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Money Laundering Asset Forfeiture and Bankruptcy Fraud

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In a "typical" bankruptcy fraud case (assuming any such thing exists), the maximum statutory punishment that can be imposed upon a defendant is five years in prison,3 a $250,000 fine,4 three years of supervised release,5 two additional years of incarceration if the person violates a condition of supervised release, restitution,6 and a $100 special assessment to the victims assistance fund.7

However, if a defendant also engages in an illegal monetary transaction with proceeds derived from fraud connected to a bankruptcy case and is convicted of some form of "money laundering," the federal money laundering statutes and sentencing provisions call for an even greater punishment.

A person convicted of money laundering under 18 U.S.C. §§1956(a)(1) or 1956(a)(2) faces the possibility of a $500,000 fine or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than 20 years, or both. A defendant convicted under 18 U.S.C. §1956(a)(3) can be fined up to $250,000, imprisoned not more than 20 years, or both. In addition, a defendant who conducts or attempts to conduct a transaction prohibited by §1956(a) also faces potential liability to the United States for a civil penalty not more than the greater of the value of the property, funds or monetary instruments involved, or $10,000.8

A defendant convicted of engaging in a monetary transaction in property derived from a specified unlawful activity under 18 U.S.C. §1957(a) faces a possible prison term of 10 years, a $250,000 fine or both.

Both §§1956 and 1957 require that the proceeds being laundered or that form the basis of an illegal monetary transaction come from a "specified unlawful activity" (SUA). In part, the term includes any offense listed in 18 U.S.C. §1961(1), which includes "any offense involving fraud connected with a case under title 11" (except a case under 18 U.S.C. §157).9 Consequently, any participant in the bankruptcy system who conceals assets before or after the filing of the bankruptcy may potentially be running the risk of being convicted not just of bankruptcy fraud, but of money laundering as well. This commentary strongly suggests that the price for committing bankruptcy fraud can indeed be quite costly.

Section 1956

Section 1956(a)(1) makes it a crime to conduct or attempt to conduct10 a financial transaction11 that involves the proceeds of an SUA knowing that the property involved in the transaction represents the proceeds of some form of unlawful activity.12 Section 1956(a)(2) governs transactions of an international nature. It prohibits a person from transporting, transmitting or transferring, or attempting to transport, transmit or transfer a monetary instrument or funds from the United States to or through a place outside the United States. These are the actus reas components of §§1956 and 1957.

In order to obtain a conviction under §1956(a)(1) or (a)(2), the prosecution must establish beyond a reasonable doubt that the defendant engaged in any of the foregoing transactions, or attempted to do so, with one of four mental states: (1) with the intent to promote the carrying on of an SUA, (2) with the intent to engage in certain forms of tax fraud, or (3) and (4) knowing that the transaction is designed in whole or in part to either (a) conceal or disguise the nature, location, source, ownership or control of the proceeds of an SUA, or (b) to avoid a transaction reporting requirement under state or federal law.

Section 1956(a)(3) makes it a federal offense to conduct or attempt to conduct a financial transaction involving property represented to be the proceeds of an SUA, or property used to conduct or facilitate an SUA. To obtain a conviction, the United States must establish that this conduct was done (1) to promote the carrying on of an SUA; (2) to conceal or disguise the nature, location, source, ownership or control of property believed to be the proceeds of an SUA; or (3) to avoid a transaction-reporting requirement under state or federal law. Note that under this section, the funds involved in the prohibited financial transaction do not have to be the actual proceeds of an SUA.

Any financial transaction made with funds concealed from a bankruptcy estate, or wrongfully withheld from or diverted from a bankruptcy estate, can run afoul of several of the prohibitions discussed above. Such conduct is made with the intent to promote a bankruptcy fraud in violation of §1956(a)(1)(A)(i), or to conceal the nature, source, ownership or control of the bankruptcy fraud proceeds in violation of §1956(a)(1)(B)(i). If the transaction was from the United States and to or through another nation, §§1956(a)(2)(A) and 1956(a)(2)(B)(i) would be implicated. Any financial transaction involving property represented to be the proceeds of a bankruptcy fraud (SUA), or with property used to facilitate the bankruptcy fraud (SUA), even if it is not in fact the proceeds of a bankruptcy fraud, violates §1956(3)(A) or (3)(B) if done with the intent to promote a bankruptcy fraud, or to conceal the nature, source, ownership, or control of the bankruptcy fraud proceeds. In summary, engaging in a financial transaction with property that belongs to a bankruptcy estate—and engaging in a financial transaction with otherwise legitimate funds for the purpose of helping someone commit bankruptcy fraud—are rather poor ideas.

