January 19, 1978

78-2 MEMORANDUM OPINION FOR THE

ASSISTANT ATTORNEY GENERAL, CRIMINAL

DIVISION

Rebates in Violation of Shipping Act—Applicability

of Conspiracy Statute (18 U.S.C. § 371)

This responds to your inquiry concerning a group of cases involving ocean 

freight rebating. The question is whether the 1972 amendment to § 16 of the 

Shipping Act of 1916 precludes conspiracy prosecutions under 18 U.S.C. § 371 

in these cases. The Fraud Section of the Criminal Division has taken the 

position that the cases may be prosecuted under the conspiracy statute; the 

Government Regulations and Labor Sections disagree.

Our conclusions may be summarized as follows:

As a general matter, a statutory prohibition the violation of which 

is subject only to a civil penalty may be an “ offense against the 

United States” for purposes of the conspiracy statute. The 1972 

amendment to § 16 does not rule out the possibility of prosecuting a 

corporate shipper and a corporate carrier for conspiring to violate 

paragraph Second of § 16. Congress’ action, as well as principles 

analogous to those underlying the Wharton rule, indicate, however, 

that any such prosecution must be based upon more than a minimal or 

ordinary violation of the provisions of the Shipping Act. That is, the 

prosecution must be able to show, that because of its nature or extent, 

the conduct contemplated by the conspiracy agreement involved 

harm to society beyond that ordinarily presented by the substantive 

offense itself. Similarly, depending upon the particular circumstances, 

cases of the present type may constitute a conspiracy to defraud the 

Federal Maritime Commission.

We are, however, not familiar enough with the facts of the present cases to 

make specific recommendations.

Background

1. Section 16 of the Shipping Act of 1916, as amended, 46 U.S.C. § 815 

(1975 Supp.), reads as follows:

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It shall be unlawful for any shipper, consignor, consignee, forwarder, broker, or other person, or any officer, agent, or employee 

thereof, knowingly and willfully, directly or indirectly, by means of 

false billing, false classification, false weighing, false report of 

weight, or by any other unjust or unfair device or means to obtain or 

attempt to obtain transportation by water for property at less than the 

rates or charges which would otherwise be applicable.

It shall be unlawful fo r any common carrier by wafer, or other

person subject to this chapter, either alone or in conjunction with any

other person, directly or indirectly —

First. To make or give any undue or unreasonable preference or 

advantage to any particular person, locality, or description of traffic 

in any respect whatsoever, or to subject any particular person, 

locality, or description of traffic to any undue or unreasonable 

prejudice or disadvantage in any respect whatsoever ....

Second. To allow any person to obtain transportation fo r property

at less than the regular rates or charges then established and

enforced on the line o f such carrier by means o f false billing, false

classification, false weighing, false report o f weight, or by any other

unjust or unfair device or means.

Third. To induce, persuade, or otherwise influence any marine 

insurance company or underwriter, or agent thereof, not to give a 

competing carrier by water as favorable a rate of insurance on vessel 

or cargo, as is granted to such carrier or other person subject to this 

chapter.

Whoever violates any provision o f this section other than paragraphs

First and Third hereof shall be subject to a civil penalty of not more 

than $5,000 for each such violation.

W hoever violates paragraphs First and Third hereof shall be guilty 

of a misdemeanor punishable by a fine of not more than $5,000 for 

each offense. [Emphasis added.]

The principal provision discussed herein is paragraph Second.

2. Investigations of ocean freight rebate practices are being conducted by the 

U.S. Attorneys (regarding several carriers, including United States Lines and 

Sealand Services, Inc. and Seatrain Lines, Inc.). As a result of one of these 

investigations, Sealand has made extensive disclosures to the Federal Maritime 

Commission concerning rebates amounting to some $19 million and has agreed 

to pay a civil penalty of almost $5 million. The U.S. Attorney in Newark has 

forwarded to some 53 other U.S. Attorneys cases involving more than 300 

shippers that received the rebates.

Your memorandum indicates that:

The investigations have disclosed that employees of the carriers 

would obtain freight business by agreeing with employees or officers 

of the shippers to pay freight rate rebates. Books and records of the 

carriers were falsified by identifying rebate payments as, inter alia,

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“ promotional expenses.” Rebate payments were made by laundering 

the funds through both domestic and overseas subsidiaries of the 

carriers, obviously with the assistance and knowledge of employees 

of the subsidiaries.

