Who Pays Your Bills? What Foreign-Supported Nonprofits Need to Know about the Foreign Agents Registration Act

The Lobbying Disclosure Act put quite a few regulations on nonprofits and associations regarding reporting of lobbying activity.  Frankly, I disagree with how the Act was written in that it doesn't take into account small nonprofits who may not have the staff or resources to fully comply with the stringent reporting requirements.  However, one key aspect of the Act is aimed at foreign nonprofits and associations and requires registration as well as disclosure of finances and activities in the pursuit of lobbying our elected officials or administratively appointed positions.  The following article needs to be read by all foreign nonprofit entities with a presence on Capitol Hill.  The penalties are stiff and not reporting correctly could cause foreign nonprofits to lose their ability to lobby.  Bunnie

Who Pays Your Bills? What Foreign-Supported Nonprofits Need to Know about the Foreign Agents Registration Act

by D. E. Wilson, Jr., Esq. and Andrew E. Bigart, Esq.,Venable LLP, Washington, DC

Lost in the media frenzy surrounding the arrest of 12 Russian spies by the FBI in June 2010 was the fact that the spies were arrested – not for stealing state secrets or trading technology – but for failing to register with the U.S. Department of Justice (“DOJ”) under the Foreign Agents Registration Act (“FARA,” 22 U.S.C. § 611 et seq.). This statute requires U.S. persons to register when they engage in certain political or quasi-political activities on behalf of “foreign principals.” The media’s obsession with Anna “Sexy” Chapman aside, the real lesson from the recent arrests is that U.S. persons – including trade associations, charities and other nonprofits – that engage in political or quasi-political activities on behalf of foreign principals must comply with FARA or risk similar public embarrassment and possibly criminal penalties.

What Is the Foreign Agents Registration Act?

FARA ensures that the U.S. Government and the people of the United States are informed of the identity of foreign persons attempting to influence U.S. public opinion, policy and laws. The statute requires persons representing foreign principals to register with DOJ for engaging in any of the following: (1) political activities; (2) public relations; (3) political consulting; (4) publicity activities; and (5) information-services. The statute defines the term “foreign principal” broadly to include foreign governments, political parties, individuals, and corporations.

Many nonprofits are surprised to learn that there is no FARA exemption for nonprofit, tax-exempt entities. Rather, FARA provides limited exemptions for raising funds for medical assistance and charity, and activities promoting bona fide religious, scholastic, academic, or scientific pursuits or of the fine arts. In addition, FARA provides an exemption for persons registered under the Lobbying Disclosure Act of 1995 (this exemption does not apply to the representation of foreign governments or political parties).

Persons required to register must provide DOJ with information on the nature of the relationship with the foreign principal, the work to be performed for the foreign principal, and, on a semi-annual basis, submit a report of the activities performed on behalf of the foreign principal and funds received from, or disbursed on behalf of, that foreign principal. Penalties for failing to comply with FARA can include a fine of $10,000 or imprisonment up to five years.

Why Should Nonprofits Worry about FARA?

The recent arrest of the 12 Russian spies under FARA underscores that DOJ will take action against persons who fail to comply with the statute’s requirements. For example, just days after the arrest of the Russian spies, DOJ obtained a guilty plea from a former U.S. congressman who failed to register under FARA for lobbying on behalf of an Islamic charity.

The issue of nonprofits and registration under FARA has become a hot topic in the blogosphere. DOJ has apparently opened an inquiry into whether two U.S. nonprofit organizations, B’Tselem and Americans for Peace Now, have violated FARA by failing to register as foreign agents. The investigation was launched in response to information provided to FARA by a group opposed to the political positions of the two nonprofits. Similarly, there are numerous websites devoted to whether the Council on American-Islamic Relations is a foreign agent that must register under FARA. The list of websites purporting to expose foreign agents goes on and on. In each case, the FARA hook is that the nonprofits receive a substantial proportion of their operational funding from foreign sources or act at the direction of a foreign parent or government entity.

The FARA registration requirements extend to trade associations that focus primarily on economic – as opposed to political – issues. For example, any trade association or export council that represents the interests of a foreign person or country may be subject to FARA. In this regard, several large international trade councils – such as the Korea-United States Exchange Council – are registered under FARA. There are, however, many other trade associations and export councils that appear to represent foreign interests that have not registered.

