Comprehensive Guide to White-Collar Criminal Defense: Money Laundering

Introduction to Federal Money Laundering

Federal money laundering laws play a critical role in the United States' efforts to prevent the integration of illicit funds into the legitimate financial system. These laws target a broad spectrum of financial crimes, including those tied to drug trafficking, organized crime, and white-collar crime. Money laundering is an offense that involves the concealment or disguise of the illicit origins of proceeds derived from criminal activity, as well as the spending of illegally derived money, and its legal framework is governed by several key statutes.

Among the most significant statutes are 18 U.S.C. § 1956 and 18 U.S.C. § 1957, which specifically criminalize the act of laundering proceeds from criminal activities. These provisions, along with related laws such as the Bank Secrecy Act (BSA) and USA PATRIOT Act, create a robust set of tools for prosecutors and investigators to target money laundering activities across various sectors.

In this post, we will explore these federal money laundering laws, the key elements required for a conviction, and the defenses to these crimes.

The Money Laundering Control Act (1986) & 18 U.S.C. § 1956 (Money Laundering)

The Money Laundering Control Act of 1986 (codified at 18 U.S.C. § 1956) was the first federal statute that explicitly criminalized money laundering. This law made it illegal to engage in financial transactions that involve the proceeds of criminal activity with the intent to promote that illegal activity or to conceal the nature, source, or ownership of the funds.

Under 18 U.S.C. § 1956, there are three primary categories of money laundering offenses:

• Promotional Money Laundering: This occurs when funds derived from criminal activity are used to promote the criminal activity itself (e.g., using drug trafficking proceeds to further drug distribution operations or using fraud proceeds to further a pyramid scheme).

• Concealment Money Laundering: This involves transactions designed to disguise the true origin of the funds, often through a series of complex transactions or offshore accounts or crypto wallets, making it difficult for authorities to trace the illegal source.

• Avoidance of Reporting Requirements: This refers to efforts to avoid financial transaction reporting requirements, such as structuring transactions to fall under thresholds set by the Bank Secrecy Act (e.g., under $10,000).

Penalties under 18 U.S.C. § 1956 can include up to 20 years in prison, significant monetary fines, and the forfeiture of any property involved in the illegal transactions.

Promotional Money Laundering and White-Collar Crime

In the context of white-collar crime, promotional money laundering can be particularly relevant in cases involving complex financial schemes where funds are moved through various channels to facilitate or perpetuate illicit activities. White-collar crimes such as fraud, embezzlement, insider trading, and bribery often generate large sums of money that criminals attempt to legitimize or use to further their criminal enterprises.

For example:

• Corporate Fraud: In a large-scale corporate fraud scheme, such as an unlawful attempt to boost corporate revenue, the proceeds of fraudulent financial reporting or accounting manipulations may be used to fund additional fraudulent investments or to cover up further illegal activities, such as bribes or kickbacks.

• Insider Trading: A person involved in insider trading might use the profits from illegal stock trades to fund the acquisition of other assets or investments, thereby promoting their ongoing illegal activities.

• Embezzlement: An individual who embezzles money from their employer may use the stolen funds to create the appearance of legitimacy by investing them in real estate or other ventures, promoting the success of the criminal activity.

In these cases, the individuals or groups involved are not merely laundering money to hide its origin (as in concealment money laundering) but are using the illicit funds to further their illegal schemes, thus promoting the continuation of their criminal conduct.

Promotional money laundering is a powerful tool for prosecutors in white-collar crime cases because it directly ties financial transactions to the ongoing commission of fraud, bribery, or other financial crimes, and can be used to strengthen charges against those attempting to reinvest criminal proceeds into further illegal activities.

Concealment Money Laundering and White-Collar Crime

Concealment money laundering refers to financial transactions that are conducted with the intent to conceal or disguise the nature, source, ownership, or control of proceeds derived from criminal activity.

