- In the Yusuf case, the Third Circuit held that unpaid taxes, which allegedly were retained by filing a false return through the U.S. mail, were “proceeds” for purposes of the federal international money laundering statute 18 U.S.C. §1956(a)(2). Thus, a taxpayer in that circuit could be subject to the harsh criminal penalties for money laundering offenses for evading taxes by filing a false return through the mail.
- The Eleventh Circuit held in the Khanani case, which involved a situation similar to that in Yusuf, that unpaid taxes were not proceeds for purposes of the money laundering statute.
- In May 2009, Congress passed legislation that changed the definition of “proceeds” in the money laundering statute, but the change in definition has not solved the problem caused by the Yusuf decision.
Tax return preparers take note: The Third Circuit Court of Appeals1 may have opened the door to a new approach that could result in significantly increased criminal penalties for taxpayers who file false returns. According to the court’s opinion in Yusuf,2 taxpayers who mail or e-file their tax returns and knowingly understate their taxable income thereon may be exposing themselves to the same money laundering charges levied against drug dealers and financiers of international terrorism. To make matters worse, in Yusuf these counts were stacked upon some of the more traditional tax crimes imposed under the Internal Revenue Code.3
At present, the significance of Yusuf is unclear. The Eleventh Circuit has reached a contrary result in a case4 involving facts similar to Yusuf. Moreover, recent amendments to the federal money laundering statutes included in the Fraud Enforcement and Recovery Act of 2009 (FERA)5 have further complicated the issues raised in the case.
A simple example demonstrates the potential consequences of the Yusuf decision. Picture a client operating a cash-generating business, such as a retail store or a restaurant.6 Traditionally, if that client willfully underreports the business’s income on a federal tax return, the client faces the risk of various civil and criminal tax penalties under the Internal Revenue Code. On the criminal side, the government could charge the client with criminal tax evasion under Sec. 7201, which carries a maximum prison sentence of five years and a fine of up to $100,000 (or $500,000 in the case of a corporation). Alternatively, the government could charge the client with willfully making a false statement on his or her tax return under Sec. 7206(1), which carries a maximum prison sentence of three years and a fine of up to $100,000 (or $500,000 in the case of a corporation). These criminal sanctions may be imposed in addition to any civil tax, penalties, and interest that may be assessed. A major purpose of the penalty regime in the Code is to deter tax crimes.7
The addition of mail or wire fraud and money laundering charges raises the stakes. Under Yusuf, a client could now face the very real possibility of 20 years or more in prison and the forfeiture of any assets involved in or traceable to the money laundering. Tax advisers everywhere need to take notice of this holding and consider its potential application. The concerns raised by the decision are an issue not only for taxpayers facing criminal investigation but also for clients who aggressively seek to minimize their tax liability. This article examines Yusuf and the money laundering statutes, including the applicable provisions of FERA. It also provides recommendations to minimize the risks posed for both taxpayers and their advisers under the money laundering rules.
Money laundering involves concealing or disguising the proceeds of certain types of unlawful activity. The money laundering rules of particular concern in tax cases are found in Section 1956 of title 18 of the U.S. Code.8 This section prohibits a variety of offenses that can be broadly classified as transaction money laundering, transportation money laundering, and sting operations, where the crime involves property that a law enforcement officer represents to be the proceeds of unlawful activity.9
In Yusuf, the taxpayers were charged with a transportation offense under Section 1956(a)(2) of the statute. This provision targets the transporting, transmission, transfer, or attempt to transfer a monetary instrument or funds across international borders. In order to obtain a conviction under this subsection, the government must show that the defendant intended to promote a “specified unlawful activity” or knew that the funds involved in the transportation, transmission, or transfer represent the proceeds of some form of unlawful activity and intended to conceal the nature, location, source, ownership, or control of the funds or to avoid a transaction reporting requirement.10
For taxpayers not involved in international transactions, the provision most likely to be applicable is Section 1956(a)(1), which prohibits transaction money laundering. To convict under this rule, the government must show that the defendant conducted or attempted to conduct a financial transaction knowing that the property involved resulted from unlawful activity. The assets must also be the proceeds of a specified unlawful activity, as that term is defined in the statute. Finally, there must be proof that a defendant participated in the transaction with the intent to promote the carrying on of specified unlawful activity11 or with the intent to engage in conduct constituting tax evasion or a violation of Sec. 7206.12 Alternatively, the government can show that the defendant knew the transaction was designed to conceal the nature, location, source, ownership, or control of the proceeds of specified unlawful activity or was designed to avoid a transaction reporting requirement under state or federal law.13
In almost all cases, as part of its prosecution the government must prove that a specified unlawful activity occurred. The money laundering rules define this term by reference to a long list of crimes, including mail and wire fraud.14 Significantly, even though the law refers to tax evasion and Sec. 7206 when discussing the intent requirements for money laundering, “[t]ax crimes, . . . in and of themselves, are not among the crimes listed in the statute as ‘specified unlawful activity.’”15 The Third Circuit did not address this point in Yusuf.
