Money Laundering and the Russia Probes
Special Counsel Robert Mueller is taking a keen interest in the issues of money laundering as they arise in the context of the larger Russia investigation, as has been reported in recent months. There have also been reports of both the New York Attorney General and the U.S. Attorney for the Southern District of New York approaching their investigations through this lens, with the latter focusing specifically on Paul Manafort. The following aims to explain what money laundering is and why it is critical not only to the alleged financial crimes investigations touching on those in Trump’s orbit, but also to the broader meddling and collusion probes.
Money laundering is a catch-all term for the process by which an individual or organization takes illegally obtained, or “dirty,” money and “cleans” it by passing it secretly through the economy so that it appears “clean,” or legal. The process’s ultimate goal is to create the illusion that the money was obtained legally, and, according to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), involves three main phases: placement, layering, and integration.
“Placement” refers to the process by which the individual or organization introduces the money into the legitimate economy. According to the international watchdog organization the Financial Action Task Force (FATF), this first step often involves breaking up large amounts of illegally-obtained cash into smaller, less conspicuous amounts, which are then deposited directly into bank accounts or converted into monetary instruments such as checks or money orders. This sometimes involves the use of offshore bank accounts in countries with lax disclosure requirements, most famously Switzerland, leading to the use of the colloquial term “Swiss bank accounts” to refer to offshore accounts generally.
Once the money has been deposited into the economy, an individual “layers” the money through repeated transactions, establishing a paper trail that creates the appearance that the money was obtained legitimately through investments in real estate, gambling, or payments for goods and services. One common tool for doing so is by creating anonymous shell corporations, which allow people to do business without disclosing the identities of the ultimate beneficial owners. The money launderer may pass the money through multiple bank accounts or shell corporations, thus further obfuscating its origins.
Because of the need to both establish a paper trail of legitimate payments and obscure the money’s origins, layering typically involves several transactions of different types. One common method of layering is to open a front company that deals mainly in cash transactions, such as restaurants, bars, and laundromats, which allows a launderer to incorporate large sums of money into an apparently legitimate business operation in small increments. Illicit profits can also be layered through gambling, whether by converting the cash into chips and back to create the illusion that the money was simply won at a casino or by making numerous small bets and masking the losses while claiming the money as the proceeds of winning bets.
Real estate is often involved in both layering and the final phase of money laundering, integration. For example, a money launderer may purchase a property using one anonymous shell corporation, then sell it to other corporations he or she owns at successively higher prices, thus creating a chain of sales of escalating value that can ultimately account for a portion of the illegally-obtained money. Additionally, many countries, including the United States, do not require extensive due diligence for purchases made through brokers or allow for purchases without the buyer needing to be physically present in the country of the property. Because of these oversights, and because commercial real estate provides both a store of value and appreciation, money launderers often invest in real estate to integrate money once it has been sufficiently layered.
Money laundering is a global issue because of its associations with organized crime, trafficking in illicit or stolen goods, terrorist financing, and government corruption. The processes described above are frequently used by criminals to mask the origins of money, whether because it was derived from illegal activities like drug or human trafficking or because it will subsequently be used for illegal or clandestine activities such as financing the operations of organized crime organizations or fueling disinformation campaigns.
Money Laundering in the United States
Though such financial crimes are often associated in the popular imagination with offshore bank accounts in countries such as Switzerland, Panama, Cyprus and the Cayman Islands, in recent years, would-be money launderers have increasingly turned to the United States. Much of this shift is due to the relative ease of creating anonymous shell corporations in the U.S., which can be created for as little as $100 in states such as Wyoming, Delaware, and Nevada. In particular, lax transparency standards for limited-liability corporations in Delaware have led to the establishment of more than a million corporations in the state, which is now home to more companies than people. As a result, in 2015, the U.S. ranked third out of more than 90 countries on the international transparency organization the Tax Justice Network’s Financial Secrecy Index, behind only Switzerland and Hong Kong.
