Money Laundering and Forfeiture Digest

Transcription

1 Money Laundering and Forfeiture Digest Summaries and Analyses of Recent Money Laundering and Asset Forfeiture Cases April 2017 Prepared by Stefan D. Cassella Asset Forfeiture Law, LLC Aggravated Identity Theft / Plea Agreement A defendant convicted of aggravated identity theft in violation of 18 U.S.C. 1028A may be ordered to forfeit the proceeds of his offense even though there is no statutory forfeiture authority for that violation. Because a conviction under 1028A requires proof that the defendant committed the offense while committing a violation of another statute, a defendant convicted of violating 1028A may be ordered to forfeit the proceeds of the underlying predicate offense, if there is statutory authority for the forfeiture of the proceeds of that crime. United States v. Pollard, F.3d, 2017 WL (9 th Cir. Mar. 8, 2017) Ninth Circuit * Defendant used false identification documents to open fraudulent bank accounts and steal money. His indictment charged him with both aggravated identity theft and bank fraud in violation of 18 U.S.C. 1028A and 1344, respectively. The indictment also contained a forfeiture notice pertaining to the bank fraud offense, but because there is no express statutory authority for forfeiture for a violation of Section 1028A, it contained no such notice pertaining to aggravated identity theft. Defendant ultimately entered a guilty plea only to the Section 1028A violation. Despite the absence of statutory authority for forfeiture in aggravated identify theft cases and the absence of a reference to that offense in the forfeiture notice in the indictment, Defendant agreed to the forfeiture of $4.1 million in proceeds of that offense. He also agreed to waive his right to appeal the forfeiture judgment. Despite some initial misgivings, the district court entered the forfeiture judgment in the amount of $4.1 million. United States v. Pollard, 2015 WL (D. Nev. Apr. 30, 2015) (Digest July 2015). And despite his waiver, Defendant appealed. The threshold question on appeal was whether the waiver in Defendant s plea agreement barred him from objecting to the forfeiture order on any ground whatsoever. The panel held that Defendant s waiver of his right to object to the forfeiture order on Eighth Amendment grounds was valid, as was his waiver of his right to object that the Subscribe to the Digest Subscriptions to the Money Laundering and Forfeiture Digest may be purchased on the Subscriptions page of our website: The annual subscription includes 12 issues of the Digest plus access to hundreds of pages of resources materials. Asset Forfeiture Law, LLC 1

2 Government did not give him notice that the forfeiture would be based on Section 1028A as Rule 32.2(a) appears to require. It also held that he had waived his right to have the Government establish the amount of the forfeiture order by a preponderance of the evidence. The court held, however, that a defendant s waiver does not preclude an appellate court from reviewing an illegal sentence. Therefore, to the extent that Defendant argued that the forfeiture order was illegal because there is no statutory authority for forfeiture in connection with a violation of the aggravated identify theft statute, he was free to appeal. The court acknowledged that Congress has not enacted any forfeiture authority for a violation of Section 1028A per se. It noted, however, that proof of a violation of Section 1028A necessarily requires proof that the defendant committed the identify theft offense while committing another illegal act. Here, Defendant was convicted of aggravated identity theft only because he agreed that he had committed the offense while committing bank fraud. When a conviction for aggravated identity theft is premised on a proven or admitted violation of a predicate offense such as bank fraud, the court said, and there is statutory authority for the forfeiture of the proceeds of that predicate, the defendant may be ordered to forfeit the proceeds of the underlying crime as part of his sentence for violating Section 1028A. Accordingly, because the bank fraud conviction was essential to Defendant s conviction for aggravated identity theft, and because forfeiture is authorized for bank fraud, the court held that the district court was authorized to order Defendant to forfeit the $4.1 million in bank fraud proceeds, even though he was convicted of aggravated identity theft and not convicted of bank fraud. SDC Contact: AUSA Dan Hollingsworth (D. Nev.) Comment: One of the tenants of forfeiture law is that there is no common law of forfeiture. Thus, there can be no forfeiture imposed as part of the sentence for a criminal offense unless Congress has authorized forfeiture as part of the punishment for that offense. Congress has not authorized forfeiture for aggravated identity theft. Thus, it has been assumed, until now, that a defendant convicted only of a violation of Section 1028A cannot be ordered to forfeit any property as part the criminal case. But that assumption turns out to have been wrong. Aggravated identity theft is one of those offenses that requires proof that the defendant committed the offense while committing another crime. Here, the defendant was accused of committing the identity theft violation while committing bank fraud. The court reasoned that although there is no forfeiture authority for aggravated identify theft per se, there is forfeiture authority for bank fraud. And because proof (or an admission to) the bank fraud violation was essential to the Section 1028A conviction, forfeiture of the proceeds of the bank fraud could lawfully be imposed as part of the sentence for the aggravated identity theft violation. This is an important development in forfeiture law; the absence of statutory authority for forfeiture for violations of Section 1028A has often been cited as a glaring loophole in the statutory forfeiture scheme. But there is another aspect of this opinion that may 2

