Money-Laundering Statutes May Implicate the Innocent

Although this may seem straightforward, the issues become murkier when the line between the criminal proceeds, the charged financial transactions and the specified unlawful activity being promoted starts to blur. For example, in United States v. Montoya, 945 F.2d 1068 (1991), the Ninth Circuit upheld a money-laundering conviction where the defendant deposited a check he had received as a bribe. The defendant argued that depositing the check could not have “promoted” the bribe, because the bribe was complete upon receipt of the check. The Ninth Circuit disagreed, because the defendant “could not have made use of the funds without depositing the check,” and depositing the check gave the defendant the opportunity to “carry out” the bribe. Under that analysis, it is very difficult to ascertain the distinction between the initial specified unlawful activity and the transaction that promotes further criminal activity. Put another way, where a bribe (the specified unlawful activity) is paid by check (the proceeds), it is hardly obvious that the mere deposit of the already-received bribe is intended to promote that same bribe. Although some courts have declined to follow Montoya, given the Ninth Circuit's analysis, it is difficult to imagine any monetary crime that a federal prosecutor could not style as promotion money laundering.

Concealment money laundering refers to conducting financial transactions involving the proceeds of specified unlawful activity while “knowing that the transaction is designed in whole or in part ' (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity.” Section 1956(a)(1)(B)(i). It is well established that “designed” means “having as its purpose,” and the statute plainly requires that a defendant know that the property involved in the financial transaction is the proceeds of a crime. Thus, it appears that the statute's reach is limited to transactions specifically intended to conceal certain attributes of criminal proceeds.

In practice, however, the issue is more complicated. For example, a particular defendant need not personally intend to conceal one of the specified attributes, as long as the purpose of the transaction was to conceal that attribute. A related complication is that one person's conduct can be used to establish another person's knowledge. For example, a prosecutor may argue that where one person made a misleading or false statement related to a financial transaction, that false statement is evidence that another person who was involved with part or all of the transaction knew that it was designed to conceal an attribute of the funds involved. The merit of that position would be highly fact-dependent.

Moreover, evidence that a transaction is designed to conceal can take a variety of forms: Use of a complex transaction structure, use of a “shell” corporation, use of third parties or use of foreign bank accounts have all been found sufficient proof that a transaction was designed to conceal. The implications for businesses that routinely engage in complex financial transactions are ominous: Viewed through the eyes of a zealous prosecutor who may have become aware of unsavory conduct, a transaction that may have the effect of concealing an attribute of the funds (like one involving multiple layers of shell corporations), may suddenly look like it was designed to conceal those attributes even when its purpose was entirely innocuous. Many transactions will, particularly with the benefit of hindsight, have the effect of concealing attributes of the money. Although that effect is analytically distinct from proof that these transactions were designed to conceal, in the midst of an investigation of other criminal conduct, putative defendants may find themselves battling a presumption that byzantine financial transactions must have been designed to conceal.

Particularly in combination, these principles have the practical effect of expanding the scope of criminal investigations, because financial transactions can be linked to a multitude of other transactions and conduct, so that a discrete episode of questionable conduct can mushroom and envelope numerous other events and individuals. Because the outer boundaries are not clearly delineated, and each case is highly dependent on its particular facts, it is difficult to predict how far money laundering can stretch from the core underlying crime.

Third Circuit Interprets the Law

A recent Third Circuit decision, United States v. Richardson, 658 F.3d 333 (3rd Cir. 2011), puts these principles into sharp focus. In Richardson, the court vacated a money-laundering conviction and remanded for entry of a judgment of acquittal, because the evidence was insufficient to establish that the defendant knew that the transactions were “designed to conceal.” Although there was
evidence that the defendant participated in transactions that were designed to conceal, the court concluded there was inadequate proof that the defendant knew those financial transactions were designed to conceal. The court's analysis is interesting, because it evinces close attention to the nuances of the statute and eschews theories blurring the distinction between knowledge of intent to conceal and an effect of concealment.

In Richardson, the government alleged that the defendant and her fianc' (a leader of a drug organization) committed concealment money laundering when they used money received from his drug business to purchase a home in the defendant's name. On appeal, she argued that even if she knew drug money was used to purchase her home, there was insufficient evidence of her knowledge that the charged financial transactions were designed to conceal. In response, the government pointed to: 1) cash deposited by the defendant's fianc' into his legitimate business account which were then transferred to his individual checking account (and ultimately put toward the down payment); 2) a series of structured cash deposits made by the defendant and her fianc' into different accounts at different times on the day of the settlement; and 3) the defendant's false statement on a mortgage application about her income, and the omission of her fianc' from the title even though he was the “de-facto” owner.

At first blush, the government's evidence seemed compelling. As the court observed, funneling cash through an ostensibly legitimate business is classic money laundering. But the court noted the lack of evidence that the defendant knew about that particular aspect of the transaction. Rather than inferring knowledge based on her close relationship with her fianc', or her participation in other transactions, the court cabined the evidence of laundering money through the legitimate business as not relevant to the defendant.

