Manafort, Cohen cases highlight banks' vulnerability to fraud

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The headline-grabbing prosecutions of Paul Manafort and Michael Cohen have a link that has drawn little scrutiny: Both men lied repeatedly and brazenly to banks in connection with loan applications.

Manafort, President Trump’s former campaign chair, made misrepresentations to Citizens Financial Group about a Manhattan condo that was being used as an Airbnb rental, according to testimony at his trial in August. He submitted false information about his income to Banc of California, a community bank in Santa Ana. And he lied to the Federal Savings Bank in Chicago about who racked up more than $200,000 in credit card charges for New York Yankees season tickets.

Cohen, who was once Trump’s personal lawyer, admitted to making false statements about both his net worth and his monthly expenses in connection with an application for a home equity line of credit. During discussions with a second bank about restructuring millions of dollars of debt, he falsely claimed to have a negative net worth, according to prosecutors. Cohen was not charged criminally in the latter case.

In all of these instances, the lies were not initially detected. Only after authorities began looking for evidence of other potential crimes did the two men face the consequences of deceiving financial institutions.

The Manafort and Cohen cases raise questions about the effectiveness of the controls that banks use to detect fraudulent loan applications, particularly when the perpetrators are wealthy and well connected.

Ellen Podgor, a professor at Stetson University’s law school who studies white-collar crime, said it is unsurprising that various financial misdeeds of Cohen and Manafort took years to uncover. “I mean, look at how long it took with Bernie Madoff,” she said.

Manafort and Cohen had a few factors working in their favor. Importantly, both men had enormous wealth, even if they were also hiding large liabilities in some situations.

Banks often cater to clients who make large deposits, which can lead to corners being cut on loan approvals.

Pat McElroy, a Fort Worth, Texas, consultant to financial institutions, said it is hard for banks to detect prospective borrowers who have submitted false information, particularly if applicants create a phony paper trail.

“They can tell you anything they want to tell you on loan applications, and it may or may not be caught,” he said.

McElroy noted that borrowers with complex finances, as wealthy clients often do, are often required to provide audited financial statements. But he added: “That’s not always an absolute fail-safe. I’ve seen situations where audited financials are fake.”

At Manafort’s trial in Alexandria, Va., on bank fraud and tax fraud charges, his accountant testified that she inflated his income in an effort to persuade banks to lend him money against his homes. The accountant, Cynthia LaPorta, also testified that she backed up Manafort’s assertion that he was using Manhattan condo as a second home, even though he had been renting the property on Airbnb.

Another factor that may have helped Manafort and Cohen get away with lying was their connection to powerful people.

One of Manafort’s loan applications with the Federal Savings Bank was rejected at first because certain inconsistencies were detected, according to the testimony of a bank executive, but CEO Steve Calk overruled that decision. Evidence presented at the trial showed that Manafort had talked with Calk about a potential job in the Trump administration.

A third factor that appears to have helped both Manafort and Cohen evade detection involves personality traits. Both men were not only willing to lie, they were willing to lie on a large scale.

For example, when Cohen applied for a home equity line of credit from First Republic Bank, he failed to disclose more than $20 million in outstanding debt. A spokesman for San Francisco-based First Republic declined to comment.

Manafort purchased Yankees season tickets on a credit card, and after his large balance was flagged as part of the loan application process at Federal Savings, he directed a scheme to claim that his deputy had borrowed the card to make the purchase, according to trial testimony.

“Audacity, more audacity, always audacity,” said Bill Black, a professor of economics and law at the University of Missouri-Kansas City, reciting a quote from Georges Danton, a key figure in the French Revolution.

“We just don’t expect people to lie to our face,” said Black, who investigated fraud as a federal regulator during the savings and loan crisis. “And so it’s actually the most effective means of defrauding folks.”

In addition to deceit, Cohen also had an appetite for intimidation.

In a sentencing memo, prosecutors from the Southern District of New York wrote that Cohen threatened bankers with whom he was trying to renegotiate debt. The description of the bank in the government’s memo fits Sterling National Bank in New York, which was named by prosecutors in another court filing in Cohen’s case. A Sterling spokesman declined to comment.

“I’m going to hit everybody up with a lawsuit that’s gonna spin everyone’s head,” Cohen said during a phone call with the bankers, according to a recording that was cited in the government’s sentencing memo. “And I’m looking forward to that, by the way. And I’m not saying it as a threat. It’s a fact.”

Cohen, who pleaded guilty to charges that include lying to a financial institution, was sentenced Wednesday to three years in prison. Manafort has yet to be sentenced.

The Manafort trial did highlight one situation in which loan fraud was thwarted. An employee at Providence, R.I.-based Citizens testified that she discovered a $1.5 million mortgage on a Brooklyn property that Manafort had attempted to hide. The loan application was denied.

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Mortgage fraud Crime and misconduct Mortgages HELOCs Fraud detection Fraud prevention First Republic Citizens Bank DoJ