Eliot’s Mess: Client 9 and the IRS

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Smart people acting stupid is a recurring theme in political scandal. Given Eliot Spitzer’s record as New York Attorney General, he surely knew that plenty of financial institutions would have loved to see his downfall. That’s one reason why the recklessness of his behavior is so remarkable.

One of the intriguing aspects of this case is what, exactly, triggered the investigation that discovered Spitzer’s involvement with a prostitution ring. The New York Times reports this morning that it began with the IRS, which was conducting “a routine examination of suspicious financial transactions reported to them by banks.”

An IRS spokesman told me this morning that the agency is not commenting on the Spitzer case. However, he did point me to the law that requires banks to report “suspicious activity,” and to the definition of what that is. The law in question is the Bank Secrecy Act of 1970, which was designed to catch money launderers and drug traffickers, not johns. It automatically requires banks to report all cash payments over $10,000. But there are a number of other transactions that regulators must be notified about:

The transaction or series of transactions involves or aggregates funds or other assets of $2,000 or more, AND
The MSB [Money Service Business] knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part) falls into one or more of the following categories:

It involves funds derived from illegal activity, or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law or regulation, or to avoid any transaction reporting requirement under federal law or regulation; or

Is designed to evade any BSA regulations; or

Has no business or apparent lawful purpose, or is not the sort in which the particular customer would normally be expected to engage, and the MSB knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
Involves use of the money services business to facilitate criminal activity.

This Comptroller of the Currency report has a long list of the types of transactions, locations and individuals who might fall under suspicion. One red flag, for instance, would be money orders, travelers checks and bank checks “purchased in round denominations or repetitive amounts.”

It seems that any large movement of cash to or from a public official’s account would potentially provide a trigger for this kind of reporting requirement, because it might suggest the possibility of graft or a violation of campaign finance law. And surely Spitzer, who had so much experience in this area, must have been aware of that. All of which makes his behavior all the more inexplicable.

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