United States v. Yusuf , 49 V.I. 1182 ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
6-17-2008
USA v. Yusuf
Precedential or Non-Precedential: Precedential
Docket No. 07-3308
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 07-3308
UNITED STATES OF AMERICA;
GOVERNMENT OF THE VIRGIN ISLANDS,
Appellant
v.
FATHI YUSUF MOHAMMED YUSUF
a/ka FATHI YUSUF;
WALEED MOHAMMED HAMED a/k/a WALLY HAMED;
WAHEED MOHAMMED HAMED a/k/a WILLIE YUSUF;
MAHER FATHI YUSUF a/k/a MIKE YUSUF;
ISAM MOHAMAD YOUSUF a/k/a SAM YOUSEF;
UNITED CORPORATION, d/b/a PLAZA EXTRA;
NEJEH FATHI YUSUF
On Appeal from the District Court of the Virgin Islands
(Division of St. Croix)
(District Court No. 05-cr-00015)
District Judge: Hon. Raymond L. Finch
Argued December 11, 2007
Before: SMITH, NYGAARD and ROTH, Circuit Judges
(Opinion filed: June 17, 2008)
Richard T. Morrison, Esquire
Acting Assistant Attorney General
S. Robert Lyons, Esquire (Argued)
Anthony J. Jenkins, Esquire
Alan Hechtkopf, Esquire
United States Attorney
United States Department of Justice
Tax Division
P. O. Box 502
Washington, D. C. 20044
Counsel for Appellant
Gordon C. Rhea, Esquire (Argued)
Richardson, Patrick, Westbrook & Brickman, LLC
1037 Chuck Dawley Boulevard, Building A
Mt. Pleasant, SC 29464
Counsel for Appellee
2
Randall P. Andreozzi, Esquire
Marcus, Andreozzi, Fickess, LLP
6255 Sheridan Way, Suite 302
Williamsville, NY 14221
Pamela L. Colon, Esquire
27 & 28 King Cross Street
Christiansted, St. Croix
USVI, 00820
John K. Dema, Esquire
1236 Strand Street, Suite 103
Christiansted, St. Croix
USVI, 00820
Derek M. Hodge, Esquire
Mackay & Hodge
P. O. Box 303678
Charlotte Amalie, St. Thomas
USVI, 00803
Thomas Alkon
Alkon & Meaney
2115 Queen Street, Suite 101
Christiansted, St. Croix
USVI, 00820
Counsel for Appellee
3
Henry C. Smock, Esquire
Smock Law Offices
Palm Passage, Suite B18-23
P. O. Box 1498
Charlotte Amalie, St. Thomas
USVI, 00804
Counsel for Appellee
OPINION
ROTH, Circuit Judge:
The government has appealed the District Court’s pre-
trial order, dismissing from the indictment various counts and
allegations based on international money laundering.1 The
narrow issue on appeal is whether unpaid taxes, which were
unlawfully disguised and retained by means of the filing of false
tax returns through the U.S. mail, are “proceeds” of mail fraud
for purposes of sufficiently stating a money laundering offense
under the federal, international money laundering statute, 18
U.S.C. § 1956(a)(2). We hold that such unpaid taxes are
“proceeds” of mail fraud for purposes of sufficiently stating an
1
The government also appeals from the District Court’s
order to release notices of lis pendens with respect to various
properties listed in the indictment.
4
international money laundering offense. For this reason, we will
vacate the orders of the District Court and remand the case for
further proceedings consistent with this opinion.
I. Background
Because we have previously outlined the facts of this
case in United States v. Yusuf, 461 F.3d 374 (3d Cir. 2006) and
United States v. Yusuf, 199 Fed.Appx. 127 (3d Cir. 2006), we
recite only those facts pertinent to our analysis in this particular
appeal.
There are seven defendants in this case: (1) United
Corporation, a family-owned business located in the Virgin
Islands that operates a chain of three Plaza Extra Supermarket
stores in St. Thomas and St. Croix; (2) Fathi Yusuf, the primary
shareholder of United; (3) Maher “Mike” Yusuf, Fathi’s son,
who is a part-owner of United and manager of one of the Plaza
Extra stores; (4) Waheed “Willie” Hamed, Fathi’s nephew, who
manages the second Plaza Extra store; (5) Waleed “Wally”
Hamed, Fathi’s nephew and Waheed's brother, who manages the
third Plaza Extra store; (6) Isam “Sam” Yousef, Fathi’s nephew,
who is a resident of St. Maarten, Netherlands Antilles, and owns
and operates a retail furniture and appliances store; and (7)
Nejeh Fathi Yusuf, Fathi’s son, who is an owner and employee
of United and who participated in the operation of the Plaza
Extra stores.
