Supreme Court Revisits Money Laundering

Cuellar was arrested and charged with attempting to transport drug proceeds across an international border with the intent to conceal or disguise, in violation of ' 1956(a)(2)(B)(i). He was convicted at trial, but a divided panel of the Fifth Circuit Court of Appeals reversed the conviction. The majority concluded that while the government proved that Cuellar was attempting to transport drug proceeds across an international border, it failed to prove that the transportation was designed in whole or part to conceal or disguise the nature, location, source, ownership or control of the proceeds. That is, the majority determined that the mere act of secreting the drug proceeds in the hidden compartment was insufficient to prove an intent to conceal or disguise. The court believed that for the statute to make sense, the act of concealing or disguising implies an intent to 'create the appearance of legitimate wealth.'

On rehearing, the Fifth Circuit en banc held that the government had proved intent to conceal in two distinct ways. First, the manner in which the money was wrapped, hidden, and covered with animal hair established the intent to conceal the nature and location of the drug proceeds. Second, the evidence established that Cuellar knew little or nothing about the beneficial owner of the money; therefore, the government proved the intent to conceal the ownership of the proceeds. The opinion of the court rejected the panel decision's statutory gloss of an implied requirement of proof to 'create the appearance of legitimate wealth or the converting of dirty money to clean.' Three judges dissented. In their view, there was a distinction between 'concealing money to transport it and transporting money to conceal it,' and only 'the latter conduct is encompassed by the definition of money laundering which is to make dirty money difficult to trace by concealing its illegality.' As the minority construed the statute, the government is required to prove at trial what the defendant 'planned to do with the money once he reached his destination,' and that there was a 'design to create the appearance of legitimate wealth.'

The Supreme Court took the case to resolve the conflicting interpretations of 'intent to conceal.'

Some History

In enacting ' 1956, Congress was attempting to criminalize the act of money laundering because until passage of this statute it was not a direct federal offense to launder crime proceeds. Before ' 1956, the government prosecuted acts of money laundering either by charging false statements (18 U.S.C. ' 1001) in connection with the filing of monetary instrument reports required under the Bank Secrecy Act or charging that the money launderer caused a domestic financial institution to fail to file or file a false Currency Transaction Report in violation of the Bank Secrecy Act (31 U.S.C. ' 5313, 18 U.S.C. ' 2). Before ' 1956, cross-border money laundering was charged by proving that an individual failed to file or filed a false Currency and Monetary Instruments Report when he crossed the border. This made prosecuting money laundering very cumbersome.

In response to repeated Department of Justice (DOJ) entreaties to outlaw money laundering expressly, Congress passed the Money Laundering Control Act of 1986, which added ' 1956 as one of two new anti-money laundering sections of the criminal code. On behalf of the DOJ, I worked with Congress to help craft the 1986 Act. That experience leads me to believe it was Congress's clear intent to criminalize money laundering as broadly as possible. Congress understood that money launderers plied their trade in very creative ways, and that to endeavor to define precisely all the ways in which money might be laundered would be a fool's errand. Hence, the broad language of the statute.

Although the statute was most frequently used in the years immediately after its enactment to prosecute drug money launderers, the original list of specified unlawful activity ' crimes whose proceeds could be the subject of a money laundering prosecution ' was not limited to drug-related crimes, and the list has since been expanded. Laundering the proceeds of a bribe or of violating the Clean Water Act can be prosecuted as a money laundering offense. So Cuellar's argument to the Supreme Court that Congress meant ' 1956 to target only traditional money laundering (whatever that might mean, Cuellar does not say) goes against the legislative history. Section 1956 was not an anti-drug money laundering statute. Indeed, in recent years, it has been used effectively to prosecute terrorist financiers.

What It Means

It's true that Congress did not define the phrase 'designed in whole or in part ' to conceal or disguise.' When not otherwise defined, statutory terms are to be interpreted in accordance with their ordinary meaning. As Hamlet said, 'Ay, there's the rub.' In my view, there is no 'ordinary' meaning to these words outside of the context of laundering crime proceeds. Put another way, the ordinary understanding of concealing and disguising of the proceeds of crime has always been taught in terms of placement, layering and integration. This three-part definition would appear to imply that what the money launderer did to earn his living, i.e., to transform dirty money into clean money by creating the appearance of legitimate wealth, was what Congress principally intended to outlaw.

