United States v. Santos and Proceeds of Illegal Transactions

The issue presented in this case is simple--so simple, in fact, that any high school student should be able to understand it and probably come up with a defensible answer. It concerns "money laundering" and what specifically the term "proceeds" means in the federal law that disallows money laundering. When I first heard the word "money laundering" about 20 years ago, I had no idea what it meant, but the "instant image" created in my mind was of the many times my money came out of the wash discolored or torn because I had neglected to clean out my pockets before washing the pants. Well, money laundering is almost that. It is, according to federal law, one of two things: (1) using proceeds* from

[*"proceeds" is the big word in this case]

some kind of illegal activity and paying off the people who help you out; or (2) concealing the source of the illegal money by taking it and investing it in "legitimate businesses." Citation is 18 USC sec. 1956(a)(1)(A)(i). This is the "laundering" part of it. You take "dirty money" and make it "clean." This happens in the Sopranos all the time. What I didn't know about money laundering is that the first time the word was actually used was during the Watergate scandal of 1973-74, where the Committee to Re-Elect the President (CREEP in the 1972 election) took illegal campaign contributions and, in a roundabout way, got them to be "legitimate" campaign contributions. However, the money-laundering law was passed primarily to get at two different activities: (1) Mafia-style gambling operations; and (2) international and domestic drug transactions. If you study the law on money-laundering long enough you can enter into these nether worlds as deeply as you want. I will go no further here.

The Issue in Santos

In this case Danny Santos was small time gambling operator. He operated an illegal lottery known as a "bolita" (little balls) in East Chicago, IN for about 20 years, from the early 1970s to 1990s. His "runners" would take bets from patrons in local restaurants and bars, take their "cut" out of the bets, turn the remaining money over to the "collectors," who in turn gave the money to Santos. Winners were based on the daily Pick Three and Pick Four Illinois lottery games and on the Puerto Rican lottery. Santos would give some money to the winners, some to this two "collectors" and then keep the rest. Pretty simple operation.

Well, after repeated federal investigations where Santos kept moving his operation and keeping it open, they finally arrested him and indicted him, his collectors and some runners on 10 charges having to do with the operation. The money laundering charge at issue in the Supreme Court case states that it is illegal to take the "proceeds" of the operation and make a "financial transaction" (i.e., a payoff to staff) or to conceal the source of the funds.

But what are the "proceeds" of an illegal operation? Well, it is one of those questions whose answer is obvious until someone asks you the question. Then you can come up with two distinctly different answers. On the one hand, proceeds could be equivalent to the "gross receipts" of the operation. In this case it would mean the total amount of money brought in by Santos during his operation. Or, on the other hand, proceeds could mean the "net receipts" of the operation--the amount left on hand after all "employees" were paid off. So, in a humorous sort of way, we have a question of statutory interpretation thrown into a case about a low-level gambling operation.

Why This Case Made it to the Supreme Court

This case made it to the Court because the 7th Circuit held (461 F3d 886, 7th Cir (2006)) that "proceeds" should mean "net receipts." Why would they have concluded this? It wasn't from any reading of the statute or legislative history underlying the law. Indeed, those are mute on the point. Rather, it resulted from application of a principle called the "rule of lenity" in criminal cases. The rule of lenity, as defined by the 7th Circuit is when :

"there is a grievous ambiguity or uncertainty in the language and structure" of a statute, "the rule of lenity instructs that ambiguity in the meaning of a statutory provision should be resolved in favor of the defendant," quoted in Santos, 461 F3d at fn 2.

Thus the 7th Circuit concluded that "proceeds" here meant "net receipts."

Other circuit courts which have examined the issue have concluded it was a "no-brainer" on the other side--that the law was passed to get at the activity in question and any money resulting from the operation was "proceeds." After all, this side argues, you shouldn't have to come in with a battery of accountants to analyze the books of an operation to make sure it was profitable before you indict the people for money laundering.

Conclusion

So that is the simple issue before the US Supreme Court: does the word "proceeds" in 18 USC 1956(a)(1)(A)(i) mean "gross receipts" or "net receipts"? You would think the Court had bigger fish to fry, really...

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