US v. Santos
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Contents |
[edit] Briefs and Documents
Docket: 06-1005
Oral Argument: Transcript
Judgment:
- Brief for Petitioner United States of America
- Brief for Respondent Efrain Santos
- Reply Brief for Petitioner United States of America
- Brief for Respondent Benedicto Diaz
Amicus briefs
[edit] Pre-Argument Articles
[edit] Argument Preview
By Amy Howe
Does the term “proceeds” in 18 U.S.C. 1956(a)(1), which prohibits money laundering, refer to the gross receipts of illegal activity or only the profits of that activity? On October 3, 2007, the Supreme Court will consider this question in No. 06-1005, United States v. Santos, a case that – at least according to the government – could have a significant effect on the government’s ability to prosecute money laundering cases.
[edit] Background
18 U.S.C. 1956(a)(1) is the principal federal money laundering statute. It imposes criminal penalties on anyone who knows that the property involved in a financial transaction represents the proceeds of an illegal activity but nonetheless conducts or attempts to conduct such a transaction “with the intent to promote the carrying on of” (Section 1956(a)(1)(A)(i)) that activity or “knowing that the transaction is designed . . . to conceal or disguise the nature . . . of the proceeds of” (Section 1956(a)(1)(B)(i)) that activity.
For nearly two decades, respondent Efrain Santos operated an illegal lottery in Indiana with the help of, among others, respondent Benedicto Diaz. Santos was convicted of charges arising out of his lottery operation, including one count of promoting money laundering, in violation of 18 U.S.C. 1956(a)(1)(A)(i), that stemmed from his payments to the lottery’s couriers and winners. Diaz pleaded guilty to conspiracy to commit money laundering, a charge that rested on his receipt of payment for his work in the lottery. The Seventh Circuit rejected both respondents’ appeals. However, after their convictions became final, the Seventh Circuit held in United States v. Scialabba (2002) that money used to pay for the overhead expenses of an illegal activity cannot be “proceeds” for purposes of Section 1956(a)(1). Instead, the court of appeals reasoned, the term “proceeds” encompasses only the profits stemming from an illegal activity.
Relying on Scialabba, Santos and Diaz filed a motion for collateral relief, which the district court granted. On appeal, the Seventh Circuit affirmed the decision in respondents’ favor. In so doing, it acknowledged that other courts of appeals had reached a contrary result; that the Seventh Circuit’s holding could make it more difficult for the federal government to enforce the money laundering statutes; and that “the government ha[d] demonstrated that the question of whether Congress intended the term proceeds in § 1956(a)(1)(A)(i) to mean gross or net income is a debatable one.” However, it nonetheless declined to overturn the decision in Scialabba. Instead, and waving the judicial version of a red flag, it explained that “[r]ather than vacillate over Congress’s intent, it is better for our circuit here . . . to stay the course at this juncture, for only Congress or the Supreme Court can definitively resolve the debate over this ambiguous term.”
[edit] Petition for Certiorari
The United States filed a petition for certiorari, which was granted on April 23, 2007.
The government’s petition advanced two basic arguments. First, the government contended that the Seventh Circuit’s overly narrow construction of the term “proceeds” in Section 1956(a)(1) would limit the government’s ability to enforce the money laundering statute. The construction is overly narrow, the government emphasized, in light of both the commonsense definition of “proceeds” (as supported by an array of dictionaries) and the legislative history of the RICO forfeiture statute, enacted shortly before the money laundering statute, which specifically explains that the term “proceeds” does not mean “profits.” The construction “also presents serious practical problems for money laundering operations,” the government continued, including because “there are no generally accepted accounting principles for criminal enterprises.” Thus, under the Seventh Circuit’s construction, courts would have to resolve a laundry list of “novel and difficult questions” – including, for example, “whether illicit profit should be measured using accrual or cash accounting methods,” “whether profit should be measured on an annual, monthly, or other basis,” and “how ‘capital expenses’ should be amortized” – to determine the “profits” for a particular illegal activity. And the interpretation of “proceeds” to include only “profits” would impede not only prosecutions under Section 1956(a)(1)(A)(i) but also under Section 1956(a)(1)(B)(i), which also involves “proceeds.”
Second, the government contended, the circuits are divided with regard to the question presented: two circuits (the First and Third) have “expressly considered and rejected” the Seventh Circuit’s rationale, while another circuit (the Eighth) has followed those circuits, albeit without citing the Seventh Circuit’s decision in Scialabba.