Because defendant United conducts business through its
Virgin Islands supermarkets, it is required to comply with
statutorily-mandated monthly reporting of gross receipts and
5
payment of tax on those receipts. Section 43(a), Title 33, of the
Virgin Islands Code provides, in pertinent part, that “[e]very
individual and every firm, corporation, and other association
doing business in the Virgin Islands shall report their gross
receipts and pay a tax of four percent (4%) on the gross receipts
of such business.” 33 V.I.C. § 43(a) (emphasis added). Section
44(c) provides for monthly returns and payments and states that
“[t]he returns and payments required by this subsection shall be
due within 30 calendar days following the last day of the
calendar month concerned.” 33 V.I.C. § 44(c). Thus, taxes
imposed on United’s gross sales receipts from its supermarkets
during a particular month were due and payable on the last day
of the following month.
In July 2001, the Federal Bureau of Investigation (FBI)
received a suspicious activity report from the Bank of Nova
Scotia in St. Thomas, U.S. Virgin Islands. The report stated
that, over a four day period in April 2001, $1,920,000 (in $50
and $100 bills) was deposited into United’s bank account. The
FBI began an investigation which revealed that defendants
allegedly conspired to avoid reporting $60,000,000 of the
supermarkets’ gross receipts on United’s Virgin Islands gross
receipts monthly tax returns and failed to pay the Virgin Islands
government the 4% tax that United owed on those unreported
gross receipts.2 The investigation further revealed that
2
Specifically, after Plaza Extra Supermarkets’ sales receipts
were collected each day, the funds were typically transferred to
the “cash room,” to which only certain individuals, including
defendants, were permitted access. In the cash room, Plaza
6
defendants allegedly engaged in various efforts to disguise and
conceal the illegal scheme and its proceeds.3 Such efforts
included allegedly depositing these monies into bank accounts,
controlled by defendants, outside of the United States.
On September 9, 2004, a grand jury in the Virgin Islands
returned a seventy-eight count, superseding 4 indictment,
charging various counts relating to mail fraud, tax evasion, and
Extra employees counted the sales receipts and prepared bank
deposit slips. The indictment alleged that defendants directed
the employees to withhold from deposit substantial amounts of
cash received from sales, typically in denominations of $100,
$50, and $20. Instead of being deposited into the bank accounts
with other sales receipts, this cash was allegedly delivered to
one of the defendants or placed in a designated safe in the cash
room. The indictment further alleged that, from 1996 through
2001, tens of millions of dollars in cash was withheld from
deposit in this manner and was not reported as gross receipts on
both Virgin Islands and federal tax returns filed by United.
3
For example, with the unreported cash, defendants allegedly
purchased, and directed other individuals to purchase, cashier’s
checks, traveler’s checks, and money orders, typically from
different bank branches and made payable to outside parties, in
order to disguise the cash as legitimate financial instruments and
to evade federal record-keeping mandates.
4
The grand jury handed down the original indictment in this
case on September 18, 2003.
7
international money laundering.5 At Counts 3 through 43, the
indictment charged forty mail fraud offenses, in violation of 18
U.S.C. § 1341, alleging in paragraphs 30 and 31 as follows:
Beginning at least as early as in or about
January 1996 and continuing through at least in or
about September 2002, in the District of the
Virgin Islands and elsewhere, [defendants]
knowingly and willfully devised and intended to
devise a scheme and artifice to defraud and to
obtain money and property, specifically money
5
The charges included conspiracy to commit mail fraud and
structure financial transactions, in violation of 18 U.S.C. § 371
(Count 1); conspiracy to commit money laundering, in violation
of 18 U.S.C. § 1956(h), (a)(2)(B)(i) (Count 2); mail fraud, in
violation of 18 U.S.C. § 1341 (Counts 3-43); international
money laundering, in violation of 18 U.S.C. § 1956(a)(2)(B)(I)
(Counts 44-52); structuring financial transactions, in violation
of 31 U.S.C. § 5324(a)(3), (d)(2) (Counts 53, 54, 77);
conspiracy to evade taxes, in violation of 33 V.I.C. § 1522
(Count 55); causing the filing of false tax returns, in violation of
33 V.I.C. § 1525(2) (Counts 56-60); causing the filing of false
tax returns, in violation of § 26 U.S.C. § 7206(2) (Counts 61-
74); engaging in criminal enterprise, in violation of 14 V.I.C. §
605(a) (Count 75); conspiracy to engage in a criminal enterprise,
in violation of 14 V.I.C. § 605(d) (Count 76); and obstruction of
justice, in violation of 18 U.S.C. § 1503. The indictment further
contained an asset forfeiture allegation, pursuant to 18 U.S.C. §
982, 21 U.S.C. § 853, and 14 V.I.C. § 606.