Discussion

1. This inquiry relates to the possibility of prosecution under the general 

conspiracy statute. That statute, 18 U.S.C. § 371, provides as follows:

If two or more persons conspire either to commit any offense 

against the United States, or to defraud the United States, or any 

agency thereof in any manner or for any purpose, and one or more of 

such persons do any act to effect the object of the conspiracy, each 

shall be fined not more than $10,000 or imprisoned not more than 

five years, or both.

If, however, the offense, the commission of which is the object of 

the conspiracy, is a misdemeanor only, the punishment for such 

conspiracy shall not exceed the maximum punishment provided for 

such misdemeanor.

It is established that, for purposes of 18 U.S.C. § 371, the term “ offense 

against the United States” , is not limited to crim es.1 It also encompasses 

conduct prohibited by a Federal statute and “ made punishable only by a civil 

suit for a statutory penalty.” Hunsaker v. United States, infra, at 112. Thus, it 

may follow that violation of paragraph Second of § 16 as amended, which is 

punishable by civil penalty, is an “ offense” within the meaning of 18 U.S.C. 

§ 371.2 The first issue is whether that result is foreclosed, because of the 1972 

amendment to § 16.

2. Section 16 of the Shipping Act prohibits several types of practices by 

shippers, common carriers by water, and others. Before the 1972 amendment 

of § 16, violation of any of those prohibitions was a misdemeanor punishable 

by a fine of not more than $5,000.3 The principal effect of the 1972 legislation 

is to provide, with respect to paragraph Second and all other provisions except 

paragraphs First and Third, that a violation thereof is no longer a crime, but is 

subject to a civil penalty.4

The legislative history of the 1972 amendment is brief and contains no

1See United States v. Hutto, 256 U.S. 524, 529 (1921) (offense of Federal official’s having 

financial interest in Indian trade); Hunsaker v. United Slates, 279 F. (2d) 111, 112 (9th Cir. I960), 

cert, denied, 464 U.S. 819 (1960) (Gold Reserve Act); United Stales v. Weisner, 216 F. (2d) 739, 

742 (2d Cir. 1954) (Gold Reserve Act). In Weisner, the court rejected the argument that 18 U .S.C. 

§ 1, which deals with the classification of criminal offenses, governed the meaning of "offense” 

for purposes of 18 U .S.C . § 371.

2It should be noted that § 16, as amended, refers to a civil penalty for each "violation” of 

paragraph Second. In contrast, with regard to paragraph First and Third, the statute refers to a fine 

for each "offense.” There is no reason, however, to treat this difference in terminology as decisive 

regarding the applicability o f 18 U .S.C . I 371.

3See 46 U .S.C . § 815 (1970).

‘See Pub. L. No. 92-416 (1972), § 1(b).

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mention of the possibility of prosecutions under the conspiracy statute. Thus, 

an effort must be made to infer Congress’ intent.

The bill which was ultimately enacted differed in certain respects from the 

version introduced and initially passed by the House of Representatives. As 

enacted, the law provides that the civil penalties for violation of the Shipping 

Act “ may be compromised by the Federal Maritime Commission, or may be 

recovered by the United States in a civil action.” 5 The original House bill 

contained the change from criminal to civil sanctions, but under that bill 6 the 

Federal Maritime Commission would have been empowered to assess the civil 

penalties, subject to review of its action in the courts of appeals.

The purpose of the House bill was to strengthen the ability of the 

Commission to carry out its regulatory functions under the Shipping Act, in 

part by amending the penalty provisions in the “ areas that give the Commission 

most of its enforcement problems in day-to-day operations.” 7 The House report 

stated that the then-existing situation (i.e., investigation of matters by the 

Commission and referral to the Department of Justice for prosecution) was 

unsatisfactory because it involved delay and also overlapping of effort on the 

part of the Commission and the Department.8 Another disadvantage cited in the 

House report was that frequently (because of the time elapsed between the 

occurrence of the infraction and the criminal trial) the sentence imposed by the 

courts was too light and was insufficient to defer future violations.9

Although the House report stressed that the amendments would mean m ore. 

effective regulation by the Commission, it also said that the proposed procedure 

(assessment of penalties by the Commission, with review in the courts of 

appeals) “ would, in most instances, reduce the total litigation expenses to both 

the Government and private parties [and] relieve the overburdened Federal 

courts . . . .” 10

The Senate, however, amended the bill so as to restrict the authority of the 

Commission to seeking to compromise a civil penalty. Thus, under the Senate 

bill (which was enacted), absent such a compromise, the Commission may 

refer the matter to the Department of Justice for the bringing of a civil action to 

recover a penalty.