Respondents Diaz and Santos filed two separate briefs opposing certiorari. Diaz argued that certiorari was not warranted for several reasons. First, he contended, the government’s cert. petition merely recycled the arguments that it had made – unsuccessfully – in its petition in Scialabba. Second, the government’s dire warnings regarding the effect of the Seventh Circuit’s decision on money-laundering prosecutions have not come to fruition. Courts are perfectly capable of implementing the Seventh Circuit’s rule even without “Wharton School PhD’s”; all that they need to be able to do to calculate the “profits” from an illegal activity is subtract expenses from gross receipts. Moreover, Diaz reassures the Court, financial records for illegal activities often are available: in this case, for example, the government even obtained some records from the lottery’s accountant. And further evidence that the Seventh Circuit’s rule will not have any adverse effects can be seen in the context of RICO forfeiture cases, where the Seventh Circuit has similarly construed “proceeds” to mean “net profits” for over a decade. Third and finally, even if the term “proceeds” were construed to mean “gross receipts,” in this case there has been no showing that – as required by law – the money-laundering transaction at issue is separate from the predicate offense, as Mr. Diaz merely took his salary from the money that he collected.
Respondent Santos echoed Diaz’s argument that the government has not demonstrated a money-laundering transaction in this case that is separate from the predicate offense. Because the only financial transaction at issue in his case was running an illegal gambling operation, this case is not a good vehicle in which to address the question presented.
[edit] Merits Briefing
In its brief on the merits, the United States reiterates the arguments that it made in the petition. First, and citing no fewer than twelve dictionaries, it again emphasizes that “gross receipts” is the primary meaning of the term “proceeds,” and that such a definition is also consistent with the meaning that Congress gave to the term in other related statutes, including the RICO and drug forfeiture statutes.
Second, the government reiterates, the Seventh Circuit’s construction of the term “proceeds” as including only profits is overly narrow and would prohibit the government from bringing some prosecutions under the money-laundering statute, including those of criminals who had not yet turned a profit. (The government does concede the obvious question here – i.e., that “[a]s a practical matter, it may be that few individuals will run the risk of criminal sanctions to pursue an illegal enterprise that is not profitable” – but contends that if the Seventh Circuit’s construction is allowed to stand “it will be easy for defendants to assert an absence of profits and difficult for the government to prove profitability.”)
Third, the government continues to assert that the Seventh Circuit’s construction would create difficulties not only for the government, which would be required to prove that the underlying criminal activity turned a profit, but also for the courts. On this point, the government addresses some of the counterarguments raised in the respondents’ BIO. It explains, for example, that most criminal enterprises do not keep accounting records, and that those few records which do exist are likely to be inaccurate, indecipherable, or flat-out phony. Moreover, the Seventh Circuit’s interpretation would require the government to prove that the defendant knew that the underlying crime was profitable – a nearly insurmountable burden in cases involving professional money launderers. And the government dismisses the BIO’s argument that courts could compute profits simply by subtracting expenses from gross proceeds, explaining that because there is no specific accounting method to use in such cases, “money laundering trials would likely turn into a battle of accounting experts.”
Fourth, the government again attempts to rebut the policy justifications on which the Seventh Circuit relied in reaching its conclusion. It explains that the Seventh Circuit’s concern that “proceeds” must be construed to mean “profits” to avoid a scenario in which a defendant is prosecuted on multiple grounds for the same offense is unfounded, as other elements of the money-laundering statute “ensure that the money laundering offense and the underlying crime remain distinct.” And the rule of lenity does not come into play in this case, the government reasons, because it applies only when the statute is ambiguous – which this statute is not.
In his brief on the merits, respondent Efrain Santos first argues that unless the term “proceeds” is construed to mean “profits,” there is no distinction between a violation of 18 U.S.C. § 1955 – conducting an illegal gambling operation – and a money laundering violation under Section 1956(a)(1). He explains that if proceeds were instead construed as “gross receipts,” as a practical matter everyone who is found guilty of a violation of Section 1955 will also be guilty of a Section 1956(a)(1) violation.
Santos next counters the government’s myriad dictionary definitions of “proceeds” with his own dictionaries (and Google searches) – which, he contends, demonstrate that “proceeds” can in fact mean both gross receipts AND profits. And he downplays the government’s reliance on legislative history by citing legislative history of Section 1956(a)(1) demonstrating that Congress was in fact focused on profits, rather than gross receipts, when it enacted the statute. The government’s arguments to the contrary, he notes, are based on the legislative history of the RICO statute, which is less relevant. To the extent that any ambiguity regarding the meaning of “proceeds” remains (and, like the government, Santos contends that the statute is clear, albeit with a different meaning attributed to “proceeds”), the rule of lenity militates in favor of Santos’s position.