Next, the court noted that the structured cash deposits were also classic hallmarks of money laundering, describing five cash deposits, each barely under $10,000, at four different bank locations on the same day as “powerful evidence” of concealment. Yet, it found that the defendant could not be tagged with knowledge of intent to conceal based on that series of structured deposits because she herself made only one of them. The court declined to infer that the defendant knew about the pattern of structured deposits from the totality of the evidence, including her own participation in one deposit just under the $10,000 reporting limit and her false statement discussed below.

Even the defendant's blatant lie about her income on her mortgage application ' which the government argued showed her knowledge that the transaction was designed to conceal the source and ownership of the purchase money ' was deemed insufficient. The court concluded that the only reasonable conclusion a jury could have reached, based on all of the evidence at trial, was that the defendant lied about her income and titled the property in her name simply because her fianc' had bad credit, not because of any intent to hide his involvement (which the court found had been made obvious during the course of the home purchase process). In light of that alternative explanation, the court gave no weight to the lie as proof of the defendant's knowledge.

Conclusion

Richardson was a classic example of prosecutors using the money-laundering statute to loop into a case a defendant who was not involved in the underlying criminal activity at issue. What is interesting about the Richardson case is the court's willingness to consider the pieces of evidence of the defendant's knowledge separately, and independently, of her fianc's knowledge, and it serves to highlight arguments that can be made by defendants.

In many other money-laundering cases, as discussed above, the proof of transactions that had the effect of concealing the source of money (as the transactions in Richardson surely did), or proof that one conspirator clearly intended transactions in which another participated to conceal aspects of the money, frequently has had a spillover effect and been deemed sufficient to convict an outlying (and perhaps unwitting) participant in the scheme. The Richardson case, then, may often be cited in the future to limit the extent to which additional defendants and transactions can be entwined in an investigation or prosecution via the money-laundering statute.

The prospect of a federal money-laundering charge being added to offenses under investigation has serious implications. It can mean exposure to heightened penalties. It can also extend the statute of limitations where it involves conduct occurring later than the substantive offense primarily under investigation. Additionally, money-laundering charges can expand the scope of a conspiracy, by sweeping in conduct involving financial transactions performed by other individuals or far removed from the core conduct at issue. For all of these reasons, the reach of the money laundering statutes is significant.

Two Types of Money-Laundering Charges

Section 1956 of Title 18 prohibits two kinds of money laundering, often referred to as “promotion” and “concealment.” Promotion money laundering refers to conducting financial transactions involving criminal proceeds “with the intent to promote the carrying on of specified unlawful activity.” 18 U.S.C. ' 1956(a)(1)(A)(i), (2)(A), 3(A). The classic case of promotion money laundering is familiar: A defendant takes the proceeds of “specified unlawful activity” (defined to include a host of crimes) and plows it back into additional specified unlawful activity.

Although this may seem straightforward, the issues become murkier when the line between the criminal proceeds, the charged financial transactions and the specified unlawful activity being promoted starts to blur. For example, in United States v. Montoya , 945 F.2d 1068 (1991), the Ninth Circuit upheld a money-laundering conviction where the defendant deposited a check he had received as a bribe. The defendant argued that depositing the check could not have “promoted” the bribe, because the bribe was complete upon receipt of the check. The Ninth Circuit disagreed, because the defendant “could not have made use of the funds without depositing the check,” and depositing the check gave the defendant the opportunity to “carry out” the bribe. Under that analysis, it is very difficult to ascertain the distinction between the initial specified unlawful activity and the transaction that promotes further criminal activity. Put another way, where a bribe (the specified unlawful activity) is paid by check (the proceeds), it is hardly obvious that the mere deposit of the already-received bribe is intended to promote that same bribe. Although some courts have declined to follow Montoya, given the Ninth Circuit's analysis, it is difficult to imagine any monetary crime that a federal prosecutor could not style as promotion money laundering.

Concealment money laundering refers to conducting financial transactions involving the proceeds of specified unlawful activity while “knowing that the transaction is designed in whole or in part ' (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity.” Section 1956(a)(1)(B)(i). It is well established that “designed” means “having as its purpose,” and the statute plainly requires that a defendant know that the property involved in the financial transaction is the proceeds of a crime. Thus, it appears that the statute's reach is limited to transactions specifically intended to conceal certain attributes of criminal proceeds.

In practice, however, the issue is more complicated. For example, a particular defendant need not personally intend to conceal one of the specified attributes, as long as the purpose of the transaction was to conceal that attribute. A related complication is that one person's conduct can be used to establish another person's knowledge. For example, a prosecutor may argue that where one person made a misleading or false statement related to a financial transaction, that false statement is evidence that another person who was involved with part or all of the transaction knew that it was designed to conceal an attribute of the funds involved. The merit of that position would be highly fact-dependent.