3 turn out to be equally important. The defendant in this case expressly agreed to the forfeiture in his plea agreement and waived all right to appeal, even though he was not pleading to an offense for which forfeiture is statutorily authorized. That is not an uncommon event: prosecutors frequently accept a defendant s agreement to forfeit property derived from or used to commit an offense other than the one to which the defendant is pleading guilty. For example, the Government may accept a guilty plea to a tax offense or a Section 1001 violation (for which there is generally no forfeiture authority) and have the defendant agree to the forfeiture of the proceeds of a related mail or wire fraud offense even though all of the mail or wire fraud counts in the indictment are dismissed as a condition of the plea. The prosecutor s assumption in such cases is that the defendant will be bound by his plea agreement and that therefore there will be no one to complain if the court enters a forfeiture order as part of the defendant s sentence despite the absence of any statutory authority to do so. But that turns out not to be so. As the court expressly holds in this case, a defendant s agreement to an illegal sentence i.e., a sentence that is not authorized by statute, is not binding on either the defendant or the appellate court. Thus, while this case is great news for prosecutors frustrated by the lack of express forfeiture authority for violations of 1028A, it carries with it a warning: beware of plea agreements in which the defendant agrees to forfeit property in connection with a crime other than the one to which he is pleading guilty. That may work in aggravated identity theft cases in the narrow circumstances present here, but in general the better practice is to have the defendant agree not to contest the parallel civil forfeiture of the property involved in the counts that are being dismissed from the indictment as part of a plea agreement. See the next case summary for an instance where this was done, albeit in a way that opened the door to another problem. SDC Plea Agreement / Community Property / Role of State Law Because wife s community property interest was extinguished under state law when her husband agreed to forfeit the property, she had no right to object to the Government s motion for an order of forfeiture. United States v. Tracts 31A, Lots 31 and 32, Fed. Appx., 2017 WL (5th Cir. Mar. 9, 2017). Fifth Circuit * Defendant was charged with defrauding a school district of $3.7 million by submitting false or inflated invoices for electrical supplies and materials. The indictment contained a notice that the Government would seek the forfeiture of two annuities that Defendant had purchased with $3.4 million in fraud proceeds. The Government also filed a parallel civil forfeiture action against the two annuities to which both Defendant and his wife filed claims under Texas s community property law. As part of a written plea agreement, the Government agreed to dismiss the fraud charges and allowed Defendant to plead to a misdemeanor tax offense. In return, Defendant agreed not to contest the civil forfeiture of the two annuities. All went according to plan at Defendant s plea hearing, with the same attorney representing both Defendant and his wife, and the wife not raising any objection to Defendant s agreement to forfeit the annuities. But when the Government moved for an or- 3

4 der of forfeiture in the civil case, Defendant s wife obtained her own counsel and objected. She had never signed the plea agreement, she said, and had never waived or withdrawn her claim to the annuities in the civil forfeiture case. The district court overruled her objections and entered summary judgment for the Government. The wife appealed. On appeal, the Government relied on a provision of Texas law that governs the disposition of community property by one spouse. It provides that when community property is held in one spouse s name, that spouse is presumed to have the authority to alienate the property without the other spouse s consent, and a third party to whom the property is conveyed is entitled to rely on that spouse s authority to convey it, as long as the third party did not have actual notice of the need for the other spouse s consent. The court adopted the Government s argument and held that under state law, the Government, in negotiating the plea, was entitled to rely on Defendant s apparent authority to alienate the two annuities, and that his wife therefore had no legal ground to object to the forfeiture. Accordingly, the court affirmed the entry of summary judgment disposing of the wife s claim and forfeiting the property to the Government. SDC Contact: AUSAs Robert Rawls and Michael Lockhart (E.D. Tex.) Comment: This case illustrates how the Government can avoid the problem that arose in United States v. Pollard (see the previous case summary) by having the defendant in a criminal case agree not to contest the civil forfeiture of property when there was no legal authority for the forfeiture of the property in his criminal case. But unfortunately, the case also illustrates an entirely separate problem that the Government could easily have avoided. The holding in this case is that the wife loses because, under Texas law, her community property interest was extinguished when her husband agreed to forfeit the property in circumstances that indicated that he had the authority to do so. That s a nice demonstration of the way state law can be used to determine the outcome of a claim in a civil forfeiture case. But there is a much broader lesson here, and there was an alternative and more straightforward way of dealing with the wife s claim under federal forfeiture law. The teaching point is that the prosecutor should never have accepted a plea in which one spouse agreed to forfeit property in which the other spouse had claimed an interest without having the uncharged spouse sign-on to the plea agreement, preferably while being represented by her own counsel (or at least after waiving, in writing, any objection to the joint representation by her husband s attorney). There is no regulation or policy that says that the Government cannot accept such a plea without making the spouse a party to it; but as this case illustrates, it can avoid a lot of legal heartburn by insisting that she do so. The alternative resolution would have been for the Government to move for summary judgment on the wife s claim in the civil forfeiture case on the merits. The two annuities that were subject to forfeiture in this case were purchased with fraud proceeds; therefore, the wife could not have claimed a pre-existing interest in the annuities under 18 U.S.C. 983(d)(2); she could have made a successful claim only by showing that she had acquired her interest in the property as a bona fide purchaser for value under 983(d)(3). 4

