Department of Justice Reveals Support for Eliminating the LDA Exemption to FARA and Other FARA Reforms

Department of Justice Reveals Support for Eliminating the LDA Exemption to FARA and Other FARA Reforms

December 12, 2022, Covington Alert

The Department of Justice (“DOJ” or “The Department”) recently released a letter, sent to Senator Chuck Grassley (R-IA) and a bipartisan group of Senators a few weeks ago, in which DOJ expressed support for eliminating the Lobbying Disclosure Act (“LDA”) registration exemption to the Foreign Agents Registration Act (“FARA”). This is a striking and notable development that could have significant implications for U.S. companies with foreign parents or foreign affiliates. A repeal of the LDA exemption would dramatically expand the scope of FARA, reversing Congress’s decision in the 1990s to place foreign commercial lobbying under the LDA rather than FARA. Without the LDA exemption, U.S. subsidiaries of companies based around the world would likely be forced to report their lobbying activity under FARA, as we have written before.

The comments came in a letter that the Department issued to provide its views on a bill introduced by Senator Grassley and others in May 2021 to reform FARA. The bill, the “Foreign Agents Disclosure and Registration Enhancement Act of 2021,” would give significant new powers to the Department of Justice to enforce compliance with FARA, including providing DOJ with civil investigative demand authority, increasing the maximum criminal and civil fines for FARA violations, and requiring that the Government Accountability Office analyze FARA enforcement and audit the LDA exemption to FARA.

In the letter, DOJ largely supported the bill’s provisions, although it offered several suggestions “to make the legislation even stronger” and addressed one constitutional concern. This client advisory highlights some of the key areas addressed in the Department’s letter.

For the first time publically, DOJ suggested eliminating the LDA exemption to FARA. The Department noted that it “has found that foreign governments increasingly use state-owned enterprises for a mix of commercial and geo-political strategic purposes, making it more difficult to disentangle agents for foreign commercial interests . . . and those who are agents for foreign governments and political parties.” The Department further explained that removing the LDA exemption could “close this problematic gap.” Further, DOJ suggested that companies could instead look to the commercial exemptions that would still apply for other “private and nonpolitical activities in furtherance of the bona fide trade or commerce” of a foreign private sector principal or “in other activities not serving predominating a foreign interest.”

Under the LDA exemption adopted by Congress, FARA’s registration requirements “shall not apply . . . if the agent has engaged in lobbying activities and has registered” under the LDA and the foreign principal is either a foreign individual or a foreign nongovernmental entity. Congress stated in the 1995 legislative history that the legislation created a distinction between two different types of lobbyists: “a lobbyist for a foreign commercial entity is required to register under the Lobbying Disclosure Act and a lobbyist for a foreign government or foreign political party is required to register under FARA.” In a subsequent revision of the statute in 1998, both the House and Senate expressed the “intention . . . to reaffirm the bright line distinction between governmental and non-governmental representations.”

Regarding the Department’s reference to the commercial exemptions, while it is certainly true that some foreign private sector entities may still be able to rely on the commercial exemptions for certain activities, there are a number of practical implications of this proposed change for both companies and individuals under FARA. First, the LDA exemption applies not only to private companies but also to private individuals and nonprofits. For example, an agent of a foreign nonprofit lobbying for human rights issues in the U.S. might be able to rely on the LDA exemption but not the commercial exemptions. So, the Department’s stated reasoning for eliminating the LDA exemption might be over inclusive in terms of the type of activity that would become registrable after eliminating the LDA exemption. To achieve DOJ’s stated intent, Congress would potentially need to broaden the application of the commercial exemptions to include certain other lobbying activities that do not involve foreign government principals.

