Sex and taxes: How Spitzer allegedly got caught
The New York Times has anonymous sources at the IRS who claim that the inquiry into Eliot Spitzer began last year as a "routine investigation of suspicious financial transactions reported to them by banks." (See update, below.)
If these claims are true, they seem to imply that Spitzer's bank records weren't flagged because he was already the subject of some other investigation.
Take that for what it's worth. I assume that these leaks from anonymous officials to the New York Times are tantamount to the official version, i.e., those details are getting out because the authorities want us to hear them, not because some public-spirited whistleblowers want to air the facts. (Remember all those senior administration officials who talked to the New York Times about the run-up to the war in Iraq?)
If these sources are to be believed, Spitzer ultimately got caught because IRS noticed a pattern of activity that was inherently suspicious enough to warrant further investigation.
There, in the Hauppauge offices of the Internal Revenue Service, investigators conducting a routine examination of suspicious financial transactions reported to them by banks found several unusual movements of cash involving the governor of New York, several officials said.
The investigators working out of the three-story office building, which faces Veterans Highway, typically review such reports, the officials said. But this was not typical: transactions by a governor who appeared to be trying to conceal the source, destination or purpose of the movement of thousands of dollars in cash, said the officials, who spoke on condition of anonymity.
The money ended up in the bank accounts of what appeared to be shell companies, corporations that essentially had no real business.
The transactions, officials said, suggested possible financial crimes — maybe bribery, political corruption, or something inappropriate involving campaign finance. Prostitution, they said, was the furthest thing from the minds of the investigators.
Soon, the I.R.S. agents, from the agency’s Criminal Investigation Division, were working with F.B.I. agents and federal prosecutors from Manhattan who specialize in political corruption. [NYT]
It's not clear whether the unusual activity was caught by the bank and reported to the IRS, or whether the IRS found the pattern all by itself.
Here's the pattern they picked up: Spitzer was paying companies that didn't seem to have any real business. Nobody seems to have reported how much, for how long, or how often Spitzer was paying. The phrase "suspicious transactions" makes it sound all complicated and nefarious. In this cash, it boils down to spending habits. We're not talking high finance.
Allegedly, the feds initially assumed that Spitzer was involved in some kind of public corruption and only later learned that he was paying for sex. They might be telling the truth, or they might be trying to hide this was a sex sting from the beginning. It would be politically ugly to admit that this whole wiretap project was just to catch the governor buying sex.
There's no indication that Spitzer set up or controlled these companies. He just paid them with his own money. Anonymous officials are throwing the prospect of "structuring" charges around--which means that the feds claim to see a pattern of transactions that were just a little too small to trigger mandatory reporting by the bank.
How many of these smallish payments does one have to make before triggering official suspicion? How did the authorities know that these companies were shells and not legitimate businesses?
Since Spitzer is a high-ranking public official, the feds had to get approval from the US Attorney General to investigate him. (They story doesn't say when the feds sought permission, so it's unclear who was in the office at the time.) Just something to keep in mind. The NYT article is imprecise on this point, but it sounds as if the feds got permission to pursue Spitzer while they still thought they were dealing with public corruption. (How convenient, if true.)
At some point, the feds realized that these were front companies set up by the prostitution ring. These companies had innocuous-sounding names like "QAT Consulting Group", "QAT International" and "Protech Consulting"--stuff that wouldn't look suspicious on credit card bills or bank records. Anyway, they found a snitch and went to town:
Then, with the assistance of a confidential informant, a young woman who had worked previously as a prostitute for the Emperor’s Club V.I.P., the escort service that Mr. Spitzer was believed to be using, the investigators were able to get a judge to approve wiretaps on the cellphones of some of those suspected of involvement in the escort service.
The wiretaps, along with the records of bank accounts held in the names of the shell companies, revealed a world of prostitutes catering to wealthy men. At the center was the Emperor’s Club, which arranged “dates” with more than 50 beautiful young women in New York, Paris, London, Miami and Washington.
But its finances moved through the shell companies — the QAT Consulting Group, QAT International and Protech Consulting — which held bank accounts into which clients wired their payments, according to court papers in the case. [NYT]
So, Spitzer got caught on a wiretap that had been set up specifically to catch him buying sex. Interestingly, the same article says that a separate inquiry into the prostitution ring began last October.
Update: This comment made me revise my interpretation of the article. The author, Bill, has some very good reasons to doubt that criminal investigators inside the IRS are talking to the Times. I wonder who those anonymous law enforcement officials actually work for. The Justice Department, maybe? Re-read the article and see what you think.