezzle funds
from the coffers of state-owned companies) or, as many scholars call it, ‘abuse of
state resources’ for political finance purposes (the use of state employees,
offices and vehicles for campaign purposes). An example of this took place in
Russia, where President Putin was accused after the 2000 elections of having
used profits from Swiss-based firms Andava and Focus Service, both working
with Aeroflot, to finance the pro-Kremlin Unity (Yedinstvo) party and the
presidential campaign. Moreover, Putin-ally Boris Berezovsky acknowledged
that he had transferred cash from Aeroflot to ‘fund the presidential campaign’.13
Thus, it is important not only to evaluate illegal private political finance, but
also to analyse the degree of illegal state funding and abuse of state resources.
Government favouritism to maintain privileged positions within the economic
system for powerful political and economic elites, together with the general lack
of political accountability, leads to corrupt political finance.
Controlling political finance: an exercise in damage limitation
Every democratic system has to regulate the flow of money into politics.
Unregulated political financing presents certain problems for modern liberal
democracy. It fails to guarantee that candidates and political parties compete on
equal terms. Political competition under unregulated political financing,
according to the scholar Keith Ewing, would be like ‘inviting two people to
participate in the race, with one participant turning up with a bicycle, and the
other with a sports car.14
In general, measures concerning political financing are divided into
regulations and subventions. Most democracies restrict the use of at least some
sources of private donations, either by banning them or by setting contribution
limits. Restrictions on donations are aimed at preventing parties and candidates
from obligating themselves to private interests. Headline cases make this
imperative, such as in Argentina; where in 2001 the ex-head of state-run Banco
Nación, Aldo Dadone, was arrested on charges of ‘illicit association’ and jailed
for accepting bribes from the local branch of IBM. In 1993, IBM officials
allegedly paid millions in bribes to secure a US $250 million contract at the bank
during Dadone’s tenure. More than 20 officials from Banco Nación, IBM and
the administration of Argentina’s former President Carlos Menem were indicted
during the investigation of the bribe case. Not only is Argentina now trying to
crack down on grand corruption, it has enacted much stricter rules in the area of
political finance.
The regulation of political expenditure generally involves restrictions
concerning direct vote buying or limitations on the expenditures of political
parties or individual candidates (both parliamentary and presidential).
Restrictions on how much parties spend on their activity, such as election
campaigning, are based on the assumption that unregulated political finance fail
to guarantee a level playing field in the competition for power .Yet general limits
on campaign expenditure should by no means be perceived as an ideal legal
mechanism that states in the process of democratisation should utilize in
attempting to regulate campaign finance. Particularly in authoritarian regimes
such as Belarus and Ukraine, imposing low and strict limits on campaign
expenditure might marginalise opposition and, as a result, aid the nondemocratic
regime by allowing it to take advantage of other resources, such as
state-controlled TV. Furthermore, in some countries, artificially low legal
limits on permitted campaign spending make the reporting of political party
expenditure irrelevant, as is the case in India and Israel.
Democracies employ different strategies to control the flow of money into
politics, creating a framework within which political parties and individual
candidates can operate. More effective formulas for public control of political
money seem to require the existence of a comprehensive system of political
finance based on three necessary pillars: (1) full disclosure, (2) independent
enforcement agency and (3) reasonable public funding. Disclosure requires
systematic reporting, auditing, public access to records and publicity. The
objective of disclosure of political finances is to make politicians’ accounts a
subject of public knowledge and political debate. Enforcement demands an
independent agency endowed with the necessary legal powers to supervise,
verify, investigate and if required, institute legal proceedings. Assuming
private funding as a constant, regular public funding diversifies the sources of
funding.
Transparent public funding, in fact, is one of the options for combating the
practices of abusing state resources and plutocratic funding that fuels the
financial corruption of politics. Public funding limits the opportunity for
corporations and wealthy individuals to exercise external control, capturing
political parties and their policy-making capacities. It relieves parties, to a large
extent, from pressure of constant fundraising and reduces the prospects for
some types of political finance-related corruption, such as from funding from
infamous sources and from the abuse of state resources. Furthermore, in semi-authoritarian
regimes, such as Russia and Ukraine, lack of significant public
funding serves the purpose of starving the opposition of resources.
Nonetheless, even substantial public funding is not a sufficient condition to
eliminate other types of political finance-related corruption, such as personal
enrichment, illegal expenditure or vote buying.
Lack of enforcement
Regardless of complex regulations, analyses show a worrying gap between
legal requirements and the political practice of funding politics. One
implication of the ineffectiveness of control mechanisms within the political
finance system has been the growing level of political corruption. The major
weakness that undermines the working of effective political finance systems is
the lack of fully independent enforcement mechanisms.