5 In short, a spouse in a community property state cannot circumvent forfeiture law by asserting that her interest in her husband s criminal proceeds arose automatically under state law. When the defendant committed the fraud, the Government s interest immediately vested in the fraud proceeds. Thus, the wife acquired nothing unless she was a BFP. See United States v. Martinez, 228 F.3d 587, 590 (5th Cir. 2000) (relation back doctrine vests title to criminal proceeds in the Government at the time the crime occurs, precluding the defendant s wife from ever acquiring an interest under community property law); United States v. Hooper, 229 F.3d 818, (9th Cir. 2000) (to prevail under 853(n)(6)(A), the claimant must have a preexisting interest in the forfeited property; because proceeds do not exist before the commission of the underlying offense, spouse in community property state could not rely on 853(n)(6)(A) to challenge the forfeiture of drug proceeds); United States v. Brewer, 591 F. Supp. 2d 864, 869 (N.D. Tex. 2008) (following Hooper; it is unnecessary to determine if defendant s wife could acquire an interest in real property purchased with criminal proceeds under state community property law, because in all events, her interest would not be a preexisting interest under 853(n)(6)(A)); United States v. Boscarino, 2013 WL , *2 (D. Ariz. Apr. 30, 2013) (following Hooper; community property interest in proceeds of defendant s crime is not a preexisting interest under 853(n)(6)(A); motion to dismiss for failure to state a claim granted); United States v. Peterson, 820 F. Supp. 2d 576, (S.D.N.Y. 2011) (applying Hooper; domestic partner with a community property interest in defendant s property could not assert a claim under 853(n)(6)(A) to portion of property acquired with fraud proceeds), aff d, 537 Fed. Appx. 3, (2 nd Cir. 2013). SDC Forfeiture and Restitution / Gross v. Net Proceeds Second Circuit joins all others in holding that forfeiture and restitution are both mandatory and may not be offset against each other. Because there is no lawful way to embezzle funds, a defendant convicted of embezzlement must forfeit the gross proceeds of her offense without any deduction for her direct costs. United States v. Bodouva, F.3d, 2017 WL (2nd Cir. Mar. 22, 2017). Second Circuit * Defendant was the Chief Operating Officer of an architecture firm. She embezzled money from the firm s 401(k) plan by withholding payments from employee salaries but not remitting the money to the plan. She was convicted of violating 18 U.S.C. 664 and was ordered to forfeit $127,854 in embezzlement proceeds. She appealed, arguing that the district court should have given her credit against the forfeiture order for the funds that she voluntarily paid in restitution to the plan after her indictment but before her trial. The panel held that the district court had no discretion in the matter, and thus did not err in refusing to credit the restitution payment to the amount of the forfeiture order. Restitution and forfeiture are creations of distinct statutes, the court said, and serve different purposes. Criminal forfeiture is a form of punishment while restitution is intended to return the victim and the perpetrator to the status quo that existed before the violation took place. Accordingly, Congress s failure to provide for the offset of one against the other does not constitute 5

6 an unfair double disgorgement. Defendant argued that the offset was required by the definition of proceeds in the forfeiture statute, 18 U.S.C. 981(a)(2)(B). Setting up a 401(k) plan, she said, is not an inherently unlawful activity; rather, it is a lawful service that she provided in an unlawful way. Therefore, in her view, she was entitled to have the amount of her forfeiture judgment reduced by her direct costs, which would include the amount of her restitution payments. The panel did not agree. Defendant s argument, the court said, misidentifies her criminal conduct. Her crime was not the unlawful provision of services to [her firm s] employees. Her crime was embezzlement, [and] there is simply no way to lawfully embezzle funds. Accordingly, Defendant was not entitled to any offset against the forfeiture order for any direct costs. SDC Contact: AUSA Dina McLeod (S.D.N.Y.) Comment: The panel s principal holding that forfeiture and restitution serve different purposes and may not be offset against each other follows all of the other circuits that have addressed this question. See 20-8 of Asset Forfeiture Law in the United States (2d ed. 2013) and 2016 Supplement. The panel collects some of the other appellate cases on that point. For the Fifth Circuit s even more recent opinion on the same issue, see the next case summary. What is most interesting is the defendant s creative argument that paying voluntary restitution is a direct cost of committing a crime, and that because she was not doing anything inherently illegal, she was eligible to have her forfeiture order reduced by her direct costs pursuant to 18 U.S.C. 981(a)(2)(B). The panel did not reach the question whether paying restitution is a direct cost. Rather, it simply held that the defendant s crime embezzlement is indeed inherently illegal ( embezzlement... cannot be done lawfully ), and thus the definition of proceeds in Section 981(a)(2)(B) did not apply in her case. I find this highly significant. Defendants in fraud cases, for example, frequently argue that they weren t doing anything inherently illegal when they defrauded their investors, the party issuing a fraudulently-obtained contract, or the myriad other victims of fraud. To the contrary, they say, they were merely engaged in lawful conduct but in an unlawful way. But if, as the Second Circuit says in this case, there is no lawful way to commit embezzlement, there is also no lawful way to commit fraud. Which is why I have always believed that a person convicted of fraud should be required to forfeit the gross proceeds of his or her offense. See id. 25-4(d). SDC Forfeiture and Restitution / Excessive Fines / Joint and Several Liability Fifth Circuit likewise holds that a district court lacks the authority to offset forfeiture and restitution against each other. Panel also holds that there is no Eighth Amendment violation in holding a participant in a health care fraud conspiracy liable for the forfeiture of the proceeds of the conspiracy that were foreseeable to him. United States v. Sanjar, F.3d, 2017 WL (5th Cir. Mar. 27, 2017). Fifth Circuit * Defendant was part of a conspiracy to use a mental-health center to 6