Section 1957

Unlike §1956, §1957 sets forth just a single offense. Section 1957(a) makes it a crime if a person "knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 that is derived from specified unlawful activity."

Thus, provided that the transaction involved takes place in the United States or its territorial jurisdiction, or the defendant is a U.S. person, regardless of where the transaction occurs, any person who knowingly engages in a monetary transaction13 involving more than $10,000 of property that represents the proceeds of a bankruptcy fraud is criminally liable under §1957.

Asset Forfeiture

In many cases where the United States charges §1956 or 1957 violations, the prosecution may include a criminal asset forfeiture count under 18 U.S.C. §982. Asset forfeiture can involve the forfeiture not only of the proceeds of the crime, but can also include the forfeiture of substitute assets if the original assets have been depleted. It is even possible to forfeit property "involved in" the money laundering. Civil forfeiture is another possibility.14

Money Laundering and the Sentencing Guidelines

Under U.S.S.G. §2S1.1(a), a person convicted of violating §1956(a)(1)(A), (a)(2)(A), or (a)(3)(A) faces a base offense level of 23 (46-57 months). Conviction for any other subpart of §1956 involves a base offense level of 20 (33-41 months). In money laundering sentences, the offense level is increased in the following amounts if the value of the funds exceeded $100,000:

Guideline Value Increase
§2S1.1(b)(2)(A) <$100,000 no increase
§2S1.1(b)(2)(B) >$100,000 add 1
§2S1.1(b)(2)(C) >$200,000 add 2
§2S1.1(b)(2)(D) >$350,000 add 3
§2S1.1(b)(2)(E) >$600,000 add 4
§2S1.1(b)(2)(F) >$1,000,000 add 5
§2S1.1(b)(2)(G) >$2,000,000 add 6
§2S1.1(b)(2)(H) >$3,500,000 add 7
§2S1.1(b)(2)(I) >$6,000,000 add 8
§2S1.1(b)(2)(J) >$10,000,000 add 9
§2S1.1(b)(2)(K) >$20,000,000 add 10
§2S1.1(b)(2)(L) >$35,000,000 add 11
§2S1.1(b)(2)(M) >$60,000,000 add 12
§2S1.1(b)(2)(N) >$100,000,000 add 13

In §1957 cases, the base offense level is 17.15 If the value of the funds exceeds $100,000, the offense level is to be increased based on the table discussed above.

The base offense level for these offenses begins at a term of years greater than a defendant is likely to receive in a typical bankruptcy fraud case. Consider the case of a defendant who fraudulently conceals $100,000 from a bankruptcy estate. He faces a sentence of at least level 12, which includes the base offense level and an enhancement for the dollar value.16 His sentence will likely be enhanced for abuse of judicial process (+2)17 and also enhanced for more than minimal planning or a scheme to defraud more than one victim (+2).18 Assuming no acceptance of responsibility or other downward departures, the ending sentencing level the hypothetical defendant would face is level 16, four levels below where a §1956 sentence begins and one level below where a §1957 sentence starts.19 The greater punishment afforded to money laundering supports the contention that Congress intended to provide a strong disincentive to persons contemplating money laundering. Hence, persons tempted to commit bankruptcy fraud should think twice before engaging in any monetary transactions with funds concealed from, or wrongfully diverted from, a bankruptcy estate, unless they are willing to pay the hefty price discussed above.

Case Law

A review of published federal case law reveals that the prosecutors are not reluctant to employ these powerful weapons in bankruptcy fraud cases where the facts support their use.

