What Prompted Spitzer Investigation?

March 10, 2008 6:58 p.m.

We’ve been trying to piece together the answer to that question this afternoon, and ABC News reports an interesting piece of the puzzle:

The federal investigation of a New York prostitution ring was triggered by Gov. Eliot Spitzer’s suspicious money transfers, initially leading agents to believe Spitzer was hiding bribes, according to federal officials.

It was only months later that the IRS and the FBI determined that Spitzer wasn’t hiding bribes but payments to a company called QAT, what prosecutors say is a prostitution operation operating under the name of the Emperors Club. …

The suspicious financial activity was initially reported by a bank to the IRS which, under direction from the Justice Department, brought in the FBI’s Public Corruption Squad.

“We had no interest at all in the prostitution ring until the thing with Spitzer led us to learn about it,” said one Justice Department official.

The ABC report goes on to say that Spitzer will be charged with structuring, according to its source.

If I’m remembering my white collar crime law correctly, structuring is basically trying to avoid triggering the federal reporting requirement for any cash transaction that exceeds $10,000. So a series of $9,000 payments to the same person in a short period of time would raise suspicions, for example.

Typically, structuring is a charge prosecutors put together after the fact, by which I mean they reconstruct a financial transaction or series of financial transactions after they have already begun their investigation and are able then to piece together the elements of a structuring charge.

But banks and other financial institutions (including casinos, I believe) also monitor themselves for signs of money-laundering activity. So it’s certainly possible that a bank could have tipped off the feds, though my sense is that it takes a pretty clear pattern of conduct involving substantial amounts of money before a bank’s compliance staff takes notice. Readers with expertise in the area can correct me if I’m wrong.

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