In addition, the government can prosecute a defendant for money laundering even if it cannot obtain a conviction for the specified unlawful activity itself. This is noteworthy because the statute of limitation restarts each time a defendant engages in a financial transaction that involves proceeds.16 The money laundering statute defines the term “transaction” broadly to include a purchase, sale, loan, gift, transfer, delivery, or other disposition.17
Although the money laundering law provides for a maximum prison sentence of 20 years, the sentence of a taxpayer convicted under this provision is likely to be affected by the federal sentencing guidelines.18 An example helps illustrate the significance of a money laundering charge:
[I]f a taxpayer is convicted under 26 U.S.C. §7201 of committing tax evasion by underreporting $1,000,000 of “clean money” and causing a tax loss of $280,000, then the taxpayer’s base offense level would be 16 under the November 1997 version of the Sentencing Guidelines. Assuming the taxpayer has no criminal history, accepts responsibility for his actions, and pleads guilty to the charge, then his sentencing range would be 12–18 months imprisonment. If that same taxpayer is convicted under 18 U.S.C. §1956(a)(1)(A)(ii) with laundering money with the intent to engage in the $1,000,000 tax evasion, then the taxpayer’s base offense level would be 23. If that taxpayer pleads guilty and accepts responsibility for his actions, then his sentencing range for this offense would be 51–63 months, almost five times as much as the underlying offense.19
The sentencing guidelines have been revised since this example was drafted. However, the essential point remains: There is a significant increase in penalties where money laundering applies.
The Yusuf Opinion
The Yusuf case arose from a 78-count indictment20 in which the United States alleged that United Corporation, the operator of the largest retail grocery chain in the U.S. Virgin Islands, along with several of its principals, skimmed revenues from United’s legitimate supermarket operations and filed Virgin Islands gross receipts tax returns that did not report the skimmed income.21 In Yusuf, the government alleged mail fraud as the underlying unlawful activity for purposes of the money laundering charges against United and the other defendants because United had mailed its allegedly false tax returns. In a pretrial motion to strike, the defendants moved to have the money laundering charges dismissed,22 arguing that unpaid taxes illegally disguised and retained through filing false tax returns were not “proceeds” of mail fraud for purposes of proving an international money laundering charge.
The district court agreed, holding that “the mailing of the allegedly false gross tax returns did not result in proceeds, as that term is commonly interpreted,” and struck the money laundering charges from the indictment. However, on appeal, the Third Circuit overturned the district court, holding that unpaid taxes constitute proceeds of mail fraud for these purposes. Like money laundering, mail or wire fraud also carries potential 20-year sentences, in addition to fines.23
The Court’s Reasoning
In Yusuf, the Third Circuit reasoned that every time United Corporation mailed its monthly gross receipts tax return to the Virgin Islands Bureau of Internal Revenue, it derived proceeds from the alleged mail fraud in the form of the tax savings that it realized by failing to report and pay the 4% gross receipts tax on the full amount of its retail grocery revenues.24 The court then determined that the transfer of these proceeds overseas by the defendants could properly subject the defendants to international money laundering charges under 18 U.S.C. Section 1956(a)(2)(B)(i). The indictment sought lengthy prison terms for several of the individuals, fines that could have exceeded $100 million, and the forfeiture of all United Corporation’s holdings, including all its retail grocery operations.25
At the heart of Yusuf is the definition of the term “proceeds,” which is a necessary predicate to triggering application of the money laundering statute.26 The Yusuf court interpreted the term broadly to encompass the business’s tax savings or tax liability avoided on the unreported gross receipts.27 As support for this interpretation, the court cited the recent Supreme Court opinion in Santos.28 Upon closer scrutiny, however, it appears that Santos contemplates a much narrower view of the definition of proceeds.