Under 18 U.S.C. § 1956(a)(1)(B), it is illegal to engage in such transactions if the individual knows that the funds involved are from illegal sources and intends to hide their illicit origin. This form of money laundering is primarily aimed at preventing authorities from tracing the criminal source of the funds and is often associated with efforts to make illicit proceeds appear legitimate.

In the context of white-collar crime, concealment money laundering plays a significant role. White-collar criminals—who are typically involved in non-violent financial crimes like fraud, embezzlement, bribery, and insider trading—often rely on concealment strategies to hide the illegal origin of their profits. The goal is to integrate criminal proceeds into the legitimate financial system, making it difficult for authorities to detect the crime.

White-collar criminals use concealment money laundering techniques in a variety of ways to obscure the trail of illicit funds. These methods can involve complex financial transactions, shell companies, offshore accounts, and a range of other tactics designed to make it difficult for investigators to trace the flow of money.

1. Fraud and Embezzlement

In cases of fraud or embezzlement, individuals might steal money from their employer or defraud clients and then use concealment strategies to "clean" the stolen funds. They might funnel the proceeds through a series of bank accounts, shell companies, or investments in real estate, making it appear as though the funds came from legitimate sources. The objective is to distance the illicit funds from their criminal origin.

• Example: An executive embezzles funds from a corporation and deposits the stolen money into a foreign bank account. Later, the money is used to buy expensive properties, masking the illicit origin of the funds and making it difficult to trace the money back to the crime.

2. Securities Fraud and Insider Trading

White-collar criminals engaged in securities fraud or insider trading may use concealment money laundering to hide the profits made from manipulating stock prices or trading on insider information. After illegal trades are made, the proceeds may be transferred through various accounts or invested in assets to create a legitimate appearance for the criminal funds.

• Example: An insider trading scheme generates profits through illegal stock transactions, which are then funneled into shell corporations or overseas accounts. The funds are later reinvested in legitimate business ventures to disguise their criminal origin.

3. Bribery and Corruption

In cases of bribery and public corruption, public officials or corporate executives may conceal bribe payments by routing the money through a web of intermediaries, foreign accounts, or legitimate business transactions. This ensures that the source of the bribe is difficult to trace back to the official or the bribing party.

• Example: A government official receives a bribe in exchange for a contract, but the bribe money is transferred through a third-party company in a foreign jurisdiction. The funds are then invested in a legitimate business venture, further obscuring their illicit origin.

4. Money Laundering through Complex Financial Structures

White-collar criminals often use sophisticated financial structures to conceal their illegal proceeds. This might include using trusts, offshore corporations, shell companies, or complex financial instruments to hide the ownership and source of funds. These structures can be designed to create a layer of separation between the illicit activity and the legitimate financial system.

• Example: A business owner involved in fraudulent schemes might set up a network of shell companies in multiple countries, making it appear as though the illicit proceeds come from legitimate business operations. By moving the money through multiple accounts, the criminal creates significant difficulty for authorities attempting to trace the flow of funds.

5. Real Estate Transactions

Real estate is a common tool for white-collar criminals to launder illicit proceeds. Criminals often purchase properties using illicit funds, then later sell them, making it appear that the funds were earned through legitimate real estate transactions. They may also purchase properties through third parties or shell companies to further obfuscate the true ownership.

• Example: A criminal involved in a large fraud scheme buys several luxury properties with stolen funds and then resells them after a period of time, making it appear as though the funds came from legitimate real estate investments.

White-Collar Crime and Avoiding Reporting Requirements

One key aspect of money laundering is the avoidance of reporting requirements that are designed to ensure transparency in financial transactions. Under 18 U.S.C. § 1956(a)(1)(B)(ii), money laundering laws make it a criminal offense to engage in financial transactions with the intent to avoid or evade legal reporting or record keeping obligations. These laws are designed to prevent individuals or organizations involved in illegal activities from circumventing systems meant to detect and track illicit financial flows.

