The Definition of Money Laundering (Part 2): Paul Manafort, Russian Oligarchs, and New York Real Estate

One of the charges pending against former Trump campaign manager Paul Manafort is conspiracy to commit money laundering. Prosecutors charge that Manafort laundered money through overseas shell companies to further his illegal lobbying activities in the United States on behalf of Ukraine, to purchase real estate, and to spend millions of dollars on personal goods and services while avoiding income taxes.

In Part One of this post I discussed the primary domestic money laundering statute, 18 U.S.C. 1956(a)(1), and whether it might apply to Trump’s hush money payoff to adult film star Stormy Daniels. In this post, I’ll examine the primary international money laundering statute, 18 U.S.C. 1956(a)(2). This statute is directly relevant to the case against Manafort, and potentially to shady New York real estate deals involving the Trump organization.

The Definition of Money Laundering

As I discussed in Part One, classic money laundering involves concealing the existence, nature, or illegal source of illicit funds to make them appear legitimate. The money launderer seeks to clean up his criminal proceeds so when the money is discovered or spent no one will ask questions about where it came from. This often involves running criminal proceeds through the books and bank accounts of a legitimate business or a shell corporation so the proceeds will appear to have a legal source – or at least so the true source will be obscured.

But the money laundering statutes cover more than just efforts to clean up dirty money. In particular, the international money laundering statute also prohibits the international transfer of “clean” money – money not generated by any unlawful activity – if the purpose of the transfer is to promote criminal activity.

The Elements of International Money Laundering

International money laundering is prohibited by 18 U.S.C. 1956(a)(2). It has the following elements:

  • The defendant transported, transmitted, or transferred, or attempted to transport, transmit, or transfer, monetary instruments or funds across the U.S. border;
  • With the intent to promote the carrying on of a Specified Unlawful Activity; or
  • With the knowledge that the funds were proceeds of some form of unlawful activity and that the movement of funds was designed in whole or in part:
    1. To conceal or disguise the nature, location, source, or ownership of the funds; or
    2. To avoid the filing of a Currency Transaction Report (CTR).

The first requirement is that the defendant moved funds across the U.S. border, or attempted to do so. The movement can be either to or from the United States. This will most often involve international wire transfers between financial institutions, but could be something as simple as carrying a suitcase full of cash across the border or sending money in a Federal Express package. There are three different ways for such a transfer to constitute money laundering:

1) Intent to promote an SUA: under the first theory, the government must prove the defendant made the international transfer with the intent to promote the carrying on of a Specified Unlawful Activity (SUA). As discussed in Part One, SUA is a term of art in money laundering prosecutions and is defined in the statute at 18 U.S.C. 1956(c)(7). It includes a long list of federal crimes, including many related to violent crime, weapons offenses, terrorism and illegal drugs, as well as common white collar offenses such as mail and wire fraud, bribery, and obstruction of justice. Offenses against foreign nations, including violent crime, drugs, fraud, and corruption, also qualify as SUAs.

A key aspect of this particular violation is that it applies even to “clean” money. Most money laundering theories require that the transaction involved criminal proceeds and that the defendant knew it. But for international “promotion” money laundering, there is no such requirement. The source of the funds may be perfectly legal, as long as the funds are transmitted internationally to further criminal activity. Accordingly, for this particular violation, the term “laundering” is a bit of a misnomer – it could more accurately be called a prohibition of international criminal financing.

 2) Knowing that the transfer involves dirty money and is designed to conceal or disguise the funds: An alternative way to violate this statute is similar to the “concealment” theory of domestic money laundering discussed in Part One. This charge requires first that the defendant know that the funds involved in the transfer are “dirty money” – proceeds of some activity that is a felony under state, federal, or foreign law. Second, the government must also prove the defendant knew that the transfer was designed in whole or in part to conceal or disguise the nature, location, source, ownership, or control of the proceeds of an SUA.

This is a more classic notion of money laundering: the money is moving internationally in order to “clean it up” and ultimately conceal its illegal origins. That in turn will allow the owner of the illicit funds to enjoy the proceeds and give them an aura of legitimacy.

 3) Knowing that the transfer involves dirty money and is designed to avoid a CTR filing requirement: The final money laundering theory under this statute prohibits international transfers when the defendant knows both that the transfer involves dirty money and that it is designed in whole or in part to avoid the reports that banks and merchants must file for any cash transactions in excess of $10,000.00.

Domestic vs. International Laundering Statutes

The international laundering statute 1956(a)(2) and the domestic statute 1956(a)(1) discussed in the Part One have a number of similarities. Both apply to efforts to promote an SUA, to disguise the source or ownership of criminal proceeds, and to avoid CTR requirements. There is a lot of overlap between the two, and many acts of money laundering could be charged under either or both. But there are a few key differences.

The first is the international requirement. As my shorthand name implies, domestic money laundering applies to laundering events that take place entirely with the United States. But international laundering under 1956(a)(2) may only be charged if there is a movement or attempted movement of funds across the United States border.

Another difference is the unit of prosecution. Domestic laundering focuses on “financial transactions,” which involve some kind of exchange involving a financial institution or otherwise affecting interstate commerce. Some transaction or exchange is required; it’s not enough simply to move money around. The international statute focuses not on a transaction but on the transfer or movement of funds. A defendant could violate (a)(2) simply by making an international wire transfer or even by carrying a bag of money across the U.S. border, even though no transaction is involved.

Finally, as noted above, if the purpose of an international transfer is to promote an SUA, the funds being transferred may have a perfectly legal source. Domestic laundering, on the other hand, always requires that the financial transaction involve criminal proceeds and that the defendant knows it.