In Santos, the Supreme Court considered competing interpretations of the meaning of the term “proceeds” in the federal money laundering statute in the context of a case involving an illegal gambling operation. The government contended that “proceeds” meant the gross receipts from a specified unlawful activity, while Santos argued that it represented only that portion of gross receipts that constitutes profits or net receipts.29
The Court ruled in Santos’s favor, stressing that “[b]ecause the profits definition of proceeds is always more defendant-friendly than the receipts definition, the rule of lenity dictates that it should be adopted.”30 The Court explained the rule of lenity as follows:
From the face of the statute, there is no more reason to think that “proceeds” means “receipts” than there is to think that “proceeds” means “profits.” Under a long line of decisions, the tie must go to the defendant. The rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subjected to them. This venerable rule not only vindicates the fundamental principle that no citizen should be held accountable for a violation of a statute whose commands are uncertain, or subjected to punishment that is not clearly prescribed. It also places the weight of inertia upon the party that can best induce Congress to speak more clearly and keeps courts from making criminal law in Congress’s stead.31
Although the Yusuf opinion acknowledges the profits definition described in Santos,32 the court goes on to define the word even more broadly than the gross receipts definition propounded by the government, stating that “we reject the suggestion that to qualify as ‘proceeds’ under the federal money laundering statute, funds must have been directly produced by or through a specified unlawful activity, and we agree that funds retained as a result of the unlawful activity can be treated as the ‘proceeds’ of such crime.”33 Thus, under Yusuf, actions or decisions of a business that result in tax savings or the avoidance of tax liabilities generate gross receipts to the business. In this manner, the Yusuf court creates a government-friendly definition of proceeds that now encompasses tax savings and tax liabilities avoided.
The Third Circuit’s opinion in Yusuf has created a split in the federal circuit courts of appeals that the Supreme Court has chosen not to address at this time.34 An Eleventh Circuit case, Khanani,35 involved a fact pattern virtually identical to Yusuf,36 but the court ruled in favor of the taxpayers.
The Khanani defendants, owners of retail clothing stores, implemented a scheme to skim money lawfully earned through store sales, funnel it through various shell entities, and use it to pay salaries to undocumented workers. They did not report the income on their tax returns, and as a result they underpaid income tax and retained increased profits. Among other allegations, the indictment charged the Khanani defendants with money laundering. The trial court dismissed the money laundering count, holding that tax savings do not constitute proceeds for purposes of prosecution under the money laundering statute. On appeal, the Eleventh Circuit affirmed the trial court’s dismissal, agreeing that “it is clear that the term ‘proceeds’ does not contemplate profits or revenue . . . derived . . . from the failure to remit taxes.”37
Yusuf, like Khanani, presents a tax case involving the alleged failure to report receipts from lawful business activities. Yusuf is factually similar to Khanani, but the two circuit courts’ conclusions appear to be in direct conflict. The Supreme Court, however, has denied certiorari in Yusuf without opinion. As of this writing, the issue has not been widely addressed by other federal circuit courts of appeal.38 However, some federal trial courts have questioned the Third Circuit’s use of Santos outside the context of illegal gambling.39
Congressional Intent and Department of Justice Policy
In order to resolve the contradiction between Yusuf and Khanani, analysis of congressional intent is enlightening. When it enacted the federal money laundering statute, did Congress intend that the money generated by failing to pay taxes constitutes proceeds for purposes of satisfying the requirements for a money laundering offense? The legislative history of the statute clearly indicates that the answer to this question is no. As explained in the Senate report to the Money Laundering Crimes Act of 1986, Congress understood that “tax evasion, unlike other crimes, does not have any clearly identifiable ‘proceeds.’” Congress did not intend for “proceeds” to encompass the “run-of-the-mill” crime of tax evasion but rather focused on the nonreporting of income from “racketeering, foreign drug operations, or other heinous crimes.”40 Section 1956(a)(2) of the money laundering statute41 was intended “to support recent United States’ efforts to obtain international cooperation to halt the flow of drug money, and to prevent the United States from becoming a haven in which foreign drug traffickers can keep or invest their earnings.”42
Consistent with the legislative history of the money laundering statute, Department of Justice policy formerly cautioned prosecutors against raising mail fraud in the context of federal tax cases. The government advised its prosecutors that “Congress intended that tax crimes be charged as tax crimes and that the specific criminal law provisions of the Internal Revenue Code should form the focus of prosecutions when essentially tax law violation motives are involved, even though other crimes may technically have been committed.”43 Accordingly, “the Tax Division will not authorize [money laundering] charges where the effect would merely be to convert routine tax prosecutions into money laundering prosecutions.”44
The Yusuf indictment appears to reflect a clear departure from this policy. At least one commentator has labeled the government’s argument a “stretch,” suggesting that this money laundering argument might not have been cleared with the Tax Division of the Department of Justice.45 Regardless of whether that is true, one thing is clear: The legal argument that prevailed in Yusuf is now precedent in the Third Circuit.
