Money laundering means the concealment of the existence, origin, nature or source of money obtained illegally. Federal law prohibits money laundering partially because detecting financial crimes such as tax evasion, drug trafficking and gambling operations can be difficult. Because these criminals typically want to spend their ill-gotten gains, they often try to convert them into what looks like “legitimate” money. Catching criminals trying to hide the source of their illegally gained money is often easier than proving the original crimes.
There are numerous ways to launder money, such as smuggling cash offshore, depositing it in foreign banks and then wiring it back to US banks to set up and fund “legitimate” businesses with “dirty” money and then asserting that ill-gotten gains are profits from the legitimate businesses.[1]
The federal money laundering statute defines the crime as when a person, “knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity…” conducts a transaction to “conceal or disguise the nature, the location, the source, the ownership or the control of the proceeds of the specified unlawful activity” or to “avoid transaction reporting requirements.”[2]
The seriousness with which federal law takes money laundering is reflected in its 20-year statutory maximum sentence and a base offense level eight levels higher than theft of the same amount of funds under the Federal Sentencing Guidelines,[3] and enhancements for people who are in the “business” of laundering funds.[4]
The necessary proof to obtain a money laundering conviction can be broken down into four elements:
- The defendant must engage in a financial transaction;
- The defendant must know that assets involved represent proceeds of illegal activity;
- The money must, in fact, have come from certain specified illegal activities (such as fraud, bribery, smuggling and many others); and
- The defendant acted with the intent to promote or conceal the illegal activity or to avoid taxes or reporting requirements.
The financial transaction element is broadly defined by the statute.[5] It includes the movement of funds by wire, monetary instruments (like checks or money orders) or money transfer services such as Western Union or electronic financial service providers such as PayPal.[6] Transactions also include transferring goods or titles to real estate, cars, etc. However, as with many federal criminal statutes, there is an interstate commerce requirement; that is, the activity must, in some “way or degree” affect interstate commerce. As a practical matter, this is not difficult to show, as under the terms of the statute, the use of a financial institution that engages in interstate commerce is sufficient.
In United States v. Campbell, Ellen Campbell (a real estate agent) was convicted of money laundering for assisting a drug dealer in purchasing a house with drug money. Campbell arranged for the seller to accept $60,000 in cash, representing a third of the purchase price. The large amount of cash used by the buyer, Campbell’s admission that she knew the money “might have been drug money” and other circumstantial evidence was sufficient to justify the inference that Campbell knew that the transaction was designed to legitimize drug money by converting it to real estate.[7] This case illustrates that “knowledge” of the illegal source of the funds also can mean willful blindness to the source.
Regarding the third element, that the money must be derived from illegal activity, in United States v. Piervinanzi, the defendant successfully challenged a money laundering conviction when he had not yet received the proceeds of his illegal scheme when he made the transfer that prompted the laundering charge. Because he had not yet received the money, it was not “criminally derived property” even though the laundering transfer may have been made in anticipation of its receipt.
Note, though, that transferring from an account that holds commingled “clean” and “dirty” money can still constitute money laundering. As long as dirty money has been put in an account, any transfers of money from that account to conceal it, avoid reporting it or any “laundering” activity can be money laundering.[8]
Counterfeiting
The Federal Criminal Code devotes an entire chapter to counterfeiting and forgery.[9] The Code makes crimes of counterfeiting and forging a variety of items, including currency, securities, postage stamps, license plates, legal documents and more.[10] Forging or counterfeiting an obligation of the United States, such as money and savings bond notes, is punishable by up to 20 years in prison.[11] The same is true for obligations of foreign governments.[12]
Moreover, forgery and counterfeiting statutes define these terms much more broadly than the creation of the documents. The crimes also apply to “dealing,” “possessing” and “passing” these fraudulent documents.
