Money Laundering 101

With post 9/11 banking reforms, banks are becoming an arm of the government — a very muscular arm.

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Earlier this week, former IRS Criminal Investigator Martin Sheil looked at what Trump and his associates should be afraid of as the government probes their business and financial dealings. In this week’s WhoWhatWhy podcast, Sheil tells Jeff Schechtman how bank records have become the key to the government’s investigation of any complex financial crime.

Sheil gives a behind-the-scenes tour of what special counsel Robert Mueller and his investigators will be doing to follow the paper trail and “box in” their targets. It’s a look at the Trump investigation, but also a chilling portrait of the tools and powers that the government has at its disposal when it looks into anyone’s financial affairs.

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Jeff Schechtman: Welcome to Radio WhoWhatWhy. I’m Jeff Schechtman.

You all remember that during Watergate, the mantra was, “follow the money.” Well, it may very well be turning out that in the Russia-gate story or the Trump-gate story, the same may be true. That rather than simply a focus on hacking, and election interference, and collusion, the real story that is emerging centers on hundreds of millions of dollars in cash that was used to buy luxury properties, to launder money, evade taxes for individuals, foreign governments, and dozens and dozens of corporations and LLCs. The problem for those trying to hide these transactions is that the laws and regulations have gotten far more sophisticated than back in the day when Al Capone was finally done in for not paying his taxes. Today the financial reporting regulations of banks, particularly post-9/11, and post-the 2008 crash, are exceedingly complex, and the Treasury Department’s ongoing vigilance in the area of financial crimes makes it much harder to hide anything, especially once the financial alarm sounds in the Treasury Department. So given all of this how vulnerable is Trump and his associates? How might Mueller’s investigation into financial crimes play out beyond just the national security concerns of election hacking? And is this investigation into his business dealings which Trump should fear most? We’re going to spend some time today looking at all of this with my guest, Martin Sheil. He’s a retired branch chief of the IRS criminal investigation division, and his recent article, “Why Donald Trump Should Be Nervous,” appears in WhoWhatWhy.org. Martin, thanks so much for joining us.

Martin Sheil: Hey, it’s great to be here, Jeff, thank you so much for inviting me on.

Jeff: I want to talk first about all of the things that are in place today that make it really incumbent upon banks to report what’s going on with respect to unusual financial transactions. Talk a little bit about that first.

Martin: Sure, sure. That was a great intro by the way, Jeff. You really seem to have a handle on the approach that I’m taking and hopefully that Mr. Mueller and his team are taking. “Follow the money” has become like a cliché. It’s a great soundbite, but if you drill down a little bit over the years, it’s really become more like follow the paper. And the money trail is really a paper trail, and I think this is where a lot of the folks involved in the Trump campaign may be tripping themselves up. You know, they’re big businessmen, and they’re real estate magnets and whatnot, they’re used to having their way and just directing people and not really having to be accountable to basic paper trails of accountability, government regulations and whatnot. You see this with several of the folks like Mr. Flynn and Mr. Kushner recently, they just don’t want to fill out their foreign security disclosure forms correctly, they leave out a lot of things which makes someone like myself wonder if they’ve filled out their tax forms correctly and have they filled out all the forms that the banks are required to fill out. Have they been accountable with these various regulations.

Jeff: Explain to us what FinCEN is. It’s something we’ve been hearing a lot about lately.

