Paul Manafort’s multiyear tax fraud and Michael Cohen’s ability to easily arrange campaign contributions as hush money could have been intercepted sooner based on existing tax and campaign rules.
But decisions by policymakers and lawmakers to defang regulation and defund investigations, particularly through political pressure aimed at the Internal Revenue Service, helped the behavior to go unnoticed.
On Tuesday, Manafort, President Trump’s former campaign chairman, was convicted of eight tax- and bank-fraud charges — the same day Cohen, Trump’s former attorney, pleaded guilty to tax fraud and campaign finance violations. The felonies slipped past multiple agencies and were unearthed by prosecutors and journalists only after they began digging into Trump’s inner circle. White-collar crime experts believe similar behavior is flourishing throughout the political system, exploiting the yawning gaps in government scrutiny.
“Had it not been for their relationship with President Trump, these crimes would have ultimately gone unprosecuted,” said Eugene Soltes, an associate professor at Harvard Business School and expert on white-collar crime.
Such worries come amid a steady, multiyear decline in the number of financial fraud cases the government has pursued, erosions that began during the Obama administration after Republicans took control of Congress.
The IRS, for instance, conducted audits on just 0.6 percent of tax returns last year, the lowest level in 15 years. For incomes above $1 million, a category that likely would have included Manafort, the IRS audited just 4.4 percent of returns, down from 12.5 percent in 2011.
Overall, the number of new white-collar crime prosecutions brought by federal investigators has fallen to its lowest level in more than 20 years, according to data from Syracuse University’s Transactional Records Access Clearinghouse. There are projected to be fewer than 6,000 of these prosecutions in 2018, down from more than 10,000, when the number peaked in 2011.
Meanwhile, penalties against corporations and their executives imposed by the Justice Department sank from $51.5 billion in 2016 to $4.9 billion during Trump’s first year in office, according to consumer advocate Public Citizen.
Manafort’s lawyers said the IRS never audited his taxes, despite his complex financial relationships with Ukranian officials and wire transfers to Cyprus bank accounts — actions that can be red flags for investigators. Prosecutors proved he had avoided paying his full tax obligations for years.
IRS spokesman Matthew Leas declined to comment on whether the agency audited Manafort, saying the agency was prohibited from discussing specific taxpayers.
Manafort is also accused of failing to notify the Justice Department about his lobbying work for the Ukraine government, which is required by the Foreign Agents Registration Act.
Manafort faces trial next month on violating FARA law, but a prior inspector general review concluded the FARA enforcement system had been frequently ignored by lobbyists in years past, partly because officials at the FBI and Justice Department had different notions of how such cases should be pursued.
Marc Raimondi, a Justice Department spokesman, said the agency has “spent significant effort” in the past year reaching out to entities that they believe should register under FARA, “and we have made our determination findings more fulsome.” This has led to a large increase in FARA registrations, he said, with the number jumping by more than 50 percent from 2016 to 2017.
Cohen pleaded guilty to eight crimes, including two acts of arranging illegal campaign contributions to pay hush money to two women who claimed they had had an affair with Trump.
The Federal Election Commission has civil jurisdiction over violations of campaign finance law. But it largely relies on campaigns to self-report their activity as well as whistleblowers to uncover illicit activity.
What’s more, Cohen directed the payments through two business entities outside of the scope of the FEC, making it even harder for agency officials to know what he was doing. Cohen was later reimbursed through “sham” invoices billed to the Trump Organization, prosecutors said.
Christian J. Hilland, an FEC spokesman, declined to comment on the Cohen case.
The use of obscure limited liability companies, which enables white-collar criminals to mask how they move money, presents particular challenges for federal investigators, former federal officials said.
“Right now in the United States, there is a massive problem of anonymous companies,” said Elizabeth Rosenberg, who served in the Treasury Department during the Obama administration, combating terror financing and financial crimes.
The Obama administration tried to bring more transparency to such entities, proposing in 2016 changes to federal law that would require people to disclose the “beneficial ownership” for limited liability companies. But Congress did not pass the bill.
“I think that everything is now being set up so that it is possible to hide money, whether it is foreign money or money like [the Cohen case], and it’s almost impossible to detect it,” said Ann Ravel, a Democrat and former FEC chairman.