Prior to Khanani and Yusuf, the government had generally taken a position consistent with the legislative history of the money laundering statute and Department of Justice policy. For example, in the case of Smith,46 the government conceded its error for improperly charging money laundering in a tax case, as noted in its appellate brief:
Tax crimes are not among those listed as specific unlawful activity in the money laundering statute. See Section 1956(c)(7). Indeed, Congress explicitly noted that tax evasion, unlike other crimes, does not have any clearly identifiable “proceeds” as that term is used in the money laundering statute. S. Rep. 99-433, 99th Cong., 2d Sess. 11 (1986). Consequently, defrauding the government of tax revenues does not generate proceeds of specified unlawful activity, and the monetary transactions here did not fall within the ambit of the money laundering statute.47
2009 Amendment to the Money Laundering Statute
In early 2009, after publication of the Yusuf opinion, the Fraud Enforcement and Recovery Act of 2009 (FERA) was introduced before Congress, and President Barack Obama signed the bill into law on May 20, 2009. The new law, among other things, amends the money laundering statute to define proceeds as “any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity.”48 The amendment effectively reverses the reasoning in Santos that limited the term “proceeds” to net profits rather than gross receipts.
The language of the amendment does little to answer questions raised in Yusuf. It does not address whether tax savings or tax liabilities avoided could ever be proceeds subject to the money laundering statute. A draft version of the bill would have amended the international money laundering statute to make it apply to cases of tax evasion.49 However, that change was not included in the final version of FERA. Given this deletion from the statutory language ultimately enacted into law, a reasonable interpretation of the legislative history of FERA would be that Congress appears to have rejected the notion that tax evasion could result in proceeds for purposes of the money laundering statute. This would be consistent with language in the 1986 legislative history to the money laundering statute that “tax evasion, unlike other crimes, does not have any clearly identifiable ‘proceeds.’”50 Moreover, consistent with prior interpretations of the money laundering statute as reflected in Department of Justice policies,51 in FERA Congress also cautioned prosecutors against prosecuting money laundering in combination with certain other offenses.52
In Yusuf, the government also sought forfeiture of assets under both U.S. and U.S. Virgin Islands law. On the U.S. side, the indictment in Yusuf sought forfeiture under 18 U.S.C. Section 982. Under this statute, a defendant convicted of money laundering may be required to forfeit the property involved in the money laundering or property traceable to such property.53 The forfeiture is not limited to the proceeds of an unlawful activity but may also apply to other property involved in the money laundering, which may encompass more assets. In Yusuf, the indictment sought forfeiture of approximately $60 million in cash, several parcels of real property, an investment account, and every operating asset, as well as all earnings, of the retail grocery business.54 These forfeitures would exceed the alleged approximately $2.9 million in underreported tax many times over.
Any practitioner who has been surprised by an IRS criminal investigation of a client will likely appreciate the significance of Yusuf. As a practical matter, no tax preparer can guarantee with certainty that even the most conservative client did not take some liberties in making representations of income, deductions, or credits. Nor can a CPA rule out the possibility that an aggressive IRS agent might make a criminal referral in an audit despite the best intentions of the taxpayer or the return preparer. In light of these uncontrollable variables and uncertainties, the practical question is how should tax advisers respond or prepare in the face of Yusuf?