Santos’s brief dismisses the government’s argument that the Seventh Circuit’s construction of “proceeds” will make it more difficult to prosecute money launderers as “pure speculation that is belied by the Government’s arsenal of evidentiary procedures to prove profits.” Indeed, Santos notes, the government successfully manages to prosecute other offenses – such as income tax evasion – that require similar showings. In any event, Santos concludes, any difficulties arising from a construction of “proceeds” to mean “profits” are best addressed by Congress rather than the Supreme Court.
In his brief, respondent Benedicto Diaz echoes some of the same arguments made by Santos regarding the use of dictionaries (which he deems “inconclusive”) and the appropriate legislative history. Addressing the language of the statute and the statutory context, he points out that although Congress used the term “gross revenue” in Section 1955, it nonetheless opted not to use that term in Section 1956(a)(1), leading to the conclusion that it did not intend the term “proceeds” to be equivalent to “gross revenue” or “gross receipts.” Two other terms used in Section 1956(a)(1) also support his construction of the term “proceeds.” First, he explains, the statute prohibits transactions which “promote” money laundering. The term “promote” has a “clear and unambiguous meaning: to expand or increase.” An expansion or increase in money-laundering activity, he continues, can only take place with profits. Second, while the statute requires that the transactions at issue be designed to “conceal” the proceeds of unlawful activity, the payment of business expenses are not designed to conceal and in fact generally make the unlawful activity more likely to be discovered.
Diaz also addresses the practical difficulties purportedly created by the Seventh Circuit’s construction of “proceeds.” First, as his case demonstrates, the government’s concerns about the lack of accurate records from which to calculate an activity’s profits are unfounded; here, for example, the United States was able to obtain a host of financial records, including from an accountant. Second, the need to choose an accounting method to determine any profits does not pose an insurmountable hurdle; as the government concedes, “there is no one, uniform set of accounting principles that applies in all contexts, even for lawful businesses.”
Finally, Diaz notes that the government’s construction, by effectively conflating the money-laundering offense with the underlying prohibition on illegal gambling, automatically and dramatically increases the sentence for what is essentially the same conduct.
[edit] Oral Argument Recap
Although the Court granted cert. to consider whether the term “proceeds” as used in 18 U.S.C. 1956(a)(1) refers to gross receipts or net profits, it was not at all clear from the oral argument whether a majority of the Court would actually reach that issue.
Arguing on behalf of the United States, Assistant to the Solicitor General Matthew Roberts ran into tough questions from the justices. Specifically, although the United States wanted to reiterate its argument that the “profits” definition advocated by the Seventh Circuit below and respondents in this case is illogical because it would exclude transactions – such as the expense payments at issue in this case – that Congress obviously intended to cover, several justices were unwilling to accept the underlying premise of that argument. First out of the box was Justice Scalia, who responded to Roberts’s assertion that adopting a “profits” definition of proceeds would result in some gambling-related behavior not being covered by the statute by asking “so what? . . . Is there some rule up there that says every criminal statute has to cover as much as possible?” Scalia found it “extraordinary . . . that Congress would want to make all . . . betting operations like this a violation automatically of two criminal statutes.” Justice Ginsburg agreed. In her view, the expense payments were not an effort to conceal, but instead merely “an ordinary and necessary expense of the illegal business,” such that the government’s construction merely imposed stiffer penalties for the same conduct already covered by the basic gambling statute. Scalia then parried Roberts’s suggestion that the money-laundering statute did not involve the same conduct because paying the winners and collectors is not a required element of the basic gambling statute: “[C]ome on. Nobody – nobody runs a gambling operation without paying off the winners. It’s not going to last very long.”
Questions from Justices Kennedy and Souter followed before Justice Alito threw Roberts a temporary lifeline in the form of a question regarding whether the other justices’ concerns about treating payments of expenses as money laundering resulted from the Seventh Circuit’s broad construction of other statutory terms such as promotion and concealment – “concepts,” he noted, “that are not before us here.” Roberts quickly agreed, but was just as quickly drawn back into questions from other justices.
The Chief Justice then stepped in by noting that the other justices’ concerns would still be present even if the Court were to limit the definition of “proceeds” to profits. Roberts agreed with the Chief, but Justice Scalia was less convinced. He told Roberts that the narrower definition would “solve a lot” of the problems unless the government was “willing to come in and say, yes, do it to us, give us a narrower definition of concealment and a narrower definition of what’s a transaction.” When Roberts responded that those definitions were not at issue in this case, Justice Stevens disagreed. In his view, “the facts of the case do present it,” and Justice Stevens posited that “it’s theoretically possible we could agree with you on the profits issue, but nevertheless say this doesn’t fit the promotion.” Following up on Stevens’s suggestion, both Justice Ginsburg and Justice Scalia broached the possibility that the case could be sent back to the Seventh Circuit for it to reconsider the promotion/concealment issue.
