Labor Department Seeks Tougher LM-2 Form to Fight Corruption

Despite all the legal disincentives, many of the people running our unions continue to engage in fraud and embezzlement. In response, the U.S. Department of Labor has come up with new forms of prevention. On September 30, the DOL’s Office of Labor-Management Standards (OLMS) unveiled a series of changes to its LM-2 annual reporting document for large unions; i.e., unions taking in at least $250,000 a year. First, these labor organizations must spell out more fully how they pay for assets, hotel stays, restaurants and other items that all too often are hidden under generic categories such as “miscellaneous.” Second, the largest of these unions – those with annual receipts of at least $8 million – must file a new “long form” LM-2. Labor leaders understandably oppose this. But the proposal addresses real financial crimes, which though frequently detected and punished, require more detailed monitoring.   

Annual financial reporting by unions is required by the Labor Management Reporting and Disclosure Act of 1959, also known as the Landrum-Griffin Act. Congress enacted that legislation following lengthy hearings on union corruption chaired by Sen. John McClellan, D-Ark. The Department of Labor eventually developed Form LM-2 for large unions, and Forms LM-3 and LM-4 for smaller ones. The LM-2 document remained pretty much unchanged for four decades, with enforcement being lax; many unions would turn in their forms late or not at all. Then, in 2003, with union corruption still ever present, George W. Bush-era Labor Secretary Elaine Chao and the OLMS staff, based largely on recommendations by National Legal and Policy Center, proposed an overhaul. The result was an expanded LM-2 form that closed various loopholes that had enabled misappropriation of funds by union officers, employees and associates. All national, district and local unions with annual receipts of at least $250,000 would have to file, itemizing each expense of $5,000 or more. The AFL-CIO spent a couple years in federal court attempting to overturn the rule, but the effort was unsuccessful.

A few years later, very late in President Bush’s second term, the Labor Department proposed supplementary LM-2 changes. Now unions would have to: specify benefits provided to officers and employees; identify persons to whom assets were sold; and report indirect travel and entertainment expenses. The department published the final rule in the Federal Register on January 21, 2009, one day after President Obama’s inauguration. As could have been predicted, the new Labor Secretary, Hilda Solis, quickly scrapped the rule, and eventually as well Form T-1 which had been designed to combat misuse of union benefit trust funds. Originally, unveiled in 2003 by the Bush-era DOL, the unions managed to tie up the T-1 proposals in court long enough for the Obama administration to shelve it.   

The Trump administration, if belatedly, has revived what had been discarded. On March 6 of this year, the Labor Department published a final rule requiring labor organizations with total annual receipts of $250,000 or more to file a revised Form T-1, which would replace the less detailed IRS Form 5500 for trust funds. And just weeks ago, the DOL came out with its revamped Form LM-2. Regarding the LM-2 rule, the department stated: “The proposed changes are designed to provide members of labor organizations with additional and more detailed information about the financial activities of their labor organization than is available through the current reporting.” The regulation has two main components.  

First, the new LM-2 puts in place the Bush-era LM-2 expansion published in January 2009 and quickly cancelled under Obama. It also seeks to discourage the use of indirect as opposed to direct reimbursements for gratuities such as meals, lodging, transportation and sporting events. In a direct reimbursement, a union officer or employee pays out of his own pockets and then is compensated with a check from the union. In an indirect reimbursement, the officer or employee charges the expense to a union credit card, and the union pays the credit card company. The second type is what typically drives embezzlement, fraud and lavish expense accounts. OLMS officials additionally are focusing on purchases and sales of investments and fixed assets. In one area, at least, the government is proposing to lighten regulation. No longer would a union have to account for officer and employee time in each functional category.    

Second, the department has proposed a long form version of the revised LM-2 that would apply to labor organizations with annual receipts of at least $8 million. This “LM-2 LF” form would contain a dozen new schedules. The move is very much a response to recent union scandals, especially at the United Auto Workers, several of whose leading officials, including former Presidents Gary Jones and Dennis Williams, have pleaded guilty to embezzlement, tax fraud and other federal charges. Labor organizations would have to identify all officers or employees paid $10,000 or more and/or who received $10,000 in salaries, allowances and other disbursements while serving as an officer or employee of another organization during the reporting year. Additionally, the LM-2 LF form would require: supporting schedules for certain cash receipts listed on Statement B; financial data on its strike funds; and information on foreign transactions.

The new rule has a 60-day public comment period from the date of initial posting in the Federal Register. One can be sure that unions will have much to say about this, none of it favorable. After all, they spent two years in federal district and circuit court fighting Bush administration’s LM-2 rule change following its introduction in 2003. Theft from unions, whether by union people themselves or outside business associates, remains a major problem. It’s true that a case can be made for caution here from a limited-government philosophical standpoint. The Department of Labor’s Office of Labor-Management Standards will need bureaucrats to administer the new paperwork requirements. And compliance on the part of the unions will involve extra time and money. But the fact remains that union officials, office employees, business agents and contractors continue to exhibit serious accountability issues. And the burden of this corruption, as always, falls most heavily upon dues-paying employees. The DOL is right to ask for greater transparency. One hopes it gets it.