To begin, practitioners should stay tuned for any further developments on this subject. Until it is clarified by the courts or Congress, tax advisers must follow the law in the federal appellate circuits within which their clients reside. The Yusuf holding currently applies in the territory of the Third Circuit, which includes Pennsylvania, Delaware, New Jersey, and the U.S. Virgin Islands. As a result of the Khanani ruling, a fraudulent tax return should not serve as the basis for federal money laundering charges in the Eleventh Circuit, which encompasses Alabama, Georgia, and Florida.55
The Yusuf decision underscores the importance of following the guidance found in the AICPA’s Statements on Standards for Tax Services (SSTS).56 For example, in a case involving an error in return preparation, Statement No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, requires an adviser to inform the taxpayer promptly and recommend the corrective measures to be taken. A taxpayer who follows the practitioner’s advice prior to the initiation of any criminal investigation may be able to rebut any inference of the intent required for a mail fraud conviction and a subsequent charge of money laundering.57 Statement No. 3 allows a return preparer to rely in good faith on information provided by the taxpayer or third parties. Although this standard does not generally require a CPA to verify information received, a tax preparer should stress the importance of providing truthful and complete information as a prerequisite for any tax services performed. The preparer should do this in all communications with clients, and in particular in any letters he or she sends at the start of tax season and accompanying the completed returns.
The Yusuf decision also underscores the continuing importance of obtaining sound legal advice as soon as a taxpayer or adviser is aware that the IRS has launched a criminal tax investigation. Because the tax practitioner privilege found in Sec. 7525 does not apply in criminal cases, a CPA must advise a client to promptly retain an attorney who specializes in criminal tax matters. This is important both to shield material that may be developed for the client’s defense under the attorney-client privilege and to guard against strategic mistakes such as the inadvertent disclosure of damaging material.58
The increased sanctions for money laundering also change the calculus of plea decisions. The holding forces a person who is the target of a criminal tax investigation to consider far more carefully the risks of rejecting a proposed plea agreement admitting guilt to a charge of tax evasion, for example, or filing false documents. Both of these would involve sentences far less severe than the 20 years and forfeiture a defendant may face if the case goes to trial and includes counts of money laundering.
In addition, in light of these developments, tax practitioners should reconsider their own procedures with respect to filing tax returns. The money laundering charges brought against the Yusuf defendants rest on transmission of tax materials through the mail or by electronic means. CPAs need to consider whether they should advise clients, either routinely or in cases of particular concern, to hand deliver their tax returns to the taxing authority. While hand delivery appears to be an antiquated procedure in this high-tech age, the consequences of a mail or wire fraud and money laundering conviction are sufficiently serious to warrant such a response. An unknown here is whether the IRS will see hand delivery as a red flag.59 Practitioners need to explain all these risks to clients when preparing or assisting in the preparation of documents that must be submitted to the IRS.
Finally, Yusuf dictates that tax advisers reconsider their own practices in light of the risks these legal developments hold for them personally. The opinion broadens the exposure CPAs face to prosecution for conspiracy charges applicable to persons who agree to commit an offense against the United States or defraud the federal government.60 This could apply in a variety of situations, such as where an accountant agrees to assist in the preparation of tax returns, later mailed to the IRS, on which income is understated. A conviction of the accountant would be surprising in almost all cases, since the prosecution must show that the defendant knowingly, willfully, and voluntarily participated in the scheme with knowledge of its unlawful purpose and specifically intending to further its objectives.61 Nonetheless, a CPA whose client has misrepresented income or other information used to prepare a return may face the uncomfortable prospect of a criminal investigation, again making the importance of following the guidance found in the SSTS obvious.62 Of course, a conviction would likely result in professional discipline63 in addition to the prison term and fine that can be imposed in conspiracy cases. A CPA whose conduct generates a criminal prosecution for money laundering for a client also faces the prospect of a malpractice suit.
The Third Circuit’s decision in Yusuf exposes taxpayers who underreport income on their tax returns and their tax advisers to charges of money laundering. These additional charges carry greater consequences (including much longer prison sentences and potential asset forfeitures) than “typical” tax evasion cases. Given these heightened stakes, tax advisers need to be alert to potential developments regarding this issue, obtain and advise their clients to obtain legal advice as soon as it appears that a case may involve criminal charges, and tighten their practices and procedures for ensuring the accuracy of information reported on and the methods used for filing tax returns.