Evidently, the basis for the Senate amendment to the House bill was industry 

opposition to granting the Commission authority to assess civil penalties.11 The 

Senate report referred to “ contentions” that such a procedure would be 

contrary to due process, because the “ nature of the administrative agency 

process necessarily makes the agency . . . ill-suited for the imposition of 

punitive sanctions.” 12

sId., § 3; 46 U .S.C . 814 note (1975 Supp.).

6See 117 Cong. Rec. 32415 (1971).

7H. Rept. No. 92-478, 92d C ong., 1st sess. (1971), p. 1.

ald., p. 2.

Vd„ p. 3.

'°ld., p. 4.

11See S. Rept. No. 92-1014, 92d C ong., 2d sess. (1972), p. 3.

nld., p. 2.

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In explaining the shift from criminal sanctions to civil, the Senate report 

noted, as did the House report, the unsatisfactory, time-consuming nature of 

the then-existing means of enforcem ent.13 Furthermore, the Senate report 

stated:

To change the penalties for violations of these provisions from 

criminal to civil should make the documentation of violations 

simpler, thereby expediting final consideration by the Commission, 

or the Department of Justice and the courts. Since proving a violation 

would be easier, the threat of imposition of the prescribed penalty 

should act as a more effective deterrent to further violations.

Continuing, the Senate report stated14 that enactment of the bill

. . . should provide the Federal Maritime Commission with needed 

additional authority to more effectively discharge its statutory • 

responsibilities, encourage compromised settlements for violations of 

the shipping statutes, and help to avoid needless litigation in our 

over-crowed [sic] Federal courts.

The legislative history indicates that Congress’ main purpose in substituting 

civil sanctions was to enhance enforcement by the Commission. The possibility 

of bringing conspiracy prosecutions seems consistent with the main purpose of 

the 1972 amendments. Such prosecutions need not interfere with enforcement 

by the Commission and, indeed, could be a useful supplement. Still, consideration 

must be given to other objectives mentioned in the congressional reports.

ThesHouse report and, to a lesser extent, the Senate report expressed concern 

regarding duplication of effort by the Commission and the Department. This 

problem could be exacerbated if, for example, there should be a conspiracy 

prosecution in regard to a matter that had already been the subject of a 

Commission investigation and a civil action for recovery of a penalty.

Both of the reports indicated a desire to avoid increasing the backlog of cases 

in the Federal courts. This may be some evidence that, except for the means 

provided in § 16, Congress did not contemplate Federal enforcement in this 

area.

As the Fifth Circuit has pointed o u t,15 the 1972 amendments were clearly 

not based upon a belief that criminal punishment was too severe. Both 

committee reports stressed the need for a more effective deterrent. Nonetheless, 

Congress was also concerned with fairness to the regulated firms and, in 

particular, with reducing their litigation expense (as well as that of the 

Government). This is another aspect o f congressional intent that casts doubt on 

the availability of conspiracy prosecutions.

Finally, it must be noted that Congress could have provided for both civil and

l3S. Rept., p. 2.

14I d p. 3.

15United States v. Blue Sea Line. 553 F. (2d) 445, 450 (5th Cir. 1977) (upholding the dismissal 

of indictments charging pre-1972 rebates in violation of 8 16. paragraph Second).

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criminal sanctions for violation of the provisions in question, but did not do 

s o .16

The basic conclusion we draw from the legislative history is that there is no 

absolute conflict between Congress’ intent in amending § 16 and the bringing 

of conspiracy prosecutions in this area. On the other hand, the concerns 

expressed by the congressional committees with regard to avoiding overlap 

between the Commission and the Department, fairness to regulated entities, 

and reducing the burden on the courts are entitled to some weight. Those 

concerns suggest that if there are to be conspiracy prosecutions related to 

violations of § 16 great care must be used in selecting the cases. For reasons 

discussed below, the same conclusions are suggested by principles analogous to 

those underlying the Wharton rule.

.3. The nature of the Wharton rule was thoroughly considered by the 

Supreme Court in lannelli v. United States, 420 U.S. 770 (1975).17 The Court 

described the rule by quoting from its original source, W harton’s treatise on 

criminal law :18

When to the idea of an offense \e.g., dueling] plurality of agents is 

logically necessary, conspiracy, which assumes the voluntary accession 

of a person to a crime of such a character that it is aggravated by a 

plurality o f agents, cannot be maintained ....