7 overbill Medicare for unnecessary services and for services that were never rendered. He was convicted of conspiracy to commit health care fraud and was ordered to forfeit $4 million and to pay restitution in the same amount. Defendant appealed his conviction and the forfeiture order, and the Government cross-appealed the district court s order directing the Government to apply the forfeited funds to restitution. Defendant s argument was that the forfeiture order violated the Excessive Fines Clause of the Eighth Amendment because the only benefit he received from participating in the scheme was his salary. The panel responded, however, that the forfeiture order was based on the proceeds of the crime, and that because Defendant played a major role in sustaining the [illegal] operation, it was not obvious that the amount of the order was grossly disproportional to the gravity of his offense. In its cross-appeal, the Government objected that a district court lacks the authority to order the Government to applied forfeited funds to restitution. The panel agreed. In an earlier decision, the Fifth Circuit held that it was not error for a district court to refuse to order the Government to apply forfeited funds to restitution. Its reasoning in that case was that both forfeiture and restitution are mandatory. For the same reason, the panel held that a district court has no authority to order the Government to apply forfeited funds to restitution, even if the court wants to do so. First, the court noted that restitution and forfeiture serve distinct purposes: Restitution is remedial in nature; its goal is to make the victim whole. Forfeiture is punitive; it seeks to disgorge any profits or property an offender obtains from illicit activity. Moreover, both are mandatory features of criminal sentencing that a district court does not have authority to offset. To the contrary, 21 U.S.C. 853(i) contemplates that it is for the Attorney General to decide whether to offset one against the other. That the Government (through the Medicare program) would be both the victim entitled to restitution and the recipient of the forfeited funds does not make any difference. The court acknowledged that it would make sense for the Government to apply forfeited funds to restitution where the victim would otherwise be without compensation. Indeed, the court noted that it is the policy of the Department of Justice to do exactly that. But Congress left it to the executive branch to decide whether to follow through on that sensible policy. So Defendant s appeal was denied and the Government s cross-appeal was granted. SDC Contact: DOJ Attorneys Dave Goodhand and Ellen Meltzer. Comment: Virtually every circuit has now decided that forfeiture and restitution are both mandatory, and that a trial judge is not required to offset one against the other. The Fifth Circuit s decision on that point is United States v. Taylor, 582 F , 566 (5 th Cir. 2009). This decision, like the Second Circuit s decision in United States v. Bodouva, takes that one step further: courts lack the discretion to offset forfeiture and restitution against one another even if they would like to do so. (See previous case summary). This case touches only briefly on the Eighth Amendment issue, holding in a single paragraph that making a defendant who played a significant role in a conspiracy liable for the forfeiture of the foreseeable proceeds does not constitute an excessive fine. The 7

8 court does not discuss the underlying issue: whether all defendants in a conspiracy may be held jointly and severally liable for all of the proceeds of the conspiracy by virtue of the Pinkerton doctrine. If Pinkerton does not support joint and several liability, of course, the court would never reach the Eighth Amendment argument. The Supreme Court heard oral argument on the joint and several liability issue in Honeycutt v. United States on March 29, My review of the transcript suggested to me that the Court is struggling with the issue, and was trying to figure out where in the substitute assets statute, 21 U.S.C. 853(p), the authority for joint and several liability exists. That the authority derives from the imposition of a money judgment not from the application of the substitute assets statute seemed lost on the Court, at least during the colloquy with the Assistant Solicitor General. How that issue will be resolved is totally up in the air at this point. The transcript of the Honeycutt argument is posted on my website at SDC Proceeds / Forfeiture and Restitution / Joint and Several Liability / Excessive Fines / Indictment Rule 32.2(a) A defendant who is entitled to deduct the direct costs of his fraud scheme under 981(a)(2)(B) has the burden of proving what those costs were; he may not simply deduct the market value of the goods or services that he delivered. The forfeiture for a scheme to defraud includes the proceeds of the entire scheme, including the proceeds of conduct that occurred outside the statute of limitations. Court declines to depart from binding precedent regarding joint and several liability even though the Supreme Court has granted cert. to review that issue. United States v. Reed, 2017 WL (E.D. La. Mar. 3, 2017). E.D. La. * Defendant A and Defendant B were convicted of conspiring to commit mail and wire fraud in connection with the use of $78,000 in campaign contributions for personal purposes. Defendant A was also convicted of a number of substantive charges involving an additional $609,000. As part of Defendants sentences, the Government moved for a forfeiture order holding both Defendants jointly and severally liable to forfeit the proceeds of the conspiracy, and for a separate order holding Defendant A liable to forfeit the proceeds of the substantive counts on which he alone was convicted. Both Defendants objected to the Government s motion. In a few instances, the court agreed with Defendants that the Government had included dollar amounts in its calculations without having established by a preponderance of the evidence that the money was derived from the conduct for which Defendants were convicted, and it reduced the amounts of the two money judgments accordingly. But the court rejected all of Defendants legal challenges to the forfeiture orders. First, Defendants argued that under 18 U.S.C. 981(a)(2)(B), they were entitled to deduct the direct costs that they incurred in committing their offense. The court agreed on that point, but it held that the burden was on Defendants to prove what those direct costs were. The only evidence offered by Defendants was the market value of a video that 8

