The Money Laundering Hammer

Until Santos, only the Seventh Circuit had interpreted “proceeds” as net profit. All other federal circuits addressing the issue refer expansively to gross receipts. Accordingly, most federal prosecutors and investigating agents are not accustomed to establishing net profit as a factual matter for the purposes of money laundering prosecutions and, importantly, will not have done so within completed prosecutions. Also, prosecutors are likely to re-examine the wisdom of piling money laundering charges ' which now require them to “audit” underlying schemes for evidence of (sometimes lacking) net profit ' onto fraud cases that rest primarily on the losses suffered by the victims.

The Court's Reasoning

The plurality opinion seems to pose a significant burden on the government. The plurality focused on the “merger” problem: the untenable result that any financial transaction representing a normal step in the commission of the SUA also would be punishable as the additional crime of money laundering. Per the plurality, the mere payment for the costs of a crime with its proceeds ' such as payment for a getaway car, or the distribution of shares to confederates ' does not alone constitute money laundering under the “promotion” prong, because “[d]efraying an activity's costs with its receipts simply will not be covered.”

The plurality similarly found that a co-defendant's receipt of employee payments could not “fairly be characterized as involving the lottery's profits.” Thus, Santos can be interpreted as holding not only that the government must show that the charged financial transaction involved scheme profits, but also that the transaction itself was not a traditional “cost of business.” Put another way, an expense of even a profitable scheme cannot, by definition, represent profit. This burden will be a challenge for the government, which has a history of charging “promotion” transactions based on the payment of necessary SUA expenses.

The concurring opinion of Justice Stevens ' the fifth vote needed to vacate Santos' conviction ' further muddies the waters. For Justice Stevens, the term “proceeds” in ' 1956 presents different meanings according to the SUA charged. Justice Stevens concluded that Congress intended “proceeds” to be expansive and mean gross receipts in cases involving the sale of contraband or organized crime, but that in cases presenting the “merger” problem or the possibility that the money laundering sentence would eclipse the SUA sentence, “proceeds” means only net profits. Over 250 different crimes serve as potential SUAs. How lower federal courts will apply Santos in ' 1956 cases remains to be seen.

Evidentiary Issues for the Government

Proving net profit will be a fact-intensive task, turning on the timing and nature of the charged financial transaction. The more esoteric and complex the underlying SUA ' the sorts of cases in which the government would most likely be obligated to prove net profits even according to Justice Stevens ' the harder it will be to establish net profit. Moreover, even if the government can prove that a transaction involved net profit, it still must prove that the defendant subjectively knew of that profit. Again, the difficulty of establishing knowledge of actual net profits generally will increase as the complexity of the scheme increases.

The burdens facing the government will rise or fall upon the breadth and organization of the scheme, any record keeping, the financial sophistication of the defendant, and the defendant's degree of involvement in and general awareness of the scheme. If the objective existence of net profit is hard to show, proving subjective knowledge of such profit will be harder still. These practical difficulties may lead prosecutors to forego some money laundering charges.

Options for the Defense

Any defendant facing trial on ' 1956 or ' 1957 charges must consider raising the net profit requirement in pretrial motions and requests for jury instructions.

For a defendant convicted at trial and awaiting sentencing, Santos represents a potential sufficiency-of-the-evidence issue under Federal Rule of Criminal Procedure 29 and/or a new trial issue under Rule 33 (arguing that the jury never was instructed on need to find net profit).

Santos did not interpret the federal Sentencing Guidelines, but the money laundering Guideline is driven by the “value of the laundered funds,” and defines “laundered funds” as “the property, funds, or monetary instrument involved in the ' financial transaction ' ” If the property involved in a money laundering transaction can involve only profits, then arguably the base offense level will drop in relevant cases. See U.S.S.G. ' 2S1.1(a)(2).

After sentencing and appeal, a defendant still may invoke Santos by collateral attack under 28 U.S.C. ' 2255, seeking ” ' the benefit of decisions which give the federal criminal statute under which they were convicted a more narrow reading than had previously been applied at the time of their conviction.” United States v. Santos, 342 F.Supp. 2d 781, 797 (N.D. Ind. 2004); see Bousley v. United States, 523 U.S. 614, 618-21 (1998). If a trial included no evidence of net profits, then a convicted defendant still may claim in a timely ' 2255 petition that he is “actually innocent” of the crime of money laundering ' that is, that the conduct at issue simply did not constitute a defined crime.

