The Cable

Feds: Mexican Tycoon Exploited Super PACs to Influence U.S. Elections

In a first of its kind case, federal prosecutors say a Mexican businessman funnelled more than $500,000 into U.S. political races through Super PACs and various shell companies. The alleged financial scheme is the first known instance of a foreign national exploiting the Supreme Court's Citizens United decision in order to influence U.S. elections. If proven, the campaign finance scandal could reshape the public debate over the high court's landmark decision.

Until now, allegations surrounding Jose Susumo Azano Matsura, the owner of multiple construction companies in Mexico, have not spread beyond local news outlets in San Diego, where he's accused of bankrolling a handful of southern California candidates. But the scandal is beginning to attract national interest as it ensnares a U.S. congressman, a Washington, D.C.-based campaign firm and the legacy of one of the most important Supreme Court decisions in a generation.

Under longstanding federal law, foreign nationals are prohibited from donating to political campaigns at the state, local and federal level. On January 21, the U.S. Attorney's Office accused Ravneet Singh, proprietor of the Washington campaign firm ElectionMall, and Ernesto Encinas, a former San Diego police detective, of using Azano's money to support three Democratic politicians and the city's Republican district attorney. Azano wanted to turn the San Diego bayfront into a West Coast version of Miami's bustling waterfront, but lacked the political clout to do so, according to prosecutors. In order to buy support for the project, he's accused of doling out illegal contributions to politicians.

What's unique about the allegations is that Azano's money was funnelled through a "Super PAC," a political fundraising vehicle born out of the Supreme Court's Citizens United decision in 2010. The ruling paved the way for Super PACs to spend unlimited sums of money for candidates with only limited reporting requirements. Although Super PACs have been linked to other campaign finance abuses, a foreign national has never been accused of using one to hide his idenity. "We are not aware of another example of a similar case," Peter Carr, a public relations officer at the Justice Department, told The Cable. "Super PACs are a new vehicle for political spending."

For some critics of the Supreme Court's Citizens United decision, the San Diego case validates warnings about foreign contributions previously dismissed by supporters of the landmark court case.

The controversy dates back to 2010, when President Obama used his State of the Union address to lament that Citizens United would "open the floodgates" for foreigners and special interest groups to "spend without limit in our elections."

The remark famously prompted Justice Samuel Alito to shake his head and mouth the words "not true" during the address. It also led the non-partisan fact-checking site PolitiFact to label Obama's warning "mostly false" because the legality of foreign contributions was "outside the scope of the opinion" made by the court. Politifact cited the court's majority opinion, which stated that "We need not reach the question" of foreign contributions. 

It turns out that although Citizens United did not change the legality of foreign contributions in the U.S., it enabled the type of illegal schemes now being alleged by federal prosecutors.

"Before Citizens United, in order for a foreign national to try and do this, they'd have to set up a pretty complex system of shell corporations," said Brett Kappel, a campaign finance expert at the law firm Arent Fox. "And even then, there were dollar limits in place. After Citizens United, there are no limits on independent expenditures."

That's an important point given the massive size of Azano's alleged donations: Half a million dollars. According to the complaint, Azano's money traveled through a U.S.-based shell company before arriving at the Super PAC. Because the Super PAC was only required to disclose the name of the U.S. shell company, the contributions appeared to be U.S.-based. When contacted about the allegations, the details alarmed campaign finance reformers on Capitol Hill.

"If proven, these allegations are the latest example of the damage being done to our democracy by the Supreme Court's misguided Citizens United decision," Sen. Sheldon Whitehouse (D-RI) told The Cable. "By opening the floodgates of unlimited, secret spending in American elections, the Court has helped to prop up a system in which corporations, foreign tycoons, or virtually anyone else can funnel huge amounts of money through phony front organizations."

The Supreme Court may not be the only casualty of the San Diego scandal: It could also take a few political careers down with it. Given the charges, Encinas and Singh may face up to 5 years in prison and $250,000 in fines. As for the politicians involved, last month's federal complaint did not mention the candidates by name, but it left enough clues for local reporters to piece together their identities.

Local newspaper UT San Diego traced the contributions and identified the candidates as former San Diego Mayor Bob Filner, District Attorney Bonnie Dumanis, mayoral candidate Nathan Fletcher and a U.S. congressman believed to be Juan Vargas (D-CA). Each politician denied any wrongdoing in the scandal and distanced themselves from Encinas and Singh.

While allegations involving local officials will likely remain local, the case of Congressman Vargas could be different. Unlike the other politicians, the contributions to Vargas did not go through a Super PAC, but the Democratic Congressional Campaign Committee instead. (The DCCC operates nationally to elect Democrats to the House of Representatives.) Vargas did not respond to requests for comment from The Cable, but he did tell Voice of San Diego in January that he was "shocked" at the allegations and "if true, am offended by the actions of these individuals."

