Oral argument: Oct. 3, 2007
Appealed from: United States Court of Appeals, Seventh Circuit (Aug. 25, 2006)
MONEY LAUNDERING, ILLEGAL GAMBLING, FEDERAL MONEY LAUNDERING STATUTE, FEDERAL SENTENCING GUIDELINES
Efrain Santos was convicted in Indiana federal court of running an illegal gambling business and money laundering. He presented a collateral attack against his conviction following the Seventh Circuit’s decision in another case, where it held that to prove money laundering, the government is required to show that profits from the underlying illegal activity were used to further promote or conceal that activity. Because Santos’s conviction was based on evidence that he used gross receipts, not profits, to promote his gambling ring, the District Court overturned his money laundering conviction. The Seventh Circuit upheld that decision, and the government appealed, contending that to secure a conviction it is only required to prove that gross receipts are used in a money laundering scheme. The government argues that statutory interpretation and practical enforcement considerations mandate a reading that “proceeds” means gross receipts, and Santos responds that in light of the fact that “proceeds” is not defined within the statute, the rule of lenity requires the Court to uphold the Seventh Circuit’s more restrictive reading of the term as profits. The outcome of this case will affect money laundering prosecutions tied to a wide variety of illegal activities and will affect the government’s burden in proving the elements of this charge.
The principal federal money laundering statute, 18 U.S.C. 1956(a)(1), makes it a crime to engage in a financial transaction using the “proceeds” or certain specified unlawful activities with the intent to promote those activities or to conceal the proceeds. The question presented is whether “proceeds” means the gross receipts from the unlawful activities or only the profits, i.e., gross receipts less expenses.
Whether the undefined term “proceeds” as found in the federal money laundering statute, 18 U.S.C. § 1956(a)(1), means the gross receipts obtained from illegal activities or only the profits, i.e., the gross receipts less expenses.
In this case, the Supreme Court will address the disagreement between the United States government and Efrain Santos and Benedicto Diaz, who were prosecuted for money laundering a decade ago. The dispute involves whether the government rightfully secured their convictions using evidence of the gross receipts they earned from illegal activity. Efrain Santos operated an illegal gambling ring, or bolita, in East Chicago, Indiana from the 1970’s until his arrest by the FBI in 1994. United States v. Santos, 342 F. Supp. 2d 781, 784 (N.D. Ind. 2004). His runners accepted bets for him in bars and restaurants, taking a commission of 15 - 25%, and salaried collectors, including Benedicto Diaz, delivered betting slips and bet money to Santos. Id.; Brief for the United States on Writ of Cert. to U.S. Ct. of Appeals for the Seventh Circuit in United States v. Santos and Diaz at 2 (“Brief for U.S.”). In 1997 Santos and Diaz were both convicted in federal court of conspiracy to conduct an illegal gambling business and money laundering to promote an illegal gambling business. Santos was sentenced to a total of 210 months, Diaz to 108. United States v. Santos, 342 F.Supp.2d at 785; Brief for U.S. at 2. Both defendants appealed unsuccessfully on the merits. United States v. Febus, 218 F.3d 784, 790-791 (7th Cir. 2000).
In 2001, both defendants filed a post-conviction collateral attack, requesting that the District Court vacate, set aside, or correct their sentences pursuant to the federal habeas corpus statute (28 U.S.C. § 2255). Santos, 342 F. Supp. 2d at 786. While the case was pending, the Seventh Circuit issued a decision in a similar gambling case, United States v. Scialabba, which addressed in great detail the meaning of the money laundering statute under which Santos was convicted. See 282 F.3d 475 (7th Cir. 2002). The statute imposes federal sanctions on criminals who use money that is the “proceeds” of unlawful activity to further carry on the unlawful activity. 18 U.S.C. § 1956(a)(1)(A)(i). In Scialabba, the Seventh Circuit held that the definition of “proceeds” under § 1956 could not be broadly construed to constitute all receipts, or gross income, from illegal activity. See Scialabba, 282 F.3d 475. The court reasoned that public policy and the rule of lenity favored the adoption of a narrower construction of “proceeds,”—as net income, or profits—in order to prevent the imposition of multiple convictions for the same illegal transaction. See Id. at 477-478.