Any enforcement agency’s autonomy must result from many factors,
including its membership, terms of appointment, funding and administrative
jurisdiction. The budget of an enforcement agency should preserve its
impartiality and independence (while at the same time retaining a degree of
accountability for the proper use of public funds). The enforcement agency
should have specialized personnel and should be unconditionally supported by
the judiciary, policy and other anti-corruption bodies.
Furthermore, effective enforcement of political finance regulations requires
the law to impose sanctions and penalties serving as deterrents to violators.
However, effective and proportionate sanctions should not be limited to the
criminal law. Recent evidence from Britain and Poland, two countries that
significantly reformed their political finance systems, shows that more effective
and prompt enforcement seems to result from administrative fines and the
possibility of limiting the amount of public funding (such as cuts in
reimbursement of election expenses or direct state subsidies) rather than from
severe criminal penalties; in fact, if the penalties are too severe for the
circumstances they might discourage enforcement. The difficulty of using
criminal sanctions effectively also stems from the fact that a large number of
prosecutors are reluctant to regard many of the political finance offences as
being suitable for criminal law.15
Moreover, severe sanctions against illegal funding and financial
transgressions, including imprisonment, or the deregistration of a candidate or
political party might not only lead to never-ending, costly legal battles, but they
may be a dangerous tool for a political, selective enforcement, penalising minor
violations. Such was the case of the Ukrainian leading anti-corruption
parliamentarian Oleksandr Zhyr, the former head of the Parliamentary inquiry
commission on the Heorhiy Gongadze case16. In the July 2002 by-election, the
election authorities de-registered his candidacy a day before the election, based
on a court decision that he had engaged in improper campaign spending.
In fact, most newly established democracies make a slow start in promoting
the specialisation of the police, judiciary and other enforcement bodies in the
fight against illegal funding of political parties and electoral campaigns.
Independent monitoring, including supervision over the accounts of political
parties, should be provided. Independent and professional audits are necessary
to review the campaign and the party’s financial reports, and its reports should
be presented and published. An independent auditor, who is qualified to
examine complicated financial transactions and able to analyse different
accounts, should have right of access to all the financial documents and should

be required to issue a written verdict. In an ideal scenario, auditors would be in a
position to give an opinion as to whether a financial report presents a true and
fair view of the income and expenditure incurred, rather than only confirming
that the report was completed in accordance with legal requirements.
Further, effective enforcement of party funding requires political parties to
introduce internal control mechanisms in the form of financial agents and
managers, codes of conduct, accounting procedures, financial checks and
balances and ethical committees helping to oversee financial management and
fundraising activities. An example of the lack of safeguards was in the Czech
Republic, where in February 1998, Jiri Skalicky, the Deputy Prime Minister and
Minister for the Environment, resigned as a result of a political scandal
concerning secret, anonymous donations allegedly made to their party, the
Civic Democratic Alliance (CDA), by Czech companies via an organisation
registered in the Virgin Islands.17
In general, higher professional standards should be applied to parties’
financial management and fundraising activities than to an average private
organisation. Parties should be also required to maintain professional
bookkeeping and most payments to or by a party should be made through a bank
account. Ideally, parties should hold separate accounts for routine and
campaign activities to conduct and report all party financial activities through
relevant accounts.
Finally, non-governmental organisations (NGOs) have become increasingly
active in addressing the issues related to political finance and political
corruption. In general, the role of NGOs can be divided into four main types: 1)
promoting greater disclosure and transparency, 2) searching for evidence of
illegal and corrupt political finance, 3) evaluating the effectiveness of funding
regulations and 4) creating public pressure and providing support for reform in
party and campaign finance. Pressure from NGOs and the mass media is
necessary in order to create an atmosphere which promotes anti-corruptive
initiatives, as the two can serve as very reliable ‘watchdogs’ of party and
campaign finance in many contemporary democracies.
In particular, NGOs have made an important contribution to the reform of
party funding regulation by conducting party and campaign finance
monitoring. The Argentine chapter of Transparency International, Poder
Ciudadano, was one of the first to develop a model to monitor campaign
spending. This methodology has been modified and applied by NGOs in Latvia,
Romania, Slovakia and Ukraine. In the United States, a group of NGOs has been
active for years in monitoring campaign finance contributions to election
candidates and the subsequent activities of elected representatives that benefit

their donors. The Citizens’ Research Foundation in Los Angeles, under the
former directorship of Herbert E. Alexander, is a leading example. The Centre
for Responsive Politics provides useful information on donors and spending in
congressional and presidential races. Common Cause is another important
advocacy NGO lobbying for campaign finance reform.