Martin: FinCEN is the financial enforcement crimes unit of the US Department of Treasury. They were created in the 90s, pursuant to the Bank Secrecy Act and they’re just a big database of all sorts of forms that the banks are required to file pursuant to what’s known as anti-money laundering regulations. The Patriot Act which was expanded subsequent to 9/11 really made the banks much more accountable in terms of… they almost become an arm of the government in that they’re required to know their customers, called KYC (know your customer), and that means they need to know the person behind all these different companies, shell corporations, partnerships, whatnot. They need to know who the actual physical beings are that are using the banks to transmit their monies worldwide, globally. You know, in getting to know their customer, they realize they see something that is just not kosher – put it that way – in terms of the business transaction. If they see some suspicious wire transfers going to, say like tax haven countries in the Caribbean or Switzerland or Liechtenstein or Belize or Hong Kong and some of these places, then they are required to file what’s known as a Suspicious Activity Report, known in the trade as a SAR, S-A-R. These Suspicious Activity Reports are just a terrific lead for law enforcement such as all the federal agencies, the big ones anyway, have access to these Suspicious Activity Reports. FBI, certainly IRS, Criminal Investigation (CI), Customs, DEA (Drug Enforcement Agency) quite a bit too. So if they see the banks will then file these report and they will detail their concerns, if they see something highly unusual for a specific business, they will include bank account numbers, wire routing numbers, all sorts of technical information that really saves a lot of time for law enforcement to use and follow up. FinCEN really is there to be used by all law enforcement once they obtain clearances from their agency and from Department of Treasury. They will use it. Now, what’s terrific about it is that all the banks, all the domestic banks are required to file their reports, their currency transaction reports, their suspicious activity reports, and all these other foreign activity bank account records, etc., with FinCEN. So, the banks start working almost hand-in-glove with the government in terms of pursuing really big-time financial crimes. It’s very difficult for a small federal agency, such as IRS or Customs to really pursue money, ill-gotten gains, globally without the assistance of an agency like FinCEN.

Jeff: Given how much money is awash in the system, given how many of these transactions are taking place, how much global currency is being transferred every single day, to what extent is there a likelihood that any of these transactions, any of these activities would be caught if there weren’t specific focus on a particular item?

Martin: Yeah, it’s a great question, and you know it’s really hard to know. I mean each city basically in the United States has what’s known as Financial Investigative Task Forces. This is cross-agency participation. There’ll be folks like members from FBI and IRS, and US Marshals, and US Attorney’s Office, and all these different agencies, as well from local agencies, NYPD for instance in New York will have representatives there, and from the other major local agencies. And they meet monthly. They will review open SARs for the…, filed by the banks in their area for like the last month, and there’ll be thousands if not millions, for instance in New York. So just going through it, how do they decide which ones that they are going to look at. Well, this is where they, individual members of the Task Force will apply their years of experience, and they’ll just go with their gut, or they’ll recognize the name, such as a politician, and say, “Well, we need to drill down this.” “We need to look at this a little further.” And don’t initiate an investigation. It really does represent a needle in a haystack. They’re missing a lot. Russia for instance has gone through their own, they have had their own issues. Over the years there’s been periods of time where billions of rubles – let’s just call them dollars; that could transform real quickly – flow out of Russia for their own reasons: oligarchs might be losing power, whatever. And that money cannot come directly to the States. It will come indirectly. It’ll be hidden, go to a number of different bank accounts, usually various shell accounts, might be through Cyprus or Greece or Turkey, and then to the Caribbean area to bank secrecy countries such as Belize or Panama or any of these places. And then once it’s there and it’s changed company names into different shell accounts, known as Limited Liability Companies, LLCs, the money will then be wire transferred in a heartbeat, up to let’s say an attorney’s escrow account in Manhattan. And then from there, will be used to purchase like a luxury condominium in Trump Tower, or anywhere in Manhattan or Brooklyn, or it could be down in Miami or someplace. Then you have all this Chinese money coming to the West Coast. And then you have the cartel money coming up from Mexico after it goes, bounces around the world and comes back into Los Angeles, once again buying all sorts of real estate. So, it becomes very difficult to track, especially back to the original source, the original owner of this money. There are layers and layers of companies and individuals in-between the original source of the ill-gotten gains and the final disposition, like the purchase of a luxury condominium. So for law enforcement to track that, we’re talking billions and billions of dollars. And unless you have a source of information, or a confidential informant, someone who’s right there, who knows how all this money tracks – unless you have that then you’re reliant upon the paper trail that is filed by the banks under their anti-money laundering programs, going back as far as they can, aligning all the different shell companies, and partners, and individuals that were involved. At each weigh station along the way someone’s going to take a little piece, take five, seven, eight, ten percent commission for laundering that particular transaction.

