The Definition of Money Laundering (Part 1): Porn Star Payoffs and Dirty Money
What is money laundering, and how might it apply in the various investigations involving president Trump? When Trump’s new attorney Rudy Giuliani recently said that the hush-money payment to adult film star Stormy Daniels had been “funneled” through a law firm, some suggested that sounded like money laundering. There are other money laundering issues in the Trump investigations as well; for example, it’s one of the primary charges pending against Trump's former campaign manager Paul Manafort. It therefore seems like a good time for a law-wonky look at the definition of money laundering (with an occasional porn star reference thrown in to help keep it interesting). Money laundering, like obstruction of justice, is a term that gets tossed around rather loosely. In the media and casual conversation it may refer to any financial deal that looks shady or secretive – like funneling payoffs to a porn star through a law firm, for example. But actual criminal money laundering has a narrower definition and strict requirements. In this post, I’ll discuss the primary domestic money laundering statute, 18 U.S.C. 1956(a)(1). This is the statute that would most likely apply to something like the Daniels payoff. In a future post I’ll examine the primary international money laundering statute, 18 U.S.C. 1956(a)(2). This is the statute most relevant to things like Paul Manafort’s deals involving Ukraine -- and potentially to New York real estate deals involving the Trump organization. (Side note: my shorthand titles "domestic" and "international" are not completely accurate; there is a lot of overlap between the two statutes. In particular, many transactions involving the international movement of funds could be charged under either or both sections. But it's a useful breakdown for purposes of discussion.)
Rudy Giuliani said payments were "funneled" through a law firm
The Definition of Money Laundering
Classic money laundering involves concealing the existence, nature, or source of illicit funds so the funds will appear legitimate if discovered. Criminal operations may generate huge amounts of money. But if criminals seek to spend that money and can’t produce legitimate business and financial records or other documentation to explain where it came from, bankers, the I.R.S, and others may start to ask uncomfortable questions. That’s where money laundering comes in. The money launderer seeks to clean up – “launder” -- criminal proceeds so when the money is spent no one will ask questions about the money's origins. (This concept was brilliantly summarized by attorney Saul Goodman in “Breaking Bad.”) Money laundering prosecutions therefore target not the underlying crimes that generate criminal proceeds (although those typically will be prosecuted as well, if possible) but the efforts to enjoy or conceal the fruits of those crimes. This can provide an effective second level of deterrence of criminal activity. After all, if the government makes it impossible for you to enjoy your ill-gotten gains, what fun is it to be a crook? Money laundering prosecutions also allow the government to target and deter those – such as bankers and real estate agents (and lawyers) -- who don’t engage in the underlying crimes but knowingly help criminals conceal and enjoy their profits. A textbook money laundering scheme involves cleaning dirty money so it can be spent without arousing suspicion, but the money laundering statutes are actually much broader than that. They also apply to financial transactions involving criminal proceeds that are designed to promote further criminal activity, evade income taxes, or avoid the currency reporting requirements for cash transactions over $10,000. Money laundering charges are not simply another way to prosecute the underlying fraud or corruption. The focus of domestic money laundering is what is done with the proceeds of criminal activity once that activity is completed. A good shorthand way to remember this is that money laundering should involve a “downstream transaction” – something that is done with criminal proceeds once the criminal has those proceeds in hand.
The Elements of Domestic Money Laundering
Domestic money laundering is prohibited by 18 U.S.C. 1956(a)(1). It has four elements:
The defendant conducted or attempted to conduct a financial transaction;
The defendant knew at the time that the transaction involved the proceeds of some form of criminal activity;
The transaction did in fact involve the proceeds of a Specified Unlawful Activity (SUA); and
The defendant acted with one of four types of intent or knowledge.
Element 1: Conducting a Financial Transaction
The first requirement is that the defendant conducts or attempts to conduct a “financial transaction" as defined in the statute. This includes almost any transaction involving cash, checks, money orders, securities, or other financial instruments. It also includes wire transfers and the transfer of title to any real estate, vehicle, vessel, or aircraft. A financial institution is frequently involved but that’s not required – if I sell my car to you for cash that will qualify, as long as the government can show a minimal effect on interstate commerce.
Element 2: Knowing it Involves Criminal Proceeds
The second element focuses on the knowledge of the defendant. The government must prove that at the time of the financial transaction the defendant knew the property involved was the proceeds of some act that was a felony under state, federal, or foreign law. The shorthand for this requirement is that the defendant must know the transaction involved dirty money. As in other areas of criminal law, a defendant’s knowledge may be shown by willful blindness. If the defendant deliberately closes his eyes to what is going on and acts with a conscious purpose to avoid learning the truth, he may be deemed to have constructive knowledge. In other words, the law does not allow the banker to say, “Well, when the guy with no job came into the bank with a duffel bag containing $50,000 in white-powder-encrusted 10’s and 20’s and asked me to open a bank account in the name of his dog, I didn’t KNOW that it was illegal proceeds . . . . “ Willful blindness may come into play in areas such as huge cash transactions involving New York real estate bought by shell companies (discussed more in the future post on international laundering), where developers or realtors may claim they did not know illegal proceeds were involved..