Santos’s conviction in the District Court had been based on his use of “proceeds” to pay employees and winners, with proceeds defined as gross income from the gambling ring. In his subsequent collateral attack, the District Court decided that he was entitled to the Scialabba definition of “proceeds” as net income and vacated his conviction. Santos, 342 F. Supp. 2d at 798 - 99. The United States appealed, noting that the Scialabba definition of proceeds conflicted with other Circuits, but the Seventh Circuit affirmed the decision in favor of Santos. See Santos and Diaz v. United States, 461 F.3d 886 (7th Cir. 2006). The Supreme Court granted cert to address the issue of whether proceeds as used in 18 U.S.C. § 1956(a)(1) means the gross receipts or the only the profits derived from illegal activity.
At the heart of this case is the meaning of the word “proceeds” in the federal money laundering statute, section 1956 of the U.S. criminal code. The definition of the word does not appear anywhere within the statute itself, and the Supreme Court, which has addressed many other statutory constructions regarding money laundering, has never addressed the meaning of “proceeds.”
In order to fully appreciate the extensive reach the Court’s decision will have, it is vital to recognize that money laundering is an essential aspect of various kinds of illegal activity both in this country and internationally. As described in a UN report on world wide drugs and by analysts at the U.S. State Department, money laundering itself is the process through which “dirty money,” or cash obtained from illegal activities like drug trafficking, gun smuggling, securities fraud and gambling is made to look as if it is derived from a legitimate source so that it can become part of the economy. In order for this to happen, the illegally obtained money must be placed into accounts where its origin is concealed, so that it can be used for other purposes without leading law enforcement to the original source.
One of the government’s main public policy arguments in support of its position that “proceeds” in the money laundering statute should be construed to mean gross receipts instead of net profits is that the narrower meaning, if adopted, will impose a great burden on its efforts to prosecute money-laundering cases. Essentially, the government argues that because the crime by definition requires the hiding of large sums of money, detection of money-laundering is difficult. It maintains that finding hard evidence of profits earned and proving that money launderers knew they were investing those profits into the promotion and concealment of illegal activities will be extremely difficult because criminals don’t keep good records, and have good incentives to falsify them if they do. See Brief for the U.S. at 27-28.
In pursuing these convictions, the government is addressing a problem that has a huge economic impact both at the national and international levels. In a report issued by analysts at the Bureau of International Narcotics and Law Enforcement Affairs,money laundering is described as having “potentially devastating economic, security, and social consequences” because of the increasing integration of the international economy, and the effect it has on undermining the legitimacy of private sector enterprises and financial markets. The amount of money that enters the American economy through international money laundering is staggering. For example, the government estimates that between $8 and $25 billion in wholesale distribution proceeds from Mexican and Columbian drugs is moved across the border and laundered annually. Canada’s drug trade follows closely behind with estimates of between $5 and $21 billion in revenues crossing into the U.S. U.S. Dept. of Justice National Drug Intelligence Center, National Drug Threat Assessment 2007. Following an online gambling sting early in 2007, the U.S. Attorney's Office announced charges against the internet payment services company Neteller for laundering $7 billion worth of online gambling proceeds from companies all over the world.
Clearly, the underlying crimes that require money-laundering for their financial stability are serious in themselves and tend to result in long prison sentences. However, money laundering convictions are often sought to impose increased sentences for such serious criminals. See Brief for National Association of Criminal Defense Lawyers as Amicus Curiae in Supp. of Respondents (“NACDL Amicus Brief”) at 3-4. In some cases, a money laundering conviction will not have the drastically different sentencing outcome that critics allege. For example, according the U.S. Sentencing Commission’s 2006 Sourcebook of Federal Sentencing Statistics, a federal drug trafficking conviction earns an average sentence of 82 months, and a racketeering conviction an average of 89 months. Since money laundering convictions average 36 months, the additional money laundering sentence, while significant, does not result in even doubled prison time. However, convictions for gambling and embezzlement offenses on average earn seven and nine month sentences respectively, with fraud convictions averaging 18 month sentences. As a result, in these cases, an additional money laundering conviction can result in tripled or even quadrupled prison time. It is important to note that at a maximum, the money laundering statute allows for 20 years’ imprisonment.
The National Association of Criminal Defense Lawyers points out in its amicus brief that because of the increased incarceration time faced by defendants charged with underlying crimes and money-laundering charges, prosecutors are more easily able to gain concessions from defendants simply by threatening to bring a money laundering charge. NACDL Amicus Brief at 8. By adopting the government’s definition of “proceeds” as gross receipts instead of profits, it argues, it will be easier to obtain a money-laundering conviction for conduct that is essentially a part of the underlying offense. As a result, criminals may receive vastly greater sentences “for conduct not meaningfully more blameworthy than the underlying predicate offenses.” Id. at 9.
