The civil lawsuit filed against Donald Trump, three of his children and the Trump Foundation has brought to light a major shortcoming in New York state law that enables criminal fraud conducted through private foundations to escape state prosecution.
Manhattan is a major center of private foundations.
Under New York state law, the attorney general lacks fundamental legal authority to bring criminal cases. Indictments can be sought only after another state agency makes a referral to the state attorney general. The state charities bureau could make such referrals, but because it is under the attorney general no indictments could be brought.
The state civil lawsuit alleges years “of illegal conduct by the Foundation and its board members [that] includes improper and extensive political activity, repeated and willful self-dealing transactions, and failure to follow basic fiduciary obligations or to implement even elementary corporate formalities required by law.”
Trump personally used $258,000 of charity money to settle lawsuits, a clear violation of the law. There’s also the $12,000 of charity money Trump spent to buy himself a signed Tim Tebow football helmet, a story the Washington Post broke in July 2016.
Barbara Underwood, who became New York's attorney general after the resignation of Eric Scheiderman, referred criminal matters to the Internal Revenue Service and the Federal Elections Commission.
There is one person who can persuade Underwood to indict Trump, his three oldest children and others: New York Gov. Andrew Cuomo. He could direct the state's Department of Taxation and Finance to refer the matter as a tax crimes offense. Underwood could then seek indictments.
The Trump Foundation case meets every federal standard for criminal prosecution. The behavior is significant in terms of dollars, involved many actions over many years and was flagrant and multi-faceted with explanations that lack credibility. It also meets the Justice Department’s general deterrence standard, which includes bringing cases that will encourage broad compliance because they are high-profile prosecutions.
“There’s almost no way for the state attorney general to bring a criminal case” over the private foundation fraud, said Sean Delany, executive director of the New York Lawyers Alliance, which serves nonprofits. Delany is a former head of the State Charities Bureau.
Because that bureau is also part of the state attorney general’s office, when it finds evidence of criminal fraud those findings would not allow the attorney general to bring criminal charges.
Under current New York law, even if police in New York City uncovered the fraud, a prosecution for violating state law could only be initiated by Cyrus Vance Jr., the Manhattan district attorney, who has shown a deep aversion to pursuing anything involving Trump.
Private foundation fraud is likely to go undetected because tax audits of private foundations are rare. This creates a low-risk opportunity for people like Trump to use charitable funds for personal benefit, which is a crime as well as a civil offense.
Contrast this with the audit of the Clinton Foundation, which raised money from despots and billionaires and used it for work that has saved at least 11 million lives. Auditors typically sample records, but in the Clinton Foundation's audit every single check going in and out was reviewed, along with the supporting documentation. The audit report turned up nothing amiss, only the kind sof minor discrepancies anyone will find in their check register.
The last time Congress looked deeply into private foundation abuse, in the late 1960s, it found extensive fraud, including thousands of foundations into which wealthy people made tax-deductible gifts and then traded scholarships between each other’s children.
The investigations by Rep. Wright Patman, a populist Texas Democrat, resulted in major reforms of foundation law. It also spurred foundations eager to protect their reputations to fund the National Committee for Responsive Philanthropy, which exists to serve as a watchdog to philanthropies, a subject I’ve written about for four decades.
Trump has tweeted that he would fight what he called “this ridiculous case.” It was a typical Trumpian response, ignoring established facts and attacking law enforcement.
In this case, Trump has little to fear in terms of prosecution at the federal level. Only about 1,600 criminal tax cases are filed each year, most of them connected to drug trafficking and officials who take bribes. That’s roughly one prosecution for every 96,000 individual and corporate tax returns.
Further, Trump claims the power to stop any Justice Department investigation or criminal case, even though the Justice Department has previously prosecuted people for far less egregious conduct, said Marcus Owens, former head of the IRS tax-exempt organizations division.
And of course, if Trump were to become worried about prosecution at the federal level, he claims that the U.S. Constitution gives him the power to pardon himself.