United States v. Richard, 234 F.3d 763 (1st Cir. 2000), involved an eight-year scheme and numerous defendants. In essence, the participants were involved in a fraudulent scheme to finance Catherine Petit's multimillion dollar lawsuit against Key Bank and her former attorneys. Petit and another attorney began selling "shares" in the outcome of the litigation, which they were ensured was a "sure thing." Further, they were told that their investments were backed by a multimillion dollar escrow account. One lawsuit was settled and the other dismissed. The settlement was used to entice more investors; the dismissal was never disclosed to the investors. When Petit was forced into an involuntary chapter 7 in 1993, she maintained the lawsuit was her only asset. In reality, she and Richard had parked assets in a dummy corporation. During the bankruptcy, she denied receiving any income from the sale of her interest in litigation. David Hall joined the scheme in late 1994, soliciting clients through duplicitous means for the scheme. He did not tell clients about the bankruptcy, and he forwarded funds he received to the dummy corporation through Richard and others, after skimming some for himself. Between 1989 and 1997, the operation, which had other aspects as well, raised more than $8 million.

Among numerous charges against multiple defendants, Petit and Hall were charged with conspiracy to commit bankruptcy fraud, mail fraud, money fraud and securities fraud; 12 counts of bankruptcy fraud under 18 U.S.C. §152; and money laundering under §§1956(a)(1)(A), 1956(a)(1)(B)(i) and 1957. Hall was acquitted on all bankruptcy fraud charges, but found guilty on the rest of the charges against him that went to the jury.

On appeal, Hall raised several issues. First, he claimed that the delivery or transfer of a check derived from an unlawful activity was a monetary transaction under §1957(a). The court held that giving criminally derived checks to a co-conspirator was within the ambit of the statute. Second, Hall contended that he could not be convicted under §1957(a) because he was not convicted of the listed SUA, namely bankruptcy fraud. The court rejected this argument on two grounds. The court noted that inconsistent verdicts do not undermine a conviction as long as there is sufficient evidence presented to support the conviction. Also, §1957(a) does not require the defendant to have committed the SUA; it requires that the defendant knew the transaction was made with criminally derived property. Thus, his acquittal on bankruptcy fraud had no effect on his monetary transaction convictions.

United States v. Paradis, 219 F.3d 22 (1st Cir. 2000), was an offshoot of the scheme discussed above. The defendant assisted Petit, his employer, in concealing $3 million from the chapter 7 bankruptcy estate. Paradis, the office manager of a company Petit controlled, deposited funds Petit raised through the investment scheme into an account in his and his wife's names. Along with prison time, Paradis was ordered to pay $3 million in restitution. Although his laundering of the proceeds was to conceal and divert proceeds from the bankruptcy estate, where they could have been used to pay creditors, the absence of any specific creditors who filed proofs of claims that went unpaid, and thus an absence of identifiable victims, precluded a restitution order.

The defendant in United States v. Butler, 211 F.3d 826 (4th Cir. 2000,) was convicted of one count of bankruptcy fraud and five counts of money laundering under §1957. After he filed for bankruptcy, Butler settled a debt owed to him by a corporation and its principals, which were also in bankruptcy at the time. The agreement called for a settlement of $350,000, with payments to be deposited in an escrow account. Butler disclosed the settlement to his creditors, but did not obtain bankruptcy court approval. The company and its principals fell behind on their payments and negotiated a new agreement that involved the immediate issuance of three checks of more than $100,000 each to be paid to either Butler or an associate. Butler did not disclose these transactions to the court, trustee or creditors. He used the funds paid to him for personal expenses. His associate kept the funds from the second check. Butler was charged with concealing both checks ($100,000 each). Butler also was charged with concealing and laundering the third check ($150,000), which Butler had his associate endorse back to him and which he then proceeded to give to a friend, who held the money for over a year. Butler later directed the friend to purchase cashier's checks with the funds, payable to another friend. Butler controlled the account into which the second friend deposited the funds. Butler was convicted on all six counts.