Even if a defendant pleaded guilty, he may still benefit from Santos. A guilty plea based on conduct erroneously believed to constitute a crime is not a knowing or intelligent plea; any procedural default in not previously attacking a guilty plea can be overcome through a claim of actual innocence. The thrust of the ' 2255 petition ' that money laundering was not committed because the transaction did not involve net profit ' can satisfy both the substantive and procedural requirements of ' 2255. Bousley, 523 U.S. at 618-19, 623-24. United States v. Garth, 188 F.3d 99, 105-110, 114 (3d Cir. 1999), outlines the process under Bousley for collaterally attacking guilty plea, on basis of actual innocence, to crime subsequently narrowed by court opinions. (Note, however, that the government may introduce additional evidence of guilt to disprove actual innocence in an evidentiary hearing on the ' 2255 petition.)

Clearly, a defendant still in the process of appealing his conviction should consider invoking Santos under Rules 29 and 33, even if a failure to have raised the issue at trial may result in plain-error review. For the reasons already discussed, cases involving little or no evidence of net profit are excellent candidates for findings of plain error, if not outright vacations of the convictions.

Conclusion

The immediate impact of Santos is that many money laundering prosecutions will now be more difficult to prove, and many established convictions may be vulnerable on direct appeal and collateral attack. Although the Santos plurality and concurring opinions create legal and practical issues which will be resolved only over time, the net profits requirement is now a critical issue in any ' 1956 or ' 1957 case, whether ongoing, completed, or contemplated. Even if Congress were to amend ' 1956 in reaction to Santos, the effects of the decision would still apply to all conduct committed up until the date of any statutory amendment.

Peter D. Hardy ([email protected]) is a partner at the Philadelphia-based law firm of Post & Schell, P.C., in its national White Collar Defense, Compliance and Risk Management Group. He was previously an Assistant United States Attorney in the Eastern District of Pennsylvania and trial lawyer for the Department of Justice's Tax Division.

The federal government has wielded the money laundering statutes, 18 U.S.C. ” 1956 and 1957, to great effect in various cases due to their breathtaking sweep, jury appeal, and severe sentencing enhancement under the federal Sentencing Guidelines. The Supreme Court's recent ruling in United States v. Santos , 128 S.Ct. 2020 (June 2, 2008), may undermine the feds' use of this weapon, particularly in cases in which the profit to the defendant from any given transaction is unclear. Although Santos raises many legal and practical issues to be litigated over time, an immediately compelling aspect is that it creates opportunities for defendants already convicted and sentenced under ' 1956, including those who have exhausted their appeals.

The Santos Opinion

Efrain Santos collaterally attacked his money laundering conviction under the “promotion” prong of ' 1956, which prohibits financial transactions that “promote” a specified unlawful activity (SUA). To prove ' 1956 or ' 1957 charges, the government must show that the charged transaction involved the “proceeds” of an SUA, and that the defendant knew that the property involved in the transaction represents such “proceeds.” In Santos, the SUA was running an illegal lottery. The charged financial transactions included Santos' payments to employees, runners, winners, and collectors. A four-vote plurality opinion penned by Justice Scalia found that, as a matter of statutory interpretation and employing the rule of lenity, “proceeds” under ' 1956(a)(1) refers only to the net profits of criminal activity, not gross receipts. “What counts is whether the receipts from the charged unlawful act exceeded the costs fairly attributable to it.” Because there was no evidence at trial that the charged transactions could be traced to profits of the illegal lottery, the Court affirmed the decision below vacating the convictions.

Until Santos, only the Seventh Circuit had interpreted “proceeds” as net profit. All other federal circuits addressing the issue refer expansively to gross receipts. Accordingly, most federal prosecutors and investigating agents are not accustomed to establishing net profit as a factual matter for the purposes of money laundering prosecutions and, importantly, will not have done so within completed prosecutions. Also, prosecutors are likely to re-examine the wisdom of piling money laundering charges ' which now require them to “audit” underlying schemes for evidence of (sometimes lacking) net profit ' onto fraud cases that rest primarily on the losses suffered by the victims.

The Court's Reasoning

The plurality opinion seems to pose a significant burden on the government. The plurality focused on the “merger” problem: the untenable result that any financial transaction representing a normal step in the commission of the SUA also would be punishable as the additional crime of money laundering. Per the plurality, the mere payment for the costs of a crime with its proceeds ' such as payment for a getaway car, or the distribution of shares to confederates ' does not alone constitute money laundering under the “promotion” prong, because “[d]efraying an activity's costs with its receipts simply will not be covered.”

The plurality similarly found that a co-defendant's receipt of employee payments could not “fairly be characterized as involving the lottery's profits.” Thus, Santos can be interpreted as holding not only that the government must show that the charged financial transaction involved scheme profits, but also that the transaction itself was not a traditional “cost of business.” Put another way, an expense of even a profitable scheme cannot, by definition, represent profit. This burden will be a challenge for the government, which has a history of charging “promotion” transactions based on the payment of necessary SUA expenses.

