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

AuthorGurule, Jimmy
PositionP. 363-390

D. Criminal and Civil Forfeiture of Proceeds

  1. Criminal Forfeiture

    The use of the term "proceeds" is not limited to the federal money laundering statutes. Both criminal and civil forfeiture statutes authorize the forfeiture of illicit "proceeds." (129) Left unresolved by the Santos decision is whether the Supreme Court's restrictive interpretation of "proceeds" to mean "net profits" applies to the federal forfeiture statutes. In other words, is the forfeiture of "proceeds" limited to the forfeiture of "net profits"? More specifically, are the overhead expenses of a criminal enterprise exempt from criminal and civil forfeiture? In the criminal setting, the forfeiture of illicit proceeds is authorized by three major federal forfeiture statutes. First, 21 U.S.C. [section] 853(a)(1) authorizes the forfeiture of "any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of [a federal drug] violation." (130) Second, the RICO criminal forfeiture statute, 18 U.S.C. [section] 1963(a)(3), provides for forfeiture to the United States "any property constituting, or derived from, any proceeds which the person obtained, directly or indirectly, from racketeering activity ... in violation of section 1962." (131) Finally, 18 U.S.C. [section] 982 authorizes the forfeiture of "proceeds," "gross proceeds," and "gross receipts," depending on the particular underlying offense giving rise to forfeiture. (132)

    The courts have consistently construed the term "proceeds" to mean "gross receipts," rejecting the restrictive interpretation that "proceeds" includes only "net profits" realized from unlawful activity. For example, in United States v. McHan, the Fourth Circuit reversed a district court ruling that the costs of drug operations were exempt from criminal forfeiture under 21 U.S.C. [section] 853. (133) The court held that [section] 853 authorizes the forfeiture of gross proceeds, not merely the profits accrued from illicit drug trafficking. (134) The court based its conclusion on several grounds. First, the court observed that the drug forfeiture statute originally limited criminal forfeitures for a person convicted of engaging in a continuing criminal enterprise to "profits obtained.., in such enterprise." (135) However, the provision was replaced by 21 U.S.C. [section] 853, when Congress passed the Comprehensive Forfeiture Act. (136) Section 853(a)(1) now authorizes the forfeiture of "any property constituting, or derived from, any proceeds.., obtained, directly or indirectly, as the result of" a Continuing Criminal Enterprise ("CCE") offense. (137) In using the term "proceeds," as distinguished from "profits," Congress intended to broaden the scope of the statute to encompass more than merely illicit profits derived from drug trafficking. (138)

    Second, the McHan court argued that Congress intended to subject to forfeiture, pursuant to [section] 853(a)(1), "[t]he same type of property [that was already] subject to civil forfeiture under 21 U.S.C. [section] 881(a)(6)." (139) The court observed that the reach of [section] 881(a)(6) extends beyond merely forfeiting illicit drug profits. (140) Further, the McHan court posited that "[t]he civil forfeiture provision has never been interpreted to permit a deduction for the costs of illicit drug transactions." (141)

    The McHan court found additional support for its position in the legislative history of the RICO criminal forfeiture statute, 18 U.S.C. [section] 1963. (142) The Comprehensive Forfeiture Act amended both the RICO and CCE forfeiture provisions. (143) The court observed that the language of 21 U.S.C. [section] 853 closely tracks that of the RICO criminal forfeiture provision, 18 U.S.C. [section] 1963. (144) Thus, the legislative history of [section] 1963(a)(3) was found to be illuminating when interpreting 21 U.S.C. [section] 853. (145) The McHan court posited that the legislative history of [section] 1963(a) "reveals that Congress believed '[i]t should not be necessary for the prosecutor to prove what the defendant's overhead expenses were' and, therefore, used the term 'proceeds' rather than 'profits' ... 'to alleviate the unreasonable burden on the government of proving net profits." (146) The McHan court concluded that Congress intended the term "proceeds" to be given the same meaning under the drug and RICO criminal forfeiture statutes. (147) Finally, the court maintained that sound public policy reasons support the forfeiture of gross receipts rather than merely drug profits under [section] 853. (148) The court stated:

    Were we to read proceeds in [section] 853 to mean only profits ... we would create perverse incentives for criminals to employ complicated accounting measures to shelter the profits of their illegal enterprises. The purpose of forfeiture is to remove property facilitating crime or property produced by crime--all of which is tainted by the illegal activity. (149) Thus, forfeiture of gross receipts is consistent with the intent of Congress to attack the economic base of criminal enterprises.