Authors’ note: The authors gratefully acknowledge the contributions of Teia Bui, Edward Fickess, John Marien, Tracy Marien, Ryan Murphy, and Gordon Rhea to this article.
1 The Third Circuit covers Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands.
2 Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. denied, 129 S. Ct. 2764 (2009).
3 The government charged some of the defendants under Sec. 7206(2) (aiding and abetting in the filing of false statements) for filing their own tax returns. It also charged some of them with conspiracy to evade tax (but did not charge tax evasion under Sec. 7201).
4 Khanani, 502 F.3d 1281 (11th Cir. 2007).
5 Fraud Enforcement and Recovery Act of 2009, P.L. 111-21.
6 The consequences of the court’s decision in Yusuf are not limited to cash-generating businesses. However, underreporting income generally is considered more common among such businesses due to the increased difficulties of detection. See Morse, Karlinsky, and Bankman, “Cash Businesses and Tax Evasion,” 20 Stan. L. & Pol’y Rev. 37 (2009).
7 Saltzman, IRS Practice and Procedure ¶7A.01 (WG&L 2d ed. 1991): “The threat of [civil and criminal tax] sanctions contributes to maintaining compliance with the revenue laws at high levels. Code penalties are both civil and criminal—that is, their deterrent effect depends upon monetary fines (civil penalties) or loss of personal freedom by imprisonment (criminal penalties).”
8 18 U.S.C. §1957, which was not at issue in Yusuf, includes additional rules against money laundering involving the deposit, withdrawal, transfer, or exchange of funds or a monetary instrument by, through, or to a financial institution.
9 Townsend, Campagna, Johnson, and Schumacher, Tax Crimes at 117–18 (LexisNexis 2008).
10 18 U.S.C. §1956(a)(2).
11 18 U.S.C. §1956(a)(1)(A)(i).
12 18 U.S.C. §1956(a)(1)(A)(ii). Sec. 7201 imposes a criminal tax penalty for willful tax evasion. Sec. 7206 imposes criminal tax penalties for, among other things, willfully filing a false tax return or willfully aiding or assisting in filing a fraudulent or false return.
13 18 U.S.C. §1956(a)(1)(B).
14 18 U.S.C. §1956(c)(7).
15 Townsend et al., Tax Crimes at 118.
17 18 U.S.C. §1956(c)(3). The statute includes a modified definition of transaction for financial institutions.
18 U.S. Sentencing Commission, Guidelines Manual (2010). In Booker, 543 U.S. 220 (2005), the Supreme Court declared the federal sentencing guidelines unconstitutional but ruled that sentencing courts can consider the guidelines as advisory in determining the punishment to be imposed on defendants convicted of federal crimes. See Hibschweiler, “Can Your Client (or You) Go to Jail? (Part II),” 37 The Tax Adviser 280 (May 2006).
19 Hochman, Popoff, Perez, Rettig, and Toscher, BNA Tax Management U.S. Income Portfolios 636-2d, Tax Crimes at A-16 (references omitted).
20 United States, et al. v. Fathi Yusuf, et al., Third Superseding Indictment, District of the Virgin Islands, Division of St. Croix, Crim. No. 2005-15F/B, dated September 8, 2004 (hereafter “the indictment”).
21 In Yusuf, the taxpayers were charged under both the U.S. Code and the Virgin Islands Code. The latter imposes a gross receipts tax on businesses in addition to the traditional income tax. Although this tax is on gross receipts rather than taxable income, the holding of the case does not so limit the opinion’s application. The Yusuf opinion appears equally applicable to income tax fraud allegations under the Internal Revenue Code, especially because the criminal tax provisions of the Virgin Islands Code mirror the provisions of the Internal Revenue Code. See title 33 of the Virgin Islands Code.
22 The defendants also moved to have the district court dismiss the mail fraud charges from the indictment in the pretrial motion to strike, but the court refused to do so. The government appealed the trial court’s decision to dismiss the money laundering counts, but the defendants did not have the right to appeal the trial court’s decision regarding the mail fraud counts on the pretrial motion to strike. As a result, the issue of whether the indictment properly alleged mail fraud was not at issue before the Third Circuit in Yusuf but could be raised by the defendants on appeal in the event of a conviction.
