He didn't know he was being set up at the time. He was drugged, passed out, Neri killed the hooker, and Tom showed up. Geary, groggy, guilty and panicky, still wasn't thinking clearly when Tom made his offer: the girl had no family, nobody knew she worked there, he was putting in a call to Geary's office to establish an "alibi" for Geary--he was spending the night at Michael's home in Tahoe. Once Geary agreed to that, his coglioniwere in Michael's pocket. Once the drug left his system and his head cleared, Geary probably figured out that he'd been set up. But by that time it was too late for him to backtrack.
One of the many small touches I love about GFII is Geary's reactions as Tom lays out the situation for him.
At first he is frustrated, panicked, and, I think, a little fatalistic. But as soon as Tom says "It'll be like she never existed" Geary's face brightens and he seems to snap back into focus. You can see that he suddenly realizes that he may not be ruined after all.
