'Promoting' Money Laundering

The courts are split as to how broadly to interpret the “promotion” element of ' 1956. A narrow and more business-friendly interpretation holds that promotion requires direct support with the ill-gotten funds. It therefore covers only those who would reinvest tainted funds directly into the illegitimate business. Courts applying a narrow interpretation, for example, typically apply a “legitimate business” safe harbor; that is, provided there is no concealment about source, once the money is deposited into a legitimate business no promotion occurs.

But the broader interpretation is less comforting as it holds that a violation occurs whenever the financial transaction was conducted to ” promote” past activity. Thus, where your client has added value in the form of goods or services to the corrupt business of another and then deposited funds received ' even into its own legitimate business ' a “ promotion” violation may have occurred in the broad-interpretation jurisdictions. The promotion theory is a burgeoning new tool for prosecutors and is likely to further drive legitimate businesses out of developing countries that are perceived by watchdog groups as subject to significant levels of corruption. Whether that is ultimately good policy or not remains to be seen, but for now, manufacturing and service industries of all types must be wary of money-laundering via a promotion theory as an additional prosecutorial threat.

A Five-to-Four Circuit Split

The majority of the federal circuit courts that have addressed the meaning of “promote” in ' 1956 adhere to the narrow interpretation of the word, but the majority is a slim one. Courts that employ a narrow interpretation require prosecutors to adduce evidence that the profits that were the subject of the financial transaction were actually used to further the unlawful activity itself. In such cases, if it is not clear that the money being recycled is used to continue the ongoing unlawful activity, then there is no proof of the defendant's intent to “promote” criminal activity. For example, the Eighth Circuit has held that although the depositing of funds into a bank account, even directly by a wrongdoer, may promote an antecedent unlawful activity by making funds available to that wrongdoer, the prosecution bears the burden of proving that the money was in fact used to further the prospective carrying on of such illegal activity. Similarly, the Fourth, Seventh, Tenth and Eleventh Circuits have rejected a broad interpretation of ' 1956 as inconsistent with congressional intent, reasoning that the statute should not be interpreted to make any illegal financial transaction a money laundering crime. These courts instead read ' 1956 as aimed at the practice of “plowing back,” or reinvesting, the profits of specified unlawful activity to promote that activity. The defendant must intend to use the profits to further the specific underlying crime, rather than merely spend the ill-gotten funds. To interpret ' 1956 more broadly, these courts reason, would turn the money laundering statute into a “money-spending” statute.

In contrast, courts that interpret the term “promote” broadly have held that the prosecution need only show that the financial transaction was conducted to promote past activity, including the very activity that generated the proceeds involved. In such cases, the cashing of a check or distribution of profits obtained through an underlying offense by another “promotes” the preceding unlawful activity by creating value (or additional value) in support of unlawful acts. The Second, Third, Fifth and Ninth Circuits have all found the mere deposit of illegally obtained funds sufficient to sustain a conviction under ' 1956. In one of the earliest cases upholding the broad interpretation of the statute, United States v. Montoya, 945 F.2d 1068 (9th Cir. 1991), the Ninth Circuit affirmed the conviction of California State Senator Joseph B. Montoya for money laundering under ' 1956. Montoya was convicted after depositing a $3000 check that he received from Peach State Capital, which was ostensibly an Alabama shrimp company lobbying for the passage of certain legislation, but was in reality a fictitious FBI front designed to investigate corruption among members of the California legislature. The court found that Montoya promoted the carrying out of the illegal bribery by depositing the check in his personal bank account. Although the literal language of the statute requires an intent to promote the carrying on of unlawful activity, the Ninth Circuit applied ' 1956 to Montoya even though the bribery scheme was completed upon receipt of the check.

Arm's Length!

The key to avoiding any prosecution on a promotion theory is to maintain a truly “arm's-length” relationship with any business in a high-risk country. Those cases where promotion was found indicate that the principal danger is an intimate tie between your client's business and the suspect one. Long-established business relationships give rise to reasonable inferences that a legitimate business entity has a good idea of what's going on in another, suspect one. To be sure, a long business relationship may not be enough to prove that your client knew or even was willfully blind to its partner's nefarious activities, but the inference of promotion becomes stronger where there are exclusivity clauses, secondments, shared resources (marketing for example) or other indications that the business activity is more of a “joint” effort than an arm's-length one. Under the broad interpretation, prosecutors won't have to stretch to prove that your client was willfully blind to what its partner was doing, that your client's activities helped the partner to prosper in those activities and that your client engaged in a prohibited promotional transaction by depositing its partner's payments.

