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Laundering: The Criminalization of Everything

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Money-laundering statutes epitomize how the government has shirked going after violent criminals and instead is routinely impaling innocent citizens and penny-ante misfits in order to maximize its number of convictions. If the government cannot catch the guilty, at least it can scourge the innocent.

In the same way that drug-courier profiles presume that almost every airline traveler is a smuggler, federal money-laundering laws presume that almost every citizen with a few bucks should be classified as a potential drug kingpin.

In 1986, Congress passed the Money Laundering Control Act. The law purportedly aimed at drug cartels that were smuggling billions of dollars of illicit profits out of the country. But while the law has not shut down the drug cartels, it has wreaked vengeance on private citizens who often had no idea they were breaking the law. And since it is easier for federal prosecutors to trounce hapless middle-class souls who cannot afford expensive lawyers, that works out just fine for the Justice Department.

Money-laundering laws seek to make practically every citizen an informant against every other citizen. The federal government now requires that a Currency Transaction Report (CTR) be filed for any cash exchange that involves more than $10,000 or, in some cases, more than $3,000. The government’s definition of cash is very expansive. It includes cashier’s checks, certified checks, and money orders. Even someone who buys $3,000 worth of traveler’s checks is automatically turned in to Uncle Sam. Many homebuyers have thus been reported to the IRS as potential money launderers when they have gone to a closing to buy a home with a cashier’s check in excess of $10,000. All gold and silver sales are now reported to the government under money-laundering reporting requirements. More than 10 million CTRs are being filed on American citizens every year.

The laundering laws make for easy sting operations. All that a federal undercover agent needs to do is to buy something, such as a car or boat, for cash and persuade the seller (who is often ignorant of the law) not to file a CTR. Then, at trial, the federal agent can claim that he told the seller that the cash involved was drug-tainted and — boom! Five years up the river.

In October 1994, a Chicago jury rejected federal charges against Jerry Tufano, a Chicago currency exchange owner. Tufano, 38 years old and a father of five, was the victim of an undercover federal agent for whom he converted hundreds of thousands of dollars into money orders in 1988 and 1989. The undercover agent asked that the money orders be structured in a way so that no single order would exceed $10,000 and, thus, no transaction report would have to be submitted to the IRS. Tufano obliged.

The government waited four years after completing the undercover operation before busting Tufano one morning when he was out playing basketball with his children in the driveway of his home. Federal prosecutors demanded that Tufano be convicted of “structuring” — but the regulations defining structuring were not even issued until 1989 — after the end of the sting operation against Tufano. The Chicago Tribune noted:

“The agent was posing as someone laundering drug proceeds, but the defense maintained Tufano never knew that. The one time the agent used the word “drug” in front of Tufano didn’t occur until well into the investigation, and she admitted she dropped her voice. Tufano testified he never heard what she said.”

In 1993, a federal appeals court overturned the conviction of “Uncle Bobby” McDougald, a Vietnam veteran who had been sentenced to eight years in prison for buying an automobile for an acquaintance. McDougald received more years in prison for allegedly money-laundering a few thousand dollars to buy a car than he probably would have received in most states if he had been convicted of stealing a dozen cars.

McDougald had been befriended by a businessman, Ron Watts, and had obliged him by purchasing a car for an acquaintance of Watts’s with the acquaintance’s cash. The car was registered in McDougald’s name. Watts was involved in both legitimate businesses and illicit drugs. The government could not prove that the money that McDougald used to buy the car had come from illicit drugs. At trial, the government could not show that McDougald even knew that Watts was involved in the drug trade. Watts testified that McDougald was openly opposed to drugs and that McDougald would not involve himself in any transaction involving drugs. An appeals court held that since McDougald had no intent to violate the money-laundering laws and no knowledge that such laws were being violated, he was not guilty. Unfortunately, he had already spent two years in prison.

In the late 1980s, the Customs Service sought to entrap Yugoslavian diplomats with a scheme to carry $500,000 out of the country without notifying the U.S. government. Customs set up and relied upon an informant who had previously been indicted for forgery and theft and confined to a state hospital for paranoid personality disorders. As Greg Rushford reported in Legal Times, Customs claimed that the Yugoslav official was guilty because he possessed a suitcase given him by the informant that was supposedly sealed with a Yugoslav diplomatic seal. But it turned out that the so-called diplomatic seal was actually a forgery — a cheap gold public notary seal that the informant bought in a Chicago stationery store. Taped conversations showed that the Yugoslav diplomat had explicitly stated repeatedly that he did not want to do anything illegal. The charges were thrown out of federal court.

The U.S. Sentencing Commission, an agency created by Congress to oversee and analyze court penalties for federal crimes, has repeatedly criticized the broad sweep of the laundering laws. The commission summarized one case in which an innocent businessman had been nailed for structuring:

“A businessman in retail sales banked his day’s cash receipts. The cashier at the bank told him that if less than $10,000 per day is deposited, there would be far less paperwork for all concerned. Thereafter, he kept each deposit to under $10,000, using employees who were related to him to deposit the smaller amounts. Although this constituted unlawful structuring, there was no illegal purpose to these actions beyond avoiding the reporting paperwork; the funds involved were legally obtained. The defendant’s base offense level was 13 [under federal sentencing guidelines]. However, because the offense involved many deposits over many months, and thus the quantity of structured funds involved grew to over $1 million, the applicable offense level was 18 [meaning a prison sentence of at least 4 years].”