Reporting Requirements in the Financial System

Under U.S. law, several critical reporting requirements exist to detect potential illegal activity, particularly related to money laundering and the financing of terrorism. Key reporting mechanisms include:

1. Currency Transaction Reports (CTRs): Financial institutions are required to file a Currency Transaction Report (CTR) for any cash transaction over $10,000. These reports help authorities track large cash deposits or withdrawals that might indicate illegal activities, including money laundering.

2. Suspicious Activity Reports (SARs): Financial institutions must file a Suspicious Activity Report (SAR) if they detect suspicious transactions that could indicate money laundering, fraud, or other illegal financial activities. SARs are used to alert authorities about transactions that appear unusual or suspicious in nature.

3. Bank Secrecy Act (BSA) Compliance: The Bank Secrecy Act (BSA) imposes various reporting and record-keeping obligations on financial institutions, requiring them to maintain certain records and file specific reports to prevent money laundering and other financial crimes.

White-Collar Criminals and the Avoidance of Reporting Requirements

White-collar criminals often use sophisticated techniques to avoid triggering these reporting requirements. By doing so, they can evade scrutiny from financial institutions, regulators, and law enforcement, thereby facilitating the movement of illicit funds. Several common tactics for avoiding reporting requirements include:

1. Structuring or "Smurfing" Transactions

One of the most well-known techniques used by white-collar criminals to avoid triggering CTR requirements is structuring (sometimes called "smurfing"). Structuring involves breaking up a large sum of money into multiple smaller transactions, each of which is below the $10,000 reporting threshold. This allows the criminal to avoid the filing of a Currency Transaction Report (CTR).

• Example: A person who has embezzled funds from a corporation may go to several different banks over a period of days or weeks, making multiple deposits of just under $10,000 each. This method ensures that the total amount of stolen funds is never reported as a single transaction, thereby avoiding detection.

2. Using Shell Companies and Offshore Accounts

White-collar criminals often establish shell companies or use offshore accounts in foreign jurisdictions with lax banking regulations to evade U.S. reporting requirements. By routing illicit funds through these entities or accounts, they can obscure the true ownership of the funds and bypass domestic reporting obligations.

• Example: A company involved in a fraud scheme may funnel illicit funds into an offshore account under the name of a shell company, making it more difficult for U.S. authorities to track the movement of the funds. This approach exploits the differences in regulatory standards between jurisdictions and reduces the likelihood of triggering SAR filings or CTR reports in the U.S.

3. Layering Funds through Multiple Financial Institutions

Layering, a technique commonly used in concealment money laundering, involves transferring illicit funds through a series of complex financial transactions, often across multiple banks, countries, or financial institutions. This strategy makes it harder for investigators to trace the origin of the funds, and it may also allow the criminal to avoid triggering certain reporting requirements along the way.

• Example: A white-collar criminal involved in a securities fraud scheme might move the funds through various international bank accounts, using a combination of wire transfers, checks, and cash deposits to create a convoluted paper trail. As the funds are broken up and moved across multiple jurisdictions, it becomes increasingly difficult for financial institutions to detect suspicious activity.

4. Overstating or Underreporting Transaction Amounts

Criminals may attempt to evade reporting requirements by misrepresenting the amount or nature of their transactions. This could involve either underreporting the size of a transaction to fall below reporting thresholds or overstating the value of a legitimate transaction to disguise the true source of funds.

• Example: A person attempting to launder money through a legitimate business might underreport the actual value of a sale, paying a vendor or customer in cash, or using fake invoices to cover up the true amount involved. This reduces the likelihood that a Suspicious Activity Report (SAR) will be filed.

5. Using Third Parties to Conceal Ownership and Avoid Detection

In some cases, white-collar criminals use third parties—such as family members, friends, or associates—to move or invest illicit funds on their behalf. This can help conceal the true identity of the criminal and avoid triggering CTR or SAR filings.