8
belonging to the Virgin Islands in the form of
territorial gross receipts tax revenue, by means of
material false and fraudulent pretenses,
representations and promises, knowing that the
pretenses, representations and promises were false
when made, as more particularly described in
paragraphs 9 through 12 and 14 through 20 6 of
this Indictment.
On or about the dates specified in each
count below, the defendants, for the purpose of
executing and attempting to execute and in
furtherance of the aforesaid scheme and artifice to
defraud and for obtaining money and property by
means of material false and fraudulent pretenses,
representations and promises, did knowingly
cause to be sent and moved by the United States
Postal Service, at the East End United States Post
Office in St. Thomas, Gross Receipts Monthly
Tax Returns, Forms 720 V.I., addressed to the
6
Paragraphs 9 through 12 alleged that defendants “defrauded
the Virgin Islands of money in the form of tax revenue,
specifically territorial gross receipts taxes [owed by United ] as
well as corporate income taxes [owed by United], by failing to
report at least $60 million in Plaza Extra sales on gross receipts
tax returns and corporate income tax returns” filed by United.
Paragraphs 14 through 20 alleged that defendants concealed the
fraud and its proceeds by smuggling checks and currency and by
structuring cash transactions to evade reporting requirements.
9
Virgin Islands Bureau of Internal Revenue, St.
Thomas, Virgin Islands, 00802.
At Counts 44-52, the indictment charged nine substantive
international money laundering offenses, in violation of 18
U.S.C. § 1956(a)(2)(B)(i), alleging in paragraph 33 as follows:
On or about the dates listed in each count
below, in the District of the Virgin Islands and
elsewhere, the [defendants] transported and
transferred, and attempted to transport and
transfer, monetary instruments and funds in
amounts described below from a place in the
United States, specifically the United States
Virgin Islands, to and through a place outside the
United States, specifically, Amman, Jordan,
knowing that the monetary instruments and funds
involved in the transportation and transfer
represented the proceeds of some form of
unlawful activity and knowing that such
transportation and transfer was designed in whole
or in part to conceal and disguise the nature,
location, source, ownership, and control of the
proceeds of a specified unlawful activity, that is,
mail fraud, in violation of Title 18, United States
Code Section 1341.
Thus, the indictment relied on mail fraud as the predicate
offense, or “specified unlawful activity,” to support the money
laundering charges against defendants. See 18 U.S.C. §
1956(a)(2)(B)(i).
10
Defendants moved to dismiss the substantive money
laundering charges on the basis that any unpaid taxes disguised
and retained as a result of filing false tax returns through the
U.S. mail do not equate to “proceeds” of mail fraud and,
accordingly, Counts 44 through 52, charging money laundering,
failed to state an offense. On February 13, 2007, the District
Court granted the motion and dismissed the nine substantive
money laundering counts for failure to state an offense. For the
same reason, the District Court also dismissed the charge of
money laundering conspiracy (Count 2); struck from two
structuring counts the sentence-enhancing allegations grounded
upon money laundering (Counts 53 and 54); and dismissed
paragraphs of Criminal Forfeiture Allegation 1, which were
grounded upon money laundering. The District Court reasoned
as follows:
Defendants contend that a tax savings resulting
from filing false tax returns does not “represent
the proceeds of some form of unlawful activity,”
and that, therefore, Counts 44 through 52 fail to
state an offense. In the Third Circuit, “‘proceeds’
as that term is used in § 1956 means simply gross
receipts from illegal activity.’” United States v.
Grasso, 381 F.3d 160, 169 (3d Cir. 2004)
[overruled by United States v. Santos, _S.Ct._,
2008 WL 2229212 (U.S. June, 2, 2008)].
“‘[P]roceeds’ are something which is obtained in
exchange for the sale of something else as in,
most typically, when one sells a good in exchange
for money.” United States v. Maali, 358
F. Supp. 2d 1154, 1158 (M.D. Fla. 2005)[,] [aff’d
11
sub nom. United States v. Khanani, 502 F.3d 1281
(11th Cir. 2007)]. The Court agrees with the final
analysis in Maali, that “[h]aving ascertained the
plain and ordinary definition of ‘proceeds,’ it is
clear that the term does not contemplate profits or
revenue indirectly derived . . . from the failure to
remit taxes.” Id. at 1160. The cost savings theory
was also rejected in Anderson v. Smithfield Foods,
Inc., 209 F. Supp. 2d 1270, 1275 (M.D. Fla. 2002):
The money that Defendants
allegedly illegally obtained to
violate RICO and environmental
laws, and to allegedly commit mail
and wire fraud, was money that
D efendants legally obtained
through the operation of its
business. Saving money as a result
of the alleged noncompliance with
the requirements of an
environmental statute does not
make the money illegally obtained
for the purposes of the money
laundering statute.