Had the present issues arisen before the 1972 amendment of § 16— that is, 

when criminal sanctions were prescribed for conduct such as rebating— it 

would have been necessary to determine the applicability of the Wharton rule. 

In our opinion, however, because the substantive violations are no longer 

crimes, the Wharton rule as such does not apply.19

Nonetheless, since the substantive violations are “ offenses” for the purpose 

of 18 U.S.C. § 371, it should be proper to consider principles similar to those 

underlying the Wharton rule. In lannelli, the Court stated, 420 U .S., at 782, 

that the Wharton rule does not rest on principles of double jeopardy,20 but is 

merely a “judicial presumption, to be applied in the absence of legislative 

intent to the contrary.” The rule was explained as follows (420 U.S. at 

785-86, footnotes omitted):

l6For exam ple, willful violations might have been made subject to criminal sanctions.

The Department o f Justice sent a report on the House bill to both the House and the Senate 

committees. See H. Rept., p. 10; S. R ept., p. 6. The Department stated that it had no objection to 

enactment of the bill. Its report did not suggest the need to retain criminal sanctions and did not 

mention the possibility o f prosecutions under 18 U .S.C . § 371.

l7In lannelli, the Court, in a five-to-four decision, sustained convictions for violation of 18 

U .S.C . § 1955, prohibiting large-scale gam bling activities, and for conspiring to commit that 

offense.

I8420 U .S. at 773. quoting 2 F. W harton, Criminal Law § 1604 (12th ed., 1932) p. 1862.

lvOne indication that the rule applies only when the substantive offense is a crime is the 

discussion in lannelli of the procedural effect of the rule. The Court stated, 420 U.S. at 786, 

footnote 18, that in cases covered by the rule dismissal of the conspiracy charge is not required. The 

Court added, “ W hen both charges are considered at a single trial, the real problem is the avoidance 

o f dual punishment. This problem is analogous to that presented by the threat of conviction for a 

greater and a lesser included offense, and should be treated in a similar m anner.”

20Bui see footnote 19, supra.

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W harton’s Rule applies only to offenses that require concerted 

criminal activity, a plurality of criminal agents. In such cases, a 

closer relationship exists between the conspiracy and the substantive 

offense because both require collective criminal activity. The substantive 

offense therefore presents some of the same threats that the law of 

conspiracy normally is thought to guard against, and it cannot 

automatically be assumed that the Legislature intended the conspiracy 

and the substantive offense to remain as discrete crimes upon 

consummation of the latter. Thus, absent legislative intent to the 

contrary, the Rule supports a presumption that the two merge when 

the substantive offense is proved. [Emphasis as in original.]

Here, the question raised is whether violation of § 16, paragraph Second, 

requires concerted activity. If so, it could be argued, by analogy to the Wharton 

rule, that Congress did not intend any separate sanction for a two-party 

conspiracy to commit that offense.21

Under paragraph Second, it is “ unlawful for any common carrier by 

water . . . alone or in conjunction with any other person, directly or 

indirectly . . . [to] allow any person to obtain transportation for property at less 

than the regular rates . . . by means of false billing . . . [or] any other 

unjust . . . m eans.” If this provision is read literally, the minimum number 

required for violation is one— the carrier.22 (A shipper who knowingly and 

willfully obtains or attempts to obtain below-standard rates by such false means 

violates another provision, the initial paragraph of § 16.) In our opinion, 

however, such analysis is not entirely satisfactory.

Logically, it is possible that a carrier could provide transportation at less than 

the regular rate without the shipper’s realizing that any false or unfair means 

had been used. Still, it seems reasonable to assume that often the violation 

would involve concerted action, e.g., an agreement that the carrier will pay a 

rebate to the shipper. If so, it may be asserted that the mere existence of some 

concerted action is not a basis for going beyond the civil penalties prescribed by 

Congress; this supports our conclusion (derived from the legislative history) 

that special care should be used in selecting cases to be prosecuted under 18 

U.S.C. § 371.

4. Our recommendation is that a distinction be drawn between what might

2lThe W harton rule is subject to several exceptions. One is that a conspiracy prosecution is 

permissible when the number of conspirators exceeded the minimum number of persons required 

for commission o f the substantive offense. See. lannelli v. United States, supra, 420 U .S ., at 782, 

footnote 15.