Jeff: In your experience when we talk about money laundering, what do we mean, what is it people are trying to do with this money, and what does that really represent?

Martin: Yeah, you’re basically talking about money from some type of illegal, illicit, criminal activity, dirty money that you want to transform into seemingly legitimate money, money from a legitimate business. So if you’re a drug dealer, you know, the first thing that you want to do is get your narcotics dollars into a bank, and from the bank you can then move it into, transfer it into like an innocuous sounding business company, like a restaurant, or bowling alley, or movie theater, or McDonald’s, something like that. Now, and then you move it again and you start buying, you know if you’re a restaurant you start buying produce, and meats, and stuff like that. That seems totally legitimate for a restaurant. The money has been laundered at that point. So you’ve taken money, narcotics money that’s been sold from nickel and dime bags on the corners of some of the worst communities. Those dollars are generally what’s known as “smurfed” into a bank. In other words, some couriers will bring the actual physical greenbacks, dollars, into the bank and make a deposit just under $10,000, you know, $9,000, $9,500, $9,900, and it might be in a Citibank in New York, or say a Wells Fargo account in New York. It’ll then be immediately withdrawn, say in Los Angeles, like five minutes later. Someone will have the account number, and the pin, and whatnot, they’ll take it right out and then deposit it into somebody else’s account, which then gets deposited into a restaurant account, and then the restaurant starts buying produce. The banking institution, for financial institutions, are basically being used to facilitate money-laundering, and they don’t like that. They don’t want to be… they have liability. They have a serious risk management situation, so that’s where they have to institute their anti-money laundering program, a lot of which is software generated. And if they see this pattern over and over again of these smurf deposits, they will generally write up a SAR, a Suspicious Activity Report.

Jeff: One of the things that we’re seeing with respect to Trump and his associates are large numbers of dollars being transferred back and forth, and the money being used to buy luxury real estate, and being cloaked in all of these corporations and LLCs, and really being hidden that way.  Talk a little bit about how that is working.

Martin: Well, say you’re a Russian oligarch located in Moscow. If you’re a Russian oligarch, couple hundred of them, but they’re all very tightly related to Vladimir Putin, and they all have their own little areas. Say you do aluminum, you get the aluminum monopoly in the Ukraine, and you have billions of dollars, or millions of dollars that you want to invest, and you want to get out of Russia, so what do you do? First of all, it’s rubles that you’re starting with. You need to transfer rubles through Russian banks to friendly banks that won’t ask a lot of questions. So, you set up accounts, usually have other individuals that will do that for a price, set up accounts, like say, in banks in Cyprus – that’s like a popular area right now – and set up a company, could be the XYZ company, in Cyprus, millions of dollars will be transferred, wire transferred into those accounts. You then set up, you have someone set up some other corporate accounts, these LLCs, shell company accounts, in say a place like Belize, and you immediately once you’ve got the money into say the Bank of Cyprus, you will then wire transfer your millions of dollars into the Belize shell company account. And from there you will then set up let’s say, you could do one of two things: you could set up another shell company account in Manhattan, have somebody do that and wire transfer money from Belize to those accounts, or you could have, you know, some American counterparts who have their own LLC company account, transfer it to them, but that would probably require an invoice or something to explain it. Or what you can do, and which happens quite frequently, is the money from the LLC or shell account in Belize will be wire transferred directly into a real estate attorney escrow account in Manhattan, and from there that real estate attorney will then have his own shell company account set up, and will purchase, will contact a big luxury condominium seller and agree to purchase a condo for all cash and will then, they will either write out… they’ll do another wire transfer for a $5 million condo, or they’ll send a cashier’s check. Basically that become very…, almost completely impossible to track. What I was saying before, you know, by the time you’ve gone through two, three different shell companies, and through an attorney’s escrow account, who really knows who owns, what <was> the original source and ownership of those millions of dollars of Russian rubles that were being secreted out through Cyprus, through Belize, into an attorney escrow account in Manhattan.