The mailing of the allegedly false gross tax
returns did not result in proceeds, as that term is
commonly interpreted. Accordingly, [the counts
charging money laundering] are dismissed for
failure to state an offense.
12
Accordingly, in the District Court’s view, the tax savings (i.e.,
unpaid taxes) cannot be considered “proceeds” of mail fraud
because such tax savings (1) represented a percentage of
unreported gross receipts that were lawfully obtained in the day
to day business of Plaza Extra Supermarket, and, thus, such tax
savings cannot thereafter be categorized as “proceeds” from an
unlawful activity; and (2) were merely retained, rather than
obtained, money resulting from defendants’ noncompliance with
the Virgin Islands’ gross receipts reporting statute.
On June 25, 2007, the District Court denied the
government’s motion for reconsideration and ordered the
government to release its notices of lis pendens with respect to
various properties listed in the indictment. The government
appealed the February 13 order dismissing the substantive
money laundering counts (and paragraphs) and the two June 25
orders denying reconsideration and ordering release of the
notices of lis pendens.
III. Jurisdiction and Standard of Review
The District Court had subject matter jurisdiction
pursuant to 18 U.S.C. § 3231 and 48 U.S.C. § 1612(c). We have
jurisdiction under 18 U.S.C. § 3731 and 28 U.S.C. § 1294(3).
The “sufficiency of an indictment to charge an offense is
a legal question subject to plenary review.” United States v.
Conley, 37 F.3d 970, 975 n.9 (3d Cir. 1994). “An indictment is
generally deemed sufficient if it: (1) contains the elements of the
offense intended to be charged, (2) sufficiently apprises the
defendant of what he must be prepared to meet, and (3) allows
13
the defendant to show with accuracy to what extent he may
plead a former acquittal or conviction in the event of a
subsequent prosecution.” United States v. Rankin, 870 F.2d
109, 112 (3d Cir. 1989) (internal quotation marks and citations
omitted). An indictment does not state an offense sufficiently
if the specific facts that it alleges “fall beyond the scope of the
relevant criminal statute, as a matter of statutory interpretation.”
United States. v. Panarella, 277 F.3d 678, 685 (3d Cir. 2002).
IV. Discussion
There is no dispute that the indictment sufficiently
alleges mail fraud, pursuant to 18 U.S.C. § 1341. There is also
no dispute that mail fraud is a predicate offense for a charge of
international money laundering, pursuant to 18 U.S.C. §§
1956(a)(2)(B)(i) (elements of international money laundering) 7 ,
7
The federal money laundering statute, 18 U.S.C. §
1956(a)(2), provides:
Whoever transports, transmits, or transfers, or
attempts to transport, transmit, or transfer a
monetary instrument or funds from a place in the
United States to or through a place outside the
United States or to a place in the United States
from or through a place outside the United States
...
(B) knowing that the monetary
instrument or funds involved in the
transportation, transmission, or
transfer represent the proceeds of
14
1956(c)(7)(A) (the term “specified unlawful activity” includes
any racketeering activity under RICO) and 1961(1)(B) (mail
fraud is a racketeering activity)8 . The narrow issue in this
appeal is whether unpaid taxes unlawfully disguised and
retained by means of the filing of false tax returns through the
U.S. mail are “proceeds” of mail fraud for purposes of
sufficiently stating an offense for money laundering.
some form of unlawful activity and
knowing that such transportation,
transmission, or transfer is designed
in whole or in part--
(i) to conceal or
disguise the nature,
the location, the
source, the
ownership, or the
control of the
proceeds of specified
unlawful activity; . . .
shall be sentenced to a fine of not more than
$500,000 or twice the value of the monetary
instrument or funds involved in the transportation,
transmission, or transfer whichever is greater, or
imprisonment for not more than twenty years, or
both.
18 U.S.C. § 1956(a)(2)(B)(i) (emphasis added).
8
Under 18 U.S.C. § 1961(1), mail fraud is a “specified
unlawful activity,” but tax fraud simpliciter is not.