The best defense is to “know-your-customer.” Some anti-money laundering laws, like the Bank Secrecy Act, as amended by the USA Patriot Act, require that financial institutions and other regulated companies perform due diligence and implement procedures to identify their clients prior to conducting financial business with them. Such procedures are advisable, at a minimum, for all business transactions in high-risk areas. In addition to advising your client to undertake due diligence and avoid “joint venture”-type activities with business partners in certain parts of the world, you might recommend other protective measures, including requirements that customers provide standard certifications of non-involvement in illegal activity, and that your client implement effective ethics programs that identify the high-risk regions, industries, customers and products. The cases in which courts have found a financial transaction to have promoted past activity are most often cases in which the defendants were quite close to ' and thus aware of, or even participating in ' the underlying unlawful activity itself. Therefore, companies should develop sophisticated anti-money laundering risk management systems that not only closely account for the sources of funds and their disposition, but also fully integrate such efforts into the company's other compliance and ethics systems that measure and limit exposure to fraud, tax evasion and other forms of criminal activity that may occur in its area of business. In the end, the best defense is to have at the ready a means to show that your client has assessed risks and implemented steps to protect against those risks, thus demonstrating a commitment to ethics and integrity in all its business dealings, in every corner of the world.

Jeffrey T. Green, a member of this newsletter's Board of Editors, is a partner at Sidley Austin LLP in Washington, DC, where he is a member of the Firm's White Collar Practice Area Team.

In the global marketplace, corporate and outside counsel are inundated with information about corruption levels in various countries, all on a generalized, country-specific level. What happens, though, if you learn that your client is regularly doing business with another company that is the subject of dark, though unsubstantiated, rumors of corruption? In addition to other potential charges, could your client also violate the money laundering statute even if it made no effort to conceal any source of funds?

A new theory of “promotion” liability under 18 U.S.C. ' 1956 (a)(1) indicates that the answer may well be “yes.” The plain language of the statute prohibits both transactions designed to conceal illegal activity, as well as transactions utilizing unlawful proceeds undertaken with “the intent to promote the carrying on of specified unlawful activity.” The concealment prong of the statute ' which prohibits hiding and legitimizing ill-gotten funds ' is the offense most often associated with money laundering. But the promotion prong poses additional, unforeseen risks to your client.

Promotion, as one might imagine, is a very broad concept. The dictionary defines “promotion” as “an act contributing to the growth of something or adding to its prosperity.” In the business world, we “promote” one another's activities many times every day. One company's economic report, feasibility study or engineering analysis certainly “promotes” another's business.

The courts are split as to how broadly to interpret the “promotion” element of ' 1956. A narrow and more business-friendly interpretation holds that promotion requires direct support with the ill-gotten funds. It therefore covers only those who would reinvest tainted funds directly into the illegitimate business. Courts applying a narrow interpretation, for example, typically apply a “legitimate business” safe harbor; that is, provided there is no concealment about source, once the money is deposited into a legitimate business no promotion occurs.

But the broader interpretation is less comforting as it holds that a violation occurs whenever the financial transaction was conducted to ” promote” past activity. Thus, where your client has added value in the form of goods or services to the corrupt business of another and then deposited funds received ' even into its own legitimate business ' a “ promotion” violation may have occurred in the broad-interpretation jurisdictions. The promotion theory is a burgeoning new tool for prosecutors and is likely to further drive legitimate businesses out of developing countries that are perceived by watchdog groups as subject to significant levels of corruption. Whether that is ultimately good policy or not remains to be seen, but for now, manufacturing and service industries of all types must be wary of money-laundering via a promotion theory as an additional prosecutorial threat.

