When Is Cheating a Crime? The College Admissions Case

On Tuesday, March 12, the U.S. Attorney for the District of Massachusetts announced his office had filed criminal charges against fifty people in a massive college admissions scandal. Several dozen wealthy parents were charged with paying college admissions counselor William “Rick” Singer a total of about $25 million to fraudulently gain admission for their children to some of the country’s most elite universities, including Yale, Stanford, USC, and Georgetown.  Along with Singer and the parents, a number of university athletic coaches, test administrators, and other participants in the scheme were charged.

This prosecution involves some interesting legal questions and a number of issues that fall into the classic white collar crime “gray area” of conduct that may be reprehensible but not necessarily criminal. Singer and the coaches who accepted personal bribes do not have much of a defense, and Singer and a couple of coaches have already pleaded guilty. But when it comes to the parents, I expect a number of them will mount a vigorous defense and some may well prevail. For the parents, the evidence of immorality and a sense of entitlement is overwhelming. The evidence of criminality – maybe not so much.

The Two Schemes

 Singer was at the center of two schemes, which allegedly went on from 2011 to 2018. He is the founder of The Edge College & Career Network, also known as The Key, a for-profit college counseling and preparation service. In 2012 Singer also founded the Key Worldwide Foundation as a non-profit, tax exempt organization.

In the first scheme, parents allegedly paid Singer to help their children cheat on the ACT and SAT college admissions exams. Singer would have the parents change their child’s test location to one of two testing centers where Singer had relationships with test administrators who would accept bribes to facilitate the cheating. Singer would then usually arrange for Mark Riddell, a counselor at a private school in Florida, to travel to the test center, purportedly to “proctor” the students taking the exam. Riddell would either coach the students on the proper answers or change their answers after they were done in order to obtain the test score desired by the parents. Parents typically paid Singer between $15,000 and $75,000 for each such exam, and Singer typically paid Riddell $10,000 per student.

The second scheme involved Singer bribing college coaches to designate students as recruited athletes (thus facilitating their admission) even though the students in question were not qualified. This scheme frequently involved parents and associates of Singer creating phony application materials and profiles that falsely portrayed the students as star high school athletes. Parents made payments either to Singer’s foundation or, in some cases, directly to athletic programs at the universities. Singer would then either pay the coaches directly or make payments to university athletic departments or private sports clubs controlled by the coaches in exchange for the coach’s agreement to sponsor the student for admission.

The Charging Documents

 The cases against the fifty defendants are somewhat oddly broken down into eight different charging documents. Twelve defendants, including most of the coaches involved and the test administrators who accepted bribes from Singer to facilitate the cheating scheme, are charged in one grand jury indictment with a single count of participating in a racketeering conspiracy.

Thirty-two parents who participated with Singer in either the entrance exam cheating scheme, the sports recruitment scheme, or both, were charged in a 200-plus page criminal complaint with a single count each of conspiracy to commit honest services mail fraud. The fact that prosecutors charged the parents by complaint rather than by indictment may indicate they hope to secure a quick guilty plea from some of them. Absent that, under the Speedy Trial Act prosecutors would need to indict the parents within 30 days of their arrest, which would be sometime in mid-April.

The remaining six defendants are charged in their own individual indictments or criminal informations (charges filed by prosecutors rather than by the grand jury, usually when there is going to be a guilty plea). Singer, the man at the center of the scheme, has been cooperating with the investigation since last September and has already pleaded guilty to the charges against him. Riddell, the man Singer paid to help students cheat on the entrance exams, began cooperating with investigators this past February. He is also charged individually and likely will plead guilty soon.

Two coaches were charged separately and have already pleaded guilty: John Vandemoer, the former sailing coach at Stanford, and Rudy Meredith, the former head women’s soccer coach at Yale.

Michael Center, the former head tennis coach at UT-Austin, was also charged in his own separate complaint based on a single incident where he allegedly accepted a $100,000 bribe to admit as a tennis player a student who did not play competitive tennis. It’s not clear right now why Center was charged individually instead of as part of the larger indictment, but prosecutors may expect him to plead guilty as well.

Finally, one parent, David Sidoo, a resident of Canada, was charged in a separate indictment for conspiring with Singer and Riddell to have Riddell take the exams for two of Sidoo’s children. Sidoo’s case may have been carved out because it relies on a different mail fraud theory and a different kind of scheme: Riddell allegedly created a fake ID and actually posed as Sidoo’s son to take the exam, rather than helping the son cheat. The case may also face statute of limitations issues, since most of the conduct took place more than five years ago.