15
As a threshold matter, we first address the District
Court’s view that funds originally procured through lawful
activity can be classified only as proceeds of that lawful activity
and cannot thereafter be converted into proceeds of a specified
unlawful activity.
Although the federal money laundering statute does not
define what constitutes “proceeds” of a specified unlawful
activity, see United States v. Santos, _S.Ct._, 2008 WL
2229212, at *4 (U.S. June, 2, 2008), it specifically identifies
which criminal offenses constitute “specified unlawful
activities.” 18 U.S.C. § 1956(c)(7). The term “specified
unlawful activity” covers a broad array of offenses.9 For
example, the fraudulent concealment of a bankruptcy estate’s
assets is categorized as a “specified unlawful activity.” See 18
U.S.C. §§ 1956(c)(7)(A), 152(1) (criminalizing the concealment
of assets relating to § 152). Thus, property which is required to
be included in a bankruptcy debtor’s estate but is instead
undeclared, and thus retained, is “proceeds” of a bankruptcy
fraud offense under 18 U.S.C. § 152(1). United States v.
Brennan, 326 F.3d 176, 190 (3d Cir. 2003) (the defendant,
debtor-in-possession, transferred bonds belonging to the
9
That term is defined, in pertinent part, by reference to those
criminal activities that constitute racketeering under RICO. 18
U.S.C. § 1956(c)(7)(A) (“”[T]he term ‘specified unlawful
activity’ means any act or activity constituting an offense listed
in section 1961(1) of this title . . ..”). As previously noted, mail
fraud is categorized as a racketeering act and thus falls within
the purview of the money laundering statute.
16
bankruptcy estate to a third person who cased the bonds and
invested the proceeds for the defendant’s benefit). Moreover,
simply because funds are originally procured through lawful
activity does not mean that one cannot thereafter convert those
same funds into the “proceeds” of an unlawful activity. See
United States v. Ladum, 141 F.3d 1328, 1340 (9th Cir. 1998)
(sustaining money laundering conviction where the defendant
concealed rental income derived from lawfully operated retail
stores); United States v. Levine, 970 F.2d 681, 686 (10th Cir.
1992) (sustaining money laundering conviction where the
defendant concealed corporate tax refund checks deposited in a
hidden bank account). Accordingly, we reject the suggestion
that to qualify as “proceeds” under the federal money laundering
statute, funds must have been directly produced by or through a
specified unlawful activity, and we agree that funds retained as
a result of the unlawful activity can be treated as the “proceeds”
of such crime.
Furthermore, the Supreme Court, in United States v.
Santos, recently clarified that the term “proceeds,” as that term
is used in the federal money laundering statute, applies to
criminal profits, not criminal receipts, derived from a specified
unlawful activity. 2008 WL 2229212, at * 5 (applying the rule
of lenity to interpret the ambiguous term “proceeds” to mean
“profits” of a criminal activity rather than “receipts”). In
Santos, the defendants were convicted of violating 18 U.S.C. §
1956(a)(1)(A)(i)–the subsection of the federal money laundering
statute that criminalizes financial transactions using the proceeds
of a specified unlawful activity with the intent to promote the
carrying on of such activity. The Supreme Court affirmed the
trial court’s decision to vacate the money laundering convictions
17
because the transactions on which such convictions were based
involved the gross receipts, as opposed to the profits, of the
specified unlawful activity–the operation of an illegal lottery.10
The Supreme Court reasoned that the transactions upon which
the money laundering charges were based could not be
considered to have involved “proceeds” of the illegal lottery’s
operation because such transactions involved the mere payment
of the illegal operation’s expenses rather than the operation’s
profits.11 Santos, 2008 WL 2229212, at * 6. Accordingly, we
10
In that case, defendant Santos operated an illegal lottery.
He employed individuals known as “runners” to collect the
gamblers’ bets. Upon receipt of the bets, the runners retained a
small portion as their commission and handed over the
remaining money to individuals known as “collectors,” one of
whom was defendant Diaz. The collectors would then deliver
such money to Santos, who used a portion of it to pay the
collectors’ salaries and pay the winners. The payments to the
runners, collectors, and winners were identified in an indictment
as the “transactions” upon which money laundering charges
were based under 18 U.S.C. § 1956(a)(1)(A)(i) (criminalizing
transactions which promote criminal activity).