9 they produced and for which they overcharged the campaign fund. But the court held that the market value of the video was not the same as the cost of producing it, and only the latter would constitute a deductible direct cost. Similarly, the court refused to allow a deduction for the taxes that were paid on the illegally-diverted campaign funds. Taxes, the court pointed out, are expressly excluded from the definition of costs that may be deducted from the forfeiture amount under Section 981(a)(2)(B). Next, Defendants argued that they were entitled to a deduction for the amount of money that they refunded to the campaign after illegally diverting the money to their personal use. But the court held that Defendants are not entitled to reduce their forfeiture liability by the amount of restitution they have paid to their victim, even if they make the reimbursement voluntarily. Forfeiture has a punitive purpose, the court said, and forfeiture and restitution may be ordered for the same illegal activity. Thus, Defendants were liable for the amount they illegally diverted from the campaign whether or not they later repaid it. Defendant B, who was convicted only of the conspiracy, also objected that he should not be held jointly and severally liable to forfeit funds that he did not personally obtain. He urged the court to follow the District of Columbia Circuit s decision on that point in United States v. Cano-Flores, or at least to withhold ruling on that question until the Supreme Court resolved the split in the circuits regarding joint and several liability in United States v. Honeycutt. But the court held that it was bound by Fifth Circuit precedent to impose joint and several liability. Next, Defendant A objected that the forfeiture for the substantive mail and wire fraud offenses should be limited to the amounts involved in the actual counts of conviction and should not include uncharged conduct that was part of the overall scheme to defraud. Alternatively, he argued that if uncharged conduct were to be considered, it should be limited to conduct occurring within the statute of limitations. The court rejected both arguments. It is well-established, the court said, that forfeiture in mail and wire fraud cases extends to the proceeds of the entire scheme and is not limited to the amount of money derived from the particular executions of the scheme that were alleged as substantive counts. That the scheme straddled the statute of limitations, the court added, is no reason to limit the forfeiture to less than the total amount derived from the scheme. Defendant A objected that including the conduct that occurred outside of the statute of limitations violated his rights under the Excessive Fines Clause of the Eighth Amendment, but the court disagreed. Forfeiture of the amount of illegal proceeds that a defendant actually received, the court said, is not disproportional to the offense. Finally, Defendant A objected that the amount the Government was seeking to forfeit greatly exceeded the amount set forth in the forfeiture notice in his indictment. Rule 32.2(a), the court noted, requires only that the Government provide the defendant with notice that it will be seeking forfeiture in the event of his conviction. It does not require it to set forth the amount of the expected money judgment. Here, the indictment nevertheless advised Defendant A that the Government would be seeking to forfeit at least 9