Justice Breyer offered what he described as three solutions to the concerns voiced by several members of the Court: through the definition of “proceeds,” through a narrow definition of “promotion,” or through sentencing. Roberts contended that the Court should hold that “proceeds” for purposes of the statute equals “gross receipts,” but suggested that the best way to deal with the concerns was through sentencing. Justice Scalia immediately dismissed that suggestion as “extraordinary,” scoffing that “that’s no way to run a railroad.” Justice Ginsburg was equally skeptical, asking Roberts why if the respondents “did nothing more than engage in the underlying offense” they should “receive one day more than” the sixty-month sentence for the basic gambling violation. More questions followed, with Justice Kennedy summing up the views of several justices: “[T]he problem we have is we’re not sure that it is within the statute. So then you’re asking us to say how to make the statute work when we don’t think the statute’s applicable at all.”
Arguing for respondents Santos and Diaz, Todd Vare recognized his opportunity and tried to run with it. But he was instantly slowed by questions from the Chief Justice, who echoed a line of questioning posed to Matthew Roberts by Justice Alito regarding whether the same concerns voiced by several members of the Court would persist under a “profits” definition. Vare acknowledged that they would and was thus chastised by Justice Scalia, who asked why he would advocate a solution that would constitute “the worst of both worlds.” But Scalia ended with a softball, asking why the Court shouldn’t instead “focus in on what constitutes a transaction and what constitutes concealment – something other than the ‘proceeds’ definition?”
Vare wisely responded: “I think you’re absolutely correct, Justice Scalia.” Vare then had to convince the Court, however, that the other definitional questions were properly before it. And although Vare described it as “inherent” in the question presented, Justice Kennedy had other views, describing it as a “stretch.” And Justice Scalia later opined that he didn’t necessarily want to resolve the other definitional questions because they were “very difficult” and hadn’t been thoroughly argued. Eventually, Justice Alito turned to the question presented – i.e., the definition of “proceeds.” His questions, as well as others by the Chief and Justices Scalia and Kennedy, suggested that if the Court did actually reach the merits of the question presented, Diaz and Santos might have a tough time putting together a majority.
[edit] Opinion Analysis
At issue in No. 06-1005, United States v. Santos, was whether the term “proceeds,” as used in the federal money-laundering statute, means “receipts” (as the United States contended) or “profits” (as the respondents argued). Until Monday, courtwatchers were less interested in what the Court was going to do in Santos than they were in when it was going to do something: as Marty noted shortly after the opinion was released, Santos was the oldest case still remaining from the October sitting, and certainly few people would have anticipated that we would have had to wait longer for Santos than for more high-profile cases (such as Medellin) from the same sitting. And although Monday’s decision answered the “when” question, it left open others, such as (again, as Marty observes) what behind-the-scenes machinations caused the decision to take so long, and how exactly one should read the Court’s opinion.
The first signal that the opinion itself is going to be an unusual one comes at the outset: “Justice Scalia announced the judgment of the Court and delivered an opinion, in which Justice Souter and Justice Ginsburg join, and in which Justice Thomas joins as to all but Part IV.” (As Eugene Volokh noted on Monday, this line-up is not unprecedented but is “noteworthy.” [link: http://www.volokh.com/archives/archive_2008_06_01-2008_06_07.shtml]). In the plurality’s view, the term “proceeds” is inherently ambiguous: “there is no more reason to think that ‘proceeds’ means ‘receipts’ than there is to think that ‘proceeds’ means ‘profits.’” In such a scenario, the plurality continues, the rule of lenity prevails, and it dictates a “profits” definition of proceeds.
The plurality rejects the government’s arguments that a “profits” definition will “fail[] to give the federal money-laundering statute its proper scope.” It notes (among other things) that any “speculat[ion] about congressional purpose . . . would also have to confront . . . [what] respondents have described as a ‘merger problem’” – that is, the likelihood that “any specified unlawful activity, an episode of which includes transactions which are not elements of the offense and in which a participant passes receipts on to someone else, would merge with money laundering.” The plurality found no reason why Congress might have wanted to “radically increase” a defendant’s sentence based on a transaction for which it had already provided a punishment elsewhere.
