Argument preview: US v. Santos

Argument Preview

By Amy Howe

Does the term proceeds in 18 U.S.C. 1956(a)(1), which prohibits money laundering, refer to the gross receipts of illegal activity or only the profits of that activity? On October 3, 2007, the Supreme Court will consider this question in No. 06-1005, United States v. Santos, a case that at least according to the government could have a significant effect on the governments ability to prosecute money laundering cases.

Background

18 U.S.C. 1956(a)(1) is the principal federal money laundering statute. It imposes criminal penalties on anyone who knows that the property involved in a financial transaction represents the proceeds of an illegal activity but nonetheless conducts or attempts to conduct such a transaction with the intent to promote the carrying on of (Section 1956(a)(1)(A)(i)) that activity or knowing that the transaction is designed . . . to conceal or disguise the nature . . . of the proceeds of (Section 1956(a)(1)(B)(i)) that activity.

For nearly two decades, respondent Efrain Santos operated an illegal lottery in Indiana with the help of, among others, respondent Benedicto Diaz. Santos was convicted of charges arising out of his lottery operation, including one count of promoting money laundering, in violation of 18 U.S.C. 1956(a)(1)(A)(i), that stemmed from his payments to the lotterys couriers and winners. Diaz pleaded guilty to conspiracy to commit money laundering, a charge that rested on his receipt of payment for his work in the lottery. The Seventh Circuit rejected both respondents appeals. However, after their convictions became final, the Seventh Circuit held in United States v. Scialabba (2002) that money used to pay for the overhead expenses of an illegal activity cannot be proceeds for purposes of Section 1956(a)(1). Instead, the court of appeals reasoned, the term proceeds encompasses only the profits stemming from an illegal activity.

Relying on Scialabba, Santos and Diaz filed a motion for collateral relief, which the district court granted. On appeal, the Seventh Circuit affirmed the decision in respondents favor. In so doing, it acknowledged that other courts of appeals had reached a contrary result; that the Seventh Circuits holding could make it more difficult for the federal government to enforce the money laundering statutes; and that the government ha[d] demonstrated that the question of whether Congress intended the term proceeds in § 1956(a)(1)(A)(i) to mean gross or net income is a debatable one. However, it nonetheless declined to overturn the decision in Scialabba. Instead, and waving the judicial version of a red flag, it explained that [r]ather than vacillate over Congresss intent, it is better for our circuit here . . . to stay the course at this juncture, for only Congress or the Supreme Court can definitively resolve the debate over this ambiguous term.

Petition for Certiorari

The United States filed a petition for certiorari, which was granted on April 23, 2007.

The governments petition advanced two basic arguments. First, the government contended that the Seventh Circuits overly narrow construction of the term proceeds in Section 1956(a)(1) would limit the governments ability to enforce the money laundering statute. The construction is overly narrow, the government emphasized, in light of both the commonsense definition of proceeds (as supported by an array of dictionaries) and the legislative history of the RICO forfeiture statute, enacted shortly before the money laundering statute, which specifically explains that the term proceeds does not mean profits. The construction also presents serious practical problems for money laundering operations, the government continued, including because there are no generally accepted accounting principles for criminal enterprises. Thus, under the Seventh Circuits construction, courts would have to resolve a laundry list of novel and difficult questions including, for example, whether illicit profit should be measured using accrual or cash accounting methods, whether profit should be measured on an annual, monthly, or other basis, and how capital expenses should be amortized to determine the profits for a particular illegal activity. And the interpretation of proceeds to include only profits would impede not only prosecutions under Section 1956(a)(1)(A)(i) but also under Section 1956(a)(1)(B)(i), which also involves proceeds.

Second, the government contended, the circuits are divided with regard to the question presented: two circuits (the First and Third) have expressly considered and rejected the Seventh Circuits rationale, while another circuit (the Eighth) has followed those circuits, albeit without citing the Seventh Circuits decision in Scialabba.

Respondents Diaz and Santos filed two separate briefs opposing certiorari. Diaz argued that certiorari was not warranted for several reasons. First, he contended, the governments cert. petition merely recycled the arguments that it had made unsuccessfully in its petition in Scialabba. Second, the governments dire warnings regarding the effect of the Seventh Circuits decision on money-laundering prosecutions have not come to fruition. Courts are perfectly capable of implementing the Seventh Circuits rule even without Wharton School PhDs; all that they need to be able to do to calculate the profits from an illegal activity is subtract expenses from gross receipts. Moreover, Diaz reassures the Court, financial records for illegal activities often are available: in this case, for example, the government even obtained some records from the lotterys accountant. And further evidence that the Seventh Circuits rule will not have any adverse effects can be seen in the context of RICO forfeiture cases, where the Seventh Circuit has similarly construed proceeds to mean net profits for over a decade. Third and finally, even if the term proceeds were construed to mean gross receipts, in this case there has been no showing that as required by law the money-laundering transaction at issue is separate from the predicate offense, as Mr. Diaz merely took his salary from the money that he collected.

Respondent Santos echoed Diazs argument that the government has not demonstrated a money-laundering transaction in this case that is separate from the predicate offense. Because the only financial transaction at issue in his case was running an illegal gambling operation, this case is not a good vehicle in which to address the question presented.