10 $390,932. The court held that this complied with Rule 32.2(a) and did not estop the Government from seeking to forfeit a larger amount once all of the evidence was presented at trial. Accordingly, the court granted the Government s motion to enter the forfeiture judgments but reduced the Government s requests to $46,200 (for the conspiracy for which Defendants were jointly and severally liable) and $574,063 (for the substantive counts for which only Defendant B was liable). SDC Contact: AUSAs Maria Carboni and Jordan Ginsberg Comment: There is a lot going on in this case, but a few points stand out. First, it s worth noting that the court declined to withhold ruling on the joint and several liability issue pending the Supreme Court s decision in Honeycutt. If other district court s follow suit, the joint and several liability rule will remain in place at least for the next few months in the overwhelming majority of circuits that have adopted that rule. But see United States v. Lara, Fed. Appx., 2017 WL (6th Cir. Feb. 8, 2017) (holding appeal on joint and several liability in abeyance pending the Supreme Court s decision in Honeycutt). The court s ruling on the deduction available to the defendants for the direct costs of their fraud scheme is also interesting. Defendants who obtain a contract by fraud, or who overbill for the goods and services delivered, often attempt to take advantage of the direct costs deduction in 981(a)(2)(B) by subtracting the value of the goods or services actually provided. But as the court in this case points out, the market value of what was provided is not the same as the cost of producing it, and only the latter is deductible. Finally, the court follows the Fifth Circuit s decision in United States v. Taylor, 582 F.3d 558, 566 (5th Cir. 2009), in holding that because forfeiture and restitution are both mandatory, a defendant is not entitled to offset restitution voluntarily paid against the amount of his forfeiture judgment, and United States v. Sigillito, 899 F. Supp.2d 850, (E.D. Mo. 2012), in holding that a defendant must forfeit the proceeds of the entire scheme, even if some of the proceeds were realized outside of the 5-year statute of limitations. SDC Money Laundering / Section 1957 / Proceeds / $10,000 Requirement / Knowledge Proceeds remain proceeds as they change form; when fraud proceeds are used to gamble, the gambling winnings become proceeds for purposes of money laundering under Section Where the defendant is not the person who committed the underlying fraud, his knowledge that the money he used to conduct a financial transaction was criminal proceeds may be established by circumstantial evidence. United States v. Rivera-Izquierdo, F.3d, 2017 WL (1st Cir. Mar. 6, 2017). First Circuit * Defendant s step-daughter ran a $2.5 million fraud scheme, used the money to feed her gambling habit, and gave some of her gambling winnings to Defendant, who used the money to buy two cars. Defendant was convicted of two counts of money laundering under 18 U.S.C and appealed. Defendant challenged his conviction on several grounds. First, he argued that he did not violate Section 1957 because the 10

11 money that he used to buy the cars was his step-daughter s gambling winnings, not the proceeds of her fraud. But the court held that the Government did not need to prove that Defendant s transaction involved the actual fraud proceeds; rather, it was sufficient to show that the money Defendant used to buy the cars was derived from the fraud proceeds. Because the evidence was overwhelming that the step-daughter generated her gambling winnings exclusively from the funds that she took by fraud, the Government met its burden. Defendant also argued that the district court gave the jury the wrong instruction when it defined proceeds to mean gross receipts, not net profits. The instruction tracked the definition of proceeds in Section 1956(c)(9), but as Defendant pointed out, his offense occurred prior to the enactment of that statute in May Thus, in Defendant s view, the court should have defined proceeds as net profits in accordance with the Supreme Court s decision in Santos. The panel held, however, that even if Defendant was correct that Santos applied in this case, it would have made no difference. Because the underlying fraud scheme had few expenses, the court said, virtually all of the money the step-daughter obtained from the scheme would have been net profits. Thus, the court s error in giving the wrong jury instruction did not affect the outcome of the case. Finally, Defendant argued that even if the evidence was sufficient to show that the money involved in his financial transactions was fraud proceeds, there was no evidence that he knew it. To the contrary, he said, the evidence was only that he knew the money came from this step-daughter s gambling habit. But the court did not agree. Knowledge of the illegal source of the money involved in a money laundering transaction may be shown by circumstantial evidence. Here, there was evidence that Defendant knew that his step-daughter had no source of income aside from the fraud offense that she could have used to fund her gambling venture. Among other things, that evidence included the family relationship between Defendant and his stepdaughter, and his participation in her scheme in that he recruited new victims, pressured them to engage in the fraudulent transactions, and threatened those who complained. So the court affirmed the convictions on both money laundering counts. SDC Contact: DOJ Trial Attorneys Charles Walsh and Luke Cass Comment: The principal holding in this case is straightforward and unremarkable: proceeds remain proceeds even as they change form; so the conversion of fraud proceeds to gambling winnings did not break the link between the fraud offense, which was the specified unlawful activity, and the Section 1957 violation. Other cases holding the same thing are collected in Section VIII.G of the Money Laundering Case Outline. Of course, the case could have been more complicated (and hence more interesting) if there had been evidence that the stepdaughter had commingled funds from an unknown source with her fraud proceeds when she gambled. If that had been the case, the court would have had to address the conflicting case law regarding the tracing rules that apply when the Government has to show that at least $10,000 in SUA proceeds were involved in the alleged 1957 transaction. The parties evidently did brief that issue, because the court cited several of the cases 11

