Untangling Laundered Funds: The Tracing Requirement Under 18 U.S.C. [section] 1957.

AuthorSpensley, Audrey

Table of Contents Introduction I. The Historical Development of the Tracing Doctrine Under [section] 1957 A. The Background and Purpose of [section] 1957 B. Tracing and [section] 1957 II. The Existing Circuit Split on Tracing Under [section] 1957 A. View 1: Tracing Not Required 1. Early cases: establishing a no-tracing framework 2. Courts that presumptively never require tracing 3. Courts that do not require dollar-for-dollar tracing B. View 2: Tracing Required for All Transactions C. View 3: The "Aggregation" Approach III. A Proposal: The Proportionality Approach A. The Proportionality Approach Would Mediate Between Circuits' Views B. The Proportionality Approach Would Align with Courts' Analyses in the Context of [section] 981 Forfeiture C. The Proportionality Approach Would Account for New Financial Technologies Conclusion Introduction

A local doctor runs a lucrative side business as the ringleader of an illegal gambling operation. In one month, he earns $30,000 from this scheme and deposits the money, in cash, in a bank account already containing $30,000 of savings from his legitimate salary. Later, he withdraws $20,000 to buy a motorcycle for his personal use. Next, he decides to withdraw an additional $10,000 to upgrade his new motorcycle, leaving $30,000 remaining in the account once again.

Unfortunately for the doctor, his bank alerted federal authorities to his first transaction of over $10,000 in cash, as required by federal regulations. (1) Following an investigation, he is arrested and charged with illegal gambling under state law, as well as a federal offense: money laundering under 18 U.S.C. [section] 1957, a statute which criminalizes "knowingly engaging] ... in a monetary transaction in criminally derived property of a value greater than $10,000 and ... derived from specified unlawful activity." (2)

At trial, however, the government cannot present enough evidence to prove beyond a reasonable doubt that the $30,000 in cash the doctor withdrew from his account was directly derived from his illegal gambling profits. Since cash is fungible--one dollar is the same as any other dollar--the money could have been derived from his $30,000 in legal savings. In other words, because the doctor has "commingled" his illegal and legal profits in a single bank account, the government faces difficulty establishing that the money he withdrew was a transaction "in criminally derived property," a required element under [section] 1957. (3)

Even assuming the government successfully proves all other elements of the statute, the doctor would likely be acquitted if he were charged in California. (4) If he were charged in New York, however, he would face up to ten years in federal prison, along with a substantial fine. (5) If he were charged in Texas, he would likely avoid conviction--but if he had withdrawn a single dollar more, he would instead potentially face prison time. (6) And what if the doctor did not store his profits in dollar bills, but in cryptocurrency, which he accesses through a digital wallet? That question would render the result even more uncertain, mapping the contradictory outcomes in the cash context onto newly emerging judicial interpretations of money laundering in the cryptocurrency context. (7)

As the above example illustrates, defendants may face sharply varying outcomes under [section] 1957 based on similar or even identical facts, depending on the court that presides over their case. The substantial majority of circuits do not require the government to "trace" a specific withdrawal from a commingled bank account back to the proceeds of the underlying unlawful activity. (8) Thus, in New York (which applies the majority view), the government could convict the doctor even if it could not prove that his two withdrawals contained any illegally obtained money. (9) Yet even courts that follow the majority view and dispense with a tracing requirement have differed in what they demand the government prove under [section] 1957 to demonstrate a connection between the illegal funds and the withdrawal. (10)

Conversely, the Ninth Circuit explicitly does require tracing. (11) Under the Ninth Circuit's view, the government would need to employ fact-specific accounting measures to demonstrate that the doctor's first withdrawal did in fact include more than $10,000 worth of dirty money from his gambling profits. (12)

The Fifth Circuit has adopted an intermediate "aggregation" test with respect to tracing. (13) It would conclude that the doctor's transaction was derived from his gambling proceeds only if he had withdrawn an aggregate amount across his two transactions that exceeded the total amount of clean money ($30,000) in his account. (14) Thus, if the doctor withdrew $1 to buy a water bottle in addition to the $30,000 for the motorcycle, [section] 1957 would apply because his aggregate withdrawal of $30,001 exceeded his $30,000 in clean money. The Fifth Circuit has acknowledged that such a result, at this fringe point, is an "oddit[y]" and "somewhat mechanistic." (15) It also has not explicitly held that a conviction would hinge on a single dollar, although that is the logical implication of its aggregation approach.

