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.

Comments

[SanderO]

Lindsay, you are asking the same question I had when I heard this story break.

Spitz is a rich guy and why would his "transactions" raise suspicion from a bank? How much would one have to dispense for a bank to report a suspicious transaction?

The hooker sessions were less than the amount that should even trigger and suspicion.

One might think it odd that the gov was dispensing money to "consulting firms" and this was kept from the public. I would. But if I were a bank would I be scouring the gov's records to look for weirdness? That is very troubling.

The notion that large transactions are subject to scrutiny is even a bit intrusive. Isn't it?

When you dig into this there is no reason for anyone to be suspicious of what the gov had done.

It's more likely that they were fishing for someone else and they then scoured every transaction related to the "other" suspect and found spitz on their fishing line! The they set up the taps and snagged him.

So this appears to be rather a hunt with no evidence of probable cause.

This does not excuse his behavior. And why he did it is a whole other discussion.

But he clearly wanted to have some sex he couldn't get at home. He believed he was able to get it on the sly with an upscale not exploited female who saw her actions as a quid quo pro biz deal. Prostitution IS illegal, but there is no logical reason that paying for sex should be illegal and it need not be exploitive.

It's not even inconsistent that Spitz prosecuted prostitution cases where he found exploitation or "white slavery" and might have ignored or didn't set up stings for high end hookers.

This sounds like moralistic people looking to get some one, and it may have been tipped by a disgruntled hooker who wanted to get back at her employer and squawked.

[Eric Jaffa]

Why is it that Clients #1-#8 have their privacy protected, but Client #9 (Eliot Spitzer) is public?

Federal agencies shouldn't selectively leak information to hurt Democrats.

I wonder if the other clients of this service include Republican politicians or big Republican donors.

[parse]

t's not even inconsistent that Spitz prosecuted prostitution cases where he found exploitation or "white slavery" and might have ignored or didn't set up stings for high end hookers.

What evidence do you have that this is the case? The reporting I've seen said that Spitzer used the publicity from busting the same kind of high-end prostitution ring he's accused of patronizing to further his career as AG.

Your speculation about his bank habits seems similarly unsupported. Do you know anything about the kind of cash transactions Spitzer was making?

I agree with you that the government scrutiny of bank transactions does seem intrusive, but Spitzer has never been loath the extend the police powers of government when he's the beneficiary of the resulting publicity. Check out his behavior trying to make ISP's responsible for the content of websites they hosted.

[The Phantom]

Eric

Nice try.

[Eric Jaffa]

The Phantom -

Your point is that it's ethical for a federal agency to leak the name of one customer of a prostitution service while keeping the names of the other customers secret?

[Count Zero]

This is sounding like an apology piece for Spitzer. Not to be judgmental, but regardless of whether there was other wrongs such as privacy, IRS and financial investigations into $4,000 expences (which I don't consider very much to be considered suspicious), or whatever else he's done. The fact that he admitted to hiring a call girl after holding himself up as a bastion of anti-corruption is a very sad testament to the political health of both parties, not just the Democrats.

[GuyFromOhio]

Eric -

Democrats are held to higher standards, particularly when it comes to sex and hypocrisy.

Further, Spitzer made many enemies of the high-powered and wealthy on Wall Street by championing the law. Unless he lived the life of a monk, it was only a matter of time before the Republican DoJ brought down the sword on him. Democrats in any position of power anywhere in America must remain vigilant in all things at all times, and live pristine, squeaky-clean lives lest the local US attorney catch someone doing anything remotely illegal. Politicization of the legal process was the purpose of the USA purges at DoJ, and this is a good example of the results of that effort. It is this that seperates "Clients 1-8" and "Clients 10-n" from "Client 9" - it is unlikely that any are Democratic Governors.

I submit that this is also a trial-run of what is possible when information collected under the guise of 'national security' is used instead to punish those who anger the elite class. Heightened interest and scrutiny of bank transactions, travel records and phone conversations intended to foil terrorists can be so very easily trained inward. Aluminum foil fedoras are, of course, optional.

And so Phantom can have his piece of cake also, it is likely that Gov. Spitzer will resign immediately. In contrast to the seemingly endless parade of Republicans who have insisted on clinging to public office after revelations of questionable moral conduct, it is the appropriate action.

