Are you amazed by his dramatic fall? The final outcome is not over yet. Learn about the Emperors VIP Club and its management. Make your own conclusions after you read this case study. Your feedback will be greatly appreciated.

Modus Operandi of the Emperors VIP Club and its links to ML and Eliot Spitzer’s Ironies

By: Consuelo Herrera, CAMS, CFE

Wednesday, March 12, 2008 18:48:38

Eliot Spitzer’s Ironies

Several ironies surrounded Eliot Spitzer’s scandal. He said on January 1, 2007 “No matter how great the challenge – no matter how impossible the odds – our destiny will never be a path to follow, but always a trail to blaze.” ⁽¹⁾  And he blazed but the scandal all over the front page of many newspapers because of his mundane and unethical affairs that led him to recognize  “I have disappointed and failed to live up to the standard I expected of myself.” ⁽²⁾  

Eliot Spitzer supported the implementation of what is called Suspicious Activity Report, SAR, when he was a role model as the NY State Attorney. Ironically, what he supported became the source of his shocking fall.

Eliot Spitzer presecuted high white-collar criminals challenging the status quo, not being afraid of possible retaliation coming from powerful and wealthy men that were disclosed to the public light.

In 2002, when he was the New York State Attorney, he stated that "this agreement changes the way Wall Street will operate" when his office investigated a Merril Lynch's scandal, he added, "by

adopting this settlement, Merril Lynchis setting a new standard for the rest of the industry to follow."

In March 26, 2006 the BBC New, UK, described Eliot Spitzer as "though on corporate fraud" when they covered his actions in the prosecution of HR & Block. They also stated that "Mr. Spitzer, famous for tackling corporate fraud, has fined the company $250M."(4)

Eliot Spitzer’s efforts granted him admiration, respect, and public support. Everyone, regardless of his or her political inclinations recognized Eliot Spitzer as a great leader surrounded by an aura of ethical behavior, a very rare trait today. His banner was not to compromise his beliefs and honor them. He stated that “we must transform our government so that it is ethical and wise.” Many felt very proud of him as he did not hesitate to bring a change so anxiously hoped for in the New York administration.

The FBI press releases on March 6, 2008⁽⁵⁾  did not suggest the implications of this high profile operation. It would change many lives forever and, ironically, it would be a great source of public awareness on some aspects of money laundering and its links to other crimes.

The lives changed were, first, Mr. Eliot Spitzer, the now ex-governor of NY, his wife, and his daughters. This incident has affected not only his closest members of his family, but also his electors, the NY community, the United States of America, and the world. Family values have been undermined and public trust has been greatly damaged. The re-building process, if any, will take a long, long time. Again trustworthiness, our society longs for it.

Public Awareness on Money Laundering – A Good Outcome from This Scandal

The public interest in Eliot Spitzer has escalated and with it many questions. Everyone wonders how the ex-governor’s bank transactions uncovered his links to the “Emperors VIP Club. Some journalists have explained key aspects of the anti-money laundering regulations.

Money Laundering is the process of making ill gotten proceeds result of corruption, prostitution, drug trafficking, etc., become clean and enter the stream of money through the financial system.

Suspicious Activity Reports SARs arise when customer have questionable or irregular behavior that could link them to criminal activities and offences. Financial institutions file are required to report questionable transactions to governmental authorities such as the IRS.

The importance of a Suspicious Activity Report, SAR, in preventing money laundering and financing of terrorism will never be emphasized enough. It entails first and foremost concern for public safety.  When Eliot Spitzer fought to enforce these controls, the anti-money laundering community was pleased that he stood up. Actions like these granted him almost 69% of the votes for his election as the New York Governor.

There are public misunderstandings regarding the SARs. Many regular citizens and also criminals are aware of a famous $10,000 threshold that triggers reporting requirements. Many do not know that this threshold is not considered in a single amount but taken together and that others factors play an important role before compliance officers of financial institutions determine that a transaction meets the requirements of a suspicious transaction that has to be tracked down and reported to the IRS. For example, based on that false belief someone who wants to circumvent controls would make a transaction for less than $10,000, let us say for instance, $9,500. Others are advised that the amount is split into two or three transactions. All of them are mistaken. It not the amount by itself what triggers the filing of a SAR. When analyzing the transaction(s), it does not fit the predicted pattern for a client, automatically; it becomes a red flag that must be followed up. It means that someone who never has had movements greater than $1,519 in his or her checking or saving account and suddenly, has a transaction of $2,800, far below the $10,000 threshold, this accountholder’s transactions would be traced for potential links to money laundering and or financing of terrorism.

That was exactly what happened to Eliot Spitzer. Several transactions that did not fit his spending habits were flagged, traced, and linked to the Emperors VIP Club.