Jeff: One of the things that’s been put in place recently and you make reference to this in your article, is that in certain locations in New York and Miami, I think in either Los Angeles and/or San Francisco, that title companies are now required to know who the individuals are behind those LLCs. Talk a little bit about that.

Martin: Well, FinCEN recognized that real estate was becoming the preferred vehicle for money laundering of international ill-gotten gains, and so they said, “What can we do about this?” So they basically decided, they got together, they got input from a lot of the agencies around the country and particularly in the big cities and they decided to issue what’s known as a Geographical Targeting Order, otherwise known as the GTO – a lot easier for me to say GTO – and they decided the original GTO focused on Manhattan County in New York City, and Miami-Dade County in Miami. And they decided well, you know, we will focus on title insurance companies, because everyone has to get title insurance, and they will force them to tell us about all cash transactions in terms of buying these luxury properties over a set amount of money. I think Miami was $1.5, Manhattan now is up to I think $3 million, it might have originally started at $1.5. And this was great. This compelled title insurance companies to get with these escrow attorneys and these folks who show up at closing with all this cash to purchase these properties. Anyone who had more than a 25% interest in these shell companies, these LLCs, that were purchasing the condominium, had to identify themselves, had to provide a driver’s license or Social Security number or some type of identification of a real person so that the government then knew who the – what they referred to as – beneficial owners of these shell companies were. That information became available to law enforcement, and IRS and FBI will be able to run these names through their own databases to see if they were listed, if they were known Russian organized crime members for instance. In terms of Miami, run it through DEA databases.

Jeff: How effective has this been in really getting to the bottom of these transactions?

Martin: Very effective. So effective that FinCEN decided to expand their original Geographic Targeting Order which started in the spring of 2016. They started it for a short period of time. Maybe eighteen months. They expanded that. They extended it and expanded it to then include, for New York City, they expanded to include Brooklyn, Bronx, Staten Island, Queens, whatnot. So the entire New York City was covered, and Miami-Dade was then extended to include Palm Beach and one other county down there – it escapes me. But it was also expanded to include Los Angeles, San Diego, and I believe San Francisco. And also Bexar County down below San Antonio. A lot of Mexican money was coming in to buy properties down there and they were using shell companies too. So it was very effective. So when you have all these different paper requirements, documentation requirements, a lot of these folks that are moving money around and stuff, you know, they get boxed in – they will fill out one form but they don’t fill out another and that trips them up, particularly going all the way back to these disclosure forms we talked about earlier on. If you fill out a form with a “juro” at the bottom, you may well be setting yourself up for a perjury count with a false statement to criminal exposure. These kinds of accounts are what like the special prosecutor is always looking for because they’re interested in making money-laundering cases and tax fraud cases and whatnot, but sometimes those cases take a long time or they’re difficult to make for technical reasons, if they have a very simple fallback, this person, a false statement or didn’t file a statement or lied about the statement, or whatever it is, you have, you know, a very easy prosecutable case. Sometimes it’s so compelling that folks will just plea, “Alright, you got me, I didn’t fill out that form correctly. Alright what do we do? What kind of deal can we make? Let’s make a deal time. Who are you really interested in, I might have some information on so-and-so.” And that’s when things really happen.

Jeff: Martin, now that we’ve broken this down in terms of what’s going on with respect to monitoring all of this, I want to bring it back and talk a little bit about how it might relate to what’s going on now with Trump and his associates.