This circuit split--which emerged in the 1990s, shortly after the enactment of the modern money-laundering laws (16)--persists today, even as laundering techniques are becoming increasingly sophisticated. (17) The entrenched division raises two related questions. First, how should courts' disagreement over tracing be resolved in light of the statutory framework developed by Congress? Second, how should courts' analyses be affected, if at all, by an increasingly cashless global economy, which presents distinct opportunities and challenges for prosecutors pursuing money-laundering charges?

This Note seeks to answer these questions. While various aspects of money-laundering law are subject to debate, very little scholarly work has analyzed the tracing requirement in depth. (18) This lack of engagement reflects a decrease in scholarly and public interest in money laundering more broadly since the early 2000s. (19) This Note builds on prior work by revisiting the now-entrenched circuit split, which was not as clearly established when scholars began to raise the tracing issue.

After reviewing the legislative history and cataloging existing case law, this Note argues for a novel approach to tracing. Following the Fifth Circuit's suggestion in United States v. Loe, courts should employ a "proportionality" or "pro rata" test, which applies the respective percentages of clean and dirty money within an entire account to each individual transaction allegedly covered by [section] 1957 in order to determine whether the greater than $10,000 requirement is met. (20) Applying this test to the above example, the funds in the doctor's account consisted of 50% legal money ($30,000 in salary) and 50% illegal money ($30,000 in gambling funds). Based on this 50% proportion, neither of the doctor's withdrawals (of $20,000 and $10,000, respectively) would fulfill the minimum requirement under [section] 1957.

As the court noted in Loe, this test would create a framework that simply and straightforwardly applies the language of [section] 1957: "Whoever ... knowingly engages ... in a monetary transaction in [dirty money] of a value greater than $10,000 ... shall be punished." (21) It avoids over-deference to the government and the distortion of statutory language produced by the blanket no-tracing rule used by a majority of circuits, (22) while reducing the technical difficulties, confusion, and discrepancies created by the Ninth Circuit's tracing requirement. (23) And although the proportionality approach is similar to the Fifth Circuit's more flexible aggregation approach, (24) it would not create an arbitrary tipping point, before which all funds are presumed clean and after which all funds are presumed dirty. Instead, it would focus on the relationship between the whole account and the specified transaction.

This Note proceeds in three parts. Part I introduces the issue of money laundering and the statutory background that has led to the tracing problem. Part II then turns to the circuit split that has emerged over the tracing requirement. It argues that this split is best conceptualized as a spectrum, with the Ninth Circuit on one end (requiring the tracing of all withdrawals) and the Second, Third, and Seventh Circuits on the other (assuming that commingled transactions are "in" illegal profits when the account contains any illegal money). (25) Part III argues for the proportionality approach as a workable, intermediate position on this spectrum. In doing so, it draws on a related statute: the associated civil-forfeiture law, 18 U.S.C. [section] 981. Courts interpreting [section] 981 have repeatedly adopted various accounting rules that demand some level of tracing. In the civil-forfeiture context, courts have proven more willing to substantiate the tracing requirement than in the [section] 1957 context, despite the lower level of proof required in civil cases. (26) Part III concludes by examining the emergence of the blockchain and the implications that new digital assets pose for courts interpreting and updating the [section] 1957 framework.

  1. The Historical Development of the Tracing Doctrine Under [section] 1957

    1. The Background and Purpose of [section] 1957

      "Money laundering" is the process of disguising proceeds derived from illegal activities (or, "dirty" profits) to make them appear legal (or, "clean"). (27) This process is typically divided into three stages: placement, layering, and integration. (28) The illegally-derived money is first "placed" into legitimate enterprises; (29) the funds are then "layered" through various transactions to hide their illegal origins; (30) finally, the launderers execute numerous transactions or other financial maneuvers until the dirty money is thoroughly...

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