United States v. Santos: “Proceeds” in Federal Criminal Money Laundering Statute, 18 U.S.C. Section 1956, Means “Profits,” Not “Gross Receipts”
Released: 2009-05-19T00:00:00

Background of the Case

United States v. Santos involved a challenge to the conviction of the operator of an illegal lottery and one of his collectors for violating a provision of 18 U.S.C. § 1956, a key federal criminal anti-money laundering statute. The defendants were charged with using the "proceeds" of unlawful activity to conduct a financial transaction with intent to promote the illegal gambling business. For a conviction under this particular subsection of the statute, which covers a form of money laundering, referred to as "promotional money laundering," the prosecution must prove: (1) that the defendant engaged in a financial transaction involving the "proceeds" of an unlawful activity; (2) that the unlawful activity had been designated by the statute as a "specified unlawful activity"; (3) that defendant knew that the property involved in the transaction "represents the proceeds of some form of unlawful activity"; and (4) the defendant had the "intent to promote the carrying on of specified unlawful activity."

At their trial, the defendants were convicted of operating an illegal gambling business in violation of 18 U.S.C. § 1955. Under 18 U.S.C. § 1955, anyone convicted of conducting or owning an illegal gambling business is subject to a criminal fine and imprisonment for up to five years. Proof of "illegal gambling business" requires a showing that the gambling business violates state law; involves five or more persons; and has been in operation for more than thirty days or has a gross revenue of $2,000 a day. The evidence showed that gambling receipts were used to pay the expenses of the operation—payouts to winners, salaries to employees, costs of betting slips, etc.—as well as to realize profits. The promotional money laundering charge was based on payments to winners and to employees—runners—of the gambling business. These payments were part of the underlying charge of operating an illegal gambling business. The defendant convicted of operating the gambling business received a 60-month sentence for the illegal gambling conviction and 210 months for the money laundering.

Supreme Court Decision

The issue presented to the Court was a straightforward question of statutory interpretation: as used in 18 U.S.C. § 1956, does "proceeds" mean "profits" or "gross receipts?" For Santos and his co-conspirators, the answer the Court provided is "profits." For others, however, the answer is not clear because there is no majority opinion in the case; there is an opinion for a plurality of four justices which is joined by a concurring opinion by a fifth justice, Justice Stevens, that limits the reach of the holding to a narrower ground. This means that the case may be cited as authority only for the narrow ground. Complicating this, however, are two factors: (1) the plurality opinion includes language seeking to confine the meaning of Justice Stevens's opinion; and (2) all of the other justices disavowed the approach taken by Justice Stevens.

Justice Scalia, in the plurality opinion, writing for himself and Justices Souter, Ginsburg, and Thomas, found no way to decipher what Congress intended in using the word "proceeds" in 18 U.S.C. § 1956. He found that (1) there is no definition of "proceeds" in 18 U.S.C. § 1956; (2) the federal criminal code does not provide a consistent definition or use for the term; (3) either "profits" or "gross receipts" would fit everywhere "proceeds' is used in the statute; and (3) dictionaries revealed no overwhelming preference for a primary ordinary meaning of the term. Declaring himself unable to resolve the ambiguity, Justice Scalia resorted to the rule of lenity which requires clarity in criminal statutes and ambiguities resolved in favor of defendants. He reasoned that, because "profits" is harder to prove than "gross receipts," defining "proceeds" as "profits" is more lenient towards defendants, and, therefore, it is the required interpretation in the statute. This means that, under this statute, prosecutors must prove, in addition to the other elements of the offense, that the defendant knew that the property involved in the transaction is " profits " of "some form of unlawful activity" and that the transaction involves " profits " of "specified unlawful activity."

In the opinion, Justice Scalia seeks to dispel arguments raised by the Solicitor General that defining "proceeds" as "profits" undermines the purpose of the money laundering statute—punishing concealment and promotion of illegal activities—because it does not capture all the funds generated by the illegal activity. He first asserts that the purpose of the money laundering laws might well have been eliminating the harm caused by pouring criminal profits into expanded criminal activity (i.e., "leveraging" profits). He, then, notes that the "profits" interpretation avoids the merger problem that would occur in many of the predicate offenses named in 18 U.S.C. 1956, including operating an illegal gambling business in violation of 18 U.S.C. § 1955. This is because, if "proceeds" were interpreted to mean "gross receipts," every separate expense of the underlying crime paid after its commission would be subject to prosecution both as the substantive crime and as the money laundering offense. This would raise the double-jeopardy-like situation that the merger doctrine seeks to prevent.

