Did Trump Organization Executives Cook the Books?–Tax Crimes Explained under Federal and State Law

With the sentencing of Michael Cohen now over, the government left significant clues about the potential legal liability of the Trump Organization and members of the Trump family. A key area of vulnerability: tax fraud. The Southern District of New York U.S. Attorney’s Sentencing Memorandum for Cohen denotes accounting fraud, which can be prosecuted at the federal or state level, and appears to place at least one of the Trump family members in the legal crosshairs.

What did the Trump Organization do that’s legally significant?

The SDNY memorandum describes—page 14 to be exact—how the Trump Organization (aka “The Company”) handled Cohen’s reimbursement of the hush money payments, referenced as election-related payments in the memorandum:

“Executives of the Company decided to pay the $420,000 in monthly installments of $35,000 over the course of a year.

At the instruction of an executive for the Company, Cohen sent monthly invoices to the Company for these $35,000 payments, falsely indicating that the invoices were being sent pursuant to a “retainer agreement.” The Company then falsely accounted for these payments as “legal expenses.” In fact, no such retainer agreement existed and these payments were not legal expenses – Cohen in fact, provided negligible legal services for Individual-1 or the Company in 2017 — but were reimbursement payments.”

The accounting fraud occurred through the misrepresentation of hush money payments as legal expenses through company accounting. This misrepresentation is material in that the Sentencing Memorandum recounts that Cohen received $420K during the course of 2017.

The SDNY prosecutors write in a very conclusory fashion in describing the above accounting fraud, which suggests that the evidence on which they base their conclusions is very strong. But before we explore the ramifications let’s break down the fact pattern a bit more.

The Washington Post noted in an article this past August that Allen Weisselberg CFO of the Trump Organization is the person identified in court filings as Executive-1. In February 2017, Cohen sent Weisselberg the first invoice seeking two monthly payments of $35K each “[p]ursuant to [a] retainer agreement,” according to the SDNY’s court documents. (Throughout 2017, Cohen would send his invoices “to one or representatives” of the Trump Organization, the U.S. Attorney’s Office stated.)

Weisselberg forwarded Cohen’s invoice “to another executive of the Company (“Executive-2”) the same day by email, and it was approved,” SDNY stated. Weisselberg then forwarded that email to another Trump Organization employee, writing: “Please pay from the Trust. Post to legal expenses. Put ‘retainer for the months of January and February 2017’ in the description.”

In fact, prosecutors said, “there was no such retainer agreement, and the monthly invoices Cohen submitted were not in connection with any legal services he had provided in 2017.”

Weisselberg has worked for the Trump family since 1970, shortly after he graduated from college. For decades he has now served as Chief Financial Officer of the Trump Organization. He has also been designated as one of two Trustees of the Donald Trump Revocable Trust. The Trump Organization business was put under the control of this Trust when Donald Trump became President in January 2017. The other official Trustee of the Trust is Donald Trump Jr. who bears the title of Executive VP of Development and Acquisitions for the Trump Organization LLC. It should be noted that Eric Trump is designated as the Chair of the Trust’s Advisory board but not as Trustee. Eric also bears the title of Exec Vice President of Development and Acquisitions for the Trump Organization, as does Ivanka Trump.

So in the above noted fact pattern, when Weisselberg forwards the Cohen invoices to another Trump Organization executive for approval and then forwards for payment from the Trust, technically, only Weisselberg and Donald Trump Jr., can authorize payments from the Trust.

It should be noted however that in a deposition related to a lawsuit against Trump University, Weisselberg stated that only five people had the authority to sign checks for the organization – Donald Trump, Donald Trump Jr., Eric Trump, Ivanka Trump and Allen Weisselberg. “That seems to be the group that we’ve used over the last number of years to sign checks over all of our entities.” Weisselberg added, “whether there’s an exception to the rule, I’m not aware of it.” Another person who may be relevant in the equation is Jeffrey McConney, controller and vice president of the Trump Organization.

The above fact pattern and conclusory language from the Michael Cohen sentencing memorandum from SDNY is probative that the Company’s books were in fact cooked. A false invoicing scheme was hatched to reimburse Michael Cohen’s hush money payments to two women who engaged with Donald Trump in extra-marital affairs. These payments were made just prior to the 2016 Presidential election and are understood by federal prosecutors to be campaign payments. Since there was a quid pro quo with regard to these payments – silence for money – these payments would be construed as income to the receivers. But the payments should have been reported as campaign contributions and reimbursed from the appropriate campaign funds available to Individual-1, and not expensed by The Company, run nominally by a Trust in lieu of Individual-1. At the very least, the payments should not have been billed as legal services.

