Explainer: How big money flows into politics

(CBS News) Let's get this out of the way first: The American campaign finance system is an absolute labyrinth. "You have to forget the idea that this is a system that has real boundaries and is supposed to make sense," says Bob Biersack of the non-partisan Center for Responsive Politics. The maze can be traced to the fact that the courts have chipped away at the campaign finance laws passed by Congress in a variety of ways and has transformed what was once a semi-coherent system into an ill-defined one under which political donations that resulted in convictions forty years ago are now both legal and relatively mundane.

That doesn't mean we can't get a clear understanding of the world of "super PACs" and "social welfare organizations," however. And there's good reason to make the effort: The new rules have paved the way for an infusion into the political system of so-called "dark money" - much of it anonymous - that is already having a transformative impact on American elections. Below, a (relatively) simple explanation of how the system works:

Why is this so convoluted, anyway?

Under federal law, an individual can give up to $2,500 to a candidate or candidate committee per election (primary and general election contests are treated as separate elections) and up to $30,800 to a party committee per year. That may seem like a lot, but it's relative pocket change in an era in which more than $2 billion is expected to be spent on the presidential election.

Since 1976, individuals have been allowed to spend as much as they want to influence elections, so long as they had no connection to a candidate, political party or candidate committee. But the moment they pooled their resources with another person, the group became a political action committee - a PAC. PACs, which generally represent special interests (think business groups, organized labor and ideological groups), were long barred from raising more than $5,000 from individuals (or other PACs) each calendar year. They were also limited to giving candidates $5,000 per election and national party committees $15,000 per election.

In 2010, a number of court decisions - chief among them Citizens United and a D.C. Circuit Court of Appeals case called SpeechNow - paved the way for so-called "super PACs," which are essentially PACs on steroids. Super PACs can raise unlimited money from corporations, unions and individuals - no more $5,000 limit - and can spend as much as they want to influence elections, including through ads explicitly calling for the election or defeat of presidential, House and Senate candidates.

I'm with you so far...

Well hang on, because we're not done yet. Super PACs have to register with the Federal Election Commission (FEC), which means disclosing to the public every month who is giving you money. (The latest FEC disclosures come out Wednesday.) Some wealthy individuals and special interests would rather keep their contributions quiet, and there is a vehicle for them to do so: Nonprofit groups organized under the 501(c) section of the tax code.

The most common such groups when it comes to politics are 501(c)(4) groups, also known as "social welfare organizations." Politics cannot be the primary purpose of these groups, but the definition has never been all that clear - as former FEC chair and election law expert Michael Toner notes, "the IRS has been less than crystal clear on how to apply the primary purpose test." The law has generally been interpreted to mean that "social welfare" groups have to spend less than 50 percent of their expenditures on electoral activities. The rest can be spent on education, lobbying and other activities not directly tied to electing candidates.

501(c)(4)s and related groups can also raise unlimited funds, and they do not have to disclose their donors publicly. They only have to file with the IRS once per year and can effectively file whenever they want to, which means they can keep the amount they've raised and spent secret until after the election. It adds up to a situation in which it is impossible to know how much money is flowing into the political system while the election is taking place.

Here's how this plays out. A group sets up two sister organizations, such as American Crossroads (a super PAC) and Crossroads GPS (a "social welfare" group). Donors who don't mind their contributions being disclosed are told to give to American Crossroads, which can spend its entire budget on election activities. Those who want to remain secret are told to give to Crossroads GPS, which can spend a little less than half its budget on election activities. In the 2010 election cycle, according to one recent study, "social welfare" groups actually outspent the better-known super PACs. And in 2012 alone, according to the Center for Responsive Politics, super PACs have already spent more than $123 million. Some estimate that conservative outside groups, which are far outpacing their liberal counterparts, will spend more than $1 billion on this year's elections once the dust settles.  

It gets even crazier. Crossroads GPS could give, say, $10 million to American Crossroads, which would then disclose the donation. But the disclosure would only say the money came from Crossroads GPS, not the donors behind it, which effectively turns the ostensible line between the two groups into a myth.

Yikes. So is this the new normal?

Maybe not. Rep. Chris Van Hollen, D-Md., has sued the FEC in an effort to force disclosure in certain ads. The FEC generally does not force groups engaged in "electioneering communications" - broadcast ads that run within 30 days of a primary election or 60 days of a general election and mention a federal candidate - to disclose its donors. Van Hollen says the FEC's interpretation of the law runs afoul of the law as laid out in the Bipartisan Campaign Reform Act of 2002, better known as McCain-Feingold. Election law observers do not expect the FEC to change its rules or the lawsuit to be settled before November, however. And even if Van Hollen is successful, most of the current system would remain in place, and groups could potentially get around the requirement by simply running ads that directly tell people to vote for or against a candidate as opposed to "electioneering" ads that don't make a direct appeal.

More significant would be a challenge to the system as a whole. On the most basic level, Congress could change the law, though no one is expecting that to happen anytime soon. Alternatively, the IRS could choose to crack down on "social welfare" organizations by offering a tighter interpretation of the primary purpose test. The FEC could also decide to define the "social welfare" groups as political groups subject to disclosure rules, as President Obama's lawyer is requesting. Finally, the Supreme Court could choose to revisit the controversial Citizens United decision, possibly through a Montana campaign-finance case now before the high court. 

Even if there is movement on any of these fronts, however, it's unlikely to come before November. Which means that at least for this election cycle, a convoluted campaign finance system with little rhyme or reason - which is now allowing an unprecedented flow of often-undisclosed money into the political system -- will likely remain the law of the land.