From Forbes Magizine
By Nathan Vardi
Gov. Eliot Spitzer's downfall raises a question: Is there any privacy in our financial transaction?
New York's governor was felled not by "Kristen"--but by Osama bin Laden. Since Sept. 11 stronger anti-money laundering rules and new technology have made it tougher to hide transactions of all sorts. As a result, the feds are just as likely to nab a high-profile john as they are a terrorist or drug dealer. "It's very difficult to avoid creating a paper trail," says Gregory Baldwin, a lawyer specializing in money laundering issues in Miami. "If you try too hard, you can trip a wire." In other words, it's easier to cheat on a spouse than to cheat the system. Here are five ways spenders try to cover their tracks.
1.
Wires/Transfers.
If accusations in court filings and the rumors are true, Spitzer's mistake was to wire funds to QAT, a front company used by the Emperors Club V.I.P. There was a time when money wiring (via, say, Western Union (nyse: WU - news - people )) was a good way to move dirty money undetected. But now such transfers, especially to suspicious entities, raise red flags. Both banks and money services are required to record wire transfers of $3,000 or more and take note of who received the money. That's what helped nail Matthew Thompkins, a New Yorker who was sentenced last year to 23 years for operating a national underage prostitution ring. He moved a total of $850,000, in increments of less than $3,000 at a time, via U.S. Postal Service money orders and Western Union transfers. Financial institutions are required to keep an especially careful eye on so-called politically exposed persons, usually meaning foreign government officials. But many banks have decided to expand the definition to include U.S. politicians.
2.
Credit cards. You'd think felons would know better, yet that's partly how the feds collected evidence against Dennis Paris. Convicted of running a Hartford, Conn. sex-trafficking ring that used underage girls (including a 14-year-old), Paris has been fined $1.5 million and is facing life in prison. Court documents make these claims: Pretending to operate an escort service and using front companies with innocuous names, Paris walked around town with a mobile credit-card processor. His clients paid for prostitutes with Visa, MasterCard (nyse: MA - news - people ) and Discover cards. Sex chits were processed by First Data (nyse: FDC - news - people ) Corp.
Discover Financial Services (nyse: DFSWI - news - people ) says it got wise to Paris--it won't say how--and shut down his account within three months. Visa, MasterCard and First Data decline to comment. Neither First Data nor the card companies have been accused of wrongdoing.
The use of credit cards to pay for unsavory goods or services (especially, pornography) happens more than credit card companies admit. But these companies do have software designed to spot suspicious transactions, which must be reported to the feds. The industry shares a database to help identify illegal behavior, not only to help the government stop criminals but also to mitigate fraud losses, which run into billions. "Think algorithms and models and different software and Web crawlers," says Christine Elliott, an American Express (nyse: AXP - news - people ) spokesperson. Despite the safeguards, however, Amex cards were used to purchase sex from the Emperors Club, according to the criminal complaint, apparently without triggering the criminal investigation.
3.
Prepaid cards. "Spitzer should have used a stored-value card and put money on that," says Gregory Calpakis, executive director of the Association of Certified Anti-Money Laundering Specialists in Miami. "It is almost an untraceable instrument." Prepaid cards have become a big money laundering concern for the feds. American Express sells gift cards with denominations as high as $500 that can be purchased at retailers anonymously (that is, with cash) and without limit. The company points out that customers can't bank with the card or use it outside the U.S. But other stored-value cards, often branded by Visa or MasterCard, can be accessed for cash via atms worldwide and reloaded with cash online or at checkout counters without a bank account or face-to-face identity verification. Law enforcers have seen drug dealers use these cards, and they fear that terrorists rely on them, too.
Sallie Wamsley-Saxon pleaded guilty in February to running a prostitution service in Charlotte, N.C., using prepaid cards from Green Dot Corp. to move cash, say court filings. Over a two-year period she took in fees from prostitutes (sometimes via her PayPal account) and transferred $120,501 to her Green Dot cards, each with a $2,500 maximum. She used the funds partly to pay for the hookers' hotel rooms, according to court filings. "What we do is a reasonable measure to know the identity of each customer," says John Ricci, general counsel for Green Dot, which apparently didn't get wise to Wamsley-Saxon (someone tipped off the cops) but cooperated with the investigation.
4.
Digital currency. According to the Justice Department, between 1999 and 2005 child pornographers, hackers and identity thieves made use of E-gold, an online payment system in the Caribbean. Users provide an e-mail address to E-gold, then go to a currency exchange (like Cambist.net) to swap greenbacks, euros, yen and so forth for digital currency backed by gold; from there the customer is free to conduct anonymous transactions anywhere in the world. The feds indicted E-gold last year for money laundering and illegal money transmitting because it operated without an appropriate license. The company pleaded not guilty, and its lawyer, Andrew Ittleman, says E-gold fully complied with anti-money-laundering laws and did not need a license to operate.
5.
Cash. Unless you're unlucky enough to get marked bills, cash is still very hard to trace, says Fred L. Abrams, a New York City asset-recovery lawyer. Client No. 9 (Kristen's benefactor) eventually arrived at that insight, paying $4,300 in bills in his final dealings with the Emperors Club, says the complaint.
Deposits or withdrawals that total more than $10,000 within the same day automatically prompt a currency transaction report to the federal government. Smaller amounts will also be picked up by software monitors if they fit a suspicious pattern. Slicing up transactions to avoid detection--a.k.a. structuring--is illegal. Structuring and money laundering account for half the 600,000 suspicious activity reports banks now file with the feds annually, compared with 162,720 sars at the start of the decade. (In a bizarre case, Riggs Bank, the Wall Street Journal reported, filed sars on former U.S. Senator Bob Dole, after regular withdrawals of up to $8,000 in 2004; no wrongdoing was ever alleged.)
So what's the safe way to get a wad of cash out of the bank? Take it in small and regular doses. Withdrawing $1,200 every week for a high earner is probably not going to trigger an alarm, says Clemente Vazquez-Bello, a lawyer in Miami who advises banks on anti-money-laundering regulations. And if it does, have a good explanation ready. You're within your rights to be a big spender at restaurants and flea markets where credit cards are not accepted.
