Manafort and Cohen: Trump’s Terrible, Horrible, No Good, Very Bad Day

August 21, 2018 was a watershed in the investigations surrounding president Trump. A jury in Virginia found his former campaign chairman, Paul Manafort, guilty on eight felony counts. Almost simultaneously, in New York, Trump’s former personal attorney Michael Cohen pleaded guilty to eight felony counts of tax evasion, bank fraud, and orchestrating illegal campaign contributions for Trump’s 2016 campaign.

It was a remarkable day for a president who campaigned promising to surround himself with “only the best people.” Although both cases are linked to Trump, they have different implications for the president, the Mueller investigation, and for what might be coming next from federal prosecutors.

Paul Manafort was convicted on eight felony charges.

Paul Manafort

The Manafort Conviction 

Paul Manafort was the first defendant to be convicted at trial by the special counsel’s office. After about a three-week trial and four days of deliberations, a jury in the Eastern District of Virginia found him guilty on eight counts of tax evasion, bank fraud, and failure to report a foreign bank account. The jury could not reach a verdict on ten more counts, and the judge declared a mistrial as to those.

There was a lot of drama during the trial concerning whether the judge was being too hard on the prosecutors and whether the jury should have been sequestered to avoid hearing publicity about the case or learning about Trump’s Tweets. These were mostly distractions; it’s not that unusual for a judge to be tough on prosecutors (although Judge Ellis may have taken it to an extreme at times) and juries are very rarely sequestered these days. In the end it appears the jury was able to look past the noise and do its job carefully, sorting through the different issues involved in the different counts — even though they were ultimately unable to agree on about half of them.

It’s hard to know why the jury was hung on some of the charges – and we don’t know whether there was a single holdout or whether they were more evenly divided.(Update: Shortly after this post was published, one juror went public and said there was a single holdout on the ten counts where the jury hung – the other eleven jurors wanted to convict on all counts.) They found Manafort guilty on all the tax charges, clearly finding that whatever other financial shenanigans were going on, he wasn’t reporting his income to the IRS. They rejected all but one of the counts based on failure to report ownership of a foreign bank account; that may have had something to do with doubt about the details of the legal requirements for establishing when a defendant has sufficient control over such an account. And they convicted on some bank fraud theories and not on others, which may have been based on disputes over whether particular representations to some banks were actually material.

But in the end, none of that really matters. Manafort’s defense team was dealt a pretty tough hand and did a good job raising a reasonable doubt as to at least some issues in the minds of some of the jurors. But conviction on eight felony counts still exposes Manafort, who is nearly seventy years old, to essentially life in prison. There’s no way to spin this as anything other than a big win for the prosecutors and a huge blow to Manafort – although some will undoubtedly try:

Prosecutors have the option to re-try Manafort on the counts on which the jury could not agree, but it seems very unlikely they will do so. The eight felony convictions encompass all areas of Manafort’s misconduct and are more than sufficient to hold him accountable at sentencing. In addition, Manafort is still facing a second major trial in the District of Columbia next month on charges of money laundering and bank fraud. Re-trying the counts on which this jury hung seems completely unnecessary.

Manafort also has the right to appeal the convictions. That appeal would be heard by the U.S.. Court of Appeals for the Fourth Circuit, and the process would probably take six months to a year to complete.

The really interesting question now is whether Manafort will finally decide to cooperate in the Mueller investigation. It’s been hard to understand why he hasn’t cut a deal already. Maybe he really is counting on a pardon — although if Trump granted a pardon in exchange for Manafort’s silence, that could be a separate crime of bribery. Or maybe Manafort is afraid what might happen to him if he testifies against certain Russian individuals, who have been known to assassinate their rivals.

There seems little doubt Manafort knows a great deal that would be valuable to Robert Mueller’s investigation. He was at the center of key events, including the frequent contacts between the campaign and various Russians and the change of the Republican party platform at the convention to make it less favorable to Ukraine. And Manafort was also part of the infamous June 2016 meeting at Trump Tower between campaign officials and Russians offering dirt on Hillary Clinton.

