The New York attorney general said an investigation has shown an "extensive unlawful political coordination." Meanwhile, the Justice Department found that ex-FBI Director James Comey was not politically motivated in the Hillary Clinton email case.
New York's attorney general sued US President Donald Trump, three of his children and his foundation on Thursday, saying he illegally used the nonprofit as a personal "checkbook" for his own benefit, including his 2016 presidential campaign.
Barbara Underwood, the attorney general, asked a New York state judge to dissolve the Donald J Trump Foundation and to ban Trump, his sons Donald Jr and Eric, and his daughter Ivanka from holding leadership roles in New York charities.
Underwood said her office's 21-month investigation, begun under her predecessor Eric Schneiderman, uncovered "extensive unlawful political coordination" by the foundation with Trump's campaign, as well as "repeated and willful self-dealing" to benefit Trump's personal, business and political interests.
Among the transactions, the lawsuit cited as illegal was a $10,000 payment to the Unicorn Children's Foundation for a portrait of Trump purchased at a fundraising auction in 2014, and $100,000 paid to another charity to settle a legal claim in 2007.
"Mr. Trump ran the Foundation according to his whim, rather than the law," the lawsuit said.
The lawsuit, in the state Supreme Court in Manhattan, seeks $2.8 million of restitution plus penalties, a 10-year ban on Trump serving as a director of a New York nonprofit, and one-year bans for his children.
"As our investigation reveals, the Trump Foundation was little more than a checkbook for payments from Mr Trump or his businesses to nonprofits, regardless of their purpose or legality," Underwood said in a statement.
"That is not how private foundations should function." The foundation's board of directors had not met since 1999, the lawsuit said.
TRT World's Frank Ucciardo reports from New York.
The Republican president attacked the lawsuit in a series of posts on Twitter that blamed Democratic politicians in his home state.
The sleazy New York Democrats, and their now disgraced (and run out of town) A.G. Eric Schneiderman, are doing everything they can to sue me on a foundation that took in $18,800,000 and gave out to charity more money than it took in, $19,200,000. I won’t settle this case!...— Donald J. Trump (@realDonaldTrump) June 14, 2018
The Trump Foundation issued a statement criticising the lawsuit as "politics at its very worst" and accusing the attorney general of holding its $1.7 million in remaining funds "hostage for political gain."
The New York City-based foundation said Trump himself had contributed more than $8 million, and that the foundation had already announced its intention to dissolve in 2016.
The lawsuit adds to Trump's legal problems, including an investigation by Special Counsel Robert Mueller into whether his 2016 campaign colluded with Russia.
Trump has denied there was any collusion, and Russia has denied meddling in the election.
The lawsuit challenges the Trump Foundation's role in an Iowa fundraiser for military veterans that Trump organised in 2016 instead of taking part in one of the Republican debates.
Some $2.8 million went to the foundation, the lawsuit said, and the foundation wrongly ceded control of those funds to Trump's campaign staff, who wrongly disbursed grants at campaign rallies for Trump's political benefit.
The lawsuit said Corey Lewandowski, then Trump's campaign manager, directed some of the funds to be disbursed in Iowa shortly before its caucuses, where voters from the state gather in the first electoral competition to choose parties' presidential nominees.
Lewandowski, who is not a target of the lawsuit, did not respond to a request for comment.
Paul S Ryan, head of litigation at Common Cause, a nonpartisan watchdog group in Washington, said the New York filing provides details of actions that could also violate a federal ban on campaigns funnelling "soft money" through nonprofits.
"This involvement of the Trump campaign in the foundation's disbursements right before the Iowa caucuses may very well violate the campaign finance law soft money ban," Ryan said in an interview.
The attorney general said she also sent letters about possible breaches of federal law to the Federal Election Commission (FEC) and Internal Revenue Service. Both agencies declined to comment.
TRT World's Kevin McAleese reports from Washington, DC.
In the meantime, the Justice Department's internal watchdog said on Thursday that former FBI Director James Comey made a "serious error of judgment" when he announced shortly before the 2016 US presidential election that he was reopening an investigation into candidate Hillary Clinton's use of a private e-mail server.
But Inspector General Michael Horowitz also concluded in a long-awaited, 500-page report that Comey did not exhibit any political bias in his actions or try to influence the election.
The Horowitz report was highly critical of Peter Strzok and Lisa Page, two FBI staff members who exchanged highly charged political messages, finding their texts cast a cloud over the FBI and created the appearance of bias.
Comey later headed a separate probe into alleged ties between President Donald Trump's campaign and Russia.
Trump fired him as head of the FBI in 2017 and has frequently criticised him since.