Can Money Laundering 'Travel with the Business'?

I spent the next hour explaining to my corporate lawyer colleague, and later to the client, that the purchase may be problematic. Nonetheless, the client made repeated (and forceful) statements that the purchase was completely legal since he is buying the business with legitimate funds for a legitimate purpose, and he was unwilling to understand that the seller's liability for laundering the proceeds of illicit activity ' money laundering ' could travel with the business. We obviously had a disconnect.

During our discussion, I searched for and found the seller's indictment. As I feared, the indictment included forfeiture counts for assets of the business and any assets derived from the illegal activity. 'Houston, we have a problem.'

Money Laundering

Money laundering is generally a crime off the radar screen of most corporate attorneys and business owners. Pursuant to the Money Laundering Control Act of 1986, 18 U.S.C. ” 1956, 1957, and 1960, money laundering is a federal criminal offense defined as conducting a financial transaction involving proceeds of another crime. In addition to hefty criminal penalties, the statutes provide federal law enforcement with the ability to forfeit all property involved in the money-laundering offense or in a conspiracy to commit a money laundering offense. For example, if an individual purchases a can of soda from someone known to be an illegal drug dealer with no other source of income, that person is guilty of money laundering. The soda had to have been purchased with proceeds of drug dealing and therefore is considered to be proceeds of a crime; the payment of funds for the soda is a financial transaction. The buyer is guilty of money laundering, and the soda and any revenue derived from the soda is forfeitable to the U.S. Government.

Going back to my client, when I re-explained this to him, he was shocked and needed to know more. Like any smart businessperson, he wanted to understand how money-laundering laws might affect his hopeful transaction. Using the statutory elements, I explained that his purchase of the business might be subject to money laundering penalties if: 1) a financial 2) transaction 3) affecting interstate commerce was 4) conducted, and if 5) he knew that 6) specified unlawful activities were the basis of the funds.

A Transaction

First, a transaction is needed. A transaction is defined in 18 U.S.C ' 1956(c)(3) as a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition of property. The transfer of property, including money, from one person to another is a transaction. The transaction must be financial, which includes a transaction which in any way or degree affects interstate or foreign commerce involving the movement of funds by wire or other means or involving one or more monetary instruments, or involving the transfer of title to any real property, vehicle, vessel, or aircraft. A transaction 'affects interstate commerce' if it involves a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree. Case law has found this requirement to be very low; indeed, the depositing of a check into a bank has been found to affect interstate commerce.

'Conducting' a Transaction

Next, the offender must have 'conducted' a financial transaction affecting interstate commerce, which includes initiating, concluding, or participating in a transaction. Many defendants have tried to elude this element by not being directly involved in the transaction; however, courts have held that directing others to initiate transactions is equivalent to conducting the transaction themselves.

The statutes have a scienter requirement that is often confusing and difficult to explain. Section 1956(c)(1) requires the government to prove that the defendant 'knew the property involved in a financial transaction represents the proceeds of some form of unlawful activity.' The defendant must be aware that the money is criminally derived but does not have to know the nature of the unlawful activity. This issue was at first troubling to the client because he was not involved in, nor did he know about, the alleged illegal activity of the seller. However, the seller told him about the indictment and, as a result, the client discovered the alleged illicit activity. Further, knowledge may be demonstrated by proof of willful blindness, deliberate ignorance, or conscious avoidance.

'Specified Unlawful Activity'

Finally, the property involved in the financial transaction must be the proceeds of a 'specified unlawful activity' (SUA). Sections 1956(c)(7) and 1961(1) list crimes that are considered SUAs. (See Box below.) I showed the client the list of SUAs and circled the crime alleged in the seller's indictment. The client then raised a good point ' the seller was indicted, not convicted. Therefore the SUA was only alleged at this point, not proven. The client asked if he could avoid money-laundering exposure by purchasing the business before the allegations of the indictment are adjudicated. The simple answer is 'no,' because the indictment, which specifically listed the assets of the competitor's business, serves as a constructive lien on the assets in question. Therefore, if the money-laundering charges were established (either at trial or by the seller's guilty plea), the government could be able to forfeit the business assets received by the client. The reasoning is that the indictment itself puts the world on notice that the government has a claim to the assets listed in the forfeiture count. Accordingly, the client would be taking a huge risk if he proceeded with the purchase, especially since he has no control over the seller's criminal negotiations with the government. Wisely, the client decided to cancel the purchase until after the criminal case was resolved.