The impact of money-laundering on the national economy is by no means easily discernable when considering the facts of United States v. Santos, which involved a fairly small, local operation. However small Santos’s contribution to the international money-laundering problem was, his sentence was still increased from 60 to 210 months as a result of his added conviction. See Brief in Opposition of Respondent Efrain Santos On Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit at 4. The question of how easy it should be for the government to prosecute internationally active criminals whose proceeds reach into the billions is far more intriguing and will doubtlessly be considered by the Court.
In accepting the government’s petition for certiorari in this case, the Court was responding to a pointed request for clarification on what constitutes proceeds under the federal money laundering statute, section 1956 of Title 18. The Seventh Circuit, in its Santos opinion, acknowledged that its adopted definition of the term would pose significant difficulties for law enforcement officials, and stated that the definition of “proceeds” should be resolved only by Congress or the Supreme Court. Santos v. United States, 461 F.3d 886, 893-894 (7th Cir. 2006).
The U.S. government claims that the Seventh Circuit’s decisions holding that “proceeds” means “net profits” are incorrect, and that “proceeds” should mean “gross income” for purposes of the federal money laundering statute. Brief for the U.S. at 12. The government cites several English dictionaries to support its claim that the primary dictionary definition of proceeds is “gross receipts,” i.e. the total amount received. Id. at 13 – 14. However, the Third Circuit in U.S. v. Grasso rejected the claim that there is a uniform dictionary definition. See 381 F.3d 160, 167 (3rd Cir. 2004).
The government also argues that the term “proceeds” has the same definition in related statutes that provide for the forfeiture of property illegally obtained through drug trafficking and fraud schemes, as well as in the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Brief for the U.S. at 15 (citing 21 U.S.C. § 853(a), 18 U.S.C. § 981(a)(2)(A), 18 U.S.C. § 1963(a)(3)). The same disagreement over the interpretation of “proceeds” under the money laundering statute has arisen under the criminal forfeiture statute and under RICO, and the Seventh Circuit again stands alone in refusing to adopt the meaning chosen by other courts. Brief for the U.S. at 15. The First, Eighth, and D.C. Circuits have defined “proceeds” in the RICO statute to mean gross receipts from illegal activity, while the Seventh Circuit defined it as “profits.” U.S. v. Hurley, 63 F.3d 1, 21 (1st Cir. 1995), U.S. v. Simmons, 154 F.3d 765, 770-71 (8th Cir. 1998), U.S. v. DeFries, 129 F.3d 1293, 1313-14 (D.C. Cir. 1997), U.S. v. Genova, 333 F.3d 750, 761 (7th Cir. 2003). However, in the civil forfeiture statute, Congress did define “proceeds,” and explained that it is not limited to net profits. See Brief for the U.S. at 18 - 19 (citing 18 U.S.C. � 981(a)(2)(A)).
Santos and Diaz argue that the Seventh Circuit is correct in reading “proceeds” to mean net income within the meaning of the money laundering statute. Brief for Respondent Benedicto Diaz (“Brief for Diaz”) at 6. They rebut the government’s statutory arguments by looking directly to the legislative history of Section 1956, and not that of the RICO or federal drug statutes. Brief for Respondent Efrain Santos (“Brief for Santos”) at 23 – 27. The legislative history cited by Santos and Diaz indicates that in enacting the money laundering statute, Congress was concerned about the profits of criminal activity, and intended to target the practice of “transforming illegal profits into legitimate income, which is the very essence of money laundering.” Id. at 24 – 25. They contend that a “gross receipts” construction therefore conflicts with Congressional intent, since business expenses must first be paid before money laundering occurs. Id. at 24.
Santos and Diaz also rely on the rule of lenity, which instructs that ambiguity in the meaning of a statute should be resolved in favor of the defendant. See Brief for Santos at 29 – 30, (citing, inter alia, U.S. v. R.L.C., 503 U.S. 291 (1992)). According to the rule of lenity, courts are not supposed to interpret a criminal statute in a way that increases the penalty when that interpretation “can be based on no more than a guess as to what Congress intended.” Brief for Santos at 16 (quoting Simpson v. United States, 435 U.S. 6, 15 (1978)).
Scope of Money Laundering Statute
The U.S. also argues that a “profits” definition of “proceeds” limits the scope of the money laundering statute beyond what Congress intended by "categorically precluding money laundering prosecutions based on the use" of money generated by an underlying crime to pay for expenses incurred in committing the crime. Brief for the U.S. at 22. The money laundering statute targets the use of illegal proceeds to promote further illegal activity or to conceal the illegal source of the money. See 18 U.S.C. § 1956. Since paying expenses usually allows a criminal enterprise to expand, but might technically eliminate "profits", the government argues that a “profits” definition would foreclose prosecution of concealment cases. See Brief for the U.S. at 24. It also argues that the definition would curtail the scope of the promotion element. See Brief for the U.S. at 25.