Element 3: The Property Is in Fact Proceeds of an SUA
The second element, discussed just above, covers what the government must prove about the defendant’s knowledge concerning the proceeds. The third element relates to what the government must prove about where in fact the proceeds originated. The property involved in a laundering transaction must be proceeds generated by a “Specified Unlawful Activity,” as defined in the statute. Specified Unlawful Activity includes a very long laundry list of federal crimes, as well as several categories of state offenses. In addition to drug and racketeering offenses, many leading white collar crimes are listed as SUAs, including mail and wire fraud, bribery, and obstruction of justice. As a result, although money laundering statutes were primarily aimed at drug cartels and organized crime, money laundering charges are also available in a great many white collar prosecutions.
Element 4: The Defendant's Intent or Knowledge
The final element the government must prove is that the defendant engaged in the financial transaction with a specific knowledge or intent. Under 1956(a)(1) there are four options:
Intent to promote an SUA – 1956(a)(1)(A)(i)
Intent to evade income taxes – (a)(1)(A)(ii)
Knowing that the transaction is designed in whole or in part to conceal or disguise the nature, location, source, ownership, or control of the proceeds – (a)(1)(B)(i)
Knowing that the transaction is designed in whole or in part to avoid the filing of a Currency Transaction Report (CTR) – (a)(1)(B)(ii)
Money laundering under (A)(i) is sometimes called promotion or “plowback” money laundering. It applies to reinvesting criminal proceeds in the criminal operation to further the criminal activity. Examples include a drug dealer using drug proceeds to buy a car to use for future deliveries, or a defendant engaged in a stock fraud scheme who uses criminal proceeds to set up a phony website and lease server capacity to further the scheme. Under (A)(ii), transactions in criminal proceeds that are designed to evade federal income taxes may be charged as money laundering, in addition to whatever tax charges might be appropriate. Concealment money laundering under (B)(i) is what most people think of as money laundering. It is the classic, Saul Goodman variety discussed above: transactions designed to clean up criminal funds and make them appear legitimate. This may involve running those funds through a legitimate business so they appear to be proceeds of that business (think of the car wash in “Breaking Bad”). It may also involve purchasing real estate or other assets in the name of shell companies or other entities, so those assets can be enjoyed and potentially sold later to generate "clean" income from the sale. The launderer’s goal is to make it difficult to determine where the original funds actually came from or who controlled them, and ultimately to make the illegitimate property look legitimate. Finally, laundering under (B)(ii) prohibits structuring financial transactions in criminal proceeds to avoid the reports that banks and merchants must file for any cash transactions in excess of $10,000.00. This can also be a separate crime, called structuring, the offense to which former Speaker of the House Dennis Hastert pleaded guilty in 2015. One final maxim to keep in mind: money spending is not money laundering. A criminal may use illegal proceeds to buy a house, a car, or jewelry. But if he makes the purchase openly and in his own name and there is no evidence of an intent to disguise anything, that transaction will not be concealment money laundering. Similarly, if he makes those purchases to enjoy a certain lifestyle but they don’t directly further any ongoing criminal activity, they will not be promotion money laundering.
The Requirement of “Proceeds”
The term “proceeds” appears in both the second and third elements of the offense. It means property derived or obtained from other criminal activity. As noted above, my favorite shorthand way to describe this concept is that money laundering needs to represent a downstream transaction – one that takes place after the crime that generates the proceeds has already occurred. There have been many cases where courts have thrown out money laundering convictions because the funds involved were not proceeds. For example, suppose I persuade people to wire funds to me by creating a phony investment website, and the bank account I set up to accept those transfers is in the name of a phony shell company. The government may charge me with wire fraud and use the transfers from my victims as the required use of the wires in furtherance of the fraud. But if the government also seeks to charge me with money laundering by using those same wire transfers as the financial transactions and wire fraud as the SUA, that charge will fail. The money involved in those wire transfers is not yet proceeds – it is clean money coming from my victims. That money only becomes proceeds once it is in the bank account and I have control over it. The proceeds requirement highlights that money laundering charges don’t apply to every criminal transaction or any financial deal that may look secretive or shady. In order to launder money, the money needs to be dirty in the first place. And that brings us to Stormy Daniels.
Stephanie Clifford, a/k/a Stormy Daniels
Money Laundering and the Stormy Daniels Payment
The payment to Stormy Daniels would easily qualify as a financial transaction. And there seems to be little doubt that the payment was designed to conceal the nature, origin, or source of the money. As Giuliani freely admitted, it was “funneled” through a law firm, and the actual payment was made through a corporation apparently set up by Trump's attorney Michael Cohen for that purpose. There is little reason to engage in such convoluted transactions other than to conceal who is really behind it – after all, Trump could have simply written her a check. But the issue here is the “proceeds” requirement. Based on the public information to date, there is no indication the money used to pay Daniels was proceeds of an SUA, or that those involved in the transaction knew it was dirty money. Absent criminal proceeds, the transaction may be secretive and sleazy but it is not money laundering. Of course, with further investigation it may turn out that proceeds of some other crime were indeed used to make the payoff. For example, there have been some allegations that Cohen may have engaged in bank fraud in order to get the money. If that turned out to be true, the money could be considered proceeds of the bank fraud and money laundering charges could apply. We will have to wait and see what federal investigators uncover. But as of now, this looks like a case of secretive financial dealings that don’t fit the legal definition of criminal money laundering.
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