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March 11, 2008

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.

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Comments

--The only victims here are his wife and family.--

No joke. I feel bad for the wife and terrible for the daughters. Incredibly unfair for them.

The victims of Spitzer's penchant for buying sex are his family, his party, his state, and possibly the sex worker(s) he bought. (I don't know how he treated the women, or whether his massive indiscretion was instrumental in their getting caught.)

That said, just because Spitzer did the deed doesn't mean the authorities played by the rules in order to bring him down. Or, assuming they did play by the book, it doesn't mean their motive was the dispassionate pursuit of justice, nor that they're telling the public the truth about how and why they brought him down. Politics is politics. As long as we're all about personal responsibility, I want the authorities to lay their cards on the table. Was this really a corruption probe that magically morphed into a sex scandal? Was it triggered by subtantive suspicious behavior, or was it a fishing expedition launched on a thin pretext?

Did investigators set the bar lower for Spitzer in order to make an example of him? If so, who made that call, and why?

Incidentally, I think it's perfectly legitimate to make an example of high profile offenders within the limits of the law and the accepted scope of prosecutorial discretion. IMO the criminal justice system is supposed to be about deterrence. Sometimes it's legitimate to look harder for wrongdoing, and strike harder against high value targets when they cross the line.

BUT if that's what you're doing, be upfront about it. Take the political lumps that come with a known seek and destroy mission against your political opponent. If you were gunning for a sex scandal from the beginning, spare us the public corruption sanctimony.

There's enough sleaze to cover just about everyone involved in this case. Ask Don Siegelman, if they'll let you see him in federal prison camp.

I dislike the euphemism "sex worker", but yes, the women are possible victims. Possible big time beneficiaries too-if there is no shame about them being in involved in prostitution "work", then there's a big book deal and other things awaiting somebody.

Excellent points, as usual, Ms. B, however: These women were not "sex workers" any more than people who sell crack are "drug workers" or hit men are "end-of-life acceleration workers." They were prostitutes, pure and simple, and whether Spitzer was instrumental in them getting caught or not, they were indeed caught. Good. They broke the law too.

My sense is that the rules are regularly circumvented or shaded at every level of law enforcement. I don't like that. But as shading the rules goes, this is a transgression about which I'm not feeling to badly, because it caught a major hypocrite almost literally with his pants down. This is a Good Outcome.

I don't understand how the term "sex worker" even began. Is it supposed to indicate enhanced respect for those who are prostitutes? Less "judgmental"? Indicating that this is "work" just as legitimate as any other work?

It's a silly and imprecise word. Everyone pretty much knows what a prostitute does. But does the term "sex worker" include those who give "exotic massagers" or those who work in Peep Shows?

There are actual unions of prostitutes in Amsterdam and Calcutta. They're called unions of prostitutes in those places.

Lets not mangle the language. Call things by their name.

Banks are required to file suspicious activity reports in the case of transfers like Spitzer's. These reports go to a division of the Treasury looking for tax fraud. In NY State, the US Attorney's office also has a division that looks at the same suspicious activity reports looking for possible criminal activity. When agents see ANY politician's name attached to one of these reports, the alarm bells are supposed to ring. They would have been looking for some type of public corruption, or may have considered the possibility that he may have been blackmailed, or whatever. One of the main reasons banks are required to report these types of maoney transfers is that the Feds are trying to keep banks out of the money laundering biz.

What's curious is what happened with the prostitution ring investigation (once the feds realized what the transfers were actually for). It seems that they had the case against the ring sewn up, but they waited until they had ensnared Spitzer before wrapping it up...

Phantom, as I understand it, people who give erotic massage or work in peep shows are sex workers, and that's precisely why the term is valuable--while all prostitutes are sex workers, not all sex workers are prostitutes.

But I think that there's a very great deal of difference between selling one's body and giving any type of massages, etc.

I feel some use the term "sex worker" precisely to avoid the use of the word "prostitute", and the judgments and connotations that go with it. But in doing so, we get less precise as to what it is that is even being referred to.

How is "sex worker" inherently any less precise than "prostitute"?

Speaking of a lack of precision, "selling one's body" is not precisely what a prostitute does, is it?

And while you may find the difference between prostitution and erotic massage to be significant, the term "sex worker" captures what is the same about them--both involve providing sexual services in return for payment.

OK, want to be precise?

A male or female prostitute engages in sex acts with one or more persons.

Someone who acts only as a masseuse does not do that, nor does a one who only acts as a stripper or stand behind the glass at a peep show.

The word "prostitute" very precisely describes what "Sienna" and the others doing. They weren't just giving massages or letting men watch them strip.

--A male or female prostitute engages in sex acts with one or more persons in exchange for money or other compensation--

A male or female prostitute engages in sex acts with one or more persons.

Someone who acts only as a masseuse does not do that, nor does a one who only acts as a stripper or stand behind the glass at a peep show.

That depends on which massage parlor you are visiting.

But really, you are making my point. There are sex workers who are not prostitutes.

What is a suspicious transfer? Suppose you send a series of checks to a consultant for their services... regardless of the amount why should that be suspicious?

Let's say someone sends five separate wire transfers to the same recipient on the same day, from the same account. That would seem suspicious to me--especially if each transfer was under the threshold for reporting, but the aggregate amount would have been reportable if it had been sent at once.

Spitzer allegedly did something really suspicious: He asked the bank to take his name off the wire transfers.

Your point is well-taken. In practice,"suspicious" is in the eye of the bank personnel make the decision to file, or not file. If you're a longtime account holder and a pillar of the local community who brings donuts to the tellers and golfs with the bank manager, you can probably do what you like without triggering official suspicion. Chris Mathers talks about this issue in his book "Crime School: Money Laundering."

There are sex workers who are not prostitutes.
Well, Spitzer was dealing with sex workers who were prostitutes. We agree--I think!

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