Though there are several legitimate reasons for creating one, The Atlantic notes, “shell companies, through their attendant anonymity, also enable large-scale money laundering” by creating a place for individuals or organizations to stash their illegally-obtained money. Indeed, because creating shell corporations is so cheap and easy, criminals sometimes create multiple through which to pass their money and further obscure its provenance. The Department of Justice has noted that “Eurasian organized crime groups are a particular concern because of their systemic use of sophisticated schemes to move and conceal their criminal proceeds using U.S. banking institutions and U.S. incorporated shell companies.” For example, in 2013, alleged members of two Russian-American organized crime groups were indicted for a range of financial crimes, including “mov[ing] tens of millions of dollars in illicit gambling proceeds from the former Soviet Union through shell companies in Cyprus into various investments and shell companies in the United States.”
Anti-Money Laundering Laws in the United States
Over the last several decades, the U.S. government has passed several laws intended to prevent or punish money laundering. The main anti-money-laundering law, enacted in 1970, is the Bank Secrecy Act (BSA), which outlines a recordkeeping requirements for so-called “Money Services Businesses”—that is, any company that provides money orders, traveler’s checks, check cashing, currency dealing or exchange, or stored value—to “help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in financial institutions.” Chief among these is the requirement that banks report any cash transaction over $10,000 to FinCEN and create a paper trail identifying anybody identified with the transaction.
Subsequent anti-money-laundering laws have strengthened federal enforcement of the BSA. The Money Laundering Control Act, passed in 1986, made money laundering a federal crime, prohibited structuring transactions to avoid disclosure requirements, and established civil and criminal forfeiture as punishments for violating the BSA. In 1992, the Annunzio-Wylie Anti-Money Laundering Act further strengthened the BSA’s sanctions, created the Bank Secrecy Act Advisory Group to oversee enforcement, revamped reporting mechanisms, and established recordkeeping requirements for wire transfers. The 1994 Money Laundering Suppression act required that all Money Services Businesses register with FinCEN and created training protocols for banking agencies, while the Money Laundering and Financial Crimes Strategy Act created task forces meant to concentrate law-enforcement efforts in industries or regions where money laundering is especially common.
More recently, legislators have attempted to increase disclosure requirements for anonymous shell corporations in the United States. Though the efforts have so far been unsuccessful, in 2016, FinCEN announced that it would be temporarily implementing additional rules in the interest of cutting down on money-laundering in the real-estate industry by requiring insurance companies to identify the “natural persons behind shell companies used to pay ‘all cash’ for high-end residential real estate in six major metropolitan areas,” including New York City, Miami-Dade County, Los Angeles, the San Francisco Bay Area, San Diego, and San Antonio.
Because money laundering often overlaps with other illicit activities, including drug trafficking and terrorism, some laws in those areas also cover money laundering. For example, the Anti-Drug Abuse Act of 1988, the 2001 PATRIOT Act, and the Intelligence Reform and Terrorism Prevention Act of 2004 also expanded the definition of or increased disclosure requirements for money services businesses.
Money Laundering and the Trump Organization
The Trump Organization itself has previously been implicated in money laundering. In 1998, the Treasury Department fined the Trump Organization $477,000 after the Internal Revenue Service determined that the Trump Taj Mahal casino in Atlantic City, New Jersey had broken anti-money-laundering rules 106 times in its first year and a half of operations by failing to report gamblers who cashed out more than $10,000 in a single day. At the time, the fine was the largest ever assessed for violating the BSA; however, it pales in comparison with the $10 million the casino had to pay in 2015 when FinCEN again found the establishment had “willfully violated” the law.
Recently, numerous stories have suggested some of the Trump Organization’s international business partners may be involved in illicit money-laundering activities. According to Adam Davidson of The New Yorker, one of the clearest examples is the company’s ongoing development in Batumi, Georgia, where the Trump Organization signed a licensing deal with a holding company known as the Silk Road Group, which, Davidson writes, “had been funded by a bank that was enmeshed in a giant money-laundering scandal.” (Both the White House and Trump’s lawyer Jay Sekulow reportedly declined to comment on the details of the project.)