A Five-to-Four Circuit Split

The majority of the federal circuit courts that have addressed the meaning of “promote” in ' 1956 adhere to the narrow interpretation of the word, but the majority is a slim one. Courts that employ a narrow interpretation require prosecutors to adduce evidence that the profits that were the subject of the financial transaction were actually used to further the unlawful activity itself. In such cases, if it is not clear that the money being recycled is used to continue the ongoing unlawful activity, then there is no proof of the defendant's intent to “promote” criminal activity. For example, the Eighth Circuit has held that although the depositing of funds into a bank account, even directly by a wrongdoer, may promote an antecedent unlawful activity by making funds available to that wrongdoer, the prosecution bears the burden of proving that the money was in fact used to further the prospective carrying on of such illegal activity. Similarly, the Fourth, Seventh, Tenth and Eleventh Circuits have rejected a broad interpretation of ' 1956 as inconsistent with congressional intent, reasoning that the statute should not be interpreted to make any illegal financial transaction a money laundering crime. These courts instead read ' 1956 as aimed at the practice of “plowing back,” or reinvesting, the profits of specified unlawful activity to promote that activity. The defendant must intend to use the profits to further the specific underlying crime, rather than merely spend the ill-gotten funds. To interpret ' 1956 more broadly, these courts reason, would turn the money laundering statute into a “money-spending” statute.

In contrast, courts that interpret the term “promote” broadly have held that the prosecution need only show that the financial transaction was conducted to promote past activity, including the very activity that generated the proceeds involved. In such cases, the cashing of a check or distribution of profits obtained through an underlying offense by another “promotes” the preceding unlawful activity by creating value (or additional value) in support of unlawful acts. The Second, Third, Fifth and Ninth Circuits have all found the mere deposit of illegally obtained funds sufficient to sustain a conviction under ' 1956. In one of the earliest cases upholding the broad interpretation of the statute, United States v. Montoya , 945 F.2d 1068 (9th Cir. 1991), the Ninth Circuit affirmed the conviction of California State Senator Joseph B. Montoya for money laundering under ' 1956. Montoya was convicted after depositing a $3000 check that he received from Peach State Capital, which was ostensibly an Alabama shrimp company lobbying for the passage of certain legislation, but was in reality a fictitious FBI front designed to investigate corruption among members of the California legislature. The court found that Montoya promoted the carrying out of the illegal bribery by depositing the check in his personal bank account. Although the literal language of the statute requires an intent to promote the carrying on of unlawful activity, the Ninth Circuit applied ' 1956 to Montoya even though the bribery scheme was completed upon receipt of the check.

Arm's Length!

The key to avoiding any prosecution on a promotion theory is to maintain a truly “arm's-length” relationship with any business in a high-risk country. Those cases where promotion was found indicate that the principal danger is an intimate tie between your client's business and the suspect one. Long-established business relationships give rise to reasonable inferences that a legitimate business entity has a good idea of what's going on in another, suspect one. To be sure, a long business relationship may not be enough to prove that your client knew or even was willfully blind to its partner's nefarious activities, but the inference of promotion becomes stronger where there are exclusivity clauses, secondments, shared resources (marketing for example) or other indications that the business activity is more of a “joint” effort than an arm's-length one. Under the broad interpretation, prosecutors won't have to stretch to prove that your client was willfully blind to what its partner was doing, that your client's activities helped the partner to prosper in those activities and that your client engaged in a prohibited promotional transaction by depositing its partner's payments.

The best defense is to “know-your-customer.” Some anti-money laundering laws, like the Bank Secrecy Act, as amended by the USA Patriot Act, require that financial institutions and other regulated companies perform due diligence and implement procedures to identify their clients prior to conducting financial business with them. Such procedures are advisable, at a minimum, for all business transactions in high-risk areas. In addition to advising your client to undertake due diligence and avoid “joint venture”-type activities with business partners in certain parts of the world, you might recommend other protective measures, including requirements that customers provide standard certifications of non-involvement in illegal activity, and that your client implement effective ethics programs that identify the high-risk regions, industries, customers and products. The cases in which courts have found a financial transaction to have promoted past activity are most often cases in which the defendants were quite close to ' and thus aware of, or even participating in ' the underlying unlawful activity itself. Therefore, companies should develop sophisticated anti-money laundering risk management systems that not only closely account for the sources of funds and their disposition, but also fully integrate such efforts into the company's other compliance and ethics systems that measure and limit exposure to fraud, tax evasion and other forms of criminal activity that may occur in its area of business. In the end, the best defense is to have at the ready a means to show that your client has assessed risks and implemented steps to protect against those risks, thus demonstrating a commitment to ethics and integrity in all its business dealings, in every corner of the world.

Jeffrey T. Green, a member of this newsletter's Board of Editors, is a partner at Sidley Austin LLP in Washington, DC, where he is a member of the Firm's White Collar Practice Area Team.