Temptation Lies Inside Trump Foundation’s ‘Empty Shell’

(Bloomberg Opinion) -- The lawsuit filed last week by the New York State attorney general’s office makes it clear that Donald Trump and his family treated the Donald J. Trump Foundation not as a legitimate charity, but as a pass-through vehicle that benefited Trump, his businesses and his presidential campaign.

The key phrase in the lawsuit is “empty shell,” which is lawyer-ese for a corporation that does nothing, has no purpose, and exists merely as a piece of paper and a bank account.

If the idea of the empty shell corporation is fresh in your mind, that might be because we learned in May that Michael Cohen, Trump’s former lawyer, also created and used a shell corporation, Essential Consultants LLC, to receive payments from companies seeking access to Trump.

Like the Trumps, Cohen treated his shell as a pass-through for all kinds of transactions. Those included the hush-money payments from Trump to adult film actress Stormy Daniels and the still-murky payments to a California company called Demeter Direct, controlled by a man named Mark Ko who says he has a connection to Korea Aerospace Industries Ltd.

The common denominator here is the use of a company as an alter ego for an individual – essentially an all-purpose vehicle for doing whatever you want behind a corporate veil. That’s sometimes legally permissible for a limited liability corporation. It’s definitely not legal for a nonprofit charity, which is why the New York lawsuit was filed.

The comparison between the Trump Foundation and Cohen’s pass-through tells us something significant about the mindset of Trump and the members of his family and his organization: They’re not very interested in the rules of corporate governance. They see corporations, whether for-profit or not, more like bank accounts – places to park and move money.

As long as the law is being followed, there’s nothing inherently wrong with this attitude. The problem is that using corporations as pass-throughs is, in practice, an invitation to break the law.

When it comes to for-profit corporations, the temptation is to evade paying taxes and obscure the flows of money from shady characters to other shady characters.

When it comes to nonprofits, the temptation is to ignore the public, charitable purpose of the corporation and turn it into a personal fiefdom that is nominally tax-exempt.

Add federal election law into the mix, and the temptations get stronger still. If pass-throughs are used to make campaign contributions, in practice or in kind, and the contributions go unreported, federal law is typically being violated.

The Trump Foundation shenanigans connected to the 2016 election may well have violated federal election law. The New York suit alleges a “$2.83 million donation in kind” from the foundation to the campaign.

That’s not only a violation of the foundation’s charter, which is what the New York suit is focused on. It also, if unreported, likely violates the federal law that requires disclosure of contributions.

If this is how the Trump Foundation operated, what would law enforcement find if it got a look at the inner workings of the Trump Organization? There could potentially be more campaign finance violations, if the company also made unreported contributions.

It’s possible that federal investigators may now find out more about the inner workings of the Trump Organization. The investigation of Cohen by the U.S. Attorney’s Office for the Southern District of New York may give investigators the opportunity to delve into the finances of the entity for which Cohen worked as a lawyer and fixer.

With Cohen facing potentially significant jail time, and reportedly abandoned by his lawyers over a fee dispute, it seems probable that Cohen will cooperate with the federal investigation. Attorney-client privilege won’t cover any matters in which Cohen wasn’t acting as an attorney to Trump or was participating in a crime or scheme to defraud.

It follows that, if the Trump Organization engaged in activities that violated the law, Cohen will likely be able to tell prosecutors about them.

Questionable corporate bookkeeping in the private sector isn’t on its own a basis for impeaching a president. But campaign finance violations are connected to how Trump got elected. The stakes of the various Trump-related investigations are gradually getting higher.

To contact the editor responsible for this story: Stacey Shick at sshick@bloomberg.net

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