To be guilty of counterfeiting or forging, the defendant must know of the counterfeit nature of the instrument. This can, however, be proven by circumstantial evidence. For example, in United States v. Kaye, the Second Circuit ruled that knowledge of counterfeit could be imputed to the defendant who bought and sold counterfeit bonds based on the low price at which defendant was offered the bonds, the fact that the seller did not claim to own the bonds, defendant’s contradictory statements and the defendant’s own statements, which indicated willful blindness towards the nature of what he was buying and selling. [13]
Tax Evasion and Fraud
The crime of tax evasion is governed by the Internal Revenue Code rather than the United States Criminal Code.[14] However, tax fraud can also constitute defrauding the United States, which is a crime under the Criminal Code.[15]
The most common type of tax fraud is the filing of false returns that underreport income or overstate (or plainly lie about) deductions. There is also evasion of payment, which occurs after the tax deficiency has been established. This is usually committed by hiding assets so that the IRS cannot get a hold of them. This can be tax evasion whether or not the IRS has formally begun collection efforts.[16]
Tax fraud requires the willful attempt to evade or defeat the payment of owed taxes.[17] Tax fraud is a specific intent crime, and so it requires knowledge that the tax is due and intentional steps to evade it.[18] Moreover, it requires an affirmative act to avoid taxes. A mere act of willful omission does not constitute tax fraud.[19] Merely failing to file an income tax return, in fact, is not felony tax fraud (it’s a separate crime, which we’ll discuss momentarily).[20] However, failing to file combined with any one of a number of actions can be tax fraud. These include:
– filing a false W-4 (tax withholding statement),
– false statements to IRS agents,
– diversion of corporate funds that should have been used for corporate tax payments for personal uses,
– concealment of bank accounts or any other hiding of assets to make them less visible to the IRS, and
– structuring transactions to avoid reporting requirements in order to make them less visible to the IRS.[21]
While civil penalties and interest may be applied to any tax deficiency, most federal circuit courts require the government to show a “substantial” tax deficiency to constitute tax evasion.[22] While it is not always clear what a “substantial” tax deficiency means, for purposes of IRS penalties for understatement, an understatement of 10% of one’s income is considered substantial.[23] If a smaller understatement than that is not subject even to a monetary penalty (other than interest), it seems unlikely that it would constitute felony tax evasion. Still, if the taxpayer takes affirmative steps to hide or conceal money from the IRS, there is no strict minimum to what could constitute tax evasion.
While failing to file a return is not strictly considered tax fraud under Section 7201, Section 7203 of the Internal Revenue Code establishes a separate crime for “willful failure to file return, supply information, or pay tax.”[24]
The statute imposes the duty to file on “any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information,” and provides for punishment of a year in prison, a fine of $25,000 for an individual or $100,000 for a corporation and to be assessed costs of prosecution.
While individuals are, of course, required to file their own income tax returns, corporate officers with sufficient control of their companies have the same obligation with respect to the companies. For example, a president of company who was also its sole shareholder and operating officer and who never delegated the responsibility to file to another employee or director was criminally responsible to file all required tax returns.[25]
Like tax fraud, failure to file is a specific intent crime. Good faith misunderstanding of law or good faith belief that one is not violating law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable.[26] Still, intent can be proved from the circumstances. “Where evidence justified findings that defendant knew the law required him to file returns and that he deliberately failed to file without justifiable excuse, such failure necessarily prevented government from knowing the extent of his tax liability, and his intent so to prevent it may be inferred; these elements, taken together, amounted to willfulness.” Moreover, a person can be guilty of failing to file even if, ultimately, he owes no income tax.[27]
Making false statements to the IRS for purpose of concealing unreported income is punishable as tax fraud under Section 7201 and also potentially under Section 1001 of the Criminal Code for making false statements to federal officials. Thus, the same action may be charged under both laws,[28] though they would normally be assessed concurrent sentences, especially when based on the same statements.
Signing a false corporate return that will ultimately reduce or underreport the income tax of the shareholder who is preparing the return constitutes two distinct crimes of evasion of personal income tax and subscribing a materially false corporate income tax return.[29]
Ponzi Schemes
If you were one of the thousands of people and organizations who invested in Bernard L. Madoff Investment Securities in the 1970s, 80s, 90s and even as late as the Fall of 2008, you were probably happy with its services. You consistently earned high returns (about 10% annually, on average) and your portfolio kept growing even when the market and economy suffered. Moreover, when you asked to withdraw some of your funds, your request was handled easily and expeditiously, and you got your check in a few days.