Even if payments were made to protect a spouse from emotional harm, rather than a campaign-related purpose, that would still be a non-deductible expense under the law. While the romantic affairs of Individual-1 are undoubtedly private, reimbursing hush money payments to cover up any such affairs through a corporation and (mis)representing these payments as business expenses to conceal the affairs from public agencies (such as the Federal Election Commission and IRS) make the payments anything but private. If Individual-1 wished to write a personal check from his personal checking account to the two women involved in his affairs, there would be no FEC violation since personal contributions to one’s own Presidential campaign have no limits. Disguising hush money payment reimbursements by posting payments to “The Company’s” accounting and representing them as legal fees and therefore legitimate business expenses of “The Company,” does a disservice to those who abide by FEC regulations as well as individuals and businesses who comply with the tax regulations of the IRS and NY State—part of the reason such acts aren’t just illegal, but also criminal.

So, in essence, Michael Cohen set up a shell company to conceal the hush payments. Cohen acted in coordination with and at the direction of Individual-1 with respect to these payments.

When Cohen sought reimbursement further efforts were made to conceal and disguise the hush money payments from the Federal Election Commission, and from all other interested parties when the false invoicing scheme was concocted and the reimbursement payments were misrepresented as legal fees on the Company’s books and records.

Tax crimes under state and federal law

Falsification of Corporate Accounting can be prosecuted as a misdemeanor offense in NY State. It can be charged as a felony if it is done to commit or conceal another crime such as money laundering, bank fraud or tax evasion, which could be the case here.

More significant, falsification of corporate deductions on Corporate Tax Returns can be prosecuted by the federal government and the State as felonies. The reimbursement of Cohen posted on the Company’s accounting as legal expenses. Normally, such a posting flows through to the corporate tax returns and appears as a corporate deduction unless someone manually adjusts the legal expense account as a non-deductible expense. It’s unlikely that adjustment was made here, else it would interfere with the scheme’s designed purpose to cover up these transactions as though they were for legal services rendered.

A case can likely be made in my considered opinion that the CFO intentionally falsified the accounting of the Trump Organization to conceal and disguise the hush money payments as deductible legal expenses on the corporate tax returns. This misrepresentation could result in the taking of a false deduction on both the Federal and State corporate tax returns of the Trump Organization LLC which could then result in the filing of false Corporate Tax Returns which are felony criminal violations on both the federal and State level.

Was the CFO (aka “Executive-1”) directed to cook the books?

The Washington Post article quotes Alan Futeras, an attorney for the Trump Organization, describing Weisselberg as “a bookkeeper who simply carries out directions from others about monetary payments and transfers.”

Cooking the books to conceal the hush money reimbursements to Michael Cohen could result in those directing and participating in the willful filing of false tax returns being charged with the following potential federal offenses:

Title 18-371 Klein Conspiracy to Defraud the IRS – Maximum sentence 5 years
Title 26-7206(2) Aiding and Abetting in the filing of a false tax return – 3 years
Title 26-7206(1) Subscribing to a false tax return – 3 years

Additionally, New York State has tax fraud offenses that mirror these three federal offenses.

Right now it is unclear whether Weisselberg is a witness, subject or target of any criminal investigations being conducted by the NY State Attorney General’s office or the New York City Finance Department. We do know from news reports, first broken by the Wall Street Journal, that the SDNY granted Weisselberg limited immunity to give testimony to the grand jury about Cohen’s hush money payments.

What is clear is that the accounting fraud was intentionally perpetrated for the purpose of extending the concealment of hush money payments in violation of federal election laws. In taking the overt actions to falsify the accounting of the Company, additional criminal violations may have occurred. This possibility provides the authorities with the basis for obtaining the corporate tax returns of “The Company,” and the federal, state, and municipal authorities now have the opportunity to demonstrate to all those that might be tempted, that “cooking the books” has serious repercussions. 

About the Author(s)

Martin J. Sheil

Former Supervisory Special Agent IRS Criminal Investigation. You can contact him at sheil51@protonmail.com.