The Dog That Has Not Barked Yet: New York and the Special Counsel

Anti-Money Laundering
Robert Kim

By Robert Kim

Robert Kim formerly served as manager of the BSA regulatory enforcement program at FinCEN, where he worked on numerous joint actions with the New York State Banking Department, a predecessor of the NYDFS.

The Sherlock Holmes short story “Silver Blaze” featured a clue that has become famous: the dog that did not bark during the theft of a champion race horse, from which the sleuth deduced that the thief was someone familiar to the dog. The Special Counsel investigation of Russian interference in the 2016 presidential election has featured a dog that has not barked yet: New York state.

New York shares jurisdiction with federal authorities over financial matters related to the investigation, and it is already involved in the monitoring of financial issues involving assets of President Donald Trump. New York authorities have been silent on the investigation but could become a significant factor in it. Such a move would be a new high in the state’s assertion of jurisdiction over national-level financial crime issues that has been ongoing for over a decade.

New York and Federal Authorities Over Financial Crimes

Financial issues have taken on greater significance to law enforcement and national security during the 2000s and 2010s. The expansion of federal anti-money laundering (AML) regulations under the Bank Secrecy Act (BSA), economic sanctions, and other federal policies addressing financial crimes has been accompanied by New York actions asserting a leading role in enforcing them. For example, as the federal government expanded economic sanctions on Iran until the 2015 adoption of the Joint Comprehensive Plan of Action, in 2009-15 the New York County District Attorney (Manhattan DA) initiated actions investigating and penalizing banks for violations of those economic sanctions.

The New York Department of Financial Services (NYDFS) made its mark since its formation in 2011 with regulatory enforcement actions enforcing the Bank Secrecy Act imposing monetary penalties in the hundreds of millions of dollars. A recent example of New York’s assertiveness in areas where it shares jurisdiction with the federal government is the punishment of Deutsche Bank in early 2017 for AML regulatory violations in facilitating Russian money laundering using “mirror trading” transactions. NYDFS penalized Deutsche Bank $425 million in January, and the Federal Reserve followed four months later with a far lesser penalty of $41 million.

NYDFS’s role as Deutsche Bank’s state regulator has positioned it amid the Special Counsel’s investigation of transactions involving Deutsche Bank. According to a Bloomberg report, investigators have scrutinized Trump business deals with Russians that include purchases of apartments in Trump buildings, involvement with Russian associates in a real estate development in New York, and a sale of a Florida mansion to a Russian oligarch in 2008, as well as suspected money laundering in real estate purchases by Paul Manafort, President Trump’s former campaign chairman. Investigators have requested records from U.S. and foreign banks including Deutsche Bank, where Trump has been a client since 1998. According to the New York Times, NYDFS already has a separate regulatory role addressing the Trump relationship with Deutsche Bank. It has reviewed Deutsche Bank loans to Trump for “safety and soundness” purposes, as well as Deutsche Bank’s plan for monitoring Trump accounts during Trump’s presidency.

AML and the Special Counsel Investigation

Scrutiny of real estate transactions involving Russians, President Trump and his associates puts the Special Counsel investigation into a field squarely – and publicly – in the sights of federal authorities since years before the Trump presidency. Money laundering through cash purchases of high-end residential real estate by shell companies has been a concern to federal law enforcement since the early 2010s, and money from Russia has been at the center of it.

In 2013, Manhattan U.S. Attorney Preet Bharara initiated an action to seize a Manhattan condominium and other assets allegedly purchased with dirty money from Russia, U.S. v. Prevezon Holdings, Ltd., No. 13-cv-06326. Prevezon, a Cyprus company, allegedly used laundered funds from Russia that had been obtained in the fraud scheme uncovered by Russian lawyer Sergei Magnitskiy, whose suspicious death in a Russian prison in 2008 inspired the passing of the Magnitskiy Act in 2012. One of Prevezon’s lawyers was Natalia Veselnitskaya, whose meeting with Donald Trump, Jr. has been one of the most publicized events under investigation by the Special Counsel. The Prevezon case settled on May 15 of this year after President Trump dismissed Mr. Bharara in March.