Additionally, the limitation to the LDA exemption sets a higher bar for government involvement than the limitation to the commercial exemptions. Specifically, a foreign agent may not rely on the LDA exemption if a foreign government or political party is “the principal beneficiary” of the activity. On the other hand, an agent cannot rely on the commercial exemptions if the activities “directly promote” the interests of a foreign government or political party. While these terms are not defined, the article “the” in the LDA limitation textually refers to a single “principal beneficiary.” That contrasts starkly with the limitation to the commercial exemption where the activity could directly promote the interests of multiple entities, including foreign governments. This result could occur even if the commercial interest drives the agent to act. Accordingly, the elimination of the LDA exemption would significantly narrow the type of commercial activity that would be exempt.

Proposals to eliminate or narrow the LDA exemption are not new. Senator Grassley included an LDA exemption repeal in legislation introduced in 2017 (S. 2039, the “Disclosing Foreign Influence Act.”). More recently, S. 4901, the “Preventing Adversary Influence, Disinformation and Obscured Foreign Financing Act,” would narrow the scope of both the LDA exemption and the commercial exemption for “private and nonpolitical activities” by making them unavailable to agents of foreign principals that are “foreign adversaries” of the United States, including China, Russia, Iran, North Korea, Cuba, and the Maduro regime. Additionally, S. 4893, the “Lobbying Disclosure Improvement Act,” would require LDA registrants to identify on their registration "whether the registrant is exempt under" FARA's LDA exemption. This change is likely intended to make it easier for the public to identify LDA registrants engaged in FARA registrable activities, which could also make it easier for the FARA Unit to flag and scrutinize the activities of such LDA registrants.

Regarding the other aspects of the legislation, DOJ expressed support for the provisions that would strengthen FARA enforcement.

First, the bill would authorize DOJ to issue a civil investigative demand (“CID”) to compel the production of documents, interrogatories, or depositions in a civil investigation by FARA Unit. This change would be a significant enforcement tool for the FARA Unit, as it currently must rely on information voluntarily provided by the regulated community through “inquiry letters,” at least at the outset of a civil investigation. The FARA Unit currently has no compulsory process to obtain this information. Of course, the FARA Unit has the option of using criminal tools like issuing a grand-jury subpoena. However, not all violations support using this type of criminal tool. Affording DOJ CID authority, as it points out in its letter, would allow DOJ to use this intermediate investigative and enforcement tool that other divisions of DOJ already use in civil investigations.

The Grassley bill would also increase the maximum fines for criminal violations: an increase from $5,000 to $15,000 for misdemeanors and an increase from $10,000 to $200,000 for felonies. DOJ suggested that Congress consider raising the maximum fine for the misdemeanor offenses from $5,000 to $100,000 for (1) failure to label informational materials; (2) failure to provide notice of the agency relationship to government officials; (3) violation of the prohibition on contingency fee arrangements; and (4) acting as an agent of a foreign principal for more than ten (10) days after receiving a deficiency notice from DOJ.

FARA does not currently impose civil penalties for deficient or delinquent filings. DOJ’s only current civil enforcement tool under the current law is to seek a civil injunction in federal district court. To remedy this enforcement gap, the Grassley bill proposes a three-tier approach of civil fines ranging from $1,000 to $200,000. While DOJ stated that it “strongly supports” adding civil penalties, it suggested setting a simplified approach: (1) a penalty of $100,000 for the “failure to register, failure to label informational materials, and failure to make the disclosures;” and (2) a penalty of $50,000 for “failures to remedy deficient filing statements, failures to file timely or deficient supplements, failures to file informational materials with the FARA Unit,” and other violations of FARA.

At the end of its letter, DOJ noted that it is planning on developing its own legislative package regarding FARA reform, although it declined to provide further details on the substance. It seems unlikely that the Grassley bill will move forward in the 117th Congress, which ends on January 3, 2023. Despite the divided 118^th Congress, there is bipartisan support for FARA reform. Covington will continue to monitor developments in changes to FARA and its regulations.

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Covington has one of the nation’s largest, oldest, and most experienced FARA practices, which includes attorneys in our Election and Political Law and Public Policy practice groups. The firm routinely advises U.S. and international clients on compliance with FARA, obtains advisory opinions from the FARA Unit, represents clients in FARA audits and internal investigations, and defends clients accused of violating FARA.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Election and Political Law practice.