Court Opinion

ID: 2995559
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:21:02.280247+00
Date Added: 2024-06-11T11:49:05.072022
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

Nos. 01-1291 & 01-1292

United States of America,

Plaintiff-Appellee,

v.

Lawrence Scialabba and Robert T. Cechini,

Defendants-Appellants.

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 CR 296--Ruben Castillo, Judge.

Argued January 15, 2002--Decided February 28, 2002

  Before Flaum, Chief Judge, and Coffey and
Easterbrook, Circuit Judges.

  Easterbrook, Circuit Judge. A financial
transaction involving the "proceeds" of
crime, and designed to promote the
carrying on of certain offenses, is
unlawful money laundering. 18 U.S.C.
sec.1956(a)(1). Neither the Supreme Court
nor this circuit has defined the word
"proceeds", and there is no definition in
the statute itself. This case presents
the question whether "proceeds" refers to
the gross income from an offense, or only
the net income. We conclude that, at
least when the crime entails voluntary,
business-like operations, "proceeds" must
be net income; otherwise the predicate
crime merges into money laundering (for
no business can be carried on without
expenses) and the word "proceeds" loses
operational significance.

  The business in this case is gambling,
which is unlawful in Illinois unless
licensed by the state. OK Amusement, of
which Robert Cechini was sole proprietor,
provided video poker machines to bars,
taverns, and restaurants (collectively,
the retail outlets). Patrons dropped
coins into the machines and received
on-screen "credits" if they won. These
credits could be used lawfully to
continue playing, or unlawfully as the
basis of cash payouts. Many retail
outlets redeemed credits for cash. Later,
when Cechini or Lawrence Scialabba, his
assistant, opened the coin boxes, the
contents would be split with the outlet’s
owner: some went to cover the payments
made to customers, some was retained by
the owner as compensation for his role in
the business, and defendants kept the
rest as compensation for the machines--
which OK Amusement not only supplied but
also fixed (if they broke down) or
replaced (if they were seized in raids by
the police).

  Cechini and Scialabba have been
convicted of running an unlawful gambling
business, see 18 U.S.C. sec.sec. 371,
1955;filing tax returns that failed to
report their income from this business,
see 26 U.S.C. sec.7206(1); and conspiring
to defeat tax collection from the
outlets’ owners, see 18 U.S.C. sec.371.
They do not appeal from any of these
convictions. But they do appeal from the
money laundering convictions, because
under the version of the Sentencing
Guidelines in force before November 1,
2001, the money laundering convictions
substantially augmented their prison
terms. Compare United States v.
Buckowich, 243 F.3d 1081 (7th Cir. 2001),
with Amendment 634, effective November 1,
2001. See also United States v. Perez,
249 F.3d 583 (7th Cir. 2001). Scialabba’s
base offense under the old version of
U.S.S.G. sec.2S1.1 was 31, producing a
sentencing range of 108-135 months (and a
sentence of 108 months); with no money
laundering counts the offense level would
have been 21 and the range 37-46 months.
Cechini’s base offense level was 34, with
a range of 235-293 months; he received a
sentence of 188 months (the bottom of the
range for level 32, after the district
court made an error in addition); but
without the money laundering convictions
his offense level would have been 23 and
the sentencing range 84-105 months.
  According to the prosecutor, Cechini and
Scialabba violated sec.1956(a)(1) when
they handed some of the money in the coin
boxes over to the outlets’ owners and
used more of that revenue to meet the
expenses of the business (such as leasing
the video poker machines and obtaining
amusement licenses for them from the
state). This is equivalent to saying that
every drug dealer commits money
laundering by using the receipts from
sales to purchase more stock in trade,
that a bank robber commits money
laundering by using part of the loot from
one heist to rent a getaway car for the
next, and so on. An embezzler who spent
part of the take on food and rent, in
order to stay alive to cook the books
again, would be a money launderer too.
Yet none of these transactions entails
financial transactions to hide or invest
profits in order to evade detection, the
normal understanding of money laundering.
Nor were Cechini or Scialabba charged
with reinvestment in seemingly legitimate
businesses or other means to whitewash (=
"launder") the funds; the focus was
entirely on the disposition of the gross
income. Thus the money laundering
convictions depend on the proposition
that gross income is "proceeds" under the
statute.

Here is the text of sec.1956(a)(1):

Whoever, knowing that the property
involved in a financial transaction
represents the proceeds of some form of
unlawful activity, conducts or attempts
to conduct such a financial transaction
which in fact involves the proceeds of
specified unlawful activity--(A)(i) with
the intent to promote the carrying on of
specified unlawful activity; or (ii) with
intent to engage in conduct constituting
a violation of section 7201 or 7206 of
the Internal Revenue Code of 1986; or (B)
knowing that the transaction is designed
in whole or in part--(i) to conceal or
disguise the nature, the location, the
source, the ownership, or the control of
the proceeds of specified unlawful
activity; or (ii) to avoid a transaction
reporting requirement under State or
Federal law, shall be sentenced to a fine
of not more than $500,000 or twice the
value of the property involved in the
transaction, whichever is greater, or
imprisonment for not more than twenty
years, or both.