The Criminal Charges

Here are the leading criminal statutes and theories used in the case:

Honest services fraud: The leading charge overall is conspiracy to commit honest services mail fraud. This is the charge in the massive complaint against the parents, and honest services fraud forms part of the charges in almost all the other cases as well.

In a typical mail fraud case, the defendant is charged with depriving the victim of money or property. But in honest services fraud, the defendant is charged with depriving the victim of the “intangible right of honest services” that someone else owes that victim.  In the 2010 case of Skilling v. United Statesthe Supreme Court held that honest services fraud is limited to cases involving bribery or kickbacks. The theory applies not only to public officials who accept bribes but also to private individuals who violate a special duty of trust and responsibility, such as the duty owed by an employee to an employer, by accepting bribes or kickbacks.

When it comes to the college recruitment scheme, the honest services fraud theory is straightforward. Singer bribed the coaches to admit unqualified students, which deprived the universities of their rights to the fair and honest services of those coaches. As for the entrance exam cheating scheme, the theory is that by bribing the test administrators at the two test locations, Singer deprived the companies that administer the ACT and SAT of their right to the fair and honest services of those individuals.

RICO Conspiracy: The charge in the twelve-person indictment, as well as in a number of the individual cases, is a conspiracy under the Racketeer Influenced and Corrupt Organizations Act, or RICO. The RICO “enterprise” alleged in the indictment is Singer’s two organizations, The Key and the Key Worldwide Foundation, working together. The RICO charges essentially allege that Singer conducted the affairs of this enterprise through a pattern of racketeering activity, and that the other defendants conspired to help him do that.

“Pattern of racketeering activity” is a term of art in RICO that refers to a series of specified criminal acts. In this case, the acts of racketeering alleged include honest services fraud and money laundering. (For more detail on RICO and how the charge works, see my post here.)

Tax Fraud Conspiracy: Singer is also charged with a conspiracy to defraud the United States through tax fraud. The government charges that he conspired with various parents to disguise their payments to Singer as tax-deductible contributions to the Key Worldwide Foundation, when the money was actually used to pay bribes and to enrich Singer personally,  As part of the conspiracy, Singer allegedly sent receipts to the parents thanking them for their “donations” and falsely stating that no goods or services were provided in return.

At this point only Singer is charged with tax fraud, but a number of the parents could also end up liable for either criminal or civil tax violations if they took a charitable deduction on their taxes for payments to Singer.

Money Laundering Conspiracy: So far, only Singer and Riddell are charged with a money laundering conspiracy. The allegation is similar to the tax fraud scheme: the claim is that Singer had parents make payments to his tax-exempt foundation and then made the bribe payments from that foundation in order to conceal the actual origin, source, and ownership of the money.

Singer and Riddell are pleading guilty, so the money laundering theory won’t be contested by them. But if, as has been suggested, some parents also end up facing money laundering charges, I think the charge will be subject to challenge. The issue is that the payments by the parents and Singer likely are not unlawful “proceeds” of criminal activity, as required for money laundering. The money parents sent to Singer is “clean” money from lawful sources, and the payments made by Singer are the bribes themselves. That money doesn’t become “proceeds” of bribery until it is in the hands of the bribe recipients.

Simply running money through an account with a different name to disguise where it came from is not money laundering unless that money itself represents criminal proceeds from an unlawful activity. As I noted in this post, prosecutors made a similar error when they first charged the defendants in the NCAA basketball corruption case. When the defendants were arrested the charges included money laundering, based on a similar theory, but by the time the cases were indicted that charge had been dropped. The lack of criminal proceeds is also why, for example, the hush money payments to Stormy Daniels by former Trump attorney Micheal Cohen likely do not constitute money laundering, even though he used a shell corporation to disguise where the payments were coming from.

Obstruction of Justice: Singer alone is also charged with one count of obstruction of justice, because after he was first confronted by the FBI he allegedly tipped off several parents about the investigation.

Possible Defenses and Legal Issues

For those who were paying and accepting bribes directly – the coaches and the test administrators – I don’t see much of a defense. The honest services fraud theory squarely applies, and if the facts are as the government alleges, the defendants would not have much room to argue they did not know their conduct was unlawful.

For the parents, on the other hand, it’s going to be very case-by-case. I can see a number of potential defenses. First, recall that all of the parents are currently charged with conspiracy to commit honest services fraud. That basically means a conspiracy to participate in a bribery scheme. Singer was bribing the coaches to admit the students and was bribing the test administrators for ACT and SAT. But it’s not at all clear from the complaint that the parents knew these bribes were being paid, which would be necessary for them to be guilty of a conspiracy to pay them.