At the time, he vowed to return any funds received from Encinas or Singh and urged the DCCC to return funds from the men as well. It's unclear, as of today, how much funds were returned to the men, if any. When asked if the DCCC had given back any funds from the men, a spokesman did not respond.

Meanwhile, the local scandal has sparked a burst of interest in Azano and his business empire in Mexico. Federal prosecutors say the ultimate goal of the finance scheme was to build a "Miami West" in California, which required the development of San Deigo's bayfront area. "He wanted to develop here in San Diego, and he sought political clout to help him in doing so," said Assistant U.S. Attorney Timothy Perry in January.

According to UT San Diego, Azano sells surveillance equipment to the Mexican military and owns construction firms in the Mexican state of Jalisco. Though he has yet to be charged, FBI agents searched two residential properties associated with him in San Diego County last month. According to an article in the mexican newspaper El Universal, the Azano family has benefited from lucrative Mexican government contracts for decades.

If there's something to be learned from the San Diego case more broadly, campaign reform advocates say it's the need for stricter reporting requirements from the Federal Election Commission. "That's why I've been fighting for legislation to strengthen disclosure requirements for money in politics," Sen. Whitehouse said.  The goal would be to require the disclosure of the original contributor, rather than the shell companies and Super PACs that sometimes conceal the source. Kappel said that without beefed up reporting requirements, schemes like the one alleged in San Diego won't be the last. "Given the Federal Election Commission's current interpretation of the disclosure requirements for independent expenditures, the same thing could happen in a federal election and the influence of foreign money would never be detected," he said.

Getty Images

The Cable

U.S. Officials To Foreign Companies: Don't Race Back to Iran Just Yet

The U.S. hasn't been able to slow the steady stream of foreign companies touring Iran, but senior Obama administration officials say they are keeping them from signing business deals while nuclear negotiations continue.

The administration's top Iran negotiator, Wendy Sherman, and its sanctions chief, David Cohen, reassured skeptical senators Tuesday that they are holding the line on sanctions while diplomats from the United States and Iran try to cobble together a final agreement to curtail Iran's nuclear program.

"We will continue to respond to Iran's efforts to evade our sanctions wherever they may occur," Cohen said at a Senate Foreign Relations committee hearing Tuesday.

The interim nuclear deal signed in Geneva late last year went into effect in January and lifts some  sanctions on Iran's petrochemical and auto industries, but leaves the vast majority of the punitive measures in place.

Skeptics of the talks are concerned that foreign companies are so eager to resume business with Iran that they'll take advantage of any Western sanctions relief, no matter how limited, completely undermining the sanctions regime that has crippled Iran's economy and brought Tehran to the negotiating table.

"Who's job is it going to be to put the genie back in the bottle when this thing fails?"  Sen. James Risch (R-I.d.) asked at the hearing.

Iranian President Hassan Rouhani's courting of the international business community has stoked those fears. At the elite World Economic Forum meeting in Davos, Switzerland, Rouhani extended an invitation to the business people and political leaders gathered there to visit Iran and "witness the extensive fields for investment." 

German, French and Italian companies are beating a path to Tehran, putting the administration in an awkward position at home, where officials are trying to reassure U.S. lawmakers that sanctions haven't been weakened by the interim deal.

In response, administration officials have been traveling the world to warn companies and governments not to rush back into Iran.

"As part of this effort, over the last six weeks I have traveled to the U.K., Germany, Italy, Austria, Turkey and the United Arab Emirates carrying this message: 'Iran is not open for business,'" Cohen said.

Not all American allies appear to be listening. A French trade delegation of more than 100 businesspeople went to Tehran this week to meet with officials and explore possible future opportunities. The group, the largest European delegation to visit Iran in 30 years, included French energy giant Total, carmaker Renault and engineering firm Alstom. Sherman said Kerry communicated American concerns about the trip to French Foreign Minister Laurent Fabius and told him that those visits weren't helpful.

After reports surfaced about a possible Iranian oil deal with Russia, U.S. officials warned Moscow that it could be sanctioned if the agreement went through. Sherman said those warnings have been successful so far. "My own sense of this is...that nothing will move forward at this time," Sherman said.

For the moment, she said most of the businesses visiting Iran are just looking, not inking new deals.

"Most of these delegations appear to be going to get themselves in line for the day that in fact a comprehensive agreement is reached, if it is reached," Sherman said.

One potential upside: the clear signs that Western multinationals want to return to Iran could prompt Iranian business people to pressure Rouhani to make a deal so business can resume.

"Although we don't want people to go because we think it does send the wrong message, if they do go, it puts pressure, perversely, on the Rouhani administration," Sherman said. 

Atta Kenare/AFP/Getty