On appeal, Butler argued that the five cashier's checks involved in the money laundering counts were not "criminally derived property." He claimed the United States failed to prove the completion of the bankruptcy fraud prior to the purchase of the checks. The court noted that funds are "criminally derived" if they come from a completed offense, or a completed phase of an ongoing offense. The court noted that the funds became "criminally derived property"—money deprived from the bankruptcy estate—when he caused his associate to give the $150,000 to his friend. Thus, by the time he directed the friend to begin purchasing the cashier's checks, a phase of the offense had been completed.

In United States v. Ward, 197 F.3d 1076 (11th Cir. 2000), the defendant transferred ownership of his business from his sole proprietorship to a new corporation. He kept operating the business afterward, including during the course of the bankruptcy. At the first meeting of creditors, he denied any connection with the new corporation except that his wife had purchased it. Among numerous counts, Ward was charged with making a false statement under oath at the §341 meeting, as well as concealing various bank accounts. He was convicted on these counts, as well as for money laundering under §1956 (with the intent to conceal location, source or ownership of the proceeds of the SUA) for engaging in financial transactions out of the concealed accounts, which allowed him to continue operating the business.

In United States v. Holland, 160 F.3d 377 (7th Cir. 1998), Shirley and Joe Holland were charged with various counts of tax evasion, bankruptcy fraud and money laundering. The Hollands owned one-half interests in several Indiana corporations, which they operated. Shirley also worked for three sole proprietorships owned by Joe. From 1990 through 1992, the Hollands sent more than $330,000 of income to a person in California who paid their personal and business expenses on checks drawn on an account in his own name, not the Hollands'. He also sent them substantial sums of money. During Joe's chapter 13 bankruptcy filed in October 1991, the Hollands understated and misrepresented to creditors the income they sent to California. They also concealed bank accounts and a recreational vehicle. The Hollands were convicted not only of bankruptcy fraud, but the California friend's payment of expenses at their direction constituted the basis of several §1956 charges. Joe was sentenced to 80 months in prison, while Shirley was sentenced to 27 months for her involvement.

One of the more interesting bankruptcy fraud/money laundering cases is United States v. West, 22 F.3d 586 (5th Cir. 1994). West, a Texas real estate developer, experienced financial problems due to problems in the state's economy in the late 1980s. He filed for bankruptcy in 1990.

Prior to filing, he sold his homestead to a friend, as trustee for her son, for $75,000 in cash and a promissory note for $277,500. West received 10 payments on the note. Among other assets he did not disclose in the bankruptcy, including cashier's checks in significant amounts, he also failed to properly disclose his interest in a 1962 Mazda coupe and a 1935 Austin in his schedules. He later traded the cars for a dune buggy and cash, which he deposited into an undisclosed account. West was convicted of bankruptcy fraud and money laundering, based on the financial transactions he engaged in with the promissory note proceeds and sale proceeds.

On appeal, West argued that the transactions he engaged in with the promissory note payment could not form the basis of bankruptcy fraud because they occurred more than one year prior to bankruptcy. He contended the United States could not prosecute him because the trustee was unable to recover the funds under 11 U.S.C. §548(a). The court rejected this argument, noting that "A defendant may knowingly and fraudulently transfer property in contemplation of or with the intent to defeat the provisions of Title 11 without necessarily transferring the property within one year before filing the petition."20 The Fifth Circuit astutely observed that "a knowledgeable defendant bent on pursuing a fraudulent course of action would effect a fraudulent transfer outside the one-year period within which the bankruptcy trustee could rescind it." The court similarly affirmed the money laundering counts under §1956(a)(1)(A)(i) and (B)(i) (promotion and concealment), concluding that the checks he received from the sale of the house and cars that he omitted from his bankruptcy were clearly the proceeds of unlawful activity.

Conclusion

As the foregoing discussion of statutes, U.S. Sentencing Guidelines and case law illustrates, the money laundering and asset forfeiture laws are key components of the federal government's bankruptcy fraud deterrence program. Persons tempted to commit bankruptcy fraud should bear in mind that engaging in financial or monetary transactions with the proceeds of a bankruptcy fraud, with funds represented to be such proceeds, or even with legitimate funds used to promote a bankruptcy fraud, can implicate not just the potential punishments under the bankruptcy fraud statutes, but can lead to prosecution for the more harshly punished offenses discussed above. Further, bankruptcy fraud can potentially lead to the forfeiture not only of ill-gotten gains, but in some cases can involve the divestiture of legitimate assets used to promote the bankruptcy fraud.