The prosecutor’s argument is plain
meaning: Divvying up income with tavern
owners is a "financial transaction which
involves the proceeds" (etc.). According
to the United States, two opinions
support its plain-meaning view: United
States v. Conley, 37 F.3d 970 (3d Cir.
1994), and United States v. Mankarious,
151 F.3d 694, 706 (7th Cir. 1998). We do
not read these cases so; and the meaning
of this statute is not at all plain
because it lacks a definition of
"proceeds" and the context does not
reveal whether the reference is to gross
receipts or net income.

  Treating the word as a synonym for
receipts could produce odd outcomes.
Consider a slot machine in a properly
licensed casino. Gamblers insert coins,
and the machine itself returns some of
them as winnings. Later the casino opens
the machine and removes the remaining
coins. What are the "proceeds" of this
one-armed bandit: what’s left in the cash
box, or the total that entered through
the coin slot? At oral argument the
prosecutor sensibly replied that the
"proceeds" do not exceed what’s left
after gamblers have received their
jackpots; yet the only difference between
the slot machine and the video poker
machine is that the slot machine is
automated and pays gamblers directly.
Likewise, one would suppose, the
"proceeds" of drug dealing are the
profits of that activity (the sums
available for investment outside drug
markets), the net yield rather than the
gross receipts that must be used to buy
inventory and pay the wages of couriers.
It would have been easy enough to write
"receipts" in lieu of "proceeds" in
sec.1956(a)(1); the Rule of Lenity
counsels against transmuting the latter
into the former and catching people by
surprise in the process.
  If Congress had levied a tax on the
"proceeds" of a casino, most speakers of
English would understand this as a tax on
the profits of the business (what’s left
after paying suppliers and the winning
gamblers) rather than on the amount
wagered. It makes sense to read
"proceeds" in sec.1956(a)(1) the same
way. If instead the word "proceeds" is
synonymous with gross income, then we
would have to decide whether, as a matter
of statutory construction (distinct from
double jeopardy), it is appropriate to
convict a person of multiple offenses
when the transactions that violate one
statute necessarily violate another. See,
e.g., Heflin v. United States, 358 U.S.
415 (1959); Simpson v. United States, 435
U.S. 6 (1978); Busic v. United States,
446 U.S. 398 (1980). By reading
sec.1956(a)(1) to cover only transactions
involving profits, we curtail the overlap
and ensure that the statutes may be
applied independently to sequential steps
in a criminal enterprise.

  Mankarious offers the prosecutor no
support. The defendants were charged with
mail fraud and money laundering, among
other things. They received money from
the mail fraud before they used the mail,
which served to disguise their preceding
fraud. The defendants engaged in transac
tions with this money before the mailing
and argued that these funds can not be
"proceeds" from mail fraud until the mail
fraud is complete. We held, to the
contrary, that a fraudulent scheme
involving mail (for the federal crime is
the whole scheme) can generate "proceeds"
before the mailings have been completed.
That decision has nothing to do with the
difference between gross and net income;
the distinction played no role in
Mankarious, which was about timing rather
than the difference between "proceeds"
and "receipts."

  Conley is closer to the mark but does
not hit it. The theory of prosecution in
Conley was the same as the theory here:
that using gross revenues of a gambling
business to pay suppliers and employees
violates sec.1956(a)(1). But the defense
differed. Instead of arguing that there
is a difference between revenues and
proceeds, the defendants in Conley
embraced the idea that receipts equal
"proceeds" and used that as the fulcrum
of a contention that prosecution for both
gambling and money laundering violates
the double jeopardy clause of the fifth
amendment, because proof of gambling
shows money laundering too. The third
circuit rejected that variation on the
"same transaction" approach to double
jeopardy, remarking that the statutory
elements of the offenses differ, and the
Supreme Court has held that it is the
elements of the crime rather than the
underlying transactions that define an
"offence" for purposes of the double
jeopardy clause. See United States v.
Dixon, 509 U.S. 688 (1993). Conley
accepted the parties’ shared assumption
that "proceeds" means gross income. It
did not consider, and thus did not
resolve, the question before us today.
Nor does our opinion in United States v.
Jackson, 935 F.2d 832, 839-42 (7th Cir.
1991), resolve it. Some of the
transactions said to be money laundering
in that prosecution involved the
purchases of business supplies, but other
transactions involved reinvestment of net
profits; the court was not asked to, and
did not, decide whether all gross
receipts are "proceeds." We now hold that
the word "proceeds" in sec.1956(a)(1)
denotes net rather than gross income of
an unlawful venture.

  The money laundering convictions are
vacated, and the matter is remanded to
the district court for resentencing on
the other convictions. This may affect
the amount of forfeiture (previously set
at about $3 million), so it would be pre
mature to address the defendants’
arguments that this sum was
miscalculated.