[The Phantom]

Eric

I was referring to your comment about someone intentionally trying to "hurt Democrats". No evidence of this.

For starters, this guy is a very powerful public officials. There's no evidence that any of the others were public officials or that they were politically involved.

Also, keep in mind that Spitzer was hated, absolutely loathed by many people in NY State. And absolutely not only by Republicans! His heavy handed, brutal approach as Governor, which came after his reign as NY AG --which I hold was a time of immense prosecutorial misconduct mostly against very many small people--means he had enemies everywhere.

It may be that when the investigators came upon his name, that someone talked about the explosive news--which led to the firestorm.

If they came across your name or mine, it would not be news.

Spitzer in his own way is like Leona Helmsley (for those who get that reference) --he was so horrible to so many people for so long that at the end of the day, he had no friends at all. Instant karma's gonna get ya.

[The Phantom]

To restate the point

Please don't anyone think that this everyone in the financial industries is Republican or conservative. I work very closely to those who would have views really close to those of LB or many of you. These "liberals" for lack of a better word, are as happy as any at the unexpected fall Spitzer has taken. Because they have seen the conduct of Spitzer and his minions against many of the "little people". I cannot give more detail, but take it to the bank.

The big companies and the big wheels in those companies could fight back--the firms recovered, and Spitzer never laid a glove on most of the big guys.

But the lives of many small people were destroyed, and gratuitously so, by a vicious and out of control AG's office.

[GuyFromOhio]

This is sounding like an apology piece for Spitzer.

In reference to Lindsays' previous posts on the topic, I infer otherwise. "Eliot Spitzer was a self-indulgent fool to think that he could arrange for sex over the telephone and move his money around to cover it!" is self-explanatory.

Rather, it is the process that brought this story forth that is of interest. In deference to SanderO, there are much bigger fish in the ocean than Democratic governors with bad spending habits and poor moral character. However, if the intent was to catch a particular fish, then the facts warrant examination in a different light.

In this instance, I submit the "apology" sound can be inferred from the hearing ability of the listener, rather than the words of the speaker.

[Count Zero]

Guy From Ohio:
This is sounding like an apology piece for Spitzer.

In reference to Lindsays' previous posts on the topic, I infer otherwise. "Eliot Spitzer was a self-indulgent fool to think that he could arrange for sex over the telephone and move his money around to cover it!" is self-explanatory.

Rather, it is the process that brought this story forth that is of interest. In deference to SanderO, there are much bigger fish in the ocean than Democratic governors with bad spending habits and poor moral character. However, if the intent was to catch a particular fish, then the facts warrant examination in a different light.

In this instance, I submit the "apology" sound can be inferred from the hearing ability of the listener, rather than the words of the speaker.

I wasn't aware there was any previous discussion regarding what happened, this was the first article I saw, thus, my opinion when I saw it. I agree, there should be questions asked as to why this was leaked, it is very convienient, however, without a prior context, the piece sounds like an apology piece for him. He's made alot of enemies in the New York financial circles, so I'm sure there are plenty of people out there that would like to see him out. I do think it looks bad when someone like him in particular is uncovered as anything but what they claimed. It really is a violation of public faith - as misguided as that faith in our officials often is. The end result is that no matter who exposed it, or for what reason, he was caught red handed doing something he never should have been doing in the first place. I'm just suprised many Democrats aren't more cautious of their activities in this day and age.

[Count Zero]

Addendum for GfO: Thus you can disregard my saying it was an apology piece since clearly it wasn't.

[togolosh]

The things I'm reading suggest that the banks decided what constitutes suspicious transactions (below the $10,000 reporting limit) and chose to inform the IRS. Frankly that seems to be putting a lot of discretion in the hands of the bankers. IIRC this whole thing comes from drug war requirements, so everyone is subject to this sort of informal monitoring by bankers. I have no problem subjecting the finances of politicians to a higher standard of inquiry than the general public, but the idea that the people I pay to look after my money are checking me out for suspicious behavior seems frankly unAmerican.

[parse]

togolosh, I don't think the banks are driving this thing. What's in it for them? I think they make the reports becaues they are afraid they will get in trouble if they don't. I agree that it's overly intrusive, and it's good to remember that we have people like Eliot Spitzer to thank for the continued encroachment of government on personal liberty.

