Money laundering insight

Examining the merger rule and concealment

Stefan Cassella of Asset Forfeiture Law, LLC, considers the application of the merger rule to concealment money laundering. In this case, the Defendant acted as a middleman for the sale of a prostitution business, but was unaware that both the buyer and seller were police informants. What happened when he accepted just $100?

In a 2-1 decision, a panel of the Tenth Circuit suggests that the merger rule does not apply to concealment money laundering cases under § 1956(a)(1)(B)(i). But the dissent argues that the requirement that the money laundering offense occur after the event giving rise to the proceeds being laundered applies equally to §§ 1956 and 1957.

United States v. Tee, ___ F.3d ___, 2018 WL 721677 (10th Cir. Feb. 6, 2018).

Tenth Circuit * Defendant acted as the middleman between a person selling a massage parlor and a person willing to buy it.

Defendant was aware that the massage parlor was the front for a prostitution business, but he was not aware that both the seller and the buyer were police informants.

The Government’s theory on the money laundering count was that the $100 deposit into Defendant’s bank account was a violation of Section 1956(a)(1)(B)(i), the concealment money laundering statute.

It argued that when the seller deposited the money into Defendant’s account, it became the proceeds of an attempt to promote interstate travel in aid of prostitution – which is a “specified unlawful activity” for money laundering, and that depositing the money into the account of a legitimate business showed that the transaction was designed to conceal or disguise its true purpose.

The panel had no difficulty in finding that the deposit satisfied the concealment element: using a legitimate business to disguise the true purpose of a criminal transaction is a classic example of money laundering.

But the panel split 2-1 on whether the transaction satisfied the proceeds element.

The dissenting judge (McKay, J.) argued that a money laundering offense must be separate from the offense that generated the criminal proceeds being laundered.

Because the $100 did not become the proceeds of any offense relating to sex trafficking until it was deposited, the judge argued, the deposit itself could not be a money laundering offense.

And because there was no evidence that Defendant conducted any transaction after the deposit was made, there was no evidence that he engaged in a transaction involving criminally-derived property as the statute requires.

The two judges in the majority (Bacharach and Murphy, JJ.) suggested that the separate transaction requirement – also known as the “merger rule” – may not apply in concealment money laundering cases.

Ultimately, however, they denied Defendant’s appeal on the ground that he had forfeited the issue by not making any challenge to the proceeds element either in the district court or in his brief on appeal.

It would not be appropriate to raise the issue sua sponte and to decide it in Defendant’s favor, the majority said, without giving the Government the opportunity to address the issue.

So, Defendant’s appeal of his money laundering conviction was denied. SDC Contact: AUSA Jason Hart (D. Kan.)

Comments

On the facts presented here, the dissenting judge had the better argument.

In one of the first cases to set forth the “merger rule,” the Tenth Circuit held in United States v. Johnson, 971 F.2d 562, 569-70 (10th Cir. 1992), that a defendant cannot be guilty of money laundering when he induces a fraud victim to wire funds directly to his bank account.

The transfer from the victim to the defendant could not be a money laundering offense, the court said, because money laundering requires proof that the property was the proceeds of a criminal offense at the time the transaction occurred. For there to be a money laundering offense, the defendant must engage in a second transaction distinct from the offense that generated the proceeds being laundered.

Johnson was a Section 1957 case, but as the dissenting judge points out, the merger rule applies equally to violations of Section

There is a way in which the Government could have supported a money laundering conviction in this case, however, if the facts were only slightly different.

Recall that the $100 that was deposited into the defendant’s bank account was sting money.

If the supposed seller of the massage parlor had represented to the defendant, in her role as a confidential informant, that the $100 was the proceeds of a prior offense constituting specified unlawful activity (e.g. interstate transportation in aid of prostitution), her transfer of the $100 to the defendant in a manner designed to conceal its nature or source might have been properly alleged as a violation of the “sting” statute, 18 U.S.C. § 1956(a)(3)(B).

That is so because the representation that the money was the proceeds of a prior offense satisfies the requirement that the money be “tainted” at the time the money laundering transaction takes place.

Thus, in that situation there would be no merger issue, and the transfer of the money to the defendant could be a money laundering offense.

See United States v. Stratievsky, 430 F. Supp. 2d 819, 823-25 (N.D. Ill. 2006) (there is no merger issue in sting cases; because there is no requirement of an SUA, there is no danger that the money laundering transaction will merge with the SUA that generates the proceeds being laundered). SDC

Stefan Cassella, Asset Forfeiture Law, LLC

www.assetforfeiturelaw.us