• Example: An individual convicted of insider trading might ask a friend or relative to deposit funds into multiple accounts or buy assets on their behalf. This tactic creates a layer of separation between the criminal and the illicit funds, which complicates efforts by law enforcement to track the money.

2. 18 U.S.C. § 1957 (Engaging in Monetary Transactions in Property Derived from Criminal Activity)

In addition to the offenses outlined in 18 U.S.C. § 1956, 18 U.S.C. § 1957 criminalizes engaging in monetary transactions involving criminal proceeds, specifically when the amount of the transaction exceeds $10,000. This provision targets individuals who may not be directly involved in the laundering process but who knowingly engage in financial transactions with the proceeds of criminal activity.

Under 18 U.S.C. § 1957, it is a federal offense to knowingly engage in a transaction involving criminally derived property, as long as the transaction amount exceeds $10,000. The statute is broader than 18 U.S.C. § 1956 in that it does not require the defendant to be involved in laundering the proceeds themselves; merely using the proceeds of crime in a transaction is sufficient to meet the elements of the offense.

The penalties for violating 18 U.S.C. § 1957 are generally less severe than those for 18 U.S.C. § 1956 but are still substantial: up to 10 years in prison, fines, and asset forfeiture.

Predicate Offenses of Money Laundering

Money laundering typically involves proceeds of a “specified unlawful activity,” frequently known as an SUA. There are dozens of offenses that can serve as a “predicate offense” (SUA). The predicate offense does not need to be restricted to the above-listed crimes. 18 U.S.C. § 1956(c)(7) defines "specified unlawful activity" broadly, meaning nearly any criminal offense that can generate proceeds, including violations of foreign laws and other offenses outside of the U.S. Nonetheless, here are some of the primary crimes that can serve as predicate offenses for money laundering under 18 U.S.C. § 1956 and 18 U.S.C. § 1957:

1. Drug Trafficking

• Drug trafficking is one of the most common predicate offenses for money laundering. Proceeds from the sale or distribution of illegal drugs, such as cocaine, heroin, methamphetamines, and marijuana, can be laundered to disguise their illicit origin.

2. Fraud

• Various types of fraud can serve as predicate offenses for money laundering, including:

  • Securities fraud (e.g., insider trading, Ponzi schemes)

  • Wire fraud (e.g., fraudulent schemes that involve interstate communications)

  • Bank fraud (e.g., falsifying financial records or misrepresenting the status of accounts)

  • Mortgage fraud (e.g., falsifying loan applications or property appraisals)

  • Credit card fraud (e.g., unauthorized use of credit card information)

3. Theft

• Theft, including burglary, shoplifting, and other forms of stealing, can generate proceeds that are laundered. This includes both personal theft and organized criminal enterprises.

4. Organized Crime

• Funds obtained through activities associated with organized crime, including racketeering (RICO), extortion, and illegal gambling, are frequently laundered to hide their criminal origin.

5. Corruption and Bribery

• Public corruption (e.g., bribing public officials) or private-sector bribery (e.g., corporate executives paying bribes to influence business deals) generates illicit proceeds that may be laundered to disguise the source of funds.

6. Tax Evasion

• Tax evasion generates illicit funds when individuals or corporations deliberately underreport income or overstate deductions to avoid paying taxes. The proceeds from such crimes can be laundered to conceal the nature of the funds.

7. Child Exploitation and Pornography

• Child exploitation or producing, distributing, or possessing child pornography is a serious criminal offense that often results in funds that are laundered to disguise their illegal source.

8. Immigration Violations

• Immigration-related crimes, such as human smuggling or employment of illegal immigrants, can generate illicit profits that are subject to money laundering.

Knowledge of the Criminal Activity (SUA)

Under 18 U.S.C. § 1956, the law does not require the defendant to know the precise underlying crime (the predicate offense) that generated the illicit funds. Rather, the defendant must know that the money they are handling is from illegal sources—i.e., that it constitutes proceeds from criminal activity. The defendant does not need to know the exact SUA but must have knowledge that the funds are the product of criminal activity.

