Tax Evasion to Money Laundering - Upping the Ante / Risk

I just became aware of the petition for certiorari in the Yusuf case (United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert. pending by petition for cert filed 1/30/2009), which I previously discussed here). Readers will remember that the concern arising from Yusuf and other Government noisings is that DOJ Tax will loosen the strings on its previous policy to approve only sparingly the packaging of tax evasion as mail or wire fraud as a predicate act for money laundering.

The petition for cert in Yusuf is here. Among other things, the petition alleges a conflict with United States v. Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007). DOJ Tax discusses Yusuf and acknowledges the conflict in its Criminal Tax Manual ("CTM"), which may be viewed here, as follows:

In United States v. Yusuf, No. 07-3308, 2008 WL 2875332, at *8 (3d Cir. July 21, 2008), the Third Circuit held that unpaid Virgin Islands Gross Receipts Taxes, which were unlawfully disguised and retained by means of the filing of false Virgin Islands Gross Receipts Tax Returns through the U.S. mail, are “proceeds” of mail fraud for purposes of stating a money laundering offense. The tax at issue in Yusuf was not income tax, but a non-federal tax calculated as a straight percentage of sales, which helped satisfy the limited circumstances under which the Tax Division will authorize such charges. In addition to holding that the retained taxes were the proceeds of mail fraud, the Third Circuit further held that the retained taxes amounted to "profits," thus satisfying United States v. Santos, 2008 WL 2229212 (June 2, 2008), in which the Supreme Court held that the term "proceeds," at least in some money laundering contexts, means profits, not gross receipts. Yusuf created a conflict with United States v. Khanani, 502 F.3d 1281, 1296-97 (11th Cir. 2007), in which the Eleventh Circuit held that the definition of "proceeds" is limited to "something which is obtained in exchange for the sale of something else," and thus does not include retained taxes.

Note, how DOJ Tax interprets Yusuf narrowly so as to, potentially, mitigate the broad concerns the tax community has voiced that ordinary tax evasion would be bootstrapped into money laundering via mail or wire fraud, one or both of which are almost always present in tax evasion and other tax crimes. Still, even with the possibility that courts will buy into a narrower construction, the tax community is rightly concerned and needs to watch the developments.

The Government's response to the petition for cert is due 5/6/09. You can check the status in the Supreme Court's docket sheet here.

Historically, at least back in the old days, clear conflicts were often the key factor in the Supreme Court to take cert. Conflicts alone will not do it, however, as in situations where the conflict could resolve itself by more bubbling around in the courts of appeals. Still, given the uncertainties inherent in Santos, this looks like a good opportunity for further clarification in this important area.

Finally, I remind my readers that DOJ is promoting a legislative expansion of the money laundering provisions to include some tax crimes. I have previously discussed that initiative here.