Scoping the Conspiracy - Concealment Money Laundering & Tax Reporting (3/13/09)

Conspiracy is all about the charged agreement -- the parties' contract. A critical element of the agreement is its scope. What was the object of the agreement? What actions are reasonably foreseeable in furtherance of the agreement? Upon these determinations hinge important consequences -- (1) the commencement of the statute of limitations for prosecution of the conspiracy and (2) so-called Pinkerton liability for acts committed by co-conspirators (see United States v. Pinkerton, 328 U.S. 640 (1946)).

In recent related decisions, the First Circuit struggled with and perhaps misapplied the law relating to scope of the conspiracy in the context of determining the criminal statute of limitations for an alleged money laundering conspiracy. United States v. Upton, 559 F.3d 3 (1st Cir. 2009) (main opinion); United States v. Alberico, 559 F.3d 24 (1st Cir. 2009) (opinion in related case decided on the basis of Upton). In each case, outside the 5 year statute of limitations, the defendants had stolen about $1,000,000 cash and had engaged in a real estate transaction, allegedly to launder the stolen money. Their relevant tax returns filed by each individual did not disclose either the stolen money or the rental income from the real estate. Each defendant failed to file a tax return for 1999 which, if filed, should have reported the gain on the sale of the real estate.

They were charged for conspiracy to commit money laundering, in violation of 18 U.S.C. §§ 1956(a)(1)(b), (h), and 1957(a); filing a materially false income tax return for the year 1997, in violation of 26 U.S.C. § 7206(1); and failing to file an income tax return for the year 1999, in violation of 26 U.S.C. § 7203.

A conspiracy must have some act within the relevant conspiracy statute of limitations - 5 years. (By provision of the Internal Revenue Code, a tax conspiracy has a five year statute of limitations, but the money laundering conspiracy is not subject to the special tax extension of the normal conspiracy statute of limitations.) Focusing on the conspiracy charge, the only acts within the critical 5 year statute of limitations period was the defendants’ respective failures to file their 1999 tax returns which would have been due on April 15, 2000. The relevant issue addressed on appeal was whether their failures to file were acts within the scope of the conspiracy, thus making the conspiracy charge timely. This issue split the panel, with a majority holding the failures to file were acts reasonably foreseeable acts in furtherance of the conspiracy.

Grunewald v. United States, 353 U.S. 391 (1957) sets the conceptual basis to resolve this issue. In Grunewald, the Court dealt with the general conspiracy statute (18 U.S.C. Section 371) and held that mere subsequent concealment of a completed crime was not an act in furtherance of the conspiracy to commit the crime. In reaching that holding, the Supreme Court cautioned against assuming that some subsequent concealment per se was within the scope of the original conspiracy. The First Circuit distinguished Grunewald on the basis that, in this cases at hand, the substantive offense related to concealment money laundering as to which acts subsequent to the original offense whereby the proceeds were obtained are the very essence of the crime. The Court reasoned (some case citations omitted):

Where, as we have established is the case here, the substantive crime that is the object of the conspiracy has the intent to conceal as an element, the success of the conspiracy itself may depend on further concealment. Consequently, additional acts of concealment that facilitate the central aim of the conspiracy are in furtherance of the conspiracy. See, e.g., United States v. Goldberg, 105 F.3d 770, 774 (1997) (acts of tax evasion were "integral and self-evident part of" fraud conspiracy charged under 18 U.S.C. § 371); United States v. Mann, 161 F.3d 840, 859 (5th Cir. 1998) (acts designed to frustrate regulatory oversight were "central" to conspiracy involving fraud within savings and loan institution); United States v. Esacove, 943 F.2d 3, 5 (5th Cir. 1991) (acts designed to protect money laundering conspiracy against government investigation held "necessary" part of conspiracy). And, as noted above, the jury was entitled to infer that the conspirators' parallel failures to file tax returns for 1999 were part of an ongoing plan to engage in concealment money laundering, rather than merely being later attempts to cover up a completed crime.

In effect, the majority reasoned, because the alleged conspiracy did include concealment by definition, any act that would have the effect of concealing was within the scope of the conspiracy and the date of such act could be a start date for calculating the statute of limitations.

This holding drew a vigorous dissent on the basis that Grunewald's analysis required that the parties originally agreed to the subsequent act (failure to file as to which there was no proof of agreement) or the specific act (failure to file in order to conceal) was within some general scope of the conspiracy. Certainly, under Grunewald, evading a tax liability from income derived from the criminal proceeds cannot per se be considered within the scope of the original crime. As in Grunewald, just because a conspirator may have a reason to conceal the original crime (here the stealing of cash and/or the original laundering of the criminal proceeds by purchasing the property) does not mean that a subsequent act (here failing to report the proceeds of sale of the property by failing to file a tax return) was taken in furtherance of and reasonably foreseeable from the original crime. The dissenter simply thought that there was no agreement express or implied that they would fail to file their 1999 returns as a method of further concealing the crime or the laundering of the proceeds of the original substantive offense. Each of the defendants may have had that intent at the time they failed to file, but there is no indication and Grunewald does not permit that intent to be presumed as part of the original agreement and thus within the scope of the conspiracy. Consistent with his reading of Grunewald, the dissenter objected to treating a mere subsequent act of concealment simply because it occurred, which would mean that statutes of limitation might go on indefinitely depending upon the unforeseeable individual acts of conspirators who are no longer conspiring.

In the support of his analysis, the dissenter relied in part on syllogistic reasoning: The major premise is that, had the defendants filed a 1999 return and failed to report the gain in question, that would not have constituted an act in furtherance of the conspiracy. The minor premise was that failing to file a return for the same purpose was functionally equivalent of filing a return and not reporting the gain. Hence, the latter should not be an act in furtherance of the conspiracy under Grunewald analysis. Without referring to the syllogism, the majority stated it did not accept the concept of the major premise.

The net take away for practitioners is that these cases raise a troubling specter that, with respect to concealment money laundering charges, any subsequent failure, indefinitely into the future, to timely report on tax returns all income from the proceeds of the original criminal act may be considered a concealment within the scope of an original conspiracy or, where there is not even a conspiracy, presumably an act of concealment itself. From a practical standpoint, persons engaging in this type of conduct frequently -- perhaps usually -- do not report and pay tax on the income from those proceeds, and thereby annually refresh the statute of limitations or engage in a subsequent fresh crime.

Not only is this troubling from a normal conspiracy perspective, it also highlights the problem with money laundering conspiracies because they are subject to the draconian sentences for money laundering rather than the 5 year sentence for the general money laundering statute (18 USC 371).