• Example: If an individual receives a large sum of money and knows that it is the result of drug trafficking or fraud, they could still be guilty of money laundering, even if they do not know the exact details of the criminal conduct (e.g., who specifically committed the fraud or how the drugs were trafficked).

Intent to Promote or Conceal the Criminal Activity

One of the most frequently asked questions is whether the person laundering the money needs to know the precise SUA that generated the illegal funds. The short answer is no. The person only needs to know, or have reason to believe, that the funds are criminally derived.

The law focuses on the defendant’s knowledge of the illicit origin of the funds and their actions related to laundering the proceeds, rather than requiring them to identify the precise SUA involved. This broad approach is intentional, as it allows authorities to prosecute money laundering effectively, even in cases where the details of the underlying criminal activity are complex or unknown.

• Example: A person who knowingly receives funds from a source of criminal activity and then uses those funds to invest in or support further criminal conduct—such as investing in a fraudulent business or purchasing assets to hide the origin of the funds—would meet the criteria for money laundering, even if they do not know the exact nature of the predicate offense.

The Knowledge Standard: Willful Blindness

While the defendant does not need to know the specific SUA, they cannot simply ignore obvious signs of criminal activity. "Willful blindness" (also referred to as "conscious avoidance") can be enough to meet the knowledge requirement under 18 U.S.C. § 1956.

• Willful blindness occurs when a person deliberately avoids confirming the illegal origin of funds despite having strong reason to suspect it. Courts may find that the defendant "knew" the money was illicit if they were deliberately avoiding learning the truth.

• Example: A person who receives large sums of money and avoids asking questions about its source, even though they have reason to believe the funds come from illegal activity (e.g., being paid by a known criminal associate), could be found guilty of money laundering through willful blindness.

Unlicensed Money Transmission (18 USC 1960)

Unlicensed money transmission is a federal felony under 18 U.S.C. § 1960, which criminalizes operating a money transmitting business without proper state or federal licensure. This statute purports to combat financial crimes such as money laundering and unregistered remittance services that facilitate illicit activities. This crime has a five-year statutory maximum sentence, as opposed to a 20-year maximum for money laundering.

Key Elements of the Crime

To secure a conviction under 18 U.S.C. § 1960, prosecutors must prove the following elements beyond a reasonable doubt:

1. Operation of a Money Transmitting Business:

   • This encompasses any service that transfers funds on behalf of customers, including traditional money remittance services, cryptocurrency exchanges, and digital wallet providers.

   • Example: An individual operating a peer-to-peer cryptocurrency exchange without registering with the Financial Crimes Enforcement Network (FinCEN) as required by law.

2. Failure to Obtain Appropriate Licenses:

   • Federal law requires money transmitting businesses to register with FinCEN and comply with state-specific licensure requirements.

   • Example: A company operating in New York without adhering to the state’s stringent licensing rules for money transmitters, such as obtaining a BitLicense for cryptocurrency transactions.

   • Read more about FinCEN registration requirements.

3. Knowledge of the Illegality:

   • The prosecution must prove that the operator knew their business was operating unlawfully, either by avoiding licensure or by intentionally structuring transactions to evade detection.

   • Example: A remittance service intentionally keeping transactions under $10,000 to avoid anti-money laundering reporting requirements.

Additional Considerations

• Structuring and Avoidance: Prosecutors often combine charges of unlicensed money transmission with allegations of structuring or avoiding reporting thresholds under the Bank Secrecy Act.

• Cryptocurrency and Emerging Technologies: The rise of decentralized finance (DeFi) platforms has complicated enforcement, as operators may unknowingly or knowingly violate transmission and registration laws.

• International Operations: Businesses facilitating cross-border transfers face additional scrutiny, particularly under regulations targeting anti-money laundering (AML) and counter-terrorism financing (CTF).