How to Ensure that Your Nonprofit Complies with FARA

Determining the types of activities that trigger the need to register under FARA (or the Lobbying Disclosure Act exemption) is a challenge, made even more difficult by the dearth of DOJ guidance on the subject. To avoid the possibility of criminal sanctions or public embarrassment, U.S.-based trade associations, charities and other nonprofits that receive funding from foreign sources or that are affiliated with a foreign parent should review their operations and funding to determine whether they qualify as a foreign agent of a foreign principal under FARA. This is especially true for any nonprofit that engages in U.S. lobbying or political activities.

If registration is required, legal counsel should be consulted for guidance on preparing and filing the required registration forms.

Mr. Wilson is a partner in the Washington, D.C. office of Venable LLP and a former Treasury official. Mr. Bigart is an associate in the Washington, D.C. office of Venable LLP. For more information, contact the authors at dewilsonjr@venable.com or aebigart@venable.com, or at 202-344-4000.

This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.

Nonprofits, Lobbying and You

Nonprofits, Lobbying and You
by Bunnie Riedel, Host of Nonprofit Conversation


I cannot tell you how often I speak with people who believe that nonprofit 501 (c)3 organizations are prohibited from direct lobbying at the local, state or federal levels. They fear that if they lobby they will lose their tax-exempt status. While there are limits on the amount of direct lobbying a nonprofit can do, they certainly can and should lobby.

The IRS has two tests for measuring direct lobbying: one is the “substantial part” test and the other is the “expenditure test.” Let me dissect these two.

The “substantial part” test is a highly vague measurement of how much time you and/or your volunteers spend on lobbying. It also takes into account expenditures, but offers no real guidance on what “substantial” really means and can be wide open for interpretation depending on which IRS agent has audited your tax return, seriously, I am not kidding on that. In the past the IRS has said that substantial is 5% to 15%, time and money, and they can come down at the low end or high end or somewhere in between.

This uncertainty has vexed nonprofits for years, and frankly scared the living daylights out of them because nobody wants to lose their hard sought tax exempt status. However, if you are ever in the Washington D.C. area and you take notice of the name plates on many buildings or office spaces, you will notice that D.C. is filled to the gills with nonprofits and associations who have headquarters in D.C. for the very purpose of lobbying. And most of those organizations have a 501 (c)3 designation, not a 501 (c)4.

However, the IRS does provide certainty in the “expenditure” test. I call it the “H” designation and basically what you have to do is fill out a very simple form, form Form 5768 and file it with the IRS. It’s like the IRS is saying to nonprofits “If you will just tell us that you are going to lobby, we will give you the guidelines and take the guess work out of your reporting.”

The following is from the IRS’s website:

Measuring Lobbying Activity: Expenditure Test

Organizations other than churches and private foundations may elect the expenditure test under section 501(h) as an alternative method for measuring lobbying activity. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000, as indicated in the table below.

If the amount of exempt purpose expenditures is: Lobbying nontaxable amount is:

≤ $500,000                                          20% of the exempt purpose expenditures

>$500,00 but ≤ $1,000,000                $100,000 plus 15% of the excess of exempt purpose expenditures
over $500,000

>$1,000,000 but ≤ $1,500,000          $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000

>$1,500,000                                      $225,000 plus 5% of the exempt purpose expenditures over $1,500,000

Organizations electing to use the expenditure test must file Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed.


Under the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess.

In other words, if you have an organization whose exempt purpose expenditures are less than or equal to $500,000 you can spend 20% of that on direct lobbying. And the amounts go up depending on expenditures and are capped at $1,000,000 for direct lobbying.

This designation gives nonprofits a lot of leeway to do what it is they should be doing and that is advocating for their cause.

Now, having said that, you must note that federal lobbying rules have changed in the past few years. Expenditures used to be counted mainly as the time and money you spent for actual meetings to directly lobby. Under the new lobbying rules, everything gets counted including, but not limited to: the time and money you spent preparing to lobby; the time and money spent by staff preparing your lobbying efforts; overhead incurred by your organization (what percentage of operational and capital expenses could be counted against the lobbying activity?).

This is where the accountant comes in.

Additionally, there are ceilings for lobbying expenditures that require the organization be registered as a lobbying organization, see Lobby Disclosure Guidelines and there are reports that now must be filed once an organization has hit that ceiling.

However, while at first blush it might seem daunting, once your organization is in the system, it is easy to file the necessary reports.

I encourage you to do what it is you need to do and that is educate and advocate for your cause. To a great extent, that is what many nonprofits are for, to provide a voice for their cause.

This article is not meant to be a substitute for getting legal or accounting advice from your lawyer or your accountant.  If you have any questions, you can always call the IRS, I have found them to be quite responsive and helpful.