[Hawise]

There are actual bank reporting rules in place to deal with the under $10,000 deals. After the limit was put in, suddenly $9,999 would be floated from one account to another. Now if there are multiple suspicious monetary deals, the bank has to inform the IRS. It would appear that Spitzer was moving chunks of money about and it caught the bank's attention.
Since it was AG like Spitzer who arranged the new bank reporting rules, this is a case of hoist with his own petard.

[The Phantom]

Rumor has it that he may be about to negotiate a deal that would give him immunity from prosecution and a surrender of his law license in context of resigning his office.

[LongHairedWeirdo]

Herm. My guess isn't that they thought it was a sex sting. I think it was a fishing expedition, full stop. That it was a sex scandal is just icing on the cake.

It's hard to know. It at least raises the supremely ugly question of whether there was probably cause to dig in the first place. I hate to say it, but it wouldn't surprise me if the Bushies just put out feelers on every prominent Democratic official and wait for a chance to go digging.

[Jess Wundrun]

The feds say they set up a wire-tap because of suspicious wire transfers of money into these suspect accounts.

The prostitutes say he always paid cash. (At least according to the text message transcripts that have been released).

This was most definately a fishing expedition because those suspicious wire transfers, according to federal sources did not take place.

[Bill]

I stumbled across your blog. You bill yourself as a FREELANCE JOURNALIST. I accept that and also note that you do not bill yourself as a reporter, the latter dealing with facts. You are a person who blogs their own ideas. There is n a need to cite facts and not allude to possible facts without clarifying.
I will give you credit for what is probable and what is not probable based on my years of experience... and I won't say where that experience was accumulated as you do not cite your qualifications to comment on this case.

I will agree that your item came from your reading of the NY Times. I doubt that they have an inside confidential source and that the IRS is in effect putting out statements for their benefit. First the NY Times has no confidential source in IRS and I say that with confidence. Disclosure of an investigation and related matters is a "firing offense" as well as possible prison. Disclosing Grand Jury information is also a Criminal Matter. Why risk your job for nothing? So I conclude the data to date are based on Affidavits filed in connection with search warrants etc. and based on statements from those who are playing both sides of the fence... e.g possibly a prostitute.

IRS Special Agents are prohibited from initiating an investigation based a person's sex life. Their case files are chronologically ordered and reviewed by management. Any thing else would jeopardize the case in trial and why waste your time doing that when there are other fish to fry? Political cases are also reviewed at the National Level which does not direct or investigate the case but exercises over sight.

The data you cite are related to probable money laundering, Title 31, thus pertinent to the investigation and permissible. The investigation was no doubt started based on a Currency and Banking report generated by a Bank, which of course does not want to be prosecuted for failing to report the suspicious transactions. The Bank, not IRS deemed the transactions suspicious. These reports go to both the IRS and the FBI. Therefor I speculate that the FBI missed the ball initially.

Title 31 and Title 26 USC are in the IRS jurisdiction. It appears IRS was involved in a Grand Jury investigation and joined by the FBI because of subsequently determined alleged Political Corruption. Both agencies have jurisdiction with the DOJ being the top dog. I can only speculate on the time frame here.

The articles I read also indicate the involvement of Wall Street firms, those investigated by SPITZER allegedly. Occam's Razor, a thorough investigation of jurisdictional matters eventually revealed the prostitution aspects and there will, IMHO, be a lot of subsequent prosecutions for tax evasion, money laundering etc. Mann Act? Possible but not probable.

If SPITZER wishes to save his neck from jail, there will be a whole lot of snitching. I personally do not feel there is a chance he will be found innocent. I just do not have enough information to speculate if the matter will bring down some Wall Street people / firms and / or other politicians. Watch for the fall out; in the mean time I bet they are "ill" and lawyering up "in case".

In summary, is the matter about sex? No, it involves sex but relates to other crimes. If the politicians and supporters wish to say it is a Clintonesque Sex matter, they are wrong, it is about breaking the law. To say otherwise and forgive the matter because it involves sex would lead to all crimes involving voluntary sex in order to quash the investigation and avoid responsibility for the actual crime.
All Just My Opinion.