In a concurring opinion, Justice Stevens essentially limits the reach of the plurality opinion. He did not focus on the rule of lenity although his rationale is consistent with it to the extent that he would interpret "proceeds" to mean "profits" in the case before the Court. He begins with a premise which no other justice embraces—that courts may choose different interpretations of ambiguous terms in statutes depending on the factual circumstances. He draws a parallel between the scope of judicial interpretation of statutes and the power of Congress to flesh out terms in statutes. He concludes that because Congress could specify separate meanings for a term in a statute, courts having to fill in statutory gaps occasioned by ambiguous language do not have to decide on one meaning for all circumstances. To him, the logic is: if Congress may apply different definitions drafting legislation, courts may also do so. From this premise, he seems to have concluded that Congress intended different meanings for "proceeds" in § 1956. Following this conclusion, Justice Stevens finds that "proceeds" is intended to mean "profits" where, as with the predicate offense of conducting an illegal gambling business, there is no legislative history of congressional intent to the contrary. On the other hand, the opinion seems to assert that legislative history of congressional intent is necessary before courts may extend the meaning of "proceeds" to gross receipts. The opinion also contains language indicating that there is the possibility that there is legislative history to substantiate congressional intent to authorize money laundering prosecutions based on gross receipts transactions for certain offenses.

Potential Impact

Although Justice Stevens alludes to the possibility that legislative history supports interpreting "proceeds" as "gross receipts" for some types of prosecutions, it is significant that the plurality opinion disputes this and characterizes it as dicta. This may raise uncertainty as to the sustainability of convictions involving the contraband and organized crime offenses of the kind Justice Stevens cited as having legislative history supporting a "gross receipts" definition of "proceeds." Because many of the money laundering cases that have been brought under the subsection of 18 U.S.C. § 1956 at issue have involved payment of expenses of the underlying crime, the Justice Department's ability to shut off the funding of criminal activities may be severely inhibited. An added problem will be the difficulty of sustaining the burden of proof that will be required to show "profits" of criminal activities. In its merits brief, the Solicitor General argued that this burden would be substantial and perhaps insurmountable.

In a dissenting opinion, written by Justice Alito, joined by Chief Justice Roberts, and Justices Kennedy and Breyer, there is a further indication of the difficulties that the "profits' definition will present to prosecutors: (1) one of the main purposes of enacting the money laundering laws was to target professional money launderers who are unlikely to know or care whether the property they are dealing with is "profits" or "gross receipts"; (2) a "profits" interpretation would require courts to determine the ordinary expenditures of criminal activities to distinguish them from "profits"; and (3) under the plurality opinion, if the government charges a continuing offense over period of years—as in the case before the Court—the government would have to show that the operation yielded a profit over the course of time charged.

Another dissenting opinion, written by Justice Breyer, who also joined Justice Alito's dissent, alludes to possible solutions to what he, agreeing with the Justices Scalia and Stevens, sees as a merger problem—that prosecutors are able to transform one crime into two and add the money laundering punishments for "financial transactions that constitute an essential part of" the predicate offense. One approach he mentions is requiring that the money laundering transaction be "distinct" from the underlying offense. He also suggests that the merger problem could be corrected by relying on the U.S. Sentencing Commission to use its authority to address the unfairness resulting from using the money laundering statute to under 28 U.S.C. § 991(b)(1)(B). Justice Scalia takes issue with each of these suggestions: the first because "it has no basis whatever in the words of the statute" ; the second because it lacks certainty.

Legislation

S. 386 , the Fraud Enforcement and Recovery Act of 2009, has been passed by both the House and Senate and, as of May 19, 2009, awaits the signature of the President. It was introduced on February 5, 2009, by Senator Leahy to enhance federal enforcement capabilities to counteract mortgage fraud, securities fraud, and fraud with respect to federal financial assistance. In addition to provisions which provide funding for investigation and prosecution of this type of fraud; substantive provisions extending the reach of specific criminal statutes addressing financial fraud; and (in the version passed by the House) the creation of a legislative branch Financial Crisis Inquiry Commission, the bill includes an amendment to the definition of "proceeds" in the anti-money laundering laws to cover "gross receipts" of the underlying criminal activity. This is designed to solve the problems identified in the Santos decision by clarifying the ambiguity found by the Court and making it clear that "proceeds" means "gross receipts." Specifically, as passed by both House and Senate, S. 386 would add the following provision to 18 U.S.C. § 1956(c) and incorporate it into 18 U.S.C.§ 1957(c): "the term 'proceeds' means any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity." The House-passed version also includes a provision addressing the merger problem. It sets forth a sense of Congress that prosecutions under the major anti-money laundering statutes, 18 U.S.C. §§ 1956 and 1957, should not be undertaken in combination with the prosecution of any other offense, without prior approval of specified Department of Justice Officials or the relevant United States Attorney if the underlying predicate offense for the money laundering prosecution "is so closely connected with the conduct to be charged as the other offense that there is no clear delineation between the two offenses." This provision also includes a requirement that, for the next five years, the Department of Justice provide the House and Senate Judiciary Committees with annual reports on the prosecutions under such approvals, denied such approvals, and undertaken without such approvals where such approvals would have been relevant.

Other measures in the 111 th Congress include: S. 378 , introduced by Senator Bayh, as a stand-alone measure to amend 18 U.S.C. § 1956(c)(8) to specify that "proceeds" includes "gross receipts," and H.R. 1793 , introduced by Representative Lungren, to amend 18 U.S.C. § 1956(c) to define "proceeds" as "any property derived from or obtained, directly or indirectly, through the commission of any specified unlawful activity, including the gross proceeds of that specified unlawful activity."