We should know soon whether Manafort will join others who have “flipped” and cooperated, or whether he will continue to remain silent. If he does decide to come on board with the prosecution, that has the potential to be a real turning point in the special counsel investigation.

Michael Cohen pleaded guilty to eight felonies.

Michael Cohen

The Cohen Guilty Plea 

At almost the same time the jury was returning its verdict in the Manafort trial, former Trump attorney Michael Cohen entered a guilty plea to eight felony counts in federal court in New York. Cohen pleaded guilty to five counts of tax evasion, one count of bank fraud, and two campaign finance violations. The tax crimes stem primarily from his failure to report several million dollars in income from his taxi medallion business, and really have nothing to do with Trump or the campaign.

The campaign finance violations strike closest to the Trump presidency. They involve Cohen’s role in arranging hush-money payoffs to adult film star Stormy Daniels and former Playboy model Karen McDougal – both to keep them quiet about alleged affairs with Trump during the closing weeks of the campaign. The payment to McDougal was made by a corporation — reported to be American Media Inc., which owns the National Enquirer — which bought the rights to her story so it could then kill it. The payoff to Daniels was the widely-reported $130,000 payment made by Cohen himself just days before the election. Cohen admitted that he took part in these payoffs in order to influence and benefit the Trump campaign.

The most startling thing about Cohen’s plea was his direct implication of Trump in a crime. His plea agreement says only that he arranged the hush money payoffs in “cooperation, consultation, and concert with, and at the request and suggestion of one or more members of the campaign.” But during his plea proceeding, Cohen said the payments were made at the direction of the candidate – Trump himself.

The campaign contributions were unreported and exceeded legal limits, and one was paid by a corporation. These are crimes if done knowingly and willfully, which is what Cohen admitted during his plea. But if the president directed him to commit those crimes, the president himself is also criminally responsible. The law of aiding and abetting, 18 U.S.C. 2, provides: “whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.”

In other words, if Trump truly did direct Cohen to arrange the illegal contributions, then Trump himself is liable for the same campaign finance violations to which Cohen just pleaded guilty. The same is potentially true for other members of the campaign who were involved, as well as the individuals at American Media. The president and others could also be implicated in a charge of conspiracy to violate the federal campaign finance laws.

Because Trump and others are potentially implicated, the question is where does the case go from here? The Southern District of New York could bring charges against other individuals involved in the campaign finance violations. But the SDNY is not going to charge the president – particularly in light of the longstanding DOJ opinion that a sitting president cannot be indicted. And the SDNY is not set up to investigate presidential misconduct and make a report to the Attorney General as a special counsel would do. The allegations against Trump also seem to fall outside the mandate of special counsel Robert Mueller, who is charged with investigating Russian interference with the election. (That’s why Mueller referred the allegations against Cohen to the Southern District of New York in the first place.)

That may mean the appropriate course is to call for a new special counsel to investigate the potential campaign finance violations by the president and senior members of his campaign – or to expand of Mueller’s mandate to include those allegations. The latter may make more sense, considering the substantial overlap of the allegations and people involved. Because Attorney General Sessions remains recused from any investigations involving the campaign, such a decision presumably would be made once again by Deputy Attorney General Rod Rosenstein.

DOJ may already be considering appointing a new special counsel or expanding Mueller’s mandate – we don’t know what referrals may have already been made. But now that there are direct allegations of criminal misconduct by the president himself, presumably some kind of process must be put in place to investigate those allegations.

What Happens Next?

Developments in the coming days and weeks should be fascinating. Will Manafort finally decide to flip? Will there be a new special counsel to investigate the campaign violations, or will Mueller’s role be expanded? After all the allegations about Russian meddling and collusion, will it be campaign finance violations having nothing to do with Russia that end up bringing down the president? What about Cohen – how much will he be working with prosecutors?  Although his plea agreement did not spell out any cooperation requirements, it seems likely that he would cooperate as required to help himself out in his own case.