Santos and Diaz claim that under the “gross receipts” construction, everyone who runs an illegal gambling business is also guilty of money laundering, since “there will never be an illegal gambling business that does not pay its bet collectors and winning bettors.” Brief for Santos at 9, 12. However, they point out that the Supreme Court has held that unless there is a “clear and definite legislative directive,” criminal statutes should not be construed to create multiple offenses and punishments for the same conduct. Id. at 14.
Furthermore, Santos and Diaz reason that the word “promote” means to expand or increase, and therefore cannot encompass expense payments (like those to employees or the winning bettors) that merely sustain the underlying criminal activity. Brief for Diaz at 2. This also holds true for the concealment branch of the money laundering statute, since “payments of routine business expenses are not designed to conceal the tainted nature, location, source, ownership, or control of the funds involved.” Id. at 3.
The U.S. argues that if “proceeds” is read to include only profits, the government will have an unreasonable burden of proof in money laundering cases, because it will have to show that money from a specific transaction was derived from the illegal business’s profits rather than from total revenue. Brief for the U.S. at 27. The government contends that criminal enterprises do not usually keep complete and accurate accounting records, which may be necessary in order to prove that the underlying criminal activity was profitable. Id. at 28. As the Court of Appeals in Santos acknowledged, the line between payment of expenses and reinvestment of net income is “generally speaking, murky,” especially given the absence of accounting standards in criminal activities. See Santos v. U.S., 461 F.3d 886, 893 (7th Cir. 2006).
Furthermore, a “profits” definition would give criminals who do keep records an even greater incentive to falsify their books, since disguising the success of their operation would prevent a money laundering conviction and reduce their potential sentences. Id. at 28. The prosecution would have to prove that a particular defendant’s enterprise was in fact profitable, and also that he knew it was profitable, since the money laundering statute specifies knowledge as an element of the offense. Id. at 29. The U.S. also suggests that courts would have to develop an “accounting theory” for illegal businesses, in order to determine what counts as expenses and what constitutes profit, since the U.S. contends that there are no generally accepted accounting principles for criminal enterprises. Brief for the U.S. at 29 – 30. The government explains that all of these practical issues would impose unreasonable burdens on the government and create serious obstacles to enforcement of the money laundering statute.
Santos and Diaz claim that the practical difficulties of prosecution cited by the United States are overstated and amount to pure speculation. Brief for Santos at 31. They point out that the government is required to prove “net” amounts in a variety of criminal statutes, such as income tax evasion, and is given evidentiary leeway to do so. Id. at 31. They further argue that most financial criminals do keep detailed records of their businesses, pointing out that the government in this case had extensive financial records in evidence, including records of the bolita’s own accountant. Brief for Diaz at 4, 27. In addition, they explain, courts would not have to develop a novel accounting theory, since determining profits by subtracting expenses from gross receipts follows the same basic accounting principles whether a business is lawful or unlawful. Id. at 31–33.
Furthermore, Diaz and Santos argue that the government’s interpretation imposes a significant burden on defendants because it subjects them to the possibility of substantially longer sentences. Brief for Diaz at 5. The federal sentencing guidelines for money laundering recommend much longer sentences than do the guidelines for an underlying crime such as illegal gambling. National Association of Criminal Defense Lawyers Amicus Brief at 7 – 8. For example, in Scialabba the defendant would have faced only 37 – 46 months for an unlawful gambling business, but instead faced 108 – 135 months because he was also charged with money laundering. See United States v. Scialabba, 282 F.3d 475, 476 (7th Cir. 2002).
The Supreme Court’s decision in this case will have a broad ranging effect on the prosecution and sentencing of criminals engaged in a wide array of illegal activities, from local gambling rings to the international drug trade. If the government prevails, money-laundering convictions for the use of gross receipts from illegal enterprises will be easier to obtain, and prosecutors will likely have an easier time brokering plea agreements. While from the standpoint of law enforcement officials this might be a positive development, there is also a strong likelihood that criminals whose underlying activities are not generally considered to inflict the most serious harms on society will still receive extremely harsh sentences. In a case where statutory construction of one key term will have such serious effects, the court will have to consider all of these practical considerations in coming to its decision.
Edited by: Cecelia Sander