United States v. Santos

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).

Statutory Interpretation

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.

Practical Concerns

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).