In January 2016, the Financial Crimes Enforcement Network (FinCEN) issued Geographic Targeting Orders (GTOs) requiring identification and reporting of the persons behind companies used for all-cash purchases of high-end residential real estate in Manhattan and Miami-Dade County. In July 2016, additional GTOs expanded the requirement to all of New York City and additional counties in the Miami, Los Angeles, San Diego, San Francisco, and San Antonio areas. The purpose of the GTOs was to obtain information on persons behind cash purchases of real estate suspected to be part of money laundering schemes.

These preceding federal regulatory and law enforcement efforts on AML and Russian money laundering have likely produced considerable information useful to the Special Counsel investigation. The BSA and its regulations require financial institutions to file Suspicious Activity Reports (SARs) on suspicious transactions of $5,000 or more. SARs report information on the persons involved, dollar amounts, and apparent purposes of transactions, with filers encouraged to provide the most detailed facts and analysis possible. SARs are available to federal and state law enforcement and regulatory agencies in the BSA database maintained by FinCEN, and authorized persons can search the vast collection of SARs and other data collected under the BSA (e.g. reports required under the 2016 GTOs) for information on persons, accounts, and transactions. Banks whose customers were involved in Russian purchases of real estate using shell companies are likely to have filed numerous SARs on such transactions. News reports of the 2013 Prevezon case and the 2016 GTOs should have informed banks of the risk of such transactions and of how to identify them.

Deutsche Bank is especially likely to have filed SARs on transactions apparently involving Russian money laundering, as a consequence of the NYDFS and Federal Reserve enforcement actions settled earlier this year. A review of Deutsche Bank records for transactions with indications of Russian money laundering would have occurred in the course of these enforcement actions. Although the NYDFS and Federal Reserve consent documents do not make any statements specifically about a look-back review of transactions or filings of remedial SARs, remedial filings of hundreds of SARs have been a normal corrective measure in similar enforcement actions.

SARs are likely to have provided leads for investigators to explore. SARs usually have limited usefulness because their authors are bank BSA compliance staff who have limited knowledge about money laundering threats and the interests of law enforcement, and they are not admissible in court since disclosure of a SAR filing to a person involved in the suspicious activity is a criminal offense under the BSA, but they provide nearly instantly accessible information about transactions, without the need to obtain search warrants or subpoenas. Using SAR data, investigators were likely to have made their initial inquiries at Deutsche Bank and other banks with an array of names, accounts, and transactions of interest and with advance knowledge of some of the transactions that would interest them.

The New York Trump Card

Reports of the Special Counsel investigating past real estate deals involving Russians by the Trump Organization and Trump associates have generated considerable controversy, with President Trump tweeting about his “complete power” to pardon. It is far from clear what charges if any may emerge from the facts that the investigation is uncovering, with the investigation still in progress, or whether any need for pardons will exist. It is evident, however, that the President has broad power to grant pardons to anyone aside from himself, with the Pardon Clause of Article II, Section II of the Constitution stating clearly that “The President … shall have Power to Grant Reprieve and Pardons for Offenses against the United States, except in Cases of Impeachment.”

If the grand juries impaneled by the Special Counsel indict any persons for money laundering or other financial crimes, and the president decides to grant pardons that nullify the ability of the Special Counsel to fulfill the Justice Department’s mandate – both significant ifs – the authority over financial crimes that New York has been asserting may become relevant to the situation. New York has its own legal authority for investigating and prosecuting money laundering, with New York Penal Law Article 470 establishing money laundering as a felony criminal offense. Either the New York Attorney General or the Manhattan District Attorney could prosecute such offenses involving Manhattan real estate. Moreover, the Constitution gives the president no power to grant pardons for state law offenses, with the Pardon Clause specifying the “Power to Grant ... Pardons for Offenses against the United States,” not offenses against a state.