Money-laundering laws are also being used to punish and oppress lawyers who represent accused drug dealers. The IRS now requires that lawyers file a Form 8300 listing the identity of any client who pays them over $10,000 in cash and the exact amount paid. Ten state bar associations have advised lawyers against such disclosures, stating that it would be a violation of the lawyer’s duty of confidentiality to his client. Federal Judge Patrick Kelly struck down the regulations, ruling:

“The attorney-client relationship is a sacred trust and should not be intruded in. . . . If and when a client consults with an attorney, retaining him for whatever purpose, the canons mandate the client’s very identify must be preserved.”

However, other federal judges have upheld IRS demands for lawyers to identify cash-paying clients, and the IRS officially announced it will follow a policy of non-acquiescence regarding Judge Kelly’s ruling. (In other words, IRS to Judge Kelly: Take your ruling and shove it!).

The Supreme Court torpedoed — at least temporarily — the expansive interpretation of structuring early in 1994. Waldemar Ratzlaf and his wife Loretta ran up big gambling debts in Las Vegas in 1988 and arrived at a casino with $160,000 in cash to settle accounts. The shift manager at the casino told them that if they paid in cash, the casino would have to fill out a CTR but that they could avoid that if they got a bank cashier’s check instead. The Ratzlafs rode to banks in the casino limo to buy the cashier’s checks. When bank employees informed them that they would have to file CTRs on any cash transactions over $10,000, the Ratzlafs bought cashier’s checks in amounts less than $10,000.

The Ratzlafs were convicted and sentenced to three years in prison. They appealed and the Supreme Court overturned the conviction. Justice Ruth Ginsburg, writing for the majority, wrote that the prosecution had to show that the Ratzlafs were “aware of the illegality of the ‘structuring’ in which they engaged.” Ginsburg harshly criticized lower federal judges for neglecting the requirement of “willfulness” in the requirement for money-laundering conviction — treating the “willfulness” requirement as “mere surplusage words of no consequence.” Ginsburg concluded that the court was “unpersuaded by the argument that structuring is so obviously ‘evil’ or inherently ‘bad’ that the ‘willfulness’ requirement is satisfied irrespective of the defendant’s knowledge of the illegality of structuring.”

Obviously, a federal money-laundering law that can result in such entrapment and prosecution of hapless private citizens had serious problems. So in August 1994, under pressure from the IRS and Justice Department, Congress enacted the Money Laundering Suppression Act. This law improved the existing statute by removing the “willfulness” requirement from the law — thus making it much easier to automatically convict citizens who have no idea they are violating the law.

After Clinton signed the new law, Treasury Undersecretary Ronald Noble proclaimed that the legislation will “further the growing partnership between the banking industry and law enforcement.” Unfortunately, this is a partnership that, in the vast majority of cases, is based on giving the government agents the power to compel banks to betray the innermost financial secrets of their customers.

The sheer bulk of reports coming in on possible money-laundering violations may partly explain why the U.S. government officials inexcusably failed to catch years earlier one of the vilest traitors in recent years — Aldrich Ames, the CIA agent who became a Soviet spy. Ames received massive cash payments and cash wire transfers from the Soviets and later the Russian government from 1985 to 1994. He received so many massive cash transmissions that he bought a half-million dollar home with cash on the barrelhead. In 1990, he received three separate payments of $50,000 each through large wire cash transmissions from Switzerland. Dominion Bank of Virginia filed a suspicious transaction report (sort of a Currency Transaction Report with alarm bells) with the Treasury Department — but neither Treasury, nor the FBI, nor the CIA paid any attention. As Money Laundering Alert noted, “Prompt attention to the Suspicious Transaction Report could possibly have saved the lives of some U.S. double agents that Ames betrayed.” Several CIA employees tried to warn their superiors that Ames’s living standard was suspiciously skyrocketing. The CIA investigated Ames’s finances, but apparently failed to check for the suspicious transaction reports or other reports that indicated Ames was money laundering. While the FBI and other agencies were devoting massive resources to undercover money-laundering stings, they totally neglected the stark evidence of the guilt of one of the biggest spies in recent U.S. history.

There are legitimate cases against devious money launderers who flagrantly violate the law. For instance, New York City policeman Michael Kalanz was receiving kickbacks from a Colombian drug cartel he was protecting. Kalanz hauled a duffel bag stuffed with a million dollars into the 48th Precinct station house last year and stashed it in his locker for several hours. He was convicted on money laundering and other charges.

The money-laundering problem is largely the result of the obscene profits that come from prohibiting the legal sale of narcotics. Money-laundering statutes epitomize the type of law that criminalizes vast amounts of legal activity, making legions of criminals out of honest citizens who merely do not want to tell the government everything that they are doing.

The laundering law — especially after Congress’s 1994 reform — symbolizes the kind of vague law that gives prosecutors the greatest power over the greatest number of citizens, regardless of whether those citizens intend to violate the law.

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    James Bovard serves as policy adviser to The Future of Freedom Foundation. He has written for the New York Times, The Wall Street Journal, The Washington Post, New Republic, Reader's Digest, Playboy, American Spectator, Investors Business Daily, and many other publications. He is the author of a new e-book memoir, Public Policy Hooligan. His other books include: Attention Deficit Democracy (2006); The Bush Betrayal (2004); Terrorism and Tyranny (2003); Feeling Your Pain (2000); Freedom in Chains (1999); Shakedown (1995); Lost Rights (1994); The Fair Trade Fraud (1991); and The Farm Fiasco (1989). He was the 1995 co-recipient of the Thomas Szasz Award for Civil Liberties work, awarded by the Center for Independent Thought, and the recipient of the 1996 Freedom Fund Award from the Firearms Civil Rights Defense Fund of the National Rifle Association. His book Lost Rights received the Mencken Award as Book of the Year from the Free Press Association. His Terrorism and Tyranny won Laissez Faire Book's Lysander Spooner award for the Best Book on Liberty in 2003. Read his blog. Send him email.