Much the same can be said of the Trump Organization’s deal in Baku, Azerbaijan, which, according to the Transparency International Corruption Perceptions Index, is among the most corrupt nations in the world. The family with whom the Trump Organization was partnering on Trump Tower Baku, the Mammadovs, is reported to be notoriously corrupt. According to Davidson, in 2008, Ziya Mammadov, the family’s patriarch and the nation’s Transportation Minister, “awarded a series of multimillion-dollar contracts” to an Iranian construction company whose chairman has been tied to the Iranian Revolutionary Guard, which in turn has frequently been accused of drug trafficking, sponsoring terrorism, and money laundering. These connections could suggest that the Iranian Revolutionary Guard was exploiting the Mammadovs’ real-estate business and, by extension, the Trump Organization’s interests in Azerbaijan, to launder money that has passed through terrorist and other international organizations. (According to Davidson, the Mammadovs, the Justice Department, and the White House all declined to comment on his reporting.)
In pursuing these projects, Davidson writes, the Trump Organization appears to have ignored numerous red flags that would likely have prevented most companies from partnering with allegedly corrupt officials abroad. To comply with the Foreign Corrupt Practices Act, a 1977 law that makes it illegal for U.S.-based companies to knowingly or negligently do business with foreign officials in a manner that contributes to corrupt practices abroad, companies typically perform extensive due diligence to ensure that their international partners are operating above-board. According to Davidson, multiple experts said that the Trump Organization’s deals in both Georgia and Azerbaijan presented clear warning signs that, in their judgment, would have led most companies to avoid such partnerships. (Alan Garten, a lawyer for the Trump Organization, said the Trump Organization “had undertaken ‘extensive due diligence’ before making the hotel deal and had not discovered ‘any red flags.’”)
While money laundering is not inherent to real estate, given the arguably looser regulation of the industry in comparison to the financial sector, and the relative ease of conducting virtually anonymous transactions, it has been a favorite of launderers and thus scrutiny is often warranted. In one notable example, Viktor Khrapunov, a former high-ranking Kazakh government official, was accused of laundering $3.1 million dollars of stolen state assets through purchasing of three Trump SoHo condos. Khrapunov contests these allegations and the multi-year investigation is still ongoing. According to USA Today, since Trump was elected, anonymous shell corporations have begun purchasing Trump Organization condominiums at a very rapid rate, perhaps suggesting not only the potential that wealthy individuals may be attempting to influence the president’s decisions by patronizing his businesses but also that outsiders may be attempting to use the Trump Organization for their own illicit activities.
Russia, Money Laundering, and Trump
Finally, there may be reason to believe that money laundering plays a key role in the Russian government’s interest in ensuring Trump’s election. Though Trump has recently taken to vehemently denying any financial relationship with members of the Russian government, or with Russians in general, he and his namesake company reportedly have long histories of both pursuing deals in the country and accepting investments from Russian oligarchs. According to the New Republic, Russian organized-crime syndicates have been investing in U.S. real estate, including Trump Organization properties, to launder money for decades, although there is yet no evidence that Trump himself was aware of his clientele’s potentially compromising connections.
Meanwhile, Special Counsel Robert Mueller’s ongoing investigation into potential collusion between the Trump campaign and the Russian government has reportedly expanded to include Trump’s business and some of its partners. One such partner is Felix Sater, the Russian-born real-estate developer who was a driving force behind Trump SoHo. Sater has been the subject of multiple money-laundering probes, and recently agreed to cooperate with the FBI in an ongoing investigation money-laundering in Eastern Europe. Meanwhile,the indictment of Trump’s one-time campaign chairman Paul Manafort and the campaign aide Rick Gates, which was unsealed on October 30, charges that the pair laundered millions of dollars from their previous work as political consultants in Ukraine. (Both have pled not guilty to the charges.)