Examples of Prosecution

• Cryptocurrency Exchanges: Unlicensed operators facilitating cryptocurrency transfers have faced prosecution for violating both state and federal regulations.

• Unregistered Remittance Services: Businesses transferring money abroad without complying with FinCEN registration requirements have been targeted for enforcement.

Violations of 18 U.S.C. § 1960 can, like with money laundering, result in severe penalties, including substantial fines and up to five years in prison. Given the complexity of these cases, legal representation is essential to navigate the overlapping federal and state requirements.

The Bank Secrecy Act (BSA) (1970)

While 18 USC 1956 and 1957 are the primary criminal money laundering statutes, there are also other money laundering statutes that are important to know.

The Bank Secrecy Act (BSA), also known as the Currency and Foreign Transactions Reporting Act, is an important law that lays the groundwork for detecting and reporting money laundering activities. While the BSA does not criminalize money laundering directly, it imposes essential and mandatory record-keeping and reporting requirements on financial institutions. Key provisions include:

• Suspicious Activity Reports (SARs): Financial institutions must file SARs for transactions that appear suspicious or may involve illicit funds.

• Currency Transaction Reports (CTRs): Financial institutions must report any cash transaction over $10,000.

• Anti-Money Laundering (AML) Programs: Financial institutions are required to establish AML programs designed to detect, prevent, and report money laundering activities.

• Grand Jury Secrecy: If financial institutions receive a grand jury subpoena, they cannot reveal the subpoena to the account holder.

These requirements help to identify potential violations of 18 U.S.C. §§ 1956 and 1957, and financial institutions that fail to comply, such as TD Bank recently, with BSA obligations may face substantial penalties.

4. The USA PATRIOT Act (2001)

The USA PATRIOT Act was enacted to enhance the ability of law enforcement to combat terrorism and money laundering. It expanded the scope of money laundering laws to cover not only drug trafficking and organized crime but also the financing of terrorism. Key provisions of the Patriot Act related to money laundering include:

• Customer Identification Program (CIP): Financial institutions are required to verify the identity of their clients to prevent terrorists and money launderers from using the U.S. financial system.

• Section 314: This section allows law enforcement to request information from financial institutions about potential money laundering or terrorist financing activities.

• Enhanced Due Diligence: The Act requires more rigorous monitoring of accounts and transactions involving foreign persons or jurisdictions known for money laundering.

The USA PATRIOT Act further empowers federal agencies to investigate and prosecute violations of 18 U.S.C. §§ 1956 and 1957, with expanded powers for seizing assets related to terrorist financing and money laundering.

Defeating Money Laundering Charges

Dynamis lawyers have many years of experience defending against money laundering charges. The facts of a case are critical in determining how to structure a defense. Nonetheless, set forth below are the most common defenses:

1. Lack of Knowledge or Intent

• Key Defense: Argue that the defendant lacked knowledge of the illegal source of funds or did not intend to conceal the origin of the money.

• Result: This is the most common defense — the “I didn’t know defense”. It is most effective when the accused is not part of the underlying SUA.

2. Legitimate Source of Funds

• Key Defense: Prove that the funds in question came from a legitimate source.

• Result: This too is very common and is accomplished by producing bank records, tax filings, or contracts that validate the origin of the money.

Why It’s Effective: If the funds are legally obtained, the prosecution’s case for money laundering collapses.

3. Predicate Offense Defense

• Key Defense: Challenge the underlying or predicate offense (e.g., fraud, drug trafficking) that allegedly generated the illicit funds.

• Result: This is less effective because it requires a deep dive through the underlying SUA. While sometimes this is critical to do, often it can dredge up unfavorable evidence. Proceed with caution before using this defense.

For expert legal advice, contact attorneys at Dynamis LLP or email whitecollar@dynamisllp.com, today. We’re here to guide you through every step of your defense.