Indirect Benefits and Parents of Government Contractors

Indirect benefits are one of the most problematic issues in government ethics. Usually, indirect benefits relate to an official's relationships, that is, where the official receives not a direct financial benefit, but satisfaction or an indirect benefit from a financial benefit going instead to a relative, employer, customer, or substantial political supporter.

But there are other indirect benefits, for example, benefits that go not to a business that employs the official or his spouse, but to the parent company of the business. The official may have no relationship whatsoever to the parent company, and yet not only is there an appearance of impropriety, but also there might very well be an indirect benefit to the official, because helping a parent is often a way of furthering one's career or indirectly helping the subsidiary you work for. Money is, after all, fungible. There's no telling if the benefit did not actually go to the subsidiary, using the parent company as a conduit.

This situation came to mind reading a Wall Street Journal blog post yesterday in its Washington Wire. A U.S. Senate candidate filed a complaint with the Federal Election Commission (FEC) against a political committee (PAC) whose principal donors have subsidiaries with federal contracts. According to the FEC's Citizens' Guide, "Federal government contractors may not make contributions to influence Federal elections." The candidate is arguing that the parents of federal contractors should also not make such contributions.

But according to the blogger, "The FEC has ruled in the past that 'a holding company is considered a distinct legal entity in its own right, apart from its subsidiaries,' so a parent company could make a contribution even when FEC rules prevent its subsidiary from doing so."

This appears to be too tight an interpretation of the law. This interpretation would lead lawyers to recommend that government contractors form holding companies to allow them to make political contributions. Companies are fictions, not distinct individuals. Unlike people, they can be formed and maintained at very little cost, and they can be legally and safely cloned. A contractor's parent, as the owner of a company that benefits from the contracts, has exactly the same incentive to influence government. It is also just as likely to be hit up by officials, via related or supporting PACs, who require contributions in order to get contracts (pay-to-play).

It would make no sense for an official's relationship with his human parent to be considered a conflicting relationship, but an official's relationship with his company's parent not to be considered a conflicting relationship.

Robert Wechsler
Director of Research-Retired, City Ethics

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