22 Nov 2016
Stefan Cassella of Asset Forfeiture Law, LLC considers US v. Gross, which found that spending the proceeds of smuggled goods (on, in this case, more of the same goods, the synthetic cannabinoid XLR11) is a violation of Section 1957.
[United States v. Gross, ___ Fed. Appx. ___, 2016 WL 5929206 (11th Cir. Oct. 12, 2016).]
Eleventh Circuit * Defendant was convicted of smuggling the synthetic drug XLR11 into the United States from China in violation of 18 U.S.C. § 545, and of laundering the proceeds of that offense in violation of 18 U.S.C. § 1957. The evidence showed that Defendant caused the proceeds of the retail sales of the product that included the XLR11 to be deposited into a bank account, and that he thereafter directed a third party to use those funds to pay a supplier for additional shipments of XLR11. He appealed his convictions.
With respect to the money laundering conviction, Defendant first argued that he could not be guilty of the Section 1957 offense because he did not conduct the financial transaction himself and did not have signatory authority over the account from which the funds were transferred. But the panel held that Defendant’s ability to direct the third party to transfer funds from the account and to use them to pay his suppliers indicated that he had control over the funds.
Second, he argued that the connection between the smuggling offense and the later transfer of funds from the bank account to Defendant’s supplier was too attenuated to allow the jury to find that the transferred funds were the proceeds of the smuggling offense. The panel did not agree.
To be sure, the smuggled drugs were but one ingredient in the manufacturing process that resulted in the production of the synthetic cannabinoid that was eventually sold at retail as “potpourri” or “spice.” But the panel held that because the XLR11 was an essential ingredient in that process, the proceeds of the retail sales necessarily included money derived, at least indirectly, from the smuggling offense. Therefore, when Defendant used the proceeds of the retail sales to conduct a financial transaction in excess of $10,000, he committed a violation of Section 1957.
Next, Defendant argued that simply buying drugs from a supplier does not constitute a money laundering offense because the drug transaction is not complete until the money changes hands. The panel did not disagree with Defendant’s premise: the transaction that constitutes the underlying “specified unlawful activity” (SUA) that generated the criminal proceeds cannot also constitute the money laundering offense; there must be a two-step process. But here, the evidence showed that Defendant used the proceeds of prior completed smuggling activity to pay his supplier for more drugs. Thus, there was no merger between the offense that generated the proceeds and the money laundering offense.
For the same reason, the panel rejected Defendant’s argument that there could be no money laundering offense if the alleged financial transaction constituted an essential step in a continuing unlawful enterprise. To constitute money laundering, a transaction need only involve the proceeds of a completed phase of an ongoing scheme; the money laundering offense and the underlying SUA do not merge just because the money laundering constitutes the next step in an ongoing scheme.
Finally, Defendant argued that under the Supreme Court’s decision in Santos, payments for the essential expenses of a criminal offense do not constitute proceeds because there are no profits until the essential expenses are paid. But the panel held that Santos has been legislatively overruled by 18 U.S.C. § 1956(c)(9) which defines “proceeds” as the “gross receipts” of the underlying criminal activity.
Accordingly, the panel overruled all of Defendant’s objections to his money laundering convictions.
Comment: This decision hits upon a number of recurring issues in money laundering but there are two worth highlighting.
In United States v. Khanani, 502 F.3d 1281 (11th Cir. 2007), the Eleventh Circuit held that the connection between the proceeds realized from the sale of manufactured goods and the employment of undocumented aliens to manufacture those goods was too indirect to allow the sale proceeds to be considered the proceeds of the employment of the illegal labor. The defendant in this case argued that his situation was similar: the connection between the retail sales of “potpourri” and “spice” and the smuggling of XLR11 (the SUA) was too attenuated to allow the sale proceeds to be considered the proceeds of the illegal smuggling.
But the panel rejected that argument on two grounds. As mentioned in the summary, it was important to the panel that the XLR11 was an essential ingredient in the product that was sold at retail. Thus, the panel could say, “but for the smuggling offense there would have been no product to sell.” Conceivably, the same could not be said with as much certainty about the employment of the illegal aliens in Khanani.
In addition, however, the panel noted that the definition of “proceeds” in Section 1956(c)(9) was amended in 2009 to include the phrase “property obtained directly or indirectly,” suggesting that Khanani itself might be decided differently today, and that the product of the labor of illegal workers might well be deemed to be the proceeds of the employment offense.
The other point worth highlighting is the way the panel rejected the defendant’s reliance on the Fifth Circuit’s decision in United States v. Harris, 666 F.3d 905 (5th Cir. 2012). Harris is the leading case for the proposition that a drug dealer does not commit a money laundering offense simply by using clean money to pay for a load of drugs from a supplier. To be a money laundering offense, the money involved in the transaction must be the proceeds of an earlier offense. But that requirement was satisfied here because at the time the defendant directed his associate to pay for a new load of drugs from his Chinese supplier, the money was already the proceeds of a previous smuggling offense.
Stefan Cassella, Asset Forfeiture Law, LLC
You can claim CPD minutes for this content, by signing up to our CPD WalletFREE CPD Wallet