Recent high-profile lawsuits and enforcement actions by the United States government against suspected Russian money laundering operations may further explain why the Russian government would take an interest in U.S. domestic politics. After the revelation that Donald Trump, Jr., took a meeting with the Russian lawyer Natalia Veselnitskaya, reportedly in the hopes of receiving damaging information about Hillary Clinton, the president’s eldest son defended his decision by describing the meeting as having mainly been about adoptions. However, experts on relations between the U.S. and Russia have argued that this is code for the Russian government’s desire to have the U.S. overturn the Magnitsky Act, a 2012 bill which sanctioned Russian human-rights abuses by blocking 18 Russian government officials and businessmen from entering the country and freezing any assets held in U.S. banks. In response to the Magnitsky Act, the Russian government banned American adoption of Russian children.
Though broadly aimed at human-rights abuses in Russia and elsewhere, the Magnitsky Act’s history is inseparable from illicit financial activities, including alleged money laundering, by high-ranking Russian officials. Sergei Magnitsky, the lawyer after whom the bill was named, was instrumental in uncovering what he alleged to be a complicated scheme whereby Russian government officials were defrauding Hermitage Capital, the investment fund of Bill Browder, one of the largest foreign investors in the country. After Magnitsky made his revelations, he was allegedly tortured until he was found dead in his prison cell in November 2009. Browder has since argued that Putin’s strenuous objections to the Magnitsky Act stem from the fact that Putin himself has engaged in both the kinds of financial crimes Magnitsky uncovered—an assertion arguably corroborated by information in the Panama Papers leak of 2016 indicating unusually large transfers of funds to one of Putin’s close friends, a cellist named Sergei Roldugin—and the human-rights abuses the Act sanctions.
The arguably surprising resolution of a money-laundering case involving the Russian holding company Prevezon Holdings has further fueled suspicions that Russian money-laundering efforts may have played a role in the Russian government’s support for Trump. In May, just two days before the case was set to go to trial, the Department of Justice settled with Prevezon, which was accused of fraudulently obtaining tax refunds from the Russian treasury, for only $6 million. In the case, Prevezon was represented by Veselnitskaya, which has led some of Trump’s critics to suggest that the Justice Department’s sudden decision to settle the case may have been motivated in part by Donald Trump, Jr.’s meeting with Veselnitskaya, though no concrete evidence to this effect has been identified to date.
One other peculiar connection to emerge from the June 9 meeting is Irakly “Ike” Kaveladze, a business associate of Emin and Aras Agalarov, who attended along with Veselnitskaya. In 2000, Kaveladze figured in a Congressional inquiry and a General Accounting Office (GAO) report on the use of shell companies by foreigners seeking to launder money through American banks. He reportedly set up more than 2,000 corporations in Delaware on behalf of Russian brokers and then opened bank accounts through which $1.4 billion was moved. The ultimate beneficiaries and the intent with which the money was moved remain largely unknown, with Kaveladze denying any wrongdoing. The investigation does not appear to have resulted in any charges.
 Note “shell” and “front” companies are sometimes confused and the terms are used interchangeably, even though they represent very different entity types. A shell company is an entity without business activity or significant assets, and, in many instances, it may only exist on paper. While shell companies are not inherently illegal, they may be used as tools in illicit activity, particularly when masking the ultimate beneficial owners of illegally obtained assets and funds. In contrast, a front company is one that appears to have legitimate operations and assets, but its ultimate purpose is to mask illegal activity such as laundering money or importing illicit goods (example, a freight company that transports illegal drugs and ammunition across borders).
 Many jurisdiction, both in the US and abroad, do not require one to list the ultimate beneficial shareholders of a company upon its incorporation; instead, a nominal shareholder or a registered agent can be listed, thus leaving virtually no trace of who is behind the shell company.
 These are typically classified as suspicious activity reports (SARs).