Conclusion

An allegation of money laundering against a seller of assets may taint the sale of assets to an unknowing buyer or one who doesn't understand the powerful reach of the forfeiture statutes. Failure to spot this issue, evaluate the risk and explain it to a client may cause significant negative financial repercussions (as well as criminal repercussions, if the government believes your client to be a continuing part of the scheme). While an actual scenario is rarely as simple as the one set forth above, the elements and legal analysis can be used by a corporate attorney to spot the issue and bring in additional support.

Acquisition to Money Laundering Sanctions

• Fraud committed upon a U.S. or foreign bank;
• Bribery of a public official (Foreign Corrupt Practices Act);
• Export control violations;
• Most violations related to manufacture or sale of a controlled substance;
• Concealment of assets;
• Numerous types of securities fraud, including insider trading;
• Obtaining federal government funds by fraud, including Medicare and Medicaid fraud;
• Copyright infringement.

William V. Roppolo is an attorney with Baker & McKenzie LLP in Miami, FL, and practices civil and criminal litigation with an emphasis on financial crimes. He is a former legal counsel with the Department of Homeland Security (formerly the United States Customs Service), where he focused on tracing proceeds of international criminal activity.

It can often be difficult for a white-collar attorney, who may have at least a passing familiarity with money laundering, to explain to a corporate attorney colleague how federal money laundering laws can impact deals on which the corporate attorney is advising clients. This article provides an example that may help you explain to your corporate law colleagues the impact that the federal money laundering laws could have on their work.

An Interesting Scenario

A partner in my law firm's corporate department recently walked into my office with the following scenario: A client had recently retained the firm to represent him in the purchase of a business operation of his direct competitor. The client was excited about the acquisition because the price was below market and would increase his operating capacity three-fold. When I asked why the seller was willing to part with profitable assets at a discount, I was told that the seller was recently indicted and was in need of liquid assets to fund his defense.

I spent the next hour explaining to my corporate lawyer colleague, and later to the client, that the purchase may be problematic. Nonetheless, the client made repeated (and forceful) statements that the purchase was completely legal since he is buying the business with legitimate funds for a legitimate purpose, and he was unwilling to understand that the seller's liability for laundering the proceeds of illicit activity ' money laundering ' could travel with the business. We obviously had a disconnect.

During our discussion, I searched for and found the seller's indictment. As I feared, the indictment included forfeiture counts for assets of the business and any assets derived from the illegal activity. 'Houston, we have a problem.'

Money Laundering

Money laundering is generally a crime off the radar screen of most corporate attorneys and business owners. Pursuant to the Money Laundering Control Act of 1986, 18 U.S.C. ” 1956, 1957, and 1960, money laundering is a federal criminal offense defined as conducting a financial transaction involving proceeds of another crime. In addition to hefty criminal penalties, the statutes provide federal law enforcement with the ability to forfeit all property involved in the money-laundering offense or in a conspiracy to commit a money laundering offense. For example, if an individual purchases a can of soda from someone known to be an illegal drug dealer with no other source of income, that person is guilty of money laundering. The soda had to have been purchased with proceeds of drug dealing and therefore is considered to be proceeds of a crime; the payment of funds for the soda is a financial transaction. The buyer is guilty of money laundering, and the soda and any revenue derived from the soda is forfeitable to the U.S. Government.