11
The Supreme Court reasoned as follows:
Transactions that normally occur during the
course of running a lottery are not identifiable
uses of profits and thus do not violate the money-
laundering statute. More generally, a criminal
who enters into a transaction paying the expenses
of his illegal activity cannot possibly violate the
18
recognize that the Supreme Court’s holding in Santos overrules
this Court’s decision in United States v. Grasso, which was
relied upon by the District Court. Grasso, 381 F.3d 160, 169
(3d Cir. 2004) (holding that “‘proceeds,’ as that term is used in
the money laundering statute, means gross receipts [from illegal
activity] rather than profits”).
Moreover, we have previously determined that “proceeds
are derived from an already completed offense, or a completed
phase of an ongoing offense, before they can be laundered.”
United States v. Conley, 37 F.3d 970, 980 (3d Cir. 1994).
Having thus elucidated the definition of “proceeds,” we
will next consider how the term “proceeds” relates to the
predicate offense of mail fraud. The mail fraud statute provides:
Whoever, having devised or intending to
devise any scheme or artifice to defraud, or for
obtaining money or property by means of false or
fraudulent pretenses, representations, or promises
. . . for the purpose of executing such scheme or
artifice or attempting so to do, places in any post
office or authorized depository for mail matter,
any matter or thing whatever to be sent or
money-laundering statute, because by definition
profits consist of what remains after expenses are
paid. Defraying an activity’s costs with its
receipts simply will not be covered.
Santos, 2008 WL 2229212, at * 6.
19
delivered by the Postal Service . . . shall be fined
under this title or imprisoned not more than 20
years, or both.
18 U.S.C. § 1341. Stated plainly, the elements necessary to
establish the offense of mail fraud are (1) a scheme or artifice to
defraud for the purpose of obtaining money or property and (2)
use of the mails in furtherance of the scheme. Therefore, once
these two requirements are met, mail fraud has been committed.
The Supreme Court has previously interpreted the
elements of mail fraud. A scheme to defraud need not
contemplate the use of mails as an essential part of the scheme
so long as the mailing is “incident to an essential part of the
scheme.” Schmuck v. United States, 489 U.S. 705, 710-11
(1989) (citing Pereira v. United States, 347 U.S. 1, 8 (1954) and
quoting Badders v. United States, 240 U.S. 391, 394 (1916)).
Under the mail fraud statute, the mailing must be for the
“purpose of executing the scheme.” 12 Kann v. United States,
323 U.S. 88, 94 (1944). Furthermore, a mailing cannot be said
to be in furtherance of a scheme to defraud, nor can a mailing be
12
In Kann, the defendants cashed fraudulently obtained
checks at various banks, knowing that the checks would be
forwarded to a drawee bank for collection. The Supreme Court
found that the mailing was not material to the consummation of
the scheme and thus concluded that there was no mail fraud.
323 U.S. at 94 (“It cannot be said that the mailings in question
were for the purpose of executing the scheme, as the statute
requires.”).
20
considered even incident to an essential part of the scheme,
when it occurs after the scheme has reached fruition. Id. at 94-
95.
In Schmuck, the defendant was a used-car distributor who
purchased used cars, rolled back their odometers and sold the
vehicles to retail dealers at prices he was able to inflate by
reason of the low-mileage readings. The dealers, unaware of the
fraud, resold the automobiles to their customers, who also paid
inflated prices. The Supreme Court held that the mailing
element was satisfied by the dealers' mailings of title application
forms to the state of Wisconsin on behalf of the customers,
explaining that “a rational jury could have found that the
title-registration mailings were part of the execution of the
fraudulent scheme, a scheme which did not reach fruition until
the retail dealers resold the cars and effected transfers of title.”
Schmuck, 489 U.S. at 712. Finding that the scheme would have
come to an end if the dealers had lost faith in the distributor or
were unable to re-sell the cars, the Court concluded that
“although the registration-form mailings may not have
contributed directly to the duping of either the retail dealers or
the customers, they were necessary to the passage of title, which
in turn was essential to the perpetuation of Schmuck's scheme.”
Id.
Moreover, in United States v. Morelli, we affirmed a
district court’s judgments of conviction and sentence and
concluded that unpaid taxes that were unlawfully disguised and
retained constituted “proceeds” of wire fraud for purposes of
21
supporting a conviction on a federal money laundering charge.13
169 F.3d 798, 806 (3d Cir. 1999) The defendant in Morelli was
involved in a “daisy chain” 14 scheme which included a series of
13
Wire fraud, like mail fraud, is a racketeering activity and
thus a predicate offense for money laundering. See 18 U.S.C. §§
1956(a)(2)(B)(i), (c)(7)(A); see also 18 U.S.C. §1961(1). The
federal wire fraud statute, 18 U.S.C. § 1343, is nearly identical
to the federal mail fraud statute. See Morelli, 169 F.3d at 806
(stating that “[w]ire fraud consists of (1) a scheme to defraud
and (2) a use of a wire transmission for the purpose of
executing, or attempting to execute, the scheme”); see also id.
at 806 n.9 (explaining that the federal wire fraud and mail fraud
statutes “differ only in form, not in substance, and cases...
interpreting one govern the other as well”); see also United
States v. Tarnopol, 561 F.2d 466, 475 (3d Cir.1977) (“[T]he
cases interpreting the mail fraud statute are applicable to the
wire fraud statute as well.”).
