In United States v. Yusef, No. 07-3308, (3d Cir. June 17, 2008), the Third Circuit considered a narrow issue: 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).
This was a government appeal from a pretrial order dismissing from the indictment various counts and allegations based on international money laundering.
The relevant statute requires businesses to file monthly reporting of gross receipts and to pay a 4% tax on those receipts. The mails were used for filing and payments.
The defendants here would collect the daily sales receipts, count the cash, and deposit, report and pay taxes only on a portion of the cash. From 1996 to 2001, tens of millions of dollars in cash was withheld in this manner.
The District Court found that the unpaid taxes cannot be considered "proceeds" of mail fraud because such tax savings (1) represented a percentage of unreported gross receipts that had been procured through lawful activity (the day to day business of the Supermarket) and, thus, could not be categorized as "proceeds" from an unlawful activity; and (2) were merely retained, rather than obtained.
After noting that the federal money laundering statute does not define "proceeds", the Third Circuit held "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." Following Supreme Court precedent and its own prior decision, the Court held "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."
The Court also considered whether "use of the mails" was "in furtherance of the scheme." Here, "[t]he 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."