[Jess Wundrin]

OK Here is the link to one of the Affidavits on the case and sets out the partiulars speculated upon to this point. For the "conspiracy" folks, it is PERJURY to sign a fals affidavit.

http://blogs.trb.com/news/politics/blog/Emperors%20Club%20Complaint%20-%20Redacted1.txt

[Bruce]

The issue here may involve "smurfing" - running a bunch of cash transactions below the line to evade the rule. In general, large cash transactions not even reduced to a certified check or wire are pretty rare in the United States for lawful activity: we have too much street crime. In Japan, it's not unusual for cars to be bought retail with cash and, I have heard, even houses. But Tokyo street crime is miniscule. Someone moving 12K 4K at a time, say, looks like a smurf.

In Baltimore, lots of car dealers find it easy to sell cars to semi-known dealers for 9K but getting above the 10K line is tough. But for a car, while unusual, it's not totally outlandish to have a one-shot payment.

The other point is a mandatory joke. Pastor John Hagee claimed that the Catholic Church was the "Great Whore [of Babylon]" but you aren't truly great unless you can charge $4,500 a session. Indulgence money at its zenith never did so well.

[The Phantom]

I recently bought a used car ( on Ebay, which was interesting ) and the price was just a hair over $10,000.

I asked for this amount in cash, and boy did they not want to do that. They said that the bank did not have that amount on hand, which I didn't really believe. They were so much more comfortable when I agreed to take a Bank Check.

I imagine that some of their discomfort was caused by the request for --just about $10,000. That's not the magic number.

[The Phantom]

second para-
should have said I asked my local bank to give $10,000 in cash so that I could use it to purchase the car

[Lindsay Beyerstein]

Bill, thanks for sharing your opinion. Sounds like you're very well-informed.

My post is just my interpretation of the New York Times article itself, which I quoted in the piece. Sorry if that wasn't clear. The reporting is by William Rashbaum of the NYT.

Here's the relevant passage:

The rendezvous that established Gov. Eliot Spitzer’s involvement with high-priced prostitutes occurred last month in one of Washington’s grandest hotels, but the criminal investigation that discovered the tryst began last year in a nondescript office building opposite a Dunkin’ Donuts on Long Island, according to law enforcement officials.

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]

Maybe the officials aren't with the IRS. Now that you mention it, piece doesn't explictly say that the investigators who discovered the irregularities are the same individuals who spoke to the New York Times on condition of anonymity.

I assumed, and you're right, it was my opinion, that the reporter meant that criminal investigators from the IRS spoke to him. But, looking at the literal text of the article, it might mean that non-IRS law enforcement officials told the reporter what (they said) happene at the IRS.

I don't have an opinion about whether these anonymous officials were telling Rashbaum the truth, or whether he accurately conveyed the gist of what they told him.

Rashbaum seemed to be suggesting that he talked to people inside the IRS. But that might be just a studied ambiguity to conceal the real source of this info. Rashbaum has two motives for being vague. First, he needs to protect his sources. Second, he'd have a much better story if the info comes from the IRS than from some second-hand source.

That's the problem with relying on anonymous sources. The reader has no way to assess whether those sources are in a position to know what the reporter is claiming. It makes a big difference to my opinion whether this information is coming from people at the IRS--who as you say--would have a lot to lose and little to gain, or whether it's coming from officials at the Justice Department or elsewhere who are putting their own spin on what the IRS found.

Thanks for helping me revise my opinion.

[Jack]

I think that, were W or Darth Cheney to get caught in this kind of scandal, the Republicans and those who defend them would be using many of the same arguments seen in some of these comments -- complaints about anonymous sources,"fishing expeditions" and the like. Come to think of it, an awful lot of Democrats used similar arguments relating to President Frat-Boy -- er, Clinton's inability to keep his trousers zippered.

Eliot Spitzer's name is worthy of being revealed because he's Governor of the State of New York, a post he earned by being Mr. Clean. Clients 1-8 are not Governor of New York, nor were they held up as paragons of public virtue.

I'm not feeling like he's being unfairly treated. The guy is obviously a major sleazebag. I can't imagine how vain or stupid he must be in order to pay $4000 for sex from somebody he doesn't know.

He's getting what he deserves. The only victims here are his wife and family.