Though traditional, this is not the only reasonable construction of the statute. It can be argued that simply removing the proceeds from the geography (especially to take them out of the United States to a country with a less stringent bank regulatory examination system or anti-money laundering legal regime) is an act of 'disguise' contemplated by the statute and well within Congress's intent in enacting ' 1956. Further, it is too much of a stretch to imagine that Congress required federal prosecutors to prove what the defendant 'planned to do with the money once he reached his destination' (as the en banc dissent would require). Likewise, it's difficult to believe that Congress expected prosecutors to divine the intended future acts of a criminal organization. To read this element into the statute would allow money launderers to escape enforcement too easily.

For years, courts have grappled with close cousins of the issue Cuellar presents: whether mere spending of crime proceeds equals money laundering, whether minimal steps to conceal drug proceeds equals concealment, whether the conversion of proceeds to a more liquid form equals money laundering, whether the receipt and deposit of bribe proceeds equals money laundering, etc. The courts of appeals have been fashioning interpretations of the statute based on the facts presented. Often the circuits agree; in a few instances, they are in conflict. The issue of what constitutes concealment is so complicated and closely debated that the Supreme Court received three cert. petitions raising the exact same question just this term alone.

At oral argument in Cuellar, questioning was active. At least three justices (Ginsberg, Breyer, and Stevens) appeared skeptical of the government's argument. There's no telling how the Court will decide. But if the Court reads the statute broadly, the government should prevail, given Cuellar's elaborate efforts to conceal the proceeds before trying to transport it across the international border.

Michael Zeldin ([email protected]), a member of this newsletter's Board of Editors, is the global anti-money laundering/trade sanctions practice leader at Deloitte. He was formerly the Chief of the Money Laundering Section of the U.S. Department of Justice.

On March 3, 2008, the U.S. Supreme Court heard arguments in the case of Cuellar v. United States. The decision, expected by the end of June, will interpret the 'intent to conceal' provision of the federal Anti-Money Laundering statutes. Specifically, the question presented is whether hiding illicit crime proceeds absent a design to create the appearance that the proceeds were derived from legitimate wealth violates section 18 U.S.C. ' 1956 (a)(2)(B)(i), which makes it an offense to transport crime proceeds across an international border with the intent to conceal or disguise. Before reaching the Supreme Court, the question was answered Yes by the district court, No by a divided panel of the Fifth Circuit, then Yes by the circuit sitting en banc.

The Facts

The facts presented at trial established that Humberto Fidel Regalado Cuellar was stopped while traveling on Route 277 South toward his home in the border town of Acuna, Mexico. The County Sheriff pulled Cuellar over because his car was traveling 40 mph in a 70 mph zone and had veered onto the shoulder of the road. Cuellar was in possession of $2,275, which the arresting officers testified smelled of marijuana. A canine unit was called to the scene and, while waiting, the officers searched the car with Cuellar's consent. Their search revealed that the car had been altered in a way consistent with other cars used to transport narcotics, and contained animal hair ' a known method used to distract drug-detection dogs. When the dog arrived, it 'alerted' on an area behind the driver's seat, where officers found a hidden compartment that contained more than $80,000 in U.S. currency in all denominations.

Cuellar was arrested and charged with attempting to transport drug proceeds across an international border with the intent to conceal or disguise, in violation of ' 1956(a)(2)(B)(i). He was convicted at trial, but a divided panel of the Fifth Circuit Court of Appeals reversed the conviction. The majority concluded that while the government proved that Cuellar was attempting to transport drug proceeds across an international border, it failed to prove that the transportation was designed in whole or part to conceal or disguise the nature, location, source, ownership or control of the proceeds. That is, the majority determined that the mere act of secreting the drug proceeds in the hidden compartment was insufficient to prove an intent to conceal or disguise. The court believed that for the statute to make sense, the act of concealing or disguising implies an intent to 'create the appearance of legitimate wealth.'

On rehearing, the Fifth Circuit en banc held that the government had proved intent to conceal in two distinct ways. First, the manner in which the money was wrapped, hidden, and covered with animal hair established the intent to conceal the nature and location of the drug proceeds. Second, the evidence established that Cuellar knew little or nothing about the beneficial owner of the money; therefore, the government proved the intent to conceal the ownership of the proceeds. The opinion of the court rejected the panel decision's statutory gloss of an implied requirement of proof to 'create the appearance of legitimate wealth or the converting of dirty money to clean.' Three judges dissented. In their view, there was a distinction between 'concealing money to transport it and transporting money to conceal it,' and only 'the latter conduct is encompassed by the definition of money laundering which is to make dirty money difficult to trace by concealing its illegality.' As the minority construed the statute, the government is required to prove at trial what the defendant 'planned to do with the money once he reached his destination,' and that there was a 'design to create the appearance of legitimate wealth.'