The plurality is also unmoved, to say the least, by the government’s suggestion that a “profits” interpretation will “hinder[] effective enforcement of the law.” Characterizing that argument as favoring a “‘receipts’ interpretation because—quite frankly—it is easier to prosecute,” Justice Scalia explains first that even to the extent that a “profits” interpretation requires additional work by the government, Congress “has imposed similar proof burdens” in other criminal statutes. In any event, he emphasizes, “the Government exaggerates the difficulties,” as prosecutors need only to show “that a single instance of specified unlawful activity was profitable and gave rise to the money involved in a charged transaction.” And the government can satisfy the knowledge element of the money-laundering statute, Scalia explains, through circumstantial evidence such as a long-running relationship between the launderer and the criminal.
Finally, the plurality rejects Justice Stevens’s interpretation, outlined in his concurring opinion (more on this below), of the term “proceeds” as meaning “profits” in some circumstances but “receipts” in others. Observing that such an interpretation was not advanced by either the federal government nor any amicus and, moreover, that “it has no precedent in our cases,” the plurality emphasizes that the Court’s “obligation to maintain the consistent meaning of words in statutory text does not disappear when the rule of lenity is involved.” And while the plurality acknowledges that “the Court’s holding is limited” by Justice Stevens’s narrower opinion, it explains that “the narrowness of his ground consists of finding that ‘proceeds’ means ‘profits’ when there is no legislative history to the contrary. That is all that our judgment holds.”
Concurring in the judgment, Justice Stevens provided a fifth vote to affirm the judgment below. But although he agreed with the plurality that, “[f]aced with both a lack of legislative history speaking to the definition of ‘proceeds’ when operating a gambling business is the ‘specified unlawful activity’ and . . . that Congress could not have intended the perverse result that would obtain in this case under Justice Alito’s opinion, the rule of lenity may weigh in the determination,” he would construe the term “proceeds” to mean “receipts” – rather than “profits” – when the legislative history reflects Congress’s intent to do so.
Justice Breyer joined Justice Alito’s dissent but also filed a separate opinion in which he expressed his “doubt that Congress intended the money laundering statute automatically to cover financial transactions that constitute an essential part of a different underlying crime.” But he parted ways with the plurality on how to solve the “merger problem.” Rather than “look[ing] to the word ‘proceeds’ for a solution,” he suggested in particular that the problem could be solved by the U.S. Sentencing Commission, “without resort to creating complex interpretations of the statute’s language.”
In his dissent, Justice Alito began – like the plurality – with an analysis of the text of Section 1956(a). In his view, the “primary definition” of the term “proceeds” is “the total amount brought in.” However, even to the extent that the term “proceeds” has “more than one meaning,” Justice Alito would not “abandon any effort at interpretation and summon in the rule of lenity,” but would instead “ask what the term ‘proceeds’ customarily means in the context that is relevant here—a money laundering statute.” Other money laundering statutes, Alito points out, define the term in terms of “the total amount brought in,” as do an international treaty and fourteen states. They do so, Justice Alito continues, because such a definition serves the two purposes of money-laundering statutes: deterring criminal activity and preventing the growth of criminal enterprises. By contrast, the plurality’s narrower construction of “proceeds” would both exclude conduct that was not profitable even when the enterprises responsible for the conduct were generally successful and would “introduce[] pointless and difficult problems of proof.” Thus, the dissent concludes, “the term ‘proceeds’ . . . means gross receipts, not net income.” Moreover, he continues, “contrary to the approach taken by Justice Stevens, I do not see how the meaning of the term . . . can varying depending on the nature of the illegal activity that produced the laundered funds.” Finally, Justice Alito dismissed the other justices’ concerns about the “merger” problem as “misplaced.” Like Justice Breyer, Justice Alito regards “the so-called merger problem” as “fundamentally a sentencing problem” that, in any event, “occurs in only a subset of money laundering cases.”
So what exactly does all this mean? If you’re Efrain Santos and Benedicto Diaz, it’s all good: the opinion is a get-out-of-jail-sooner pass. The implications for everyone else – or, at least, everyone else who is not charged with operating similar gambling operations – are, as Marty discussed on Monday, far less clear.
[edit] Links and further information
- The Associated Press (via Law.com) had this story after the cert. grant. [1]
- Aaron Streett had this brief discussion following the cert. grant. [2]
- Stephen Roman had this discussion following the cert. grant at the Nastybrutishandtall blog. [3]
- Medill has this summary of the case. [4]
- The Daily Writ has this summary of the case. [5]
[edit] Podcasts
- Ohio State's Alan C. Michaels discusses the case in a 9-minute podcast.[6]