12 holding that strict tracing is not required as well as the Ninth Circuit s contrary decision giving the defendant the benefit of the doubt when the transaction involves at least $10,000 in commingled untainted funds. Compare, United States v. Rutgard, 116 F.3d 1270, 1292 (9th Cir. 1997) with United States v. Johnson, 971 F.2d 562, 570 (10th Cir. 1992), United States v. Sokolow, 91 F.3d 396, 409 (3d Cir. 1996) and United States v. Moore, 27 F.3d 969, (4th Cir. 1994). The court did not feel it necessary to take sides on that issue, however, because in its view, there was no evidence that any untainted funds had been commingled at any stage in the process. All of the cases on both sides of the issue are collected in Section XVI.E of the Money Laundering Case Outline. SDC Money Laundering / Funneling Third party who opened bank accounts at the behest of a drug dealer, and allowed the drug dealer to use them to funnel drug proceeds from his customers in Illinois back to California, is guilty of concealment money laundering. United States v. Sheridan, Fed. Appx., 2017 WL (7 th Cir. Feb. 16, 2017). Seventh Circuit * A California Drug Dealer sold marijuana to a customer in Illinois, and needed a way to transfer the payments back to California. He asked Defendant, his cousin, to open bank accounts at several banks, and directed his customer to deposit the drug proceeds into Defendant s accounts at Illinois branches of those banks. Defendant would then withdraw the money from California branches of the same banks and turn it over to Drug Dealer, minus Defendant s fee. Drug dealer also gave Defendant marijuana as part of his compensation for his role in the scheme. Defendant was charged with 32 counts of concealment money laundering, 18 U.S.C. 1956(a)(1)(B)(i), corresponding to 32 deposits made by the Illinois customer. He was convicted and appealed. Defendant s principal argument on appeal was that the transactions did not conceal or disguise anything. The deposits and withdrawals, he said, were simple transactions that were all conducted openly and notoriously through bank accounts held in Defendant s own name, and merely facilitated the transfer of funds from the Illinois customer to the California Drug Dealer. The panel was not impressed. What mattered, the court said, was not whether the transactions concealed Defendant s identity, but whether he used them to conceal the money s relationship to the Illinois customer and to the California Drug Dealer. Because the transactions concealed the nature of the funds, the identity of their true owner, and his control over them, the concealment element of the money laundering statute was satisfied. Defendant also argued that there was insufficient evidence to show that he knew the funds were illegally derived. But the court held that knowledge may be shown by circumstantial evidence, and that the evidence in this case included Defendant s role in helping his cousin to package and ship marijuana from the residence that they shared. Finally, Defendant argued that there was insufficient evidence that the money deposited and withdrawn from his accounts was actually drug proceeds. The court held, however, that the jury could infer the nature of the money being deposited from 12

13 the fact that the Illinois customer was selling marijuana and had no other reason to be depositing cash into Defendant s bank accounts. So the convictions for concealment money laundering were affirmed. SDC Contact: AUSA Jason Bohm (C.D. Ill.) Comment: This is a classic funneling case. A California drug dealer has customers in another part of the country who need to send the payments for the drugs back to the West Coast. In the old days, the preferred method was to pay a courier to drive the money across the country running the considerable risk that it would be seized during a traffic stop somewhere along the way. (Based on the prevalence of civil forfeiture cases involving currency seizures coming out of Nebraska, the trip from the Missouri to the Platte seems to have been the most risky part of the journey from the point of view of the courier and his employer.) But our domestic financial institutions have afforded drug dealers with a much less risky method of accomplishing the same thing: allow the drug dealer to open an account at a bank that has branches in both California and the part of the country the drugs are shipped, allow the customer (or his minions) to deposit the drug proceeds in branches close to where they reside and where the drugs are sold, and allow the drug dealer to withdraw the funds (generally within a day of the deposit so that there is nothing for law enforcement to seize, even if it gets wind of the scheme) back in California. To further minimize the risk, of course, it behooves the drug dealer to find a willing accomplice to open the various funneling accounts and handle the withdrawal of the funds on the receiving end. In this case, the California drug dealer prevailed upon his cousin to do that, all in return for a small fee and a bit of marijuana. The willing accomplice can complain all he wants that he had no role in the underlying drug transaction, but he is still guilty of money laundering. Section 1956(a)(1)(B)(i) makes it an offense to conduct a financial transaction knowing that its purpose is to conceal or disguise the source, ownership, nature, location or control of criminal proceeds. It does not require proof that the defendant was the person who committed the underlying crime that generated the illegal proceeds or that the defendant concealed or disguised his own identity. Rather it is sufficient, as it was here, if the defendant knew that the transaction was designed to conceal someone else s crime and the connection of the money to it. Accordingly, in this case, for opening the bank accounts, allowing them to be used to funnel drug proceeds from Illinois to California, and turning the money over to his cousin the drug dealer, the defendant earned a sentence of 33 months in prison on each of the 32 counts of money laundering, to run concurrently. SDC Money Laundering Forfeiture A parcel of real property is forfeitable in its entirety as the object of a money laundering offense if the defendant pays for improvements to the property with fraud proceeds. That the defendant has subdivided the property and used the fraud proceeds to improve only some of the subdivisions does not limit the forfeiture to less than all of the property. Property is also subject to forfeiture in a money laundering case if its development was the object of the underlying fraud scheme that generated the proceeds being laundered. 13