Crooked creditors and dishonest debtors are unlikely to escape the vigilant eyes of the Assistant U.S. Trustees who stand as guardians for the integrity of the bankruptcy system. And when those who try to cheat the system get caught, this commentary clearly explains that the potential punishments they face for committing bankruptcy fraud far outweigh any small benefits that the fraud might temporarily confer.


Footnotes

1 Mr. Gaumer received his J.D. in 1989 from Washington University, and his M.A. in sociology in 1986 and B.A. in journalism in 1984 from Eastern Illinois University. He is a former chair of the South Dakota Bankruptcy Fraud Task Force (1992-2001) and a former law clerk to the Hon. Frank W. Koger, U.S. Bankruptcy Judge for the Western District of Missouri. Return to article

2 The views expressed in this article are solely those of the author and should not be attributed to the U.S. Department of Justice, U.S. Attorney for the Southern District of Iowa or any other person or entity associated with him. The author acknowledges the support of the Hon. Don C. Nickerson and Inga Bumbary Langston. Return to article

3 18 U.S.C. §3581. Return to article

4 18 U.S.C. §3571. Return to article

5 18 U.S.C. §3583. Return to article

6 18 U.S.C. §§3663 and 3663A. Return to article

7 18 U.S.C. §3013. Return to article

8 18 U.S.C. §1956(b). Return to article

9 See §1956(c)(7)(A), incorporating 18 U.S.C. §§1961(1)(D) and 1956(c)(7)(D), incorporating an offense under §152 (relating to concealment of assets, false oaths and claims, and bribery). The text here appears to encompass all bankruptcy crimes, except §157 violations, as potential SUAs. Return to article

10 "'Conducts' includes initiating, concluding or participating in initiating or concluding a transaction." 18 U.S.C. §1956(c)(2). Return to article

11 "'Financial transaction' means (A) a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means or (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel or aircraft, or (B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree." 18 U.S.C. §1956(c)(4). "'Transaction' includes a purchase, sale, loan, pledge, gift, transfer, delivery or other disposition and, with respect to a financial institution, includes a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit or other monetary instrument, use of a safe deposit box, or any other payment, transfer or delivery by, through or to a financial institution, by whatever means effected." 18 U.S.C. §1956(c)(3). Return to article

12 "'Knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity' means that the person knew the property involved in the transaction represented proceeds from some form, though not necessarily which form, of activity that constitutes a felony under state, federal or foreign law, regardless of whether or not such activity is specified in paragraph (7)." 18 U.S.C. §1956(c)(1). Return to article

13 "'Monetary transaction' means the deposit, withdrawal, transfer or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument (as defined in §1956(c)(5) of this title) by, through or to a financial institution (as defined in §1956 of this title), including any transaction that would be a financial transaction under §1956(c)(4)(B) of this title, but such term does not include any transaction necessary to preserve a person's right to representation as guaranteed by the Sixth Amendment to the Constitution." 18 U.S.C. §1957(f)(1). Return to article

14 See 18 U.S.C. §984. Return to article

15 U.S.S.G. §2S1.2. Return to article

16 Under U.S.S.G. §2F1.1, a base offense level of 6 and adding 6 for the dollar value. Return to article

17 U.S.S.G. §2F1.1(b)(4)(B) or (C). Return to article

18 U.S.S.G. §2F1.1(b)(2). Return to article

19 At least one U.S. court of appeals has granted a downward departure to a defendant convicted of both the SUA of bankruptcy fraud and of money laundering, based on its conclusion that application of the money laundering laws to the facts before it were outside the "heartland" of situations the statutes were intended to address. United States v. Woods, 159 F.3d 1132 (8th Cir. 1998). Return to article

20 22 F.3d at 590. Return to article

Journal Date: 
Tuesday, May 1, 2001

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