22The phrase "alone or in conjunction with any other person" does not alter our conclusion 

regarding the minimum.

Cf. M ay v. United States. 175 F. (2d) 994, 1003 (D .C. C ir., 1949), cert, denied, 338 U.S. 830 

( 1949) (conspiracy to commit offense of Congressm an’s accepting payment for services regarding a 

claim against the Government); Ex parte O 'Leary, 53 F. (2d) 956, 957 (7th C ir., 1931), cert, 

denied, 283 U.S. 830 (1931) (conspiracy to commit offense of Federal officer’s receiving a bribe). 

These cases applied an exception to the Wharton rule; this exception permits a conspiracy 

prosecution where the substantive offense (e.g .. accepting a bribe) is such that only one of the 

parties could commit it.

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be called “ ordinary” violations of § 16, paragraph Second, and aggravated 

cases. Such determinations depend of course upon the particular facts.

Particular care must be given to the bases for treating a conspiracy and a 

completed substantive offense as separate, that is, the “ distinct kinds of threats 

to society that the law of conspiracy seeks to avert.” 23

Factors to be considered include the nature and extent of the conspiracy and 

the number of parties. For example, whether the agreement relates to an 

isolated transaction or to a long-continuing series of transactions.

There is no violation of paragraph Second unless false billing or some other 

unfair means is used. Thus, ordinarily, some concealment will be involved. 

When, however, the parties go to unusual lengths to conceal their conduct 

(e.g., the use of foreign subsidiaries24), there may be special risks to society. 

Moreover, where such a scheme is agreed upon, there may also be a sound 

basis for charging a conspiracy to defraud the Federal Maritime Commission.25

Because Congress gave primary responsibility for enforcement to the 

Commission, consideration should be given to the action (or the position) taken 

by the Commission. For example, if the question of defrauding the Commission is 

raised, what is its view regarding the matter?

In terms of fairness, it may be more difficult to justify proceeding with a 

conspiracy charge if, with regard to the underlying conduct, a civil penalty has 

been paid.

Our approach may be illustrated by the following hypothetical cases:

a. In the first hypothetical situation, a carrier and a shipper agree, with 

respect to a particular shipment or a series of shipments, that the carrier will pay 

a rebate to the shipper. It is understood that the rebate will be paid in cash and 

that the carrier’s books will not disclose the true nature of the payment. The 

amounts involved are relatively small, and there is no history of such practices 

on the part of the parties involved.

We question whether a conspiracy prosecution would be appropriate in a 

case o f this type. The parties could argue, with some force, that their conduct is 

at most an ordinary violation of § 16 and that Congress intended use of the 

sanction of civil penalties and nothing more.

b. In the second hypothetical situation, the Federal Maritime Commission 

obtains evidence that a carrier may be engaged in paying improper rebates. It 

warns the carrier that such practices are illegal. Then, the carrier and the 

shipper enter into a secret agreement for the payment of rebates. The agreement 

includes use of an elaborate scheme for making the payments— that is, several 

stages of laundering are effected, in part, by foreign subsidiaries of the carrier.

23lannelli v. United States, supra, 420 U .S ., at 783 (footnote omitted).

“ Because o f our basic conclusion, it is not necessary to discuss the question whether a carrier 

can conspire with one (or more) o f its subsidiaries. S ee, Perma Life M ufflers, Inc. v. International

Parts Corp., 392 U .S. 134 (1968) (treble-damage action under Sherman Act may be based on a 

conspiracy between corporate entities with common ownership); Note, Developments in the 

Law-Criminal Conspiracy, 72 Harv. L. Rev. 920, 1000 (1959). See also Department o f Justice, 

“ Antitrust Guide for International O perations,’’ (January 26, 1977), p. 12.

25See, H unsaker v. United States, supra, 279 F. (2d), at 114.

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Concerted action of this type would seem to pose special risks of harm to 

society, e.g., the risk that the laundering scheme will be used to effect 

violations of other Federal laws. The action of the shipper and the carrier could 

properly be regarded as a conspiracy (1) to violate § 16, paragraph Second, and 

(2) to defraud the Commission.

We do not have detailed information regarding the present cases and, 

accordingly, are unable to make specific recommendations concerning them. 

We hope that the above discussion will assist you in determining how to 

proceed.

J o h n M . H a r m o n

Assistant Attorney General

Office o f Legal Counsel

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