The Corleone Family ran the place and obviously knew about the Senator's fondness for prostitutes. They probably never did anything about it, but decided to use it against him if the oppotunity came along. When Geary tried to put the squeeze on them, they retaliated. And quite frankly, I don't believe it was over the money he was trying to extort. I think that he insulted Michael and Italians in general, and that's what made Michael do it.