23 To illustrate, the mail fraud statute (18 U.S.C. §1341), as amended by the Sarbanes-Oxley Act of 2002, P.L. 107-204, generally carries a maximum potential sentence of 20 years. The same maximum sentence applies when the plan involves the use of interstate wire, radio, or television communication (i.e., wire fraud) (18 U.S.C. §1343). Money laundering, in turn, also carries a maximum potential sentence of 20 years and a fine of not more than the greater of $500,000 or twice the value of the monetary instrument or funds involved in the transaction (18 U.S.C. §1956).
24 Yusuf, 536 F.3d at 189–90.
25 Yusuf indictment, n. 20 above.
26 18 U.S.C. §1956.
27 Yusuf, 536 F.3d at 189.
28 Santos, 553 U.S. 507 (2008).
29 Id. at 514–516.
30 Id. at 514.
31 Id. (citations omitted).
32 The Yusuf court noted that the Supreme Court “recently clarified that the term ‘proceeds’ as that term is used in the federal money laundering statute applies to criminal profits, not criminal receipts, derived from a specified unlawful activity” (Yusuf, 536 F.3d at 185).
34 The U.S. Supreme Court denied certiorari in Yusuf on June 8, 2009 (129 S. Ct. 2764 (2009)).
35 Khanani, 502 F.3d 1281 (11th Cir. 2007), aff’g Maali, 358 F. Supp. 2d 1154 (M.D. Fla. 2005).
36 Both Yusuf and Khanani involve post–September 11, 2001, indictments against Arab American retail merchants and appear to be the only cases in which the government has tested its money laundering theory in tax cases.
37 Khanani, 502 F.3d at 1296.
38 See, e.g., Brown, 553 F.3d 768 (5th Cir. 2008), a Fifth Circuit case involving illegal distribution of medications using false prescriptions. The opinion does not resolve the question of how the term “proceeds” is to be defined. (“We need not decide these thorny issues. We hold that even if the Santos plurality’s more stringent reading of the statute governs in this case, the appellants lose” (id. at 784).) See also Van Alstyne, 584 F.3d 803 (9th Cir. 2009), a decision discussing the definition of “proceeds” in the context of money laundering and mail fraud charges.
39 See, e.g., Prince, 626 F. Supp. 2d 863 (W.D. Tenn. 2008) (a case involving health care fraud): “This Court concludes that the narrow holding of Santos is that ‘proceeds’ means ‘profits’ where the specified unlawful activity is the operation of an illegal gambling business” (id. at 871). See also Darui, 614 F. Supp. 2d 25 (D.D.C. 2009) (an embezzlement case): “Santos defines ‘proceeds’ as ‘profits’ only in the context of an illegal gambling operation. It does not mandate a definition in the context of defendant’s alleged unlawful activity (mail fraud)” (id. at 30).
40 S. Rep’t 433, 99th Cong., 2d Sess, 11 (1986).
41 See the discussion of 18 U.S.C. §1956(a)(2), the international money laundering provisions, at text accompanying note 10 above.
42 S. Rep’t 433, 99th Cong., 2d Sess, 11–12 (1986).
43 U.S. Department of Justice, United States Attorneys’ Manual, §6-4.210 (as in effect through June 27, 2007). (The current version of this section of the manual, which does not include the quote cited in the text, is available online.)
44 U.S. Department of Justice, Tax Division, Criminal Tax Manual §25.01 (2008). This section notes that “Tax Division authorization is not required when (1) the principal purpose of the financial transaction was to accomplish some other covered purpose, such as carrying on a specified unlawful activity like drug trafficking; (2) the circumstances do not warrant the filing of substantive tax or tax fraud conspiracy charges; and (3) the existence of a secondary tax evasion or false return motivation for the transaction is one that is readily apparent from the nature of the money laundering transaction itself.”
45 See Sheppard, “Dear Former Income Tax Evasion Services Customer,” 2009 TNT 195-3 (October 13, 2009).
46 Smith, No. 92-1612 (5th Cir. 8/11/93) (unpublished opinion), cert. denied, 510 U.S. 1056 (1994).
47 See brief for the United States in Smith, on appeal to the Fifth Circuit, dated February 16, 1993, at 27. The Fifth Circuit agreed with the government’s concession in Smith and reversed the defendants’ money laundering convictions. See note 46 above.