Unfortunately, though, the statements you got were lies. Your investment funds hadn’t actually been invested, hadn’t grown and your growing securities account balance was merely a figment of Bernard Madoff’s imagination. Madoff was, of course, running a Ponzi scheme.[30]
While Ponzi schemes may differ from incident to incident, the essence of a Ponzi scheme is when an investment manager lies to induce investors to give him money. He then takes money from new investors to pay off withdrawals from old investors and repeats the cycle. The cycle depends on generating enough “new” money to pay off withdrawal requests. Madoff’s scheme fell apart when, in the wake of the 2008 economic collapse, too many of his investors sought to cash out. Madoff didn’t have enough money to pay these withdrawal requests and was left with no choice but to confess his scheme. He was eventually sentenced to 150 years in prison and caused billions of dollars in losses.
Madoff, of course, didn’t invent the Ponzi scheme and is not the first person to go to prison for pulling one off.
Charles Ponzi, the namesake of the scheme, lured thousands of investors to invest with him by promising 50% returns in 90 days on profits made from international reply coupons. Ponzi used the funds he acquired to pay off a few early investors in 45 days. He collected $20,000,000 in all, but the scheme fell apart when he was unable to pay off later investors, and he was sentenced to 5-9 years in prison. Amazingly, he jumped bail and proceeded to Florida, where he bilked more victims out of thousands of dollars using a similar scam. Arrested again and released on bail, he unsuccessfully tried to flee the country. When he was caught, he served just seven more years before being released. A comparison to Madoff’s 150-year sentence should serve to illustrate how our society’s mindset towards financial scams has changed.[31]
In the mid-1980’s, almost 20 defendants operated a Ponzi scheme using precious metals as the bait. They “sold” the promise that the price of the metal would be “locked in” at the time of the sale, and that they (the defendants) would purchase the metals immediately and hold them for the customers. In fact, the defendants diverted the money to undisclosed uses and delayed the purchase of the metal or failed to purchase it at all. When detected, the defendants faced a battery of federal charges, including fraud, money laundering and racketeering.[32]
Currency Reporting Crimes
Banks are required to report currency transactions (including deposits, withdrawals, exchanges and transfers) of more than $10,000, with some exemptions. The exceptions include transactions by the bank itself (with its funds), government agency transactions and publicly traded companies.[33] These and other reporting requirements were originally established by the Bank Secrecy Act of 1970 and supplemented several times, including by the Money Laundering Suppression Act of 1994,[34] the USA PATRIOT Act of 2001 and the Intelligence Reform and Terrorism Prevention Act of 2004.[35]
Willful failure to file the required reports is a felony. Moreover, “willful” can be satisfied by indifference or abject failure to be aware of or act on a reporting requirement. In 1987, the Bank of New England was convicted when it failed to report a series of transactions in which its tellers were presented with multiple checks simultaneously that were each under $10,000, but which totaled more than that amount. The depositor did this several times and was given more than $10,000 each time, yet the bank never reported the transactions.
Evidence showed that the employees discussed the issue but that nobody followed up. The court ruled that “knowledge obtained by corporate employees acting within the scope of their employment is imputed to the corporation” and that a “corporation cannot plead innocence by asserting that the information obtained by several employees was not acquired by any one individual who then would have comprehended its full import. Rather, the corporation is considered to have acquired the collective knowledge of its employees and is held responsible for their failure to act accordingly.”