Martin: The team of attorneys that Mr. Mueller brought in are extremely good. And one fellow, we’ll just to talk money for a second here, one of the attorneys is a guy by the name of Wiseman and he was a line attorney prosecutor at a recent district of New York in Brooklyn. He did a lot of organized crime type of cases and that’s where he really cut his teeth. And he followed the money on a lot of cases there and was able to plea bargain, get folks to plea bargain his way right up to the top echelon of some of these organized crime families. Well, he was picked to work on the Enron case down in Houston, and that is a case, Enron, if you recall, had only fictitious accounts and off the books accounts, off-shore and whatnot, it was just millions and millions of transactions, phony transactions. It would’ve taken a task force decades to plow through the paper transactions, false transactions, one after another. So what he did, he just zeroed in, Mr. Wiseman, he zeroed in on the president of Enron, a guy by the name of Fastow, but he didn’t start on Fastow, he started on Mrs. Fastow, and he brought a tax fraud case against Mrs. Fastow, [Ken?] Andrew Fastow’s wife, and then confronted [Ken?] Andrew Fastow and said, “Look, we can make a deal here or we can continue the investigation.” And Mr. Fastow confronted with the fact that his wife was looking at jail time for tax fraud agreed to cooperate with the government and saved that particular investigation and the government a tremendous amount of time and effort – and the key was making a tax fraud case, a money case against the wife. Now in the current situation where Mr. Mueller is just getting started with his investigation, I know a lot of folks think, “Well, we’ve been hearing a lot about this for months and months, and well, nothing has really been done on the financial end until just recently.” Just in the last few weeks, we’ve picked up, we’ve heard that suspicious financial transactions are being looked at and that FinCEN has been queried and to provide – what I’m going to presume, a rebuttable presumption, but I think a good one – they will provide SARs, Suspicious Activity Reports, as well as whatever CTRs and 8300s, FBARs – we didn’t talk about that, but that’s the Foreign Bank Account Records of various individuals associated with Trump and his campaign. And once somebody like Wiseman and the other team members of the Mueller team get a hold of these suspicious financial transactions, they will then be able to follow the money, but particularly follow the paper, follow the bank accounts, the wire transfers – penetrate these shell companies – find out who the beneficial owners are of these shell companies. And he will, I’m sure, the team will decide on who’s the most vulnerable and then pounce. And when you have folks like Mr. Flynn who did not report all the income he received from foreign sources – Turkey and Russia, whatnot, on his disclosure forms after being directed to do so, instructed to do so, he still didn’t do it and then lied about it. You know, you have someone that is very vulnerable to being indicted, to perhaps being involved in a plea bargain. And now you look at someone like Mr. Kushner who just kind of forgot about a $265 million loan he received from Deutsche Bank a month before the election. He forgot… that was like… you see that in October, and you know, he becomes counsel to the president in January, he has to fill out his disclosure form – that’s just a couple of months later. Now, I realize he’s a very rich guy and whatnot and he’s got a lot of things going on, but even a rich guy, how do you forget about a $265 million loan that he received. He didn’t also disclose his contacts with the Russian ambassador, Kislyak. He didn’t tell anybody about his meetings with VEB, the big Moscow Russian bank, the favorite bank of Mr. Putin. So you know when you get these kinds of situations where there are paper trails, where there are inconsistencies, and you’re boxed in, the first person to make the deal with the federal prosecutor team usually gets the best deal. I mean, that’s a cliché but it’s true. But you have to understand the financial investigation is just starting, they’re just beginning to look at suspicious financial transactions. Mueller is a very careful guy and he will build his case, brick by brick, and he’s going to be looking at an awful lot of stuff. All I can tell you is the ramifications of what evidence is being subpoenaed, financially. I can’t wait for the moment that I hear that IRS Criminal Investigation, is in fact, being brought onto this team. Because, you know, it was the IRS that brought down a sitting Vice President, Spiro Agnew. No other federal agency has ever done that. So it’s, you know, Watergate saw something like 18 different separate tax indictments on Watergate individuals. So, when the IRS comes in, you know things have gotten really serious.

Jeff: Martin Sheil, I thank you so much for spending time with us today.

Martin: It’s my pleasure Jeff, anytime.

Jeff Schechtman: Thank you for listening and joining us here on Radio WhoWhatWhy. I hope you join us next week for another Radio WhoWhatWhy podcast. I’m Jeff Schechtman.

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Related front page panorama photo credit: Adapted by WhoWhatWhy from money (Chris Potter / Flickr – CC BY 2.0) and logo (FinCEN).

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