According to the Electoral Commission, the political parties received far less in big donations for the 2008 election than in 2005. So just how did they fund their campaigns?

One of the more positive features of the much derided, now defunct Electoral Finance Act 2007 was that it attempted to tighten the rules around public disclosure of large donations to political parties. Indeed, there seems to be some consensus that this tightening was necessary; these new rules were retained by the National Government when it repealled the rest of the Act under urgency earlier this year.

Before the Electoral Finance Act's passage, parties were meant to disclose to the Electoral Commission the identity of all donors who gave more than $10,000 in a calendar year. However, there were a variety of ways in which large donors could lawfully hide their identity. They might make their donation to the party "anonymously". They might use a trust as an intermediatry. They might split their donation amongst a number of "straw donors", so each donation was less than $10,000. That isn't even counting a case such as occured with New Zealand First in 2007, where the party secretary apparently just neglected to tell the Electoral Commission about receiving an $80,000 donation from the "Spencer Trust"!

The upshot was that the public disclosure of sizeable donations, those of more than $10,000, effectively was voluntary in nature. Only those who wanted to reveal their identity really had to, whilst anyone wishing to hide could do so easily and lawfully. Such a regulatory system seems pretty pointless - it's precisely those who may have something to hide that the public has the greatest interest in knowing about.

So even though New Zealand has an enviable reputation for clean government, there still was something disquieting about our political parties receiving hundreds of thousands of dollars from private sources that remained secret. Certainly it seemed to be at odds with the norms of transparency and openness that we demand in other areas of public life.

The Electoral Finance Act sought to remedy this situation by limiting to $1000 the amount that parties could receive from a single anonymous donation, as well as requiring trusts and others passing on donations to a party to identify anyone who had contributed more than $1000 towards that donation. However, it did so through provisions that apparently were whipped up in just two days during the select committee stage, which never is a good way to try and create new legislation. Rather than being a complete fix, it represented a band-aid slapped over the most obvious loopholes in the existing law.

So it's hardly surprising that the Electoral Commission's recent release of the parties' reported donations for 2008 does not represent much of an improvement in the overall transparency of election funding in New Zealand. National only reported receiving $207,000 in donations over $10,000, with Labour reporting $420,000. This compares with National's reported receipt of $1,880,000 in donations over $10,000 for 2005, and Labour's $930,000.

So why have the amounts of disclosed donations changed so markedly? One possible explanation is that the parties are getting and spending less. But that just doesn't wash. In 2008, both National and Labour reported over $2.2 million in "election expenses", which does not even include money used for things like opinion polling, travel, media training, etc. That's pretty much the same amount as they reported in 2005. So if the parties are still spending large, where's their money coming from?

I've a few thoughts. One source is the clear out that both National and Labour did of their various trusts and anonymous benefactors in late 2007, before the new disclosure rules came in. So National declared donations of $704,000 in 2007, while Labour declared $1.3 million (bumped up by its "big whip round" to pay off its pledge card debt). A second source might be increased "grassroots" fundraising of amounts under the $10,000 disclosure threshold. A third could be debt; it may be that one or both of our two main political parties is going broke. However, a fourth source will be donors who still gave more than $10,000, but did so in ways that evade the terms of the new disclosure rules.

How do they do that? A family may choose to give $9,999 per family member, including each of the kids. Or several related companies may choose to give $9,999 each to the same party. Or a donor may decide to give a $999 "anonymous" donation to a party every week for six months. Or a donor might set up fifty trusts, give $999 to each, then have them give that amount to a party... And so on. All would be perfectly legal under the new rules.

The tough question then is what to do about all this. It is a question National's public consultation process on electoral funding reform will have to grapple with. It is a question that bedevils democracies around the world. I'm not sure I have a full answer to it. Perhaps you do – if so, you should share it with the rest of us.