14
The elements of “daisy chain” schemes have previously
been detailed in this circuit and others. See, e.g., United States
v. Sertich, 95 F.3d 520, 522 (7th Cir.1996), cert. denied, 519
U.S. 1113 (1997); United States v. Veksler, 62 F.3d 544, 547 (3d
Cir.1995); United States v. Macchia, 35 F.3d 662, 665-66 (2d
Cir.1994); United States v. Victoria-21, 3 F.3d 571, 573 (2d
Cir.1993); In re Assets of Martin, 1 F.3d 1351, 1353 (3d
Cir.1993); United States v. Tarricone, 996 F.2d 1414, 1416-17
(2d Cir.1993); United States v. Aracri, 968 F.2d 1512, 1514-17
(2d Cir.1992); United States v. Musacchia, 900 F.2d 493,
495-96 (2d Cir.1990), vacated, 955 F.2d 3 (2d Cir.1991).
22
transactions that resulted in the embezzlement of excise taxes
from fuel sales. The “daisy chain” scheme operated as follows:
The particular scheme in which the
defendants participated was termed “the
Association.” The Association organized a group
of companies, all of which it controlled, into a
“daisy chain,” for the purpose of embezzling the
excise taxes on the sale of certain kinds of fuel.
Typically, the companies would sell oil down the
chain in a series of paper transactions, through
what was referred to as the “burn company.”
Eventually, the company at the bottom of the
chain, the “street company,” would sell the oil to
a legitimate retailer, i.e., a particular gas station,
for a price slightly below the tax-included market
price. This retailer would pay money to the street
company, which would send money back up the
chain in a series of wire transfers.
This scheme was illegal because it was set
up as a means to avoid excise taxes. The daisy
chain was established so that the burn company
was the one legally responsible for collecting the
excise taxes on the fuel sales and transmitting
them to the government. In the Association's
scheme, the burn company would collect the taxes
for a time, and then disappear without ever paying
the taxes to the government. As a result, the
Association could keep the money representing
23
the excise taxes without the government being
able to determine where it had gone.
Id. at 803. On appeal, the defendant claimed that the money
represented the “proceeds” of tax fraud, not the “proceeds” of a
wire fraud, because the wiring itself had nothing to do with the
Association’s coming into possession of the money. We did not
agree.
In affirming the trial court’s judgments of conviction and
sentence on the money laundering charge, we held that the
money wired up through the “daisy chain” constituted
“proceeds” of wire fraud based on the nature of the entire
ongoing fraudulent scheme. 169 F.3d 806-07. We reasoned as
follows:
We think the money was the proceeds of
the entire ongoing fraudulent venture in which the
Association engaged in creating the daisy chain
scheme, and that this venture was a wire fraud
scheme. This ongoing venture consisted of all the
individual series of transactions upon which [the
defendant] focuses, not the discrete series of
transactions individually. Although each series
may have included discrete acts of wire fraud that
followed the creation of the proceeds related to
that series, the fact is that the entire program,
encompassing all of the acts charged in the
indictment, constituted one large, ongoing wire
fraud scheme. Each wiring in each series
furthered the execution of each and every
individual act of tax fraud, and helped to create
24
the proceeds involved in each succeeding series of
transactions. This is primarily because each
wiring, whether it occurred before or after a given
act of tax fraud, served to promote and conceal
each individual embezzlement of taxes, either ex
ante or ex post. More precisely, each wiring,
including those that occurred before a particular
transaction, made it more difficult for the
government to detect the entire fraudulent scheme
or any particular fraudulent transaction or series
of transactions. In sum, the money gained in each
series of transactions (save the initial one) was the
proceeds of wire fraud because the money was the
proceeds of a fraud that was furthered by the prior
wirings.
Morelli, 169 F.3d at 806-07 (emphasis added); see also id. at
808 (quoting Schmuck, 489 U.S. at 712 (“Each wiring ‘was
essential to the perpetuation of [the Association]’s scheme.”)).