Paul Manafort

Money Laundering Charges in the Manafort Case

The criminal indictment against Paul Manafort in the District of Columbia charges that he earned tens of millions of dollars doing public relations and lobbying work for politicians and political groups in Ukraine, failed to report that work as required, lied about the work on various government forms, and obstructed justice by seeking to tamper with witnesses. The indictment also includes one count of conspiracy to commit money laundering.

The Specified Unlawful Activity for the money laundering charges is the Foreign Agents Registration Act, or FARA. FARA prohibits individuals from performing lobbying or public relations work in the United States on behalf of a foreign principal unless they file sworn reports with the Department of Justice. The reports must include the identity of the principal and the nature of the work being done. (Manafort is also charged with failing for years to register as required under FARA and with making false statements in his FARA reports once he finally filed them in 2016 and 2017.)

The money laundering charge relies on both the international and domestic laundering statutes. First, it charges that Manafort conspired with others to transmit funds across the U.S. border to promote the carrying on of the SUA — the FARA violations — in violation of section 1962(a)(2). Manafort allegedly parked the payments for his Ukraine work in multiple corporate shell entities, many of them created in Cyprus. He then funneled money from those corporations to pay lobbying groups and law firms that were helping him with his undisclosed work on behalf of Ukraine. These international transfers of funds to promote the carrying on of the FARA violations would be international “promotion” laundering under (a)(2).

The money laundering count also alleges a conspiracy to violate (a)(1), what I’ve called the domestic money laundering statute (even though this particular charge also involves international transfers – as I said, there’s a lot of overlap in the statutes). It alleges that Manafort conspired to conduct financial transactions in criminal proceeds that were designed to hide the origin, source and ownership of the proceeds and to evade taxes.

As discussed above, unlike the (a)(2) promotion violation, this violation requires that the transaction involved dirty money – proceeds of the SUA – and that the defendant knew it. The government’s theory is that the money in the overseas accounts represented Manafort’s earnings from his undisclosed Ukrainian lobbying work and thus constituted proceeds of his ongoing FARA violations. He used money from those accounts to buy real estate and to pay for millions of dollars in personal expenses such as home improvements, home furnishings, antiques, and clothing. By making the payments from accounts owned by shell corporations in Cyprus and elsewhere, he disguised the fact that the money was his and avoided paying income taxes on any of the money.

Money Laundering and New York Real Estate

Part of the money laundering allegations against Manafort are that he used shell corporations in Cyprus to purchase condos and homes in New York and Arlington VA for more than $6 million. Real estate in New York and other large American cities is a prime vehicle for international money laundering. Overseas criminals who have made millions through corruption and other unlawful means need a way to convert their illegal money into a safe and legal asset in a stable country. They often set up shell corporations in places like Cyprus or the Seychelles, put the money in bank accounts owned by those corporations, and then use the money to pay cash for real estate in the United States. (A cash purchase of expensive real estate, as opposed to financing and taking out a mortgage, is a potential red flag for money laundering.)

Purchasing real estate with cash from a shell company “cleans up” the dirty money by disguising its true origin and owner, because it’s not always easy to determine who actually owns the company. Sometimes the money will be funneled through several shells before the ultimate purchase, to make tracing the money’s origins even more difficult. After the purchase, the launderer owns a legal asset in a country with a stable government and legal system, which can then be used to generate rental income or later be sold to create proceeds that will appear to have a legitimate source.

There have long been allegations of money laundering through real estate connected to the Trump Organization. Former Trump advisor Steve Bannon was quoted in the book Fire and Fury predicting that Russian money laundering would end up being the centerpiece of the Mueller investigation. A recent analysis by McClatchy news found that buyers connected to Russia or former Soviet countries have made 86 cash purchases totaling nearly $109 million in Trump properties in New York and southern Florida.

Allegations of potential laundering activity involving the Trump Organization are important for reasons beyond the criminal acts themselves. They provide evidence of ties between Russians and members of Trump’s inner circle, which could be relevant to any possible conspiracy to affect the election. That’s why Mueller, who is charged with investigating Russian interference with the election, ended up investigating and charging Manafort for acts related to his work for Ukraine.

In addition, Russians aware of any such criminal activity could threaten to expose criminal acts by members of the Trump Organization, giving them leverage to blackmail the president. Given his persistent refusal to criticize or antagonize Russia, many have wondered whether the Russians “have something” on Trump. That could be a hotel room tape — or it could be information about money laundering.

Even if Russians were laundering money by purchasing Trump properties, the Trump family or others involved in the transactions would not be liable unless the government could prove they knew what was going on. That’s the problem with so much of the money laundering involving cash sales of real estate. When brokers and developers see the purchase in the name of shell company, they don’t know the true source of the money and don’t have any real incentive to find out. All they see is a buyer who has the cash and is ready to close. If questioned later, they can deny any knowledge that the transaction involved dirty money — after all, paying with cash, standing alone, is not illegal.

In the absence of direct evidence of knowledge by a developer or real estate broker, the doctrine of willful blindness or conscious avoidance may come into play. The jury instruction on willful blindness is sometimes called the “ostrich instruction”: the defendant stuck his head in the sand and refused to see what was happening. Prosecutors can use willful blindness to establish a defendant’s knowledge that a transaction involved dirty money – which in turn can make the defendant liable for aiding and abetting the money launderer, or for conspiracy.

Whether such knowledge can be shown beyond a reasonable doubt is a very case-specific question. Time will tell whether Mueller’s team uncovers evidence of money laundering involving purchase of Trump Organization properties – and whether Trump or members of his family knowingly furthered that illegal activity.

Click here to read Part One of this post on the definition of money laundering

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