• 25 November 2009

An Uncertain Precedent: United States v. Santos and the Possibility of a Legislative Remedy

Evan Ennis

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In 2008 in United States v. Santos, the Supreme Court addressed the meaning of the term “proceeds” as used in 18 U.S.C. § 1956, part of the Money Laundering Control Act.  Efrain Santos and a co-defendant were charged with operating an illegal lottery, which involved payments to runners, collectors, and winners.  These payments formed the basis of a ten-count indictment against Mr. Santos by the federal government, which included a charge of money laundering under § 1956(a)(1)(i).  Santos was convicted and appealed his case to the 7th Circuit, which vacated his conviction using a “receipts” definition of the term “proceeds” in the statute.  In a split decision, the Supreme Court, relying on the rule of lenity, defined the term “proceeds” in the federal money-laundering statute to mean “profits” rather than “receipts” of a criminal enterprise where the predicate offense was illegal gambling, affirming the 7th Circuit’s decision.  The Court was concerned with what it deemed the “merger” issue, where prosecutors could obtain money-laundering convictions based on criminals paying the operating expenses of their illegal enterprises rather than on separate criminal conduct.  Since a conviction for money laundering results in stiff penalties, using a “receipts” definition could result in troubling sentencing disparities or could allow prosecutors to use the threat of a money-laundering charge as a weapon to induce plea bargains.

The precedential effect of Santos is unclear, but what is clear is that the law regarding money laundering is now in disarray.  Justice Scalia and Justice Stevens openly disagree about the precedent that the case sets down.  Justice Stevens’s holding rests on the narrowest ground and, under the rule of Marks v. United States, is therefore controlling.  He writes that he believes the meaning of the terms “proceeds” can vary based on the underlying predicate offense.  As Justice Scalia points out, however, Justice Stevens’s conclusion is inconsistent with the Court’s holding in Clark v. Martinez—that the meaning of a term in a statute cannot change with the statute’s application.  Even the dissenting opinion authored by Justice Alito voices discomfort with Justice Stevens’s view that the meaning of the term “proceeds” can alter based on the predicate offense.

The precedential effect of Santos is more complicated where the predicate offense for the money-laundering prosecution relates to drugs and organized crime.  Justice Stevens and the four dissenting justices all indicate that when the predicate offense for money laundering relates to drug trafficking or the operation of organized crime syndicates related to those sales, they would read “proceeds” as indicating receipts rather than profits.  Both Justice Stevens and Justice Alito agree that the legislative history of § 1956 clearly indicates that Congress intended a receipts definition for the term “proceeds” when the predicate offense relates to either drug trafficking or the activities of organized crime related to the sale of drugs.  Justice Alito points out that five justices agree on the stare decisis effect of the case.

The Money Laundering Control Act began as an integral portion of the Regan administration’s War on Drugs.  Money laundering is often referred to as the “life blood” of organized crime and drug trafficking.  These activities generate income largely in the form of cash, and to carry on these enterprises, criminals must find a way to convert their funds into legitimate sources of currency.  Criminal organizations have proved adept at creating a nearly infinite spectrum of complicated schemes designed to conceal the fruits of their illegal transactions.  The Bank Secrecy Act of 1970 (“BSA”) was the original legislation designed to deal with money laundering, and it established reporting requirements for certain transactions that amounted to more than $10,000.  Criminal organizations proved more than adept at evading the BSA’s requirements.  Congress designed the Money Laundering Control Act to stem the tide of money laundering by drug traffickers and organized crime and to be a powerful charge for federal prosecutors.  However, prosecutors implemented the Act and the Sentencing Guidelines for money laundering without a great deal of study or experience, and problems such as the “merger” issue and sentencing disparities discussed in Santos soon emerged.

Three disparate approaches to the Santos case appear to be emerging in the lower courts.  The first adopts Justice Scalia’s approach.  Several courts have read Santos to require “proceeds” to mean profits regardless of the predicate offense.  The second approach adopts  Justice Stevens’ reasoning and allows the meaning of  “proceeds” to vary with the underlying offense.  This approach has proved less popular as it is difficult to resolve its conflict with Martinez.  The third approach simply limits Santos’s holding to money-laundering offenses where the predicate offense is illegal gambling.  No approach has yet become dominant, and due to the number of predicate offenses for money laundering and the disparate approaches emerging among the lower courts, troubling fairness issues are likely to arise.

This Editorial argues that the best solution for the problem would be for Congress to rewrite the money-laundering statute to define explicitly the meaning of the term “proceeds,” to adopt explicitly a “receipts” definition, and to revise the Sentencing Guidelines for money laundering to correct the “merger” issue.  This approach would provide a single definition and therefore greater uniformity among the lower courts.  It also preserves much of the power of the charge for federal prosecutors, and it remains true to what five justices believe to be Congress’s overriding concern about money-laundering activity by drug traffickers and organized crime related to the sale of drugs.  An adjustment to the Sentencing Guidelines would also address the very real fairness concerns raised by Justice Scalia and Justice Stevens.dingbat



Copyright © 2009 Cornell Law Review.

Evan Ennis Is a J.D. Candidate at Cornell Law School, Class of 2010.

This Legal Workshop Editorial is based on Mr. Ennis’s Student Note: Evan Ennis, Note, An Uncertain Precedent: United States v. Santos and the Possibility of a Legislative Remedy, 95 CORNELL L. REV. ___ (2009).

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