Merits Briefing

In its brief on the merits, the United States reiterates the arguments that it made in the petition. First, and citing no fewer than twelve dictionaries, it again emphasizes that gross receipts is the primary meaning of the term proceeds, and that such a definition is also consistent with the meaning that Congress gave to the term in other related statutes, including the RICO and drug forfeiture statutes.

Second, the government reiterates, the Seventh Circuits construction of the term proceeds as including only profits is overly narrow and would prohibit the government from bringing some prosecutions under the money-laundering statute, including those of criminals who had not yet turned a profit. (The government does concede the obvious question here i.e., that [a]s a practical matter, it may be that few individuals will run the risk of criminal sanctions to pursue an illegal enterprise that is not profitable but contends that if the Seventh Circuits construction is allowed to stand it will be easy for defendants to assert an absence of profits and difficult for the government to prove profitability.)

Third, the government continues to assert that the Seventh Circuits construction would create difficulties not only for the government, which would be required to prove that the underlying criminal activity turned a profit, but also for the courts. On this point, the government addresses some of the counterarguments raised in the respondents BIO. It explains, for example, that most criminal enterprises do not keep accounting records, and that those few records which do exist are likely to be inaccurate, indecipherable, or flat-out phony. Moreover, the Seventh Circuits interpretation would require the government to prove that the defendant knew that the underlying crime was profitable a nearly insurmountable burden in cases involving professional money launderers. And the government dismisses the BIOs argument that courts could compute profits simply by subtracting expenses from gross proceeds, explaining that because there is no specific accounting method to use in such cases, money laundering trials would likely turn into a battle of accounting experts.

Fourth, the government again attempts to rebut the policy justifications on which the Seventh Circuit relied in reaching its conclusion. It explains that the Seventh Circuits concern that proceeds must be construed to mean profits to avoid a scenario in which a defendant is prosecuted on multiple grounds for the same offense is unfounded, as other elements of the money-laundering statute ensure that the money laundering offense and the underlying crime remain distinct. And the rule of lenity does not come into play in this case, the government reasons, because it applies only when the statute is ambiguous which this statute is not.

In his brief on the merits, respondent Efrain Santos first argues that unless the term proceeds is construed to mean profits, there is no distinction between a violation of 18 U.S.C. § 1955 conducting an illegal gambling operation and a money laundering violation under Section 1956(a)(1). He explains that if proceeds were instead construed as gross receipts, as a practical matter everyone who is found guilty of a violation of Section 1955 will also be guilty of a Section 1956(a)(1) violation.

Santos next counters the governments myriad dictionary definitions of proceeds with his own dictionaries (and Google searches) which, he contends, demonstrate that proceeds can in fact mean both gross receipts AND profits. And he downplays the governments reliance on legislative history by citing legislative history of Section 1956(a)(1) demonstrating that Congress was in fact focused on profits, rather than gross receipts, when it enacted the statute. The governments arguments to the contrary, he notes, are based on the legislative history of the RICO statute, which is less relevant. To the extent that any ambiguity regarding the meaning of proceeds remains (and, like the government, Santos contends that the statute is clear, albeit with a different meaning attributed to proceeds), the rule of lenity militates in favor of Santoss position.

Santoss brief dismisses the governments argument that the Seventh Circuits construction of proceeds will make it more difficult to prosecute money launderers as pure speculation that is belied by the Governments arsenal of evidentiary procedures to prove profits. Indeed, Santos notes, the government successfully manages to prosecute other offenses such as income tax evasion that require similar showings. In any event, Santos concludes, any difficulties arising from a construction of proceeds to mean profits are best addressed by Congress rather than the Supreme Court.

In his brief, respondent Benedicto Diaz echoes some of the same arguments made by Santos regarding the use of dictionaries (which he deems inconclusive) and the appropriate legislative history. Addressing the language of the statute and the statutory context, he points out that although Congress used the term gross revenue in Section 1955, it nonetheless opted not to use that term in Section 1956(a)(1), leading to the conclusion that it did not intend the term proceeds to be equivalent to gross revenue or gross receipts. Two other terms used in Section 1956(a)(1) also support his construction of the term proceeds. First, he explains, the statute prohibits transactions which promote money laundering. The term promote has a clear and unambiguous meaning: to expand or increase. An expansion or increase in money-laundering activity, he continues, can only take place with profits. Second, while the statute requires that the transactions at issue be designed to conceal the proceeds of unlawful activity, the payment of business expenses are not designed to conceal and in fact generally make the unlawful activity more likely to be discovered.

Diaz also addresses the practical difficulties purportedly created by the Seventh Circuits construction of proceeds. First, as his case demonstrates, the governments concerns about the lack of accurate records from which to calculate an activitys profits are unfounded; here, for example, the United States was able to obtain a host of financial records, including from an accountant. Second, the need to choose an accounting method to determine any profits does not pose an insurmountable hurdle; as the government concedes, there is no one, uniform set of accounting principles that applies in all contexts, even for lawful businesses.

Finally, Diaz notes that the governments construction, by effectively conflating the money-laundering offense with the underlying prohibition on illegal gambling, automatically and dramatically increases the sentence for what is essentially the same conduct.