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If the Federal Election Commission and the Internal Revenue Service won’t pursue the dark money groups that make a mockery of campaign finance laws, then New York Attorney General Eric Schneiderman will.

According to a New York Times report, Schneiderman is targeting the U.S. Chamber of Commerce in a tax fraud investigation that it calls the “first significant [investigation] in years into the rapidly growing use of tax-exempt groups to move money into politics.”

The tax-exempt group in question is the National Chamber Foundation — a 501(c)(3) charitable foundation affiliated with the U.S. Chamber of Commerce. As a 501(c)(3), the NCF is strictly prohibited from engaging in political activity; Schneiderman is sending subpoenas to officials at the Foundation to determine whether they skirted that rule by secretly funneling $18 million to the Chamber of Commerce, to be used in attack ads against Democrats.

The investigation is also looking at connections between the chamber’s foundation, the National Chamber Foundation, and another philanthropy, the Starr Foundation, which made large grants to the chamber foundation in 2003 and 2004. During the same period, the National Chamber Foundation lent the chamber $18 million, most of it for what was described as a capital campaign.

In a complaint filed last year with the attorney general, watchdog groups asserted that the loan had been used to finance lobbying for “tort reform” legislation in Congress and to run issue advertising in the 2004 presidential and Congressional campaigns, most of it against Democrats.

A spokeswoman for the chamber declined to comment, as did a spokesman for Mr. Schneiderman.

As George Zornick of The Nation points out, the U.S. Chamber Watch — a union-backed watchdog group that monitors the Chamber of Commerce’s activities — has long alleged that the Starr Foundation, which is run by the head of insurance giant AIG, “funneled $18 million of ‘charitable’ money to the U.S. Chamber to advance AIG’s political goals, using the NCF as a go-between to disguise the intent.”

According to the Times, Schneiderman is looking for documents and correspondence related to the NCF’s $18 million dollar loan in an attempt to determine whether it was legitimate. He may find that it was not, given that — as Zornick points out — a Chamber of Commerce spokesman admitted in 2010 that the $18 million was “listed …as a loan only in the most technical sense,” and “was never intended to be paid back.”

If Schneiderman determines that the Chamber committed tax fraud, the consequences will be enormous. The Chamber of Commerce is one of the most prominent outside groups and powerful lobbies in American politics, and is expected to spend over $50 million on up to 40 campaigns in 2012.

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