The concurring opinion of Justice Stevens ' the fifth vote needed to vacate Santos' conviction ' further muddies the waters. For Justice Stevens, the term “proceeds” in ' 1956 presents different meanings according to the SUA charged. Justice Stevens concluded that Congress intended “proceeds” to be expansive and mean gross receipts in cases involving the sale of contraband or organized crime, but that in cases presenting the “merger” problem or the possibility that the money laundering sentence would eclipse the SUA sentence, “proceeds” means only net profits. Over 250 different crimes serve as potential SUAs. How lower federal courts will apply Santos in ' 1956 cases remains to be seen.

Evidentiary Issues for the Government

Proving net profit will be a fact-intensive task, turning on the timing and nature of the charged financial transaction. The more esoteric and complex the underlying SUA ' the sorts of cases in which the government would most likely be obligated to prove net profits even according to Justice Stevens ' the harder it will be to establish net profit. Moreover, even if the government can prove that a transaction involved net profit, it still must prove that the defendant subjectively knew of that profit. Again, the difficulty of establishing knowledge of actual net profits generally will increase as the complexity of the scheme increases.

The burdens facing the government will rise or fall upon the breadth and organization of the scheme, any record keeping, the financial sophistication of the defendant, and the defendant's degree of involvement in and general awareness of the scheme. If the objective existence of net profit is hard to show, proving subjective knowledge of such profit will be harder still. These practical difficulties may lead prosecutors to forego some money laundering charges.

Options for the Defense

Any defendant facing trial on ' 1956 or ' 1957 charges must consider raising the net profit requirement in pretrial motions and requests for jury instructions.

For a defendant convicted at trial and awaiting sentencing, Santos represents a potential sufficiency-of-the-evidence issue under Federal Rule of Criminal Procedure 29 and/or a new trial issue under Rule 33 (arguing that the jury never was instructed on need to find net profit).

Santos did not interpret the federal Sentencing Guidelines, but the money laundering Guideline is driven by the “value of the laundered funds,” and defines “laundered funds” as “the property, funds, or monetary instrument involved in the ' financial transaction ' ” If the property involved in a money laundering transaction can involve only profits, then arguably the base offense level will drop in relevant cases. See U.S.S.G. ' 2S1.1(a)(2).

After sentencing and appeal, a defendant still may invoke Santos by collateral attack under 28 U.S.C. ' 2255, seeking ” ' the benefit of decisions which give the federal criminal statute under which they were convicted a more narrow reading than had previously been applied at the time of their conviction.” United States v. Santos, 342 F.Supp. 2d 781, 797 (N.D. Ind. 2004); s ee Bousley v. United States , 523 U.S. 614, 618-21 (1998). If a trial included no evidence of net profits, then a convicted defendant still may claim in a timely ' 2255 petition that he is “actually innocent” of the crime of money laundering ' that is, that the conduct at issue simply did not constitute a defined crime.

Even if a defendant pleaded guilty, he may still benefit from Santos. A guilty plea based on conduct erroneously believed to constitute a crime is not a knowing or intelligent plea; any procedural default in not previously attacking a guilty plea can be overcome through a claim of actual innocence. The thrust of the ' 2255 petition ' that money laundering was not committed because the transaction did not involve net profit ' can satisfy both the substantive and procedural requirements of ' 2255. Bousley, 523 U.S. at 618-19, 623-24. United States v. Garth , 188 F.3d 99, 105-110, 114 (3d Cir. 1999), outlines the process under Bousley for collaterally attacking guilty plea, on basis of actual innocence, to crime subsequently narrowed by court opinions. (Note, however, that the government may introduce additional evidence of guilt to disprove actual innocence in an evidentiary hearing on the ' 2255 petition.)

Clearly, a defendant still in the process of appealing his conviction should consider invoking Santos under Rules 29 and 33, even if a failure to have raised the issue at trial may result in plain-error review. For the reasons already discussed, cases involving little or no evidence of net profit are excellent candidates for findings of plain error, if not outright vacations of the convictions.

Conclusion

The immediate impact of Santos is that many money laundering prosecutions will now be more difficult to prove, and many established convictions may be vulnerable on direct appeal and collateral attack. Although the Santos plurality and concurring opinions create legal and practical issues which will be resolved only over time, the net profits requirement is now a critical issue in any ' 1956 or ' 1957 case, whether ongoing, completed, or contemplated. Even if Congress were to amend ' 1956 in reaction to Santos, the effects of the decision would still apply to all conduct committed up until the date of any statutory amendment.

Peter D. Hardy ([email protected]) is a partner at the Philadelphia-based law firm of Post & Schell, P.C., in its national White Collar Defense, Compliance and Risk Management Group. He was previously an Assistant United States Attorney in the Eastern District of Pennsylvania and trial lawyer for the Department of Justice's Tax Division.