Moreover, evidence that a transaction is designed to conceal can take a variety of forms: Use of a complex transaction structure, use of a “shell” corporation, use of third parties or use of foreign bank accounts have all been found sufficient proof that a transaction was designed to conceal. The implications for businesses that routinely engage in complex financial transactions are ominous: Viewed through the eyes of a zealous prosecutor who may have become aware of unsavory conduct, a transaction that may have the effect of concealing an attribute of the funds (like one involving multiple layers of shell corporations), may suddenly look like it was designed to conceal those attributes even when its purpose was entirely innocuous. Many transactions will, particularly with the benefit of hindsight, have the effect of concealing attributes of the money. Although that effect is analytically distinct from proof that these transactions were designed to conceal, in the midst of an investigation of other criminal conduct, putative defendants may find themselves battling a presumption that byzantine financial transactions must have been designed to conceal.

Particularly in combination, these principles have the practical effect of expanding the scope of criminal investigations, because financial transactions can be linked to a multitude of other transactions and conduct, so that a discrete episode of questionable conduct can mushroom and envelope numerous other events and individuals. Because the outer boundaries are not clearly delineated, and each case is highly dependent on its particular facts, it is difficult to predict how far money laundering can stretch from the core underlying crime.

Third Circuit Interprets the Law

A recent Third Circuit decision, United States v. Richardson , 658 F.3d 333 (3rd Cir. 2011), puts these principles into sharp focus. In Richardson, the court vacated a money-laundering conviction and remanded for entry of a judgment of acquittal, because the evidence was insufficient to establish that the defendant knew that the transactions were “designed to conceal.” Although there was
evidence that the defendant participated in transactions that were designed to conceal, the court concluded there was inadequate proof that the defendant knew those financial transactions were designed to conceal. The court's analysis is interesting, because it evinces close attention to the nuances of the statute and eschews theories blurring the distinction between knowledge of intent to conceal and an effect of concealment.

In Richardson, the government alleged that the defendant and her fianc' (a leader of a drug organization) committed concealment money laundering when they used money received from his drug business to purchase a home in the defendant's name. On appeal, she argued that even if she knew drug money was used to purchase her home, there was insufficient evidence of her knowledge that the charged financial transactions were designed to conceal. In response, the government pointed to: 1) cash deposited by the defendant's fianc' into his legitimate business account which were then transferred to his individual checking account (and ultimately put toward the down payment); 2) a series of structured cash deposits made by the defendant and her fianc' into different accounts at different times on the day of the settlement; and 3) the defendant's false statement on a mortgage application about her income, and the omission of her fianc' from the title even though he was the “de-facto” owner.

At first blush, the government's evidence seemed compelling. As the court observed, funneling cash through an ostensibly legitimate business is classic money laundering. But the court noted the lack of evidence that the defendant knew about that particular aspect of the transaction. Rather than inferring knowledge based on her close relationship with her fianc', or her participation in other transactions, the court cabined the evidence of laundering money through the legitimate business as not relevant to the defendant.

Next, the court noted that the structured cash deposits were also classic hallmarks of money laundering, describing five cash deposits, each barely under $10,000, at four different bank locations on the same day as “powerful evidence” of concealment. Yet, it found that the defendant could not be tagged with knowledge of intent to conceal based on that series of structured deposits because she herself made only one of them. The court declined to infer that the defendant knew about the pattern of structured deposits from the totality of the evidence, including her own participation in one deposit just under the $10,000 reporting limit and her false statement discussed below.

Even the defendant's blatant lie about her income on her mortgage application ' which the government argued showed her knowledge that the transaction was designed to conceal the source and ownership of the purchase money ' was deemed insufficient. The court concluded that the only reasonable conclusion a jury could have reached, based on all of the evidence at trial, was that the defendant lied about her income and titled the property in her name simply because her fianc' had bad credit, not because of any intent to hide his involvement (which the court found had been made obvious during the course of the home purchase process). In light of that alternative explanation, the court gave no weight to the lie as proof of the defendant's knowledge.

Conclusion

Richardson was a classic example of prosecutors using the money-laundering statute to loop into a case a defendant who was not involved in the underlying criminal activity at issue. What is interesting about the Richardson case is the court's willingness to consider the pieces of evidence of the defendant's knowledge separately, and independently, of her fianc's knowledge, and it serves to highlight arguments that can be made by defendants.

In many other money-laundering cases, as discussed above, the proof of transactions that had the effect of concealing the source of money (as the transactions in Richardson surely did), or proof that one conspirator clearly intended transactions in which another participated to conceal aspects of the money, frequently has had a spillover effect and been deemed sufficient to convict an outlying (and perhaps unwitting) participant in the scheme. The Richardson case, then, may often be cited in the future to limit the extent to which additional defendants and transactions can be entwined in an investigation or prosecution via the money-laundering statute.