United States: Charging Former House Speaker With AML Violations Shows That AML Laws Can Reach Anyone

Justice Louis Brandeis once said: "Sunlight is said to be the best of disinfectants." One way that the anti-money laundering ("AML") rules attempt to shine that light, is through filing Currency Transaction Reports ("CTRs").

On May 28, 2015, Dennis Hastert, former Speaker of the U.S. House of Representatives, was indicted by a federal grand jury in the Northern District of Illinois. Mr. Hastert, a former high school teacher and football coach, was charged with making a "materially false, fictitious, or fraudulent statement or representation" to the FBI in violation of 18 U.S.C. section 1001(a)(2), and with structuring financial transactions "knowingly and for the purpose of evading the reporting requirements" of federal AML regulations issued by the Financial Crimes Enforcement Network ("FinCEN"), in violation of 31 U.S.C. section 5324(a)(3).

Mr. Hastert's AML and false statements charges stem from payments that Mr. Hastert had been making since about 2010 to an unnamed individual ("Individual A"). The indictment describes Individual A as someone who has known Mr. Hastert most of Individual A's life. The indictment also notes that in 2010, following meetings and discussions between Mr. Hastert and Individual A, Mr. Hastert agreed to provide Individual A with $3.5 million "in order to compensate for and conceal [Mr. Hastert's] prior misconduct against Individual A." Although the exact nature of the "prior misconduct" was not revealed in the federal indictment, several prominent national news sources are suggesting that Mr. Hastert had engaged in "sexual wrongdoing." See "Sex Scandals Made Denny Hastert – Now One Could Break Him," Chicago Sun Times Online (5/30/2015) (noting allegations of Mr. Hastert's "own, decades-old sexual wrongdoing"); "Former House Speaker Dennis Hastert Accused of Hiding Sex Abuse of Former Student," LA Times Online (5/29/2015) (noting that the pay-outs were made "to conceal sexual abuse against a former male student he knew during his days as a teacher").

Federal AML law provides: "No person shall, for the purpose of evading the reporting requirements of section 5313(a) or 5325 or any regulation prescribed under any such section, the reporting or recordkeeping requirements imposed by any order issued under section 5326 . . . structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more domestic financial institutions." 31 U.S.C. § 5324(a)(3). This violation is typically referred to as "structuring." Among the federal regulations promulgated pursuant to 31 U.S.C. section 5313(a), is 31 C.F.R. sections 1010.310-313, which requires domestic financial institutions to prepare and file with FinCEN a Currency Transaction Report (Form 104), more commonly known as a "CTR," for any transaction or series of transactions involving currency of more than $10,000. FinCEN regulations require the following as to CTRs: "Each financial institution other than a casino shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000, except as otherwise provided in this section. In the case of the U.S. Postal Service, the obligation contained in the preceding sentence shall not apply to payments or transfers made solely in connection with the purchase of postage or philatelic products." 31 C.F.R. § 1010.311.

During the course of Mr. Hastert's payouts to Individual A, he allegedly took several different approaches to withdrawing and distributing the funds. First, from approximately 2010 to 2012, the indictment alleges Mr. Hastert made 15 $50,000 withdrawals of cash from bank accounts that he controlled, and provided that cash to Individual A every six weeks. In approximately April 2012, the indictment alleges that pursuant to bank policy, the bank representatives questioned Mr. Hastert about the $50,000 cash withdrawals. Such questioning is an entirely routine and appropriate response to what was apparently very non-routine transactions by a customer they knew.

Following being questioned by bank representatives as to the large cash withdrawals, Mr. Hastert allegedly changed his approach to making cash withdrawals. In July 2012, the indictment alleges, Mr. Hastert began withdrawing cash in increments of less than $10,000, and providing the funds to Individual A in increments of $50,000. Later, in 2014, Mr. Hastert again changed the withdrawal and payment approach to continue to withdraw increments of less than $10,000, but then providing the funds to Individual A in increments of $100,000.

Though it does not appear to have been publicized in the newspapers, the FBI was probably brought into the case through one of the banks filing a Suspicious Activity Report or ("SAR"). Under FinCEN regulations, banks are required to file a SAR whenever, among other instances, a transaction "is conducted or attempted by, at, or through the bank," involves at least $5,000 in finds, and "the bank knows, suspects, or has reason to suspect that: (i) The transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation; (ii) The transaction is designed to evade any requirements of this chapter or of any other regulations promulgated under the Bank Secrecy Act; or (iii) The transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction." 31 C.F.R. § 1020.320(a)(2). The SAR that one of the banks might have filed would have disclosed the identity of the person involved, the nature of the suspected wrongful conduct, a detailed narrative of the facts and circumstances that led to the SAR filing, and any supporting documentation that led to the bank's decision to file the SAR. We will never really know whether SAR filings led to the FBI investigation of Mr. Hastert, as the filing of SAR reports are confidential and disclosure of their existence is heavily restricted by federal law.

All totaled, the indictment alleges that Mr. Hastert caused the withdrawal of $952,000 in funds in amounts under $10,000 in separate transactions on at least 106 occasions.

While the circumstances surrounding Mr. Hastert's conduct, if proven, are disturbing on many levels, this case illustrates how the AML compliance and reporting system is supposed to work, and that nobody is above AML compliance. Several factors appropriately would have led the banks to believe that the shifting pattern of Mr. Hastert's transactions was suspicious. For example, although by 2010 Mr. Hastert was already well out of government service and into his lobbying career, even with his higher income, the large cash withdrawals would not have had any apparent legitimate business purpose. In other words, his lobbying career would not likely have required widespread cash distributions. Additionally, the sudden change in withdrawal amounts following being questioned by bank representatives to increments that are below the CTR filing triggers, should have and apparently did alert the bank representatives to the possibility that Mr. Hastert was engaged in structuring activity.

This case also illustrates how the SAR and CTR process are designed to work together. The large-dollar cash withdrawals alerted bank staff to investigate whether suspicious activity was occurring. Then, once the dollar amounts of the cash withdrawals suddenly dropped below the filing thresholds, that alone raised red flags of possible illegal, or at least suspicious activity, likely triggering the filing of a SAR.

While AML regulations were intended to shine the disinfecting rays of sunlight on such evils as drug trafficking, organized crime, and – since Sept. 11 – terrorism, they can also be used to uncover other bad acts. In the case of former House Speaker Dennis Hastert, the AML violations have shined sunlight on allegations of prior sexual abuse. These allegations, while troubling in and of themselves, are particularly ironic because Mr. Hastert was elevated to the Speakership in order to heal the nation of the sexual improprieties that consumed his prior two predecessors – Speaker Newt Gingrich, who led the House Republicans in the impeachment of President Clinton following the Monica Lewinski scandal, and Speaker-Designate Robert Livingston, who declined the top House leadership position because of his own sexual past.

In the end, had Mr. Hastert merely paid the money to Individual A by check, or continued the large dollar transfers that he had done initially, the FBI would likely never have launched an investigation, an indictment would never have been issued, and his alleged misconduct would never have come to light. It was only when Mr. Hastert attempted to conceal his prior misconduct through additional deception that he triggered law enforcement scrutiny. This case, like so many political scandals we have seen in the past, illustrates the maxim: It's not the crime, it's the cover-up. Mr. Hastert may never face prison for anything that went on with Individual A, however he now faces prison for attempting to conceal that activity. Whatever the personal, political, and career fallout for Mr. Hastert that eventually emerges from this case, like other AML investigations and prosecutions, this case shows that nobody is above AML law.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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