    The RICO statute, 18 U.S.C. [section] 1963(a)(3), authorizes the forfeiture of the "proceeds" derived from a pattern of racketeering activity. "The term 'proceeds' as used in [section] 1963(a)(3) has been construed to mean the entire amount realized from racketeering activity and not just the 'profits' made by the defendant. Forfeiture of gross profits rather than net profits is mandated by the statute." (150) One court reasoned:

    Forfeiture under RICO is a punitive, not a restitutive, measure. Often proof of overhead expenses and the like is subject to bookkeeping conjecture and is therefore speculative. RICO does not require the prosecution to prove or the trial court to resolve complex computations, so as to ensure that a convicted racketeer is not deprived of a single farthing more than his criminal acts produced. RICO's object is to prevent the practice of racketeering, not to make the punishment so slight that the economic risk of being caught is worth the potential gain. Using net profits as the measure for forfeiture could tip such business decisions in favor of illegal conduct. (151) Construing "proceeds" to mean "net profits" would clearly undermine the effectiveness of the RICO forfeiture statute.

    The money laundering forfeiture statute, 18 U.S.C. [section] 982(a)(1), authorizes the criminal forfeiture of property "involved in" or "traceable to" a violation of [section] 1956 or [section] 1957. (152) The money laundering forfeiture provision does not use the term "proceeds." (153) The requirement that the property be "involved in" a money laundering offense is not limited to money derived from criminal activity or illicit profits. For example, legitimate funds used to disguise illegitimate funds are forfeitable as property "involved in" a money laundering offense. (154) In reaching this conclusion, one court reasoned:

    [L]imiting the forfeiture of funds ... to the proceeds of the initial fraudulent activity would effectively undermine the purpose of the forfeiture statute. Criminal activity such as money laundering largely depends upon the use of legitimate monies to advance or facilitate the scheme. It is precisely the commingling of tainted funds with legitimate money that facilitates the laundering and enables it to continue. (155) The Supreme Court's ruling in Santos creates an interesting dichotomy with respect to the application of [section] 982(a)(1), the money laundering forfeiture statute. Santos limits the federal money laundering statute to financial transactions with illicit profits derived from specified unlawful activity. (156) However, [section] 982(a)(1) authorizes forfeiture of property "involved in" or "traceable to" a violation of [section] 1956 and [section] 1957, and courts have construed the forfeiture statute to include forfeiture of legitimate funds used to disguise dirty money. (157) Thus, the money laundering forfeiture provision appears to have greater reach than the federal money laundering statute giving rise to forfeiture.

    Other subsections of [section] 982 authorize forfeiture of proceeds, gross proceeds, or gross receipts. (158) The potential impact of Santos on these forfeiture provisions is unclear. For example, does Santos limit forfeiture of "proceeds" under [section] 982 to "net profits"? What is the legal impact of the Santos decision on the forfeiture of "gross proceeds" authorized by [section] 982(5), (7), and (8)(B)? Does Santos limit forfeiture to "gross net profits," whatever that means?

  2. Civil Forfeiture

    The civil forfeiture of drug proceeds is authorized by 21 U.S.C. [section]881(a)(6). The statute provides that "[a]ll moneys, negotiable instruments, securities, or other things of value furnished or intended to be furnished ... in exchange for a controlled substance" and "all proceeds traceable to such an exchange" shall be forfeited to the United States. (159) Civil forfeiture is further authorized under 18 U.S.C. [section] 981(a)(1)(B), which permits forfeiture of any "proceeds" obtained directly or indirectly from an offense against a foreign nation, if the offense "involves trafficking in nuclear, chemical, biological, or radiological weapons technology or material, or the manufacture, importation, sale, or distribution of a controlled substance." (160) Additionally, [section] 981(a)(1)(C) authorizes civil forfeiture of the "proceeds" of statutorily enumerated crimes, including any offense defined as "specified unlawful activity" under the federal money laundering statute, 18 U.S.C. [section] 1956(c)(7). (161) Other provisions authorize civil forfeiture of gross proceeds or gross receipts. (162)

    Section 981 also authorizes civil forfeiture of property, real or personal, which constitutes or is derived from "proceeds" traceable to a violation of 18 U.S.C. [section] 2339C. (163) Section 2339C prohibits the financing of terrorism. (164)...

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