Money laundering: Commingled bank accounts and the $10,000 requirement

Legal expert and author of ‘Asset Forfeiture Law in the United States’ Stefan Cassella examines a recent case involving a medical doctor who ran a ‘pill mill’ and posted over $1 million into a commingled account. It could not be ascertained how much was tainted and how much derived from the doctor’s legitimate medical practice. The $10,000 requirement proved to be a useful element in this case.

Money Laundering / Section 1957 / $10,000 Requirement If a defendant has withdrawn virtually all the funds in a commingled bank account containing more than $10,000 in tainted funds, the jury may conclude that any withdrawal of more than $10,000 involved more than $10,000 in tainted funds.

United States v. Evans, ___ F.3d ___, 2018 WL 2926807 (5th Cir. Jun. 12, 2018).

Money Laundering / Section 1957 / $10,000 Requirement

If a defendant has withdrawn virtually all the funds in a commingled bank account containing more than $10,000 in tainted funds, the jury may conclude that any withdrawal of more than $10,000 involved more than $10,000 in tainted funds.

United States v. Evans, ___ F.3d ___, 2018 WL 2926807 (5th Cir. Jun. 12, 2018).

Fifth Circuit * Defendant, a medical doctor, ran a “pill mill” distributing pain medications without a legitimate medical purpose. He was convicted of drug offenses and five counts of money laundering in violation of 18 U.S.C. § 1957 and appealed.

The money laundering conviction concerned five withdrawals of $14,000, $15,000, $64,000, $59,000 and $48,000, respectively, from a bank account containing commingled funds.

The Government’s evidence showed that Defendant deposited a total of $1.18 million into the commingled account and withdrew virtually all of it, but it could not show how much of the money was tainted and how much was derived from Defendant’s legitimate medical practice.

It could only show that the fraction of the deposits that came from illicit prescriptions was substantial.

To convict a person of violating Section 1957, the Government must show that the transaction involved more than $10,000 in criminal proceeds.

The Fifth Circuit Rule

The Fifth Circuit (like the Ninth Circuit) applies a “drugs in, last out” rule that requires the Government to show that it was mathematically impossible for the alleged Section 1957 violation not to have involved money than $10,000 in criminal proceeds even if all the clean funds were included in the transaction.

Defendant argued that because the Government could not show how much clean money was in the commingled account, it could not show, under the “drugs in, first out” rule, that any of the five alleged transactions necessarily involved more than $10,000 in tainted funds.

The panel held, however, that Defendant misread the Fifth Circuit rule.

Because Defendant had withdrawn virtually all the money from his bank account, it was clear that whatever tainted funds had been in the account were withdrawn at one time or another.

That being so, to satisfy the $10,000 requirement, the Government had to show only that there had been more than $10,000 in criminal proceeds in the account at one time.

Or more precisely, because Defendant was charged with five counts of violating Section1957, it had to show that there had been more than $50,000 in criminal proceeds in the account at one time.

While the Government could not show exactly how much of the commingled money represented criminal proceeds, the court concluded that because $50,000 was less than five percent of the money in the account, the evidence that the tainted funds constituted a substantial part of the $1.18 million was sufficient to allow the jury to find that at least $50,000 in tainted funds had been in the commingled account at one time.

Thus, the evidence was sufficient to convict Defendant of all five counts of money laundering under Section 1957. SDC Contact: AUSAs Eileen Wilson and Carmen Mitchell (S.D. Tex.)

Comment:

The panel in this case portrays its holding as an application of previous Fifth Circuit case law on the commingled funds issue, but it appears to be a significant departure from previous Fifth Circuit cases, bringing that court more nearly in line with the majority rule for Section 1957 cases.

In United States v. Rutgard, 116 F.3d 1270, 1292 (9th Cir. 1997), the Ninth Circuit held that because the defendant is entitled to the presumption that any tainted funds are the last to be withdrawn from a commingled bank account – the “drugs in, last out” rule — a Section 1957 conviction is possible only if the amount withdrawn from the account exceeds the amount of “clean” funds by more than $10,000.

In United States v. Davis, 226 F.3d 346, 357 (5th Cir. 2000), the Fifth Circuit appeared to follow Rutgard when it held that a conviction is possible only when the aggregate amount withdrawn from an account containing commingled funds exceeds the clean funds in the account by more than $10,000.

In that case, the court said, “[any] individual withdrawal may be said to be of tainted money, even if a particular withdrawal was less than the amount of clean money in the account.”

Otherwise, it must be presumed that the tainted funds remained in the bank account and that the defendant’s withdrawal involved only clean funds.

In United States v. Loe, 248 F.3d 449, 467 n.81 (5th Cir. 2001), the court applied Davis and held that because the aggregate withdrawals from a commingled account were less than amount of clean funds, the Government failed to meet the $10,000 threshold.

In contrast, the other circuits eschew the “drugs in, last out” rule and hold that as long as the Government shows that more than $10,000 in tainted funds were in the commingled account when the alleged Section 1957 withdrawal occurred, the jury may find that that withdrawal involved more than $10,000 in tainted funds.

See United States v. Silver, 864 F.3d 102 (2nd Cir. 2017) (collecting cases and following the majority rule; “The Government is not required to trace criminal funds that are commingled with legitimate funds to prove a violation of Section 1957;” such a rule would allow defendants to defeat money laundering by commingling).

The key difference is that under the majority rule, the amount of “clean” money in the account is irrelevant; all that matters is that there was more than $10,000 in criminal proceeds in the account.

Under the Fifth Circuit’s rule explained in Davis, on the other hand, the Government must show that all of the clean funds have been withdrawn, a showing that the Government generally can make only by first showing what part of the funds in the account were clean and what part were not.

In this case, the court applied Davis but held that because the defendant withdrew virtually all the commingled funds from his account, leaving no tainted funds behind, the requirement that the clean funds be removed from the account was necessarily satisfied, and the jury therefore was entitled to find that any transaction exceeding $10,000 included more than $10,000 in tainted funds regardless of the order in which the withdrawals occurred.

But it is hard to see how that is any different from the majority rule that as long as there was more than $10,000 in tainted funds in the account at one time, any transaction may be deemed to have included more than $10,000 in tainted funds regardless of how much untainted money was in the account.

In essence, the Fifth Circuit has adopted the majority rule for the special case where all the funds in an account have been withdrawn. SDC

Stefan Cassella, Asset Forfeiture Law, LLC

www.assetforfeiturelaw.us