President Trump’s own Tweets in the aftermath of these events may provide a clue as to where he thinks he has the most to fear. He was trashing Cohen:

While bucking up Manafort and perhaps encouraging him to stay strong:

Even though it’s Cohen who now has actually implicated Trump in a crime, Trump may believe the information Manafort could provide would be even more damaging and that he needs to try to keep Manafort in the fold. That may turn out to be a miscalculation; Trump may end up regretting his decision to publicly kick Cohen to the curb. Campaign finance violations, for which Cohen could provide the key evidence, may end up being to Trump was tax evasion was to Al Capone. We shall see.

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*Title credit to Judith Viorst, author of “Alexander and the Terrible, Horrible, No Good, Very Bad Day” (1972), a book I read to my kids some twenty-odd years ago.

The Definition of Money Laundering (Part 1): Porn Star Payoffs and Dirty Money

What is money laundering, and how might it apply in the various investigations involving president Trump? When Trump’s new attorney Rudy Giuliani recently said that the hush-money payment to adult film star Stormy Daniels had been “funneled” through a law firm, some suggested that sounded like money laundering. There are other money laundering issues in the Trump investigations as well; for example, it’s one of the primary charges pending against Trump’s former campaign manager Paul Manafort. It therefore seems like a good time for a law-wonky look at the definition of money laundering (with an occasional porn star reference thrown in to help keep it interesting).

Money laundering, like obstruction of justice, is a term that gets tossed around rather loosely. In the media and casual conversation it may refer to any financial deal that looks shady or secretive – like funneling payoffs to a porn star through a law firm, for example. But actual criminal money laundering has a narrower definition and strict requirements.

In this post, I’ll discuss the primary domestic money laundering statute, 18 U.S.C. 1956(a)(1). This is the statute that would most likely apply to something like the Daniels payoff. In a future post I’ll examine the primary international money laundering statute, 18 U.S.C. 1956(a)(2). This is the statute most relevant to things like Paul Manafort’s deals involving Ukraine — and potentially to New York real estate deals involving the Trump organization.

(Side note: my shorthand titles “domestic” and “international” are not completely accurate; there is a lot of overlap between the two statutes. In particular, many transactions involving the international movement of funds could be charged under either or both sections. But it’s a useful breakdown for purposes of discussion.)

Rudy Giuliani said payments were “funneled” through a law firm

The Definition of Money Laundering

Classic money laundering involves concealing the existence, nature, or source of illicit funds so the funds will appear legitimate if discovered. Criminal operations may generate huge amounts of money. But if criminals seek to spend that money and can’t produce legitimate business and financial records or other documentation to explain where it came from, bankers, the I.R.S, and others may start to ask uncomfortable questions. That’s where money laundering comes in. The money launderer seeks to clean up – “launder” — criminal proceeds so when the money is spent no one will ask questions about the money’s origins. (This concept was brilliantly summarized by attorney Saul Goodman in “Breaking Bad.”)

Money laundering prosecutions therefore target not the underlying crimes that generate criminal proceeds (although those typically will be prosecuted as well, if possible) but the efforts to enjoy or conceal the fruits of those crimes. This can provide an effective second level of deterrence of criminal activity. After all, if the government makes it impossible for you to enjoy your ill-gotten gains, what fun is it to be a crook?

Money laundering prosecutions also allow the government to target and deter those – such as bankers and real estate agents (and lawyers) — who don’t engage in the underlying crimes but knowingly help criminals conceal and enjoy their profits.

A textbook money laundering scheme involves cleaning dirty money so it can be spent without arousing suspicion, but the money laundering statutes are actually much broader than that. They also apply to financial transactions involving criminal proceeds that are designed to promote further criminal activity, evade income taxes, or avoid the currency reporting requirements for cash transactions over $10,000.