Finally, we concluded that, under the reasoning in Schmuck,
each wiring contributed to the entire scheme and made each
subsequent individual fraudulent transaction series more likely
to be successful and less likely to be detected. See Morelli, 169
F.3d at 807.
Based upon the Supreme Court’s decisions in Santos,
Schmuck, and Kann, and our decision in Morelli, we hold that
unpaid taxes, which are unlawfully disguised and retained by
means of the filing of false tax returns through the U.S. mail,
constitute “proceeds” of mail fraud for purposes of supporting
a charge of federal money laundering. Here, 4% of the
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unreported gross receipts that should have been paid as tax to
the Virgin Islands but were instead included in the lump sums
of money which the defendants sent to Amman, Jordan, were
clearly “proceeds” of the fraudulent scheme perpetuated by
defendants. Specifically, the defendants’ fraudulent scheme was
that of concealing certain gross receipts from the Virgin Islands
government through the mailing of fraudulent tax returns in
order to defraud, cheat, and deprive the government of the 4 %
gross receipts taxes it was owed, thus enabling the defendants to
unlawfully retain such government property and profit from
their scheme. See Pasquantino v. United States, 544 U.S. 349,
355-56 (2005) (holding that Canada’s right to uncollected excise
taxes on imported liquor is “property” in its hands, depriving
Canada of that money inflicts “an economic injury no less than
had they embezzled the funds from the Canadian treasury.”);
Hammerschmidt v. United States, 265 U.S. 182, 188 (1924)
(explaining that to defraud the United States primarily means “to
cheat the government out of property or money” and to deprive
the government of “something of value by trick, deceit, chicane,
or overreaching”). Here, the mailings were both for the purpose
of executing the scheme and were material to the consummation
of the scheme. See Kann, 323 U.S. at 94. The use of the mail
to file fraudulent tax returns and fail to pay all taxes owed was
not only incident to an essential part of the scheme, but also was
clearly an essential part of the scheme because such mailings
were the defendants’ way of concealing the scheme itself by
making the fraudulently reported gross receipts seem legitimate.
See Schmuck, 489 U.S. at 711; Pereira, 347 U.S. at 8.
Furthermore, the mailings of the fraudulent tax returns
resulted in “proceeds” of mail fraud based on the nature of the
26
entire ongoing fraudulent scheme because the unpaid taxes
unlawfully retained by defendants represented the “proceeds” of
a fraud that was also furthered by previous mailings. See
Morelli, 169 F.3d at 806-07. Each mailing, whether it occurred
before or after a given act of tax fraud, served to promote and
conceal each month’s unlawful retention of taxes, either ex ante
or ex post, and made it more difficult for the government to
detect the entire fraudulent scheme. See id. Moreover, each
mailing of the fraudulent tax forms “contributed directly to the
duping” of the Virgin Islands government, and subsequent
mailings were essential to keep defendants’ scheme going
because it would have come to an end if the tax collecting
authorities did not continue to receive these mailings. See
Schmuck, 489 U.S. at 712. Accordingly, it logically follows that
the unpaid taxes, unlawfully disguised and retained through the
mailing of the tax forms, were “proceeds” of defendants’ overall
scheme to defraud the government. This scheme was both
dependant on and completed by the monthly mailing of the false
Virgin Islands gross receipts tax returns.
Finally, in light of the Supreme Court’s decision in
Santos, we recognize that the “proceeds” from the mail fraud in
this case also amount to “profits” of mail fraud. See 2008 WL
2229212, at * 5-6. By intentionally misrepresenting the total
amount of Plaza Extra Supermarkets’ gross receipts through the
mailing of fraudulent tax returns, the defendants were able to
secretly “pocket” the 4% gross receipts taxes on the unreported
amounts which were the property of the Virgin Islands
government. Cf., Pasquantino v. United States, 544 U.S. 349
(2005) (recognizing no material difference between defrauding
a government of taxes due and embezzling money from the
27
treasury, the Supreme Court held that unpaid tax constituted
property under the wire fraud statute). Other than some small
expenses incurred in perpetuating the mail fraud–i.e., the
postage stamp affixed to their monthly tax return or any other
preparation fees relating to the return– the unpaid taxes retained
by defendants amounted to profits. Once these profits were
included in the lump sums sent abroad by defendants, the
offense of international money laundering was complete.
V. Conclusion
Based on the foregoing, we will vacate the District
Court’s February 13, 2007, and June 25, 2007, orders and
remand this case for further proceedings in accordance with this
opinion.
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