Does 'proceeds' really mean 'net profits'? The supreme court's efforts to diminish the utility of the federal money laundering statute.

• Author: Gurule, Jimmy
• Position: P. 339-363

INTRODUCTION

Drug traffickers, mobsters, white collar criminals, and terrorist financiers must be breathing a huge sigh of relief. In United States v. Santos, a deeply divided Supreme Court held that the undefined term "proceeds" in the federal money laundering statute, 18 U.S.C. [section] 1956(a)(1), is limited to the net profits, not gross receipts, of unlawful activity. (1) The Supreme Court's ruling restricts the scope of the money laundering statute. After Santos, the statute only punishes "financial transactions" (2) with illicit profits derived from "specified unlawful activity," (3) not any funds derived from or obtained, directly or indirectly, through the commission of such criminal activity. (4) The legal implications of the Supreme Court's decision are far reaching and directly benefit defendants involved in criminal enterprises. Restricting the money laundering statute to "financial transactions" involving illicit "profits" derived from specified predicate offenses imposes significant obstacles to successful prosecution under the statute. Prosecutors must trace the tainted funds and prove that they constitute the net profits, not merely the gross receipts, of criminal activity. To prove net profits, prosecutors will be required to prove what the defendants' overhead expenses were. For example, the costs for purchasing, transporting, storing, and distributing illicit drugs would have to be deducted from the gross receipts. Further, in a securities fraud case involving insider trading, a defendant could argue that only the profits of the securities fraud (excluding the funds used to purchase the securities) would be the subject of a money laundering charge.

The potential scope of the Supreme Court's holding in Santos also raises other serious concerns. While the Santos case involved a prosecution under the "promotion theory" of money laundering, 18 U.S.C. [section] 1956(a)(1)(A)(i), the Court's holding applies to other subsections of the federal money laundering statute that require proof of "proceeds," including the concealment provision of money laundering. (5) Unless the term "proceeds" is interpreted to mean one thing under [section] 1956(a)(1)(A)(i), the promotion provision, and something different under the concealment provision, [section]1956(a)(1)(B)(i), the government must prove that the property involved in the financial transaction constitutes the "net profits" of specified criminal activity. The Santos decision further restricts the reach of [section] 1956(a)(2)(B)(i), the international money laundering provision, which criminalizes the transportation, transmission, or transfer of a monetary instrument or funds into or out of the United States with knowledge that the property involved represents the "proceeds" of some form of unlawful activity, and with the intent to conceal or disguise the nature, location, source, ownership, or control of the "proceeds" of specified unlawful activity. (6) After Santos, the government must prove that the monetary instruments or funds involved in the transportation, transmission, or transfer represent the "net profits" of specified unlawful activity. Further, the Supreme Court's narrow construction of the term "proceeds" appears to limit the application of [section] 1957(a), which punishes "[w]hoever ... knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000." (7) After Santos, [section] 1957 is seemingly limited to criminalizing only monetary transactions with illegal profits.

The Supreme Court's ruling also has clear implications for the application of the federal forfeiture statutes. The criminal and civil forfeiture statutes authorize the forfeiture of "proceeds." (8) If the term "proceeds" is interpreted consistent with the Supreme Court's decision in Santos, federal prosecutors would have to trace the funds to net criminal profits, excluding the defendant's overhead expenses from forfeiture. This would impose a heavy burden on the government of proving net profits in criminal and civil forfeiture cases. Finally, since after Santos the money laundering statute only prohibits the laundering of illicit net profits, financing specified unlawful activity, including acts of terrorism, with clean money is no longer criminalized under [section] 1956(a). For example, 18 U.S.C. [section] 2339C, the terrorist financing statute, punishes whoever, directly or indirectly, "unlawfully and willfully provides or collects funds" with the intention or with the knowledge that such funds are to be used to commit enumerated acts of terrorism. (9) However, the terrorist funds can be derived from either an illegal or a lawful source. Under the Supreme Court's narrow definition of "proceeds," conducting a financial transaction with the proceeds of terrorist financing derived from a legitimate source is not prohibited by the money laundering statute.

At a minimum, the Santos decision (1) imposes an unreasonable burden on prosecutors to prove net profits (money acquired less defendant's overhead expenses), (2) restricts other provisions of the money laundering statute and generates confusion with respect to whether the Court's restrictive construction of the term "proceeds" applies to the federal forfeiture statutes, and (3) limits the application of the money laundering statute to predicate acts that generate illicit profits, rendering null and void terrorist financing and other predicate offenses involving financial transactions with funds derived from a lawful source. (10) To remedy the deleterious effects of the Santos decision, Congress should amend the federal money laundering statute to make it a crime to engage in a financial transaction involving any funds derived, directly or indirectly, from specified unlawful activity, and not limited to the net gain or profits realized from such criminal acts.

Part I of this Article discusses the Supreme Court's decision in Santos, including the unusual alignment of Justices comprising the majority, concurring, and dissenting opinions. Part II provides an overview of the legislative history and structure of the federal money laundering statute. Part III examines the legal implications of the Santos decision on other sections of the federal money laundering statute. Part IV further discusses the legal effect of the Supreme Court's ruling on the federal forfeiture statutes that authorize the forfeiture of "proceeds." Specifically, following Santos, is the criminal and civil forfeiture of "proceeds" limited to the net profits of criminal activity? Are the defendant's criminal overhead expenses exempt from forfeiture? Part V analyzes Justice Scalia's erroneous construction of [section] 1956(a)(1)(A)(i), and rejects his overly broad application of the promotion theory of money laundering. Part VI discusses how the Santos decision excludes from the money laundering statute predicate offenses that do not generate illicit profits, such as the terrorist financing statute. Finally, this Article concludes by proposing several amendments to strengthen and enhance the effectiveness of the federal money laundering statute.

1. THE SANTOS DECISION

   Respondent Elfrain Santos was charged with operating an illegal lottery in Indiana for over two decades. (11) According to the government, Santos, the ring-leader of the gambling enterprise, employed various helpers to run the lottery. (12) These helpers gathered bets from gamblers, kept a portion of the bets as their commissions, and delivered the balance to Santos's collectors. (13) One of the collectors was respondent Benedicto Diaz, who delivered the money to Santos. (14) The money received by Santos was used to pay the salaries of his collectors, including Diaz, and to pay off the winners. (15) After a jury trial, Santos was found guilty of conspiracy to run an illegal gambling business (18 U.S.C. [section] 371), running an illegal gambling business (18 U.S.C. [section] 1955), conspiracy to launder money (18 U.S.C. [section] 1956(a)(1)(A)(i) and [section] 1956(h)), and money laundering (18 U.S.C. [section] 1956(a)(1)(A)(i)). (16) Santos was sentenced to sixty months of imprisonment on the gambling counts and to 210 months of incarceration on the money laundering counts. (17) Diaz pleaded guilty to conspiracy to launder money and was sentenced to 108 months of imprisonment. (18) The convictions were affirmed on appeal. (19) Thereafter, the Seventh Circuit decided United States v. Scialabba, another gambling case involving video poker machines, which held that the money laundering statute's use of "proceeds" meant net profits, not gross receipts. (20)

   Respondents filed motions under 28 U.S.C. [section] 2255, collaterally attacking their convictions and sentences. (21) Applying the holding in Scialabba, the district...