Whenever the parents wrote a check, it was either to Singer’s foundation or to an athletic account at the school, such as the USC Athletic Board. There are no instances of a parent paying a bribe directly to a coach. During the recorded conversations, Singer frequently says things like the money is going to the school or to the athletic program, or is for a “contribution.” He doesn’t spell out that he is actually bribing anyone.

Bear in mind that, before he was caught and began cooperating with the government, Singer’s incentive would have been to assure the parents that what he was doing was legal. Parents would be more likely to participate if they thought the scheme was just shady but not criminal. And it would be risky for Singer to admit criminal conduct to third parties if he didn’t have to. It’s far more likely that Singer led parents to believe he had special connections with the schools and coaches that allowed him to leverage the donations, without telling them the details of any bribes.

There’s an interesting aspect of the case revealed in the lengthy criminal complaint against the parents, where agents tried to close this potential loophole. After Singer began cooperating with the government, the FBI had him make recorded phone calls to a number of the parents with whom he allegedly had carried out the schemes before the FBI was onto him. During the calls, Singer told the parents his foundation was being audited by the IRS. He tried to get the parents to admit their knowledge of past misconduct and said he wanted to make sure they were on the “same page”. Singer would say something like, “Of course, I’m not going to tell the IRS that we actually used the money to get your son accepted for football when he didn’t really play football. I’ll just tell them it was a donation to benefit underprivileged kids.” The parents, who must have thought this was an extremely odd phone call, frequently respond with just “OK,” “yeah,” or “uh-huh.” Some of the calls are not particularly incriminating. They might leave room for parents to argue they didn’t really understand what Singer was rambling on about.

Again, a great deal of the alleged bribe money actually went to the schools, not the coaches directly. For example, in the case against Vandemoer, all of the money is alleged to have been paid to the Stanford sailing program, not to Vandemoer himself. A number of parents wrote checks to entities like the USC Athletics Board. If parents are writing checks made out to the schools and athletic programs, they might have had reason to believe the school knew about and approved what was happening. They could claim they saw little difference between what Singer was able to achieve and situations where wealthy parents give a substantial donation to a university, or pay for a new building, and their child then gets admitted. Parents will claim Singer convinced them that, through his connections, he could achieve the same thing for them with a smaller donation by fudging the system for testing or admitting athletes, and that the schools were willing to look the other way in exchange for the money.

Willful blindness is sometimes called the “ostrich doctrine”

Willful Blindness

If a parent tries to claim he or she didn’t know what Singer was really doing, how credible that will be will depend on the facts and evidence in each case. A doctrine called “willful blindness” might come into play, where the government can prove knowledge by showing a defendant deliberately closed his eyes to what was going on around him in an effort to avoid learning the truth. A prime example of this could be one point in a call recorded between Singer and parent Gordon Caplan, when Caplan says, “I don’t even want to know what you guys do.”

Of course, parents who were involved in creating phony athletic profiles for their students knew they were doing something wrong. But not everything that’s wrong is a crime. They may argue that Singer convinced them the school was willing to go along with it in exchange for the substantial donation they were making. There’s no evidence the schools were directly harmed financially – in many cases the school athletic program received a donation, and once admitted the students paid tuition.

Similarly, parents involved in helping their students cheat on the ACT or SAT clearly knew they were doing something wrong. But they may argue that cheating on a test, although wrong, should not be a federal felony. The schools and testing agencies may have been deceived, but the law generally draws a distinction between being deceived and being defrauded. If as a result of the scheme the schools received not only tuition payments but substantial cash contributions, a parent may argue they were not really defrauded at all. Perhaps the appropriate remedy is disgrace, expulsion, and loss of tuition money already paid, but not a criminal prosecution.

One could argue that the schools were deprived of valuable slots on the athletic teams or in the freshman class that could have gone to deserving students, and that deprivation amounted to fraud. But that’s not how the government has charged the case, at least at this point. Prosecutors have relied on the honest services fraud conspiracy. That will require proof that the parents knowingly participated in the bribery schemes – and based on what is in the charging documents so far, that may be difficult to prove.

Parents may actually be more vulnerable on tax charges, if they wrote off their payments to Singer’s foundation as a charitable deduction. Those could be criminal charges or merely civil penalties, depending on the facts of each case. And prosecutors may seek to add money laundering charges against some parents, but those charges will be vulnerable to the “proceeds” defense I discussed above.

Many of the parents are hiring high-powered defense attorneys – they can afford the best, of course. There may be some quick guilty pleas, but I suspect a number of the parents will fight the charges and may well prevail. Their conduct was clearly reprehensible. It’s less clear, at least at this point, that it was criminal.

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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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