The Supreme Court took the case to resolve the conflicting interpretations of 'intent to conceal.'

Some History

In enacting ' 1956, Congress was attempting to criminalize the act of money laundering because until passage of this statute it was not a direct federal offense to launder crime proceeds. Before ' 1956, the government prosecuted acts of money laundering either by charging false statements (18 U.S.C. ' 1001) in connection with the filing of monetary instrument reports required under the Bank Secrecy Act or charging that the money launderer caused a domestic financial institution to fail to file or file a false Currency Transaction Report in violation of the Bank Secrecy Act (31 U.S.C. ' 5313, 18 U.S.C. ' 2). Before ' 1956, cross-border money laundering was charged by proving that an individual failed to file or filed a false Currency and Monetary Instruments Report when he crossed the border. This made prosecuting money laundering very cumbersome.

In response to repeated Department of Justice (DOJ) entreaties to outlaw money laundering expressly, Congress passed the Money Laundering Control Act of 1986, which added ' 1956 as one of two new anti-money laundering sections of the criminal code. On behalf of the DOJ, I worked with Congress to help craft the 1986 Act. That experience leads me to believe it was Congress's clear intent to criminalize money laundering as broadly as possible. Congress understood that money launderers plied their trade in very creative ways, and that to endeavor to define precisely all the ways in which money might be laundered would be a fool's errand. Hence, the broad language of the statute.

Although the statute was most frequently used in the years immediately after its enactment to prosecute drug money launderers, the original list of specified unlawful activity ' crimes whose proceeds could be the subject of a money laundering prosecution ' was not limited to drug-related crimes, and the list has since been expanded. Laundering the proceeds of a bribe or of violating the Clean Water Act can be prosecuted as a money laundering offense. So Cuellar's argument to the Supreme Court that Congress meant ' 1956 to target only traditional money laundering (whatever that might mean, Cuellar does not say) goes against the legislative history. Section 1956 was not an anti-drug money laundering statute. Indeed, in recent years, it has been used effectively to prosecute terrorist financiers.

What It Means

It's true that Congress did not define the phrase 'designed in whole or in part ' to conceal or disguise.' When not otherwise defined, statutory terms are to be interpreted in accordance with their ordinary meaning. As Hamlet said, 'Ay, there's the rub.' In my view, there is no 'ordinary' meaning to these words outside of the context of laundering crime proceeds. Put another way, the ordinary understanding of concealing and disguising of the proceeds of crime has always been taught in terms of placement, layering and integration. This three-part definition would appear to imply that what the money launderer did to earn his living, i.e., to transform dirty money into clean money by creating the appearance of legitimate wealth, was what Congress principally intended to outlaw.

Though traditional, this is not the only reasonable construction of the statute. It can be argued that simply removing the proceeds from the geography (especially to take them out of the United States to a country with a less stringent bank regulatory examination system or anti-money laundering legal regime) is an act of 'disguise' contemplated by the statute and well within Congress's intent in enacting ' 1956. Further, it is too much of a stretch to imagine that Congress required federal prosecutors to prove what the defendant 'planned to do with the money once he reached his destination' (as the en banc dissent would require). Likewise, it's difficult to believe that Congress expected prosecutors to divine the intended future acts of a criminal organization. To read this element into the statute would allow money launderers to escape enforcement too easily.

For years, courts have grappled with close cousins of the issue Cuellar presents: whether mere spending of crime proceeds equals money laundering, whether minimal steps to conceal drug proceeds equals concealment, whether the conversion of proceeds to a more liquid form equals money laundering, whether the receipt and deposit of bribe proceeds equals money laundering, etc. The courts of appeals have been fashioning interpretations of the statute based on the facts presented. Often the circuits agree; in a few instances, they are in conflict. The issue of what constitutes concealment is so complicated and closely debated that the Supreme Court received three cert. petitions raising the exact same question just this term alone.

At oral argument in Cuellar, questioning was active. At least three justices (Ginsberg, Breyer, and Stevens) appeared skeptical of the government's argument. There's no telling how the Court will decide. But if the Court reads the statute broadly, the government should prevail, given Cuellar's elaborate efforts to conceal the proceeds before trying to transport it across the international border.

Michael Zeldin ([email protected]), a member of this newsletter's Board of Editors, is the global anti-money laundering/trade sanctions practice leader at Deloitte. He was formerly the Chief of the Money Laundering Section of the U.S. Department of Justice.