What did the Feds know about Spitzer and when did they know it?

We are only just beginning to understand the journey that federal prosecutors took in uncovering New York governor Eliot Spitzer's involvement in prostitution. But the track appears to have been a well-trodden one: Simply follow the money.

Unnamed justice department officials told the New York Times and ABC that the investigation began during a routine inquiry by a Long Island office of the Internal Revenue Service.

Under the Bank Secrecy Act, financial institutions are required to report suspicious activity in their customer accounts and file an aptly named "Suspicious Activity Report" to the Treasury Department's Financial Crimes Enforcement Agency (Fincen). Fincen collects the information in a database, which is accessible by law-enforcement agencies including the I.R.S., the F.B.I., the D.E.A., and various state regulatory agencies.

Officials say the suspicious activity in the case of Governor Eliot Spitzer was a money-laundering technique known as "structuring." Banks are required to file different forms for all customer transactions totaling $10,000 or more. In order to catch the bad guys who think they can fly under the radar by making a series of sub-$10,000 withdrawals, banks have developed systems to flag patterns of unusual activity like this.

S.A.R.'s have been required by law since 1996, but they've increased substantially in number since the Patriot Act was passed after September 11, 2001. Last year, depository banks filed 567,080 S.A.R.'s, and other financial institutions filed another 496,400. Ten years prior to that, banking officials received just 81,197 such forms.

According to the F.B.I. affidavit in the Emperor's Club case, Client 9 (a.k.a. Spitzer) chose to pay for services in cash rather than wire transfer. Assuming that Spitzer was withdrawing large sums of money from his account to pay for his visits from Kristen and her co-workers, his bank's system would have flagged the activity as possible structuring.

It's important to note that it's not illegal to take large sums of money from your bank account. Many reports get filed on customers with perfectly legitimate reasons for their withdrawals. In fact, it's up to your bank to determine whether or not the activity its systems flag on your account even warrants an S.A.R. at all.  

Here's where it helps if you're not a public official. Because the name on the account was Eliot Spitzer, the bank likely had no choice but to file the S.A.R. to Treasury officials. In this case, the suspicious activity could be covering up corruption, misuse of campaign finances, bribes, or any number of illegalities.

Now imagine you are a paper-pushing bureaucrat in a nondescript I.R.S. office in suburban New York, who examines reports from the Fincen database all day every day. One day you see a report filed on the governor of New York. You can imagine that's a pretty eventful day in that particular bean counter's life.

Conspiracy theorists suspect that a right-wing witch hunt brought Spitzer down and that a government form like the S.A.R. could never have launched such a huge investigation.

But it's easy to see how a fairly common bank form that usually doesn't signify any illegal activity at all was pushed to the forefront because of the significance of the customer's name. The I.R.S. then brought it to the F.B.I.'s attention, and the investigation was under way.

There are so many questions still unanswered, so many baffling turns to understand in Spitzer's downfall. (If he paid in cash, the bank would have had no record of the receiving party. What ultimately led officials to the prostitutes?) But the most perplexing one of all is how a law-enforcement official that has dedicated his life to exposing financial criminal activity could have let a fairly basic money-laundering technique undo him.

"It's almost unfathomable," says David Caruso, chief executive of the antilaundering consulting firm Dominion Advisory Group. "He showed almost no level of sophistication whatsoever."

Structuring violations are prosecuted as federal money-laundering crimes.

So next time you try to avoid the paper trail by paying for your criminal activity in cash, consider plastic instead. But if your job title starts with "governor of the state of," it's probably best to avoid paying at all.

See Portfolio.com's full coverage of the Spitzer scandal.