Going back to my client, when I re-explained this to him, he was shocked and needed to know more. Like any smart businessperson, he wanted to understand how money-laundering laws might affect his hopeful transaction. Using the statutory elements, I explained that his purchase of the business might be subject to money laundering penalties if: 1) a financial 2) transaction 3) affecting interstate commerce was 4) conducted, and if 5) he knew that 6) specified unlawful activities were the basis of the funds.

A Transaction

First, a transaction is needed. A transaction is defined in 18 U.S.C ' 1956(c)(3) as a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition of property. The transfer of property, including money, from one person to another is a transaction. The transaction must be financial, which includes a transaction which in any way or degree affects interstate or foreign commerce involving the movement of funds by wire or other means or involving one or more monetary instruments, or involving the transfer of title to any real property, vehicle, vessel, or aircraft. A transaction 'affects interstate commerce' if it involves a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree. Case law has found this requirement to be very low; indeed, the depositing of a check into a bank has been found to affect interstate commerce.

'Conducting' a Transaction

Next, the offender must have 'conducted' a financial transaction affecting interstate commerce, which includes initiating, concluding, or participating in a transaction. Many defendants have tried to elude this element by not being directly involved in the transaction; however, courts have held that directing others to initiate transactions is equivalent to conducting the transaction themselves.

The statutes have a scienter requirement that is often confusing and difficult to explain. Section 1956(c)(1) requires the government to prove that the defendant 'knew the property involved in a financial transaction represents the proceeds of some form of unlawful activity.' The defendant must be aware that the money is criminally derived but does not have to know the nature of the unlawful activity. This issue was at first troubling to the client because he was not involved in, nor did he know about, the alleged illegal activity of the seller. However, the seller told him about the indictment and, as a result, the client discovered the alleged illicit activity. Further, knowledge may be demonstrated by proof of willful blindness, deliberate ignorance, or conscious avoidance.

'Specified Unlawful Activity'

Finally, the property involved in the financial transaction must be the proceeds of a 'specified unlawful activity' (SUA). Sections 1956(c)(7) and 1961(1) list crimes that are considered SUAs. (See Box below.) I showed the client the list of SUAs and circled the crime alleged in the seller's indictment. The client then raised a good point ' the seller was indicted, not convicted. Therefore the SUA was only alleged at this point, not proven. The client asked if he could avoid money-laundering exposure by purchasing the business before the allegations of the indictment are adjudicated. The simple answer is 'no,' because the indictment, which specifically listed the assets of the competitor's business, serves as a constructive lien on the assets in question. Therefore, if the money-laundering charges were established (either at trial or by the seller's guilty plea), the government could be able to forfeit the business assets received by the client. The reasoning is that the indictment itself puts the world on notice that the government has a claim to the assets listed in the forfeiture count. Accordingly, the client would be taking a huge risk if he proceeded with the purchase, especially since he has no control over the seller's criminal negotiations with the government. Wisely, the client decided to cancel the purchase until after the criminal case was resolved.

Conclusion

An allegation of money laundering against a seller of assets may taint the sale of assets to an unknowing buyer or one who doesn't understand the powerful reach of the forfeiture statutes. Failure to spot this issue, evaluate the risk and explain it to a client may cause significant negative financial repercussions (as well as criminal repercussions, if the government believes your client to be a continuing part of the scheme). While an actual scenario is rarely as simple as the one set forth above, the elements and legal analysis can be used by a corporate attorney to spot the issue and bring in additional support.

Acquisition to Money Laundering Sanctions

• Fraud committed upon a U.S. or foreign bank;
• Bribery of a public official (Foreign Corrupt Practices Act);
• Export control violations;
• Most violations related to manufacture or sale of a controlled substance;
• Concealment of assets;
• Numerous types of securities fraud, including insider trading;
• Obtaining federal government funds by fraud, including Medicare and Medicaid fraud;
• Copyright infringement.

William V. Roppolo is an attorney with Baker & McKenzie LLP in Miami, FL, and practices civil and criminal litigation with an emphasis on financial crimes. He is a former legal counsel with the Department of Homeland Security (formerly the United States Customs Service), where he focused on tracing proceeds of international criminal activity.