Trump last week did not dispel the idea that the acts committed by Manafort and Cohen are common. The president told Fox News, regarding Manafort, that “some of the charges they threw against him, every consultant, every lobbyist in Washington probably does.” And Trump said Cohen’s “campaign violations are considered not a big deal, frankly.”
IRS spokesman Leas, while not addressing the Manafort and Cohen cases, said the agency’s criminal investigation unit “uses sophisticated data analytics tools to detect fraud and identify criminal activity. But it’s important to note that these analytics alone frequently do not indicate tax fraud on the surface since many situations are outside the scope of our normal processes,” such as foreign financial activity, he said.
The IRS’s ability to expose fraud cases on its own has diminished, particularly related to political figures. The IRS has faced a torrent of pressure from Republicans in Congress to stay out of politically charged cases while dealing with budget cuts in recent years.
Its budget fell from $13.1 billion in 2008 to $11.5 billion last year, and the White House has proposed more cuts. The number of IRS special agents who can pursue tax-related crimes fell from 2,683 in 2007 to 2,157 in 2017, about the level the agency had 50 years ago.
“Their systems have gotten so weak,” said Paul Streckfus, a former tax lawyer at the IRS and editor of the EO Tax Journal, a newsletter that tracks the agency’s activity. “The IRS isn’t doing much. Criminal enforcement is way down.”
The chief of IRS criminal enforcement acknowledged weaknesses in his most recent annual report.
“[R]esource issues make it impossible to be involved in every investigation in which we are asked to participate,” Don Fort wrote. “We have the same number of special agents — around 2,200 — as we did 50 years ago. Financial crime has not diminished during that time — in fact, it has proliferated in the age of the internet, international financial crimes and virtual currency.”
Republicans and the Trump administration have resisted calls from Democrats to make the IRS pursue more fraud cases, arguing that the agency is bloated and needs to be overhauled. House Ways and Means Committee Chairman Kevin Brady (R-Tex.) said last year he wanted a “bust up [of] the IRS as it is today.”
Sen. John Thune (R-S.D.) said Thursday that the agency has not come to Congress and sought more funding for investigations.
“If they feel they don’t have sufficient resources, they should let us know that,” Thune said. “We’ll obviously deal with it accordingly.”
He has proposed further cuts to the IRS’s already shrinking budget, and the Treasury Department recently instituted a new policy that blocked more scrutiny of donors to most nonprofit groups with political agendas. It said this would save money because it would remove reporting requirements.
The violations that Cohen pleaded guilty to relate to restrictions on who can make monetary or in-kind contributions to a federal candidate, and how much — rules that are overseen by the FEC.
But there are structural and political obstacles that cripple the FEC’s ability to take aggressive enforcement actions, and it likely wouldn’t have known about Cohen’s activities in the absence of news reports or a complaint, campaign finance experts said.
For about a decade, the FEC has been divided on party lines over whether it should more aggressively pursue enforcement, and whether it should launch investigations even if they aren’t prompted by formal complaints, experts said. The FEC now typically opens investigations only if there is a complaint, and the law requires approval from four of the commission’s six members to open an investigation. Two of the FEC’s seats are vacant, making it even less likely that a case will be brought.
Hilland, the FEC spokesman, said in a statement: “In exercising its regulatory and enforcement authority, the Commission uses a variety of methods to uncover possible election law violations including reviewing campaign finance reports, conducting financial audits of political committees, and investigating complaints filed with the agency by members of the public.”
After the Wall Street Journal reported on the payments to Daniels in January, Common Cause filed a complaint later that month asking the FEC and Justice Department to investigate the payments.
“I have a hard time imagining how those violations [by Cohen] would have come to attention of the FEC absent the investigative journalism that brought these violations to the public light, that led Common Cause to file our complaints,” said Paul S. Ryan, vice president of policy and litigation at Common Cause.
Trevor Potter, a former Republican FEC commissioner and founder of the campaign-finance advocacy group Campaign Legal Center, said the FEC could be a powerful deterrent if it were aggressively pursuing enforcement action and referring more potential criminal cases to the Justice Department.
“Every few years, there’s a sort of scandal like this with criminal penalties, and people going to jail,” Potter said.
“That reminds campaigns and their lawyers and accountants that these are laws that have serious teeth, and that even though the odds of a violation being discovered may be small, the effect of discovering a criminal violation is life ruining.”
Seung Min Kim and Devlin Barrett contributed to this report.