Money laundering charges are not simply another way to prosecute the underlying fraud or corruption. The focus of domestic money laundering is what is done with the proceeds of criminal activity once that activity is completed. A good shorthand way to remember this is that money laundering should involve a “downstream transaction” – something that is done with criminal proceeds once the criminal has those proceeds in hand.

The definition of money laundering

The Elements of Domestic Money Laundering

Domestic money laundering is prohibited by 18 U.S.C. 1956(a)(1). It has four elements:

  • The defendant conducted or attempted to conduct a financial transaction;
  • The defendant knew at the time that the transaction involved the proceeds of some form of criminal activity;
  • The transaction did in fact involve the proceeds of a Specified Unlawful Activity (SUA); and
  • The defendant acted with one of four types of intent or knowledge.

Element 1: Conducting a Financial Transaction

The first requirement is that the defendant conducts or attempts to conduct a “financial transaction” as defined in the statute. This includes almost any transaction involving cash, checks, money orders, securities, or other financial instruments. It also includes wire transfers and the transfer of title to any real estate, vehicle, vessel, or aircraft. A financial institution is frequently involved but that’s not required – if I sell my car to you for cash that will qualify, as long as the government can show a minimal effect on interstate commerce.

Element 2: Knowing it Involves Criminal Proceeds

The second element focuses on the knowledge of the defendant. The government must prove that at the time of the financial transaction the defendant knew the property involved was the proceeds of some act that was a felony under state, federal, or foreign law. The shorthand for this requirement is that the defendant must know the transaction involved dirty money.

As in other areas of criminal law, a defendant’s knowledge may be shown by willful blindness. If the defendant deliberately closes his eyes to what is going on and acts with a conscious purpose to avoid learning the truth, he may be deemed to have constructive knowledge. In other words, the law does not allow the banker to say, “Well, when the guy with no job came into the bank with a duffel bag containing $50,000 in white-powder-encrusted 10’s and 20’s and asked me to open a bank account in the name of his dog, I didn’t KNOW that it was illegal proceeds . . . . “ Willful blindness may come into play in areas such as huge cash transactions involving New York real estate bought by shell companies (discussed more in the future post on international laundering), where developers or realtors may claim they did not know illegal proceeds were involved..

Element 3: The Property Is in Fact Proceeds of an SUA

The second element, discussed just above, covers what the government must prove about the defendant’s knowledge concerning the proceeds. The third element relates to what the government must prove about where in fact the proceeds originated.  The property involved in a laundering transaction must be proceeds generated by a “Specified Unlawful Activity,” as defined in the statute.

Specified Unlawful Activity includes a very long laundry list of federal crimes, as well as several categories of state offenses. In addition to drug and racketeering offenses, many leading white collar crimes are listed as SUAs, including mail and wire fraud, bribery, and obstruction of justice. As a result, although money laundering statutes were primarily aimed at drug cartels and organized crime, money laundering charges are also available in a great many white collar prosecutions.

Element 4: The Defendant’s Intent or Knowledge

The final element the government must prove is that the defendant engaged in the financial transaction with a specific knowledge or intent. Under 1956(a)(1) there are four options:

  • Intent to promote an SUA – 1956(a)(1)(A)(i)
  • Intent to evade income taxes – (a)(1)(A)(ii)
  • Knowing that the transaction is designed in whole or in part to conceal or disguise the nature, location, source, ownership, or control of the proceeds –    (a)(1)(B)(i)
  • Knowing that the transaction is designed in whole or in part to avoid the filing of a Currency Transaction Report (CTR) – (a)(1)(B)(ii)

Money laundering under (A)(i) is sometimes called promotion or “plowback” money laundering. It applies to reinvesting criminal proceeds in the criminal operation to further the criminal activity. Examples include a drug dealer using drug proceeds to buy a car to use for future deliveries, or a defendant engaged in a stock fraud scheme who uses criminal proceeds to set up a phony website and lease server capacity to further the scheme.