There have been reports of the New York Attorney General and Manhattan District Attorney becoming involved in the investigation of Paul Manafort for money laundering, and if they are undertaking investigations of Manafort and others, they are starting with significant advantages. Like the dog that did not bark, NYDFS has a degree of familiarity with relevant transactions and persons of interest, being already involved in overseeing Deutsche Bank’s relationship with President Trump and his assets. New York regulatory and law enforcement authorities also have access to the same SAR data from Deutsche Bank and other banks that federal investigators have. Even without the cooperation of the Special Counsel and the information found by its investigators, New York authorities would have a head start in an investigation of money laundering in real estate transactions.

Although New York law enforcement and regulatory agencies may have legal authority to pursue an investigation independent of the Special Counsel, doing so would be an extreme measure that would create an unprecedented constitutional crisis. A state prosecuting a senior federal government official or advisor to the president has not happened in the modern era, aside from a largely forgotten 1985 Bronx County indictment of Secretary of Labor Raymond Donovan for larceny and fraud that caused him to resign and ended in an acquittal by a jury. The most prominent prosecutions of senior federal officials in the last half century were federal actions – the 1973 indictment of Vice President Spiro Agnew for corruption that resulted in his resignation, and the 1974 indictments of the Watergate Seven. Agnew paid a $268,000 penalty to the state of Maryland, but he paid the penalty as a result of pressure from a private lawsuit by a group of George Washington University law students, not a public prosecution by the Maryland Attorney General. An attempt by New York authorities to investigate and prosecute associates of the President would receive widespread condemnation from the White House and the public as a politicized act by Democrats, and the political and constitutional conflicts that would result may outweigh any benefits from the action.

Moreover, the evidence and legal arguments in support of such an indictment would have to be airtight to withstand the political scrutiny and legal opposition that they would receive. The most likely problem is that criminal money laundering offenses have an intent requirement, with New York Penal Law Article 470 requiring “knowing” that property represents the proceeds of criminal conduct as an element of a money laundering offense. Even if transactions clearly involving laundering of proceeds of criminal conduct were found, clear evidence of knowledge would be needed. The existence of emails about the infamous meeting of Natalia Veselnitskaya with Donald Trump Jr., Jared Kushner and Paul Manafort indicates that similar evidence about past business transactions may exist, but whether any may be found is unclear.

The prospect of the state of New York becoming involved in an investigation of Trump administration figures is likely to excite some, infuriate others, and dismay the majority who do not want to see further escalation of the political conflicts in Washington. Based on current reports that have only minimal information unconfirmed by New York authorities, it is unclear what they have done so far and intend to do, and it is also unclear what the view of the Special Counsel on the issue might be. Regardless of what has happened so far, the possibility exists under existing legal authorities, and all sides should take it into consideration. It would be an assertion of state power in a national issue that would have been unthinkable only six months ago, but the scale of New York’s assertion of state power in national financial crime issues would have been unthinkable only six years ago, so the possibility of yet another previously unthinkable development should not be ignored.

(Note: This article has not mentioned the 2015 FinCEN enforcement action that penalized Trump Taj Mahal Casino $10 million for anti-money laundering violations because it is likely to be irrelevant to any allegations of criminal money laundering in real estate transactions. Recent media coverage has connected the Trump Taj Mahal Casino enforcement action to the Special Counsel investigation, but the FinCEN enforcement action was for violations of anti-money laundering program regulations under the BSA by Trump Taj Mahal Casino, not any alleged criminal money laundering by the casino or any Trump-affiliated person or entity. Some coverage, uninformed about the differences between similarly named but separate legal issues, has incorrectly equated failures to comply with anti-money laundering program regulations to the criminal offense of money laundering.)

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