Eliot Spitzer is a PEP

For anti money laundering purposes, Eliot Spitzer is a PEP (Politically Exposed People). Politically Exposed People are persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, of such persons. PEPs are considered high-risk and should be subjected to a greater scrutiny.  Examples of potentially politically exposed people are head of State of Government, senior politician, senior government official, judiciary or military official, etc.

High-risk indicators in relation to PEPs are present, for instance, when a customer of a financial institution has a family member in a government position, and he or she has failed to disclose this information. Also, hiding owners, partners or principals, using shell or holding companies or equivalent structures that obscure ownership without credible explanation and the person running the business has little or no expertise in the industry or the country in connection with which he or she acts as an intermediary.

Modus Operandi of the Emperors VIP Club

According to the march 6, 2008 FBI release, four individuals, whose aliases are “Michael,” “Katie,” “Rachelle,” and “Tania Hollander,” were charged with conspiracy to violate federal prostitution statutes for their roles as organizers and managers of an international prostitution and money laundering ring called the Emperors Club VIP (the “Emperors Club”).

“Michael” and “Katie” were also charged with conspiring to launder more than $1 million in illicit proceeds from the prostitution crimes.

The FBI complaint unsealed on March 6, 2008 by the FBI states that the defendants used the Emperors Club to arrange connections between wealthy male clients and more than 50 prostitutes in, among other places, New York, New York; Washington, D.C.; Los Angeles, California; Miami, Florida; London, England; and Paris, France. The defendants charged the clients fees ranging from $1,000 to more than $5,500 per hour for prostitution services. The Emperors Club took in more than $1 million in illicit proceeds from its international prostitution business. It accepted payment in the form of cash, American Express charges, wire transfers, and money orders. To conceal the illegal nature of the business, they received prostitution proceeds in United States bank accounts in the names of front companies. The Emperors Club advertised their prostitution services in part using a website that included photographs of Emperors Club prostitutes’ bodies, with their faces hidden, along with hourly rates for different categories of prostitutes. The Website ranked the prostitutes using a ranking system from one to seven diamonds, and charged hourly rates according to the assigned ranking. According to the Website, the Emperors Club charged $1,000 per hour for a three-diamond prostitute, and $3,100 per hour for a seven-diamond prostitute.

The Website also offered the Emperors Club’s most valued clients “membership” in the “Icon Club,” a status that allowed the clients to access restricted areas of the Website and permitted them to schedule appointments with the most highly ranked prostitutes, whose fees started at $5,500 per hour. According to the Website, in certain circumstances, the Emperors Club also offered its clients the opportunity to exercise a “buy-out clause,” which permitted them to purchase direct access to one of the Emperors Club’s prostitutes without having to contact the agency.

“Michael,” 62, was allegedly the leader of the Emperors Club, with ultimate decision-making authority. He recruited prospective prostitutes, determined how to market the Club’s prostitutes to clients, and resolved problems that arose. “Katie,” 23, was the day-to-day organizer of the Club’s operations. She controlled the Emperors Club bank accounts, supervised the booking agents, and received applications from the prospective prostitutes.

Rachelle, 32, and Tania Hollander, 36,  were allegedly booking agents for the Club. They took requests from clients and coordinated meetings with prostitutes over the telephone, and referred issues relating to payment to “Katie.”

The FBI press release stated that in connection with this takedown, the FBI and IRS-CID executed three search warrants on locations connected to the Emperors Club's operations and four seizure warrants for bank accounts containing proceeds of the organization's criminal activities.

Potential Sentences

If convicted, the defendants face maximum sentences of 5 years in prison on the count charging conspiracy to violate the federal prostitution statutes; “Michael” and “Katie” face additional maximum sentences of 20 years in prison on the money-laundering conspiracy count.

Lessons Learned

Money laundering, fraud is linked to many other crimes. Its pervasive effect in the security of all nations has not yet been seen. We all must be committed to fight this plague as it undermines our values and principles.

Actions are not enough our need to recommit our lives to Jesus and act according to His commandments. Not doing so will lead us to unpredicted and shocking behaviors. Eliot Spitzer is an example of its devastating effects.

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⁽⁴⁾ The investigative team members were Mr. MICHAEL J. GARCIA, United States Attorney for the Southern District of New York, MARK J. MERSHON, Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), and PATRICIA J. HAYNES, Special Agent in- Charge of the New York Field Office of the United States Internal Revenue Service-Criminal Investigative Division (“IRSCID”)

⁽¹⁾ www.ny.gov/governor/press/0101071.html

⁽²⁾ www.ny.gov/governor/press/0310082.html

⁽³⁾ www.oag.state.ny.us/press/2005/jul/jul25a_05.html

⁽⁴⁾ http://news.bbc.co.uk/1/hi/business/4810548.stm

⁽⁴⁾  www.fbi.gov