Under (A)(ii), transactions in criminal proceeds that are designed to evade federal income taxes may be charged as money laundering, in addition to whatever tax charges might be appropriate.

Concealment money laundering under (B)(i) is what most people think of as money laundering. It is the classic, Saul Goodman variety discussed above: transactions designed to clean up criminal funds and make them appear legitimate. This may involve running those funds through a legitimate business so they appear to be proceeds of that business (think of the car wash in “Breaking Bad”). It may also involve purchasing real estate or other assets in the name of shell companies or other entities, so those assets can be enjoyed and potentially sold later to generate “clean” income from the sale. The launderer’s goal is to make it difficult to determine where the original funds actually came from or who controlled them, and ultimately to make the illegitimate property look legitimate.

Finally, laundering under (B)(ii) prohibits structuring financial transactions in criminal proceeds to avoid the reports that banks and merchants must file for any cash transactions in excess of $10,000.00.  This can also be a separate crime, called structuring, the offense to which former Speaker of the House Dennis Hastert pleaded guilty in 2015.

One final maxim to keep in mind: money spending is not money laundering. A criminal may use illegal proceeds to buy a house, a car, or jewelry. But if he makes the purchase openly and in his own name and there is no evidence of an intent to disguise anything, that transaction will not be concealment money laundering. Similarly, if he makes those purchases to enjoy a certain lifestyle but they don’t directly further any ongoing criminal activity, they will not be promotion money laundering.

The Requirement of “Proceeds”

The term “proceeds” appears in both the second and third elements of the offense. It means property derived or obtained from other criminal activity.  As noted above, my favorite shorthand way to describe this concept is that money laundering needs to represent a downstream transaction – one that takes place after the crime that generates the proceeds has already occurred.

There have been many cases where courts have thrown out money laundering convictions because the funds involved were not proceeds. For example, suppose I persuade people to wire funds to me by creating a phony investment website, and the bank account I set up to accept those transfers is in the name of a phony shell company. The government may charge me with wire fraud and use the transfers from my victims as the required use of the wires in furtherance of the fraud. But if the government also seeks to charge me with money laundering by using those same wire transfers as the financial transactions and wire fraud as the SUA, that charge will fail. The money involved in those wire transfers is not yet proceeds – it is clean money coming from my victims. That money only becomes proceeds once it is in the bank account and I have control over it.

The proceeds requirement highlights that money laundering charges don’t apply to every criminal transaction or any financial deal that may look secretive or shady. In order to launder money, the money needs to be dirty in the first place.

And that brings us to Stormy Daniels.

Stephanie Clifford, a/k/a Stormy Daniels

Money Laundering and the Stormy Daniels Payment

The payment to Stormy Daniels would easily qualify as a financial transaction. And there seems to be little doubt that the payment was designed to conceal the nature, origin, or source of the money. As Giuliani freely admitted, it was “funneled” through a law firm, and the actual payment was made through a corporation apparently set up by Trump’s attorney Michael Cohen for that purpose. There is little reason to engage in such convoluted transactions other than to conceal who is really behind it – after all, Trump could have simply written her a check.

But the issue here is the “proceeds” requirement. Based on the public information to date, there is no indication the money used to pay Daniels was proceeds of an SUA, or that those involved in the transaction knew it was dirty money. Absent criminal proceeds, the transaction may be secretive and sleazy but it is not money laundering.

Of course, with further investigation it may turn out that proceeds of some other crime were indeed used to make the payoff. For example, there have been some allegations that Cohen may have engaged in bank fraud in order to get the money. If that turned out to be true, the money could be considered proceeds of the bank fraud and money laundering charges could apply.

We will have to wait and see what federal investigators uncover. But as of now, this looks like a case of secretive financial dealings that don’t fit the legal definition of criminal money laundering.

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