Moreover, federal law makes it a crime to “structure transactions” to evade reporting requirements. This includes intentionally structuring transactions in stages so as to make each of them less than $10,000 to avoid reporting requirements (a practice known as “smurfing”).[36] While, like most crimes discussed in this module, structuring transactions to avoid detection is a specific intent crime, the Eleventh Circuit held that required intent is to purposefully evade the reporting requirements. The defendant may be guilty even if he had no specific knowledge that these smurfing tactics were themselves against the law.[37]
Other courts, though, have held that knowledge that the structuring tactic is illegal is required. The 9th Circuit held that knowledge of the duty not to avoid triggering reporting requirements is an element of substantive crime.[38] The Seventh Circuit has also held that the government must show that a defendant knew of relevant reporting requirements, that he structured his transaction for purpose of evading those reporting requirements and that he acted with knowledge that his conduct was unlawful.[39]
A pattern of structuring tactics is sufficient to show intent. In United States v. Macpherson, the Second Circuit held that a pattern of his structured deposits was sufficient to permit a jury to find that a defendant knew of and intended to evade currency reporting requirements. In that case, evidence showed that, in six out of seven consecutive weeks, the defendant went to three different banks on the same day to make identical deposits of $9,000 each.[40]
In our next module, we’ll look at false statements and perjury, including the expansive and some-would-call infamous Section 1001, which makes it a felony to lie to a federal official.
[1] https://www.hg.org/legal-articles/what-is-money-laundering-and-why-is-it-illegal-31085
[2] 18USC § 1956
[3]USSG § 2S1.1(a)(2)
[4]USSG § 2S1.1(b)(2)(C)
[5] 18USC § 1956(c)(4)
[6] https://blj.ucdavis.edu/archives/vol-8-no-1/one-hour-money-laundering.html
[7] United States v. Campbell, 977 F.2d 854 (4th Cir. 1992)
[8] United States v. Rutgard, No. 95-50309 (9th Cir. 1997), available at https://caselaw.findlaw.com/us-9th-circuit/1057825.html
[9] https://www.law.cornell.edu/uscode/text/18/part-I/chapter-25
[10] https://criminal.findlaw.com/criminal-charges/counterfeiting.html
[11]18 USC § 471
[12] 18 USC § 479
[13] United States v. Kaye, 251 F.2d 87 (2d Cir. 1958)
[14] https://www.law.cornell.edu/uscode/text/26/subtitle-F/chapter-75/subchapter-A/part-I
[15] 18 USC § 371
[16] United States v. Daniel, 956 F.2d 540 (6th Cir. 1992)
[17] Sansone v. United States, 380 U.S. 343
[18] https://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf
[19]United States v. Masat, 896 F.2d 88 (5th Cir. 1990)
[20] Spies v. United States, 317 U.S. 492, 63 S. Ct. 364 (1943)
[21] https://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf pages 5-6
[22] See, e.g., United States v. Burkhart, 501 F.2d 993 (6th Cir. 1974)
[23] http://www.taxpayeradvocate.irs.gov/2013-Annual-Report/downloads/Accuracy-Related-Penalty-Under-IRC-6662-b-1-and-2.pdf
[24] 26 USC § 7203
[25] United States v Ettorre, 387 F Supp 582 (E.D.Pa. 1975)
[26] Cheek v United States (1991) 498 US 192
[27] United States v McCabe, 416 F2d 957 (7th Cir. 1969)
[28] United States v Beacon Brass Co., 344 US 43 (1952)
[29] United States v. Larson, 612 F.2d 1301 (8th Cir. 1980)
[30] https://www.businessinsider.com/how-bernie-madoffs-ponzi-scheme-worked-2014-7
[31] https://www.thebalance.com/what-is-a-ponzi-scheme-history-examples-vs-pyramid-scheme-3305877
[32] United States v. Kennedy, 819 F. Supp. 1510 (D. Colo. 1993)
[33] https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_017.htm
[34] https://www.congress.gov/bill/103rd-congress/house-bill/3235
[35] https://www.fincen.gov/history-anti-money-laundering-laws
[36] 31 USC § 5324
[37] United States v Vazquez, 53 F3d 1216 (11th Cir. 1995)
[38] United States v Kim, 65 F3d 123 (9th Cir. 1995)
[39] United States v Gabel, 85 F3d 1217(7th Cir. 1996)
[40] United States v. Macpherson, 424 F.3d 183 (2d Cir. 2005)