48 FERA §2(f)(1).
49 FERA §2(g) (February 5, 2009), would have amended 18 U.S.C. §1956(a)(2)(A) to add clause (ii) to read as follows: “with the intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986.” Senator Chuck Grassley, R-Iowa, then ranking minority member of the Senate Finance Committee, indicated that he and Senator Patrick Leahy, D-Vermont, “plan to reintroduce the rejected provision of S. 386 [FERA] that would make tax evasion a predicate act to money laundering.” See Sheppard, “Dear Former Income Tax Evasion Services Customer,” note 45 above (citing MoneyLaundering.com, September 29, 2009).
50 S. Rep’t 433, 99th Cong., 2d Sess. 11–12 (1986). See also the text accompanying notes 40 and 42 above.
51 See notes 43 and 44 and accompanying text above.
52 FERA §2(g)(1) expresses the “sense of Congress that no prosecution of an offense under [18 U.S.C. §1956 or 1957] should be undertaken in combination with the prosecution of any other offense, without prior approval of the Attorney General, the Deputy Attorney General, . . . if the conduct to be charged as ‘specified unlawful activity’ in connection with the offense under section 1956 or 1957 is so closely connected with the conduct to be charged as the other offense that there is no clear delineation between the two offenses.” The section further requires reporting to the House’s and the Senate’s Judiciary Committees regarding any such approvals or denials.
53 18 U.S.C. §982(a)(1).
54 Indictment Forfeiture Allegations 1 and 2.
55 The law of the federal circuit in which a district court sits applies to cases tried in that court. Federal Rule of Criminal Procedure 18 states that “[u]nless a statute or these rules permit otherwise, the government must prosecute an offense in a district where the offense was committed.” A map showing the territories of the different federal appellate courts can be found online. Using this diagram, practitioners can determine which circuit’s tax decisions may be precedent for their clients.
56 AICPA Statements on Standards for Tax Services.
57 See, e.g., the guidance found in IRM §22.214.171.124, Voluntary Disclosure Practice. A voluntary disclosure is to be considered along with other factors in deciding whether to recommend a criminal prosecution. It is not an automatic guarantee of immunity (id.).
58 See, e.g., Hibschweiler and Salzman, “Tread Carefully: What CPAs Should Know About Tax Fraud,” 40 The Tax Adviser 20 (January 2009).
59 Moreover, even hand delivery may not solve the problem, as one need only “cause” the mailing or wire transmission of the return to trigger mail or wire fraud charges. See, e.g., Carpenter, 484 U.S. 19 (1987). (The Wall Street Journal’s use of the wires and the mail to print and send the publication to customers satisfied the requirement that those media were an essential part of a Wall Street Journal columnist’s insider trading scheme that involved leaking column information prior to publication.) Similarly, if a taxpayer hand delivers his or her return to the local IRS office, the office’s subsequent mailing or wire transfer to an IRS Service Center or some other office may also trigger a mail or wire fraud charge in any event. Practitioners should also be aware of the new mandatory e-filing requirements for 2011 and the requirement that a taxpayer who chooses to paper file his or her own return prepared by a preparer must sign a written statement stating that he or she affirmatively chooses to file on paper and that the taxpayer, not the preparer, is filing the return (Prop. Regs. Sec. 301.6011-6(a)(4)(ii)).
60 18 U.S.C. §371.
61 Sand et al., Modern Federal Jury Instructions, Inst. 19-6 (Matthew Bender 2007).
62 See Hibschweiler, “Tax Practice and the Federal Criminal Code,” 39 The Tax Adviser 216 (April 2008).
63 See, e.g., New York State Education Department, Office of the Professions, “Summaries of Regents Actions on Professional Misconduct and Discipline, February 2008,” noting the voluntary surrender of a license by a CPA convicted of mail fraud, wire fraud, and conspiracy to commit mail and wire fraud.
Randall Andreozzi is a partner with the law firm Andreozzi Fickess LLP. Martha Salzman is a full-time adjunct assistant professor and Arlene Hibschweiler is a full-time adjunct associate professor in the School of Management’s Department of Accounting and Law at the State University of New York at Buffalo in Buffalo, NY, where Mr. Andreozzi is also a part-time adjunct professor. For more information about this article, contact Mr. Andreozzi at email@example.com, Prof. Salzman at firstname.lastname@example.org, or Prof. Hibschweiler at email@example.com.