14 United States v. Beltramea, F.3d, 2017 WL (8th Cir. Feb. 28, 2017). Eighth Circuit * Defendant pled guilty to wire fraud and money laundering in connection with an investment fraud scheme, but objected to the Government s motion to forfeit his real estate development project as property involved in the money laundering offenses. The court conducted an evidentiary hearing, found that the property was forfeitable in its entirety, and granted the Government s motion. United States v. Beltramea, 160 F. Supp.3d 1119 (N.D. Iowa 2016) (March 2016 Digest). Defendant appealed. The Government s theory was that the property was forfeitable in connection with one or both of the two money laundering counts to which Defendant pled guilty. The first offense involved Defendant s use of $44,831 in fraud proceeds to pay a contractor for improvements to the real property. The second offense involved his use of the fraud proceeds to purchase a cashier check which he used to open a bank account in his mother s name. Defendant later used $32,361 drawn from that account to pay for additional construction work on the real property and to pay off a loan secured by the property. Defendant argued that the real property was not involved in the second money laundering count because the offense to which he pled guilty was the purchase of the cashier s check, not the use of the money derived from that check to make any payments on the real property. In Defendant s view, these were two separate transactions, and because he was convicted of money laundering in connection with one and not the other, the property involved only in the latter transaction could not be forfeited. Defendant also argued with respect to both money laundering offenses that the real property had been subdivided for development, and that the forfeiture should be limited to the subdivisions that the fraud proceeds were used to improve. The panel found that it was unnecessary to determine if the second money laundering count was sufficient to support the forfeiture because the property was forfeitable in its entirety based on the first transaction. The entire parcel, the court said, was involved in the first money laundering count in either of two ways. First, it held that the property was the subject of the $44,831 payment to the contractor to improve the property and thus facilitated the money laundering offense. That Defendant had subdivided the property made no difference. To determine whether a parcel of real property comprises a single parcel or multiple parcels, a court must look to the documents memorializing the defendant s acquisition of the property and must ignore his later attempts to subdivide it. Once the court determines that the property was acquired as a single parcel, the panel said, nothing in 982(a)(1) allows the court to order forfeiture of less than [all of it]. Second, and in the court s view most importantly, the property was involved in the money laundering offense because the development of the property was central to the entirety of [Defendant s] scheme from the outset. So the forfeiture of the real property in its entirety was affirmed under both theories. SDC Contact: AUSA Jacob Schunk (N.D. Iowa) Comment: The property subject to forfeiture in a money laundering case includes 14

15 the criminal proceeds being laundered, any other property that is the subject matter of the money laundering transaction, and any property used to facilitate the money laundering offense. See Chapter 27 of Asset Forfeiture Law in the United States (2d ed. 2013). Although the court says that the forfeited property facilitated the money laundering offense, the forfeiture of the property based on the payment to the contractor to make improvements is actually better illustration of the subject matter theory. Id., 27-9(d); see also Sections II.A and B.2(b) of my Money Laundering Forfeiture Case Outline. For some other recent illustrations of subject matter theory, see United States v. Kivanc, 714 F.3d 782, (4th Cir. 2013) (residence in which fraud proceeds were invested is subject to forfeiture in its entirety as property involved in a money laundering offense, even though legitimate funds were also invested in the property); United States v. Vico, 2016 WL , *8 (S.D. Fla. Jan. 20, 2016) (parcels of real property purchased with commingled funds in violation of 1957 are forfeitable in their entirety as the corpus of the offense); United States v. Wijetunge, 2015 WL , at *10 & n.60 (E.D. La. Oct. 28, 2015) (distinguishing United States v Rolls Royce, 905 F.2d 89, 90 (5 th Cir. 1990); in money laundering cases, forfeiture is not limited as it is under a proceeds theory to the part of the property traceable to the proceeds of the underlying offense). In my comment following the summary of the district court s decision in this case in the March 2016 Digest, I said that it was not obvious that the second money laundering conviction, standing alone, would have supported the forfeiture, because in that case the Government was forced to rely on the theory that the property was traceable to the money laundering offense, and not that it was involved in it. The panel did not resolve that issue, however, and based the forfeiture solely on the conviction on the first money laundering count. What is surprising about this opinion, however, is that the court did not limit its reasoning to either the subject matter or facilitation theories but held most importantly that the property was subject to forfeiture because it was the object of the underlying investment fraud scheme. That is, the court found that because the defendant committed the investment fraud to obtain money to use to develop his real property, and then committed money laundering offenses when he proceeded to do so, the property was forfeitable as property involved in the money laundering. This is a controversial point. Years ago, the Fifth Circuit held in United States v. Wyly, 193 F.3d 289, 302 (5th Cir. 1999), that real property that was central to a bribery/money laundering scheme was forfeitable as facilitating property because without it, there would have been no money laundering offense. See also United States v. $488,342.85, 969 F.2d 474, 477 (7th Cir. 1992) (dicta) (property involved in money laundering offense not limited to money derived from the SUA, but may include funds that facilitated the SUA); United States v. Eleven Vehicles, 836 F. Supp. 1147, 1155 (E.D. Pa. 1993) (forfeiture of property involved in arms export conspiracy of which money laundering was integral part). This theory has been rejected in more recent decisions, however, and no court has applied it since the 1990s. To the contrary, the more recent cases, including cases from the Eighth Circuit, hold that to be involved in money laundering, the property must be the subject of, or must be used to facilitate, the money laundering transaction; that it was the object of the underlying crime is irrelevant. See United States v. Huber,