Will “cost savings” now constitute proceeds of crime under United States legislation?

Read our article in the Cayman Financial Review Magazine, eversion 

It is a principle now firmly established that the proceeds of criminal offenses are interdicted in two key ways.

First, they may be seized by the state, through some form of criminal and/or civil forfeiture. Second, handling the proceeds will constitute the separate crime of money laundering.

The United States provides for both approaches, albeit that their applicability is restricted to specified lists of offenses, found in 18 USC §1956 and §1961 in the case of money laundering and a rather wider range in respect of both criminal and civil forfeiture.  

Where this relates to to proceeds derived directly from an act that inherently illegal, such as drug or human trafficking, this is straightforward. But with regard to “cost savings”, ie funds which are saved through an illegal aspect of an otherwise legitimate business, it is more complex.

Two key examples are where the business employs undocumented workers or violates environmental protection laws, both crimes included in the above lists.

Historically, in the United States, courts have been almost unanimous in excluding such cost savings; the two exceptions being the linked cases of United States v. Tyson Foods1 and the appeal judgment of the Sixth Circuit in Trollinger v. Tyson Foods2.

However, in 2009, the wording of the money laundering statute was amended to define “proceeds” as:

“any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity”3.

It is the phrase “obtained or retained” that may bring cost savings within the reach of the statute. Indeed, although the principal aim of the amendment was to address other issues, the question of cost savings was also very much in the Department of Justice’s mind when the amendment was drafted.

Although widespread, both the employment of undocumented workers and violations of environmental protection laws have definite dark sides. The former, most obviously, denies jobs to the local communities, particularly the unskilled labor market. The situation is exacerbated when, as at present, the economic climate is harsh.

Yet this is precisely the time when local, documented workers find jobs hard to find as unemployment remains high. Similarly, businesses which comply fully with the law, employing only those who are legally permitted to work, at the full rates required by law and making the legally required tax and other payments, will find it difficult to compete with those which do not.

But more serious still is the impact on undocumented workers themselves. Because they are not legally permitted to work in the jurisdiction concerned/and therefore face arrest and deportation if they are caught, the labour rights provided in that jurisdiction will in practice simply not apply to them.

They will be paid significantly less than the minimum wage for working considerably longer hours than their documented coworkers. In some cases, what little they do earn is reduced by rent and subsistence charges imposed by their employers, resulting in effective bondage: they have paid significant sums to the agents who arranged the work – and possibly also to traffickers – but they have little hope of ever paying this off.

The already bad situation to which this gives rise is often worsened still by their employers’ failure to comply with health and safety requirements, knowing that the workers are in no position to seek redress. In extreme cases, deaths have resulted.

The impact of violations of environmental protection laws is, if anything, even greater. While the issues surrounding climate change are well documented, the effects of other forms of pollution, although they are more local in nature, can be just as dramatic and certainly more immediate.

Chemical waste that is dumped, untreated, can cause conditions in the local population ranging from cancer to birth defects. Yet other forms may be more indirect but no less real. A massive spread of algae in Taihu Lake in May 2007 resulted in supplies of drinking water to Wuxi, a city with a population of 6 million, being interrupted for 4 days.

A similar outbreak occurred the following year in Chaohu Lake, the source of drinking water for 320,000 people. In both cases, the build-up occurred because the animals and other organisms, living in the water, that eat the algae and thus keep it in check had disappeared – killed by the high levels of chemical pollution.

Just as poor-quality construction materials and methods result in an earthquake bringing greater devastation and loss of life than it would otherwise, so chemical pollution can cause natural disasters of its own.

These crimes have one key factor in common: they are committed in order to save money, and hence increase corporate profits. Although the core activity of the business/individual is legitimate, the motivation of the illegal ancillary activity is financial, just as with drug or human trafficking.

The offenses are therefore economic crimes and should therefore be treated as such, combated with the weapons that governments have created to deal with them: confiscation/forfeiture of the proceeds themselves and the criminalisation, with severe penalties, of those who continue to invest them in their businesses.

There have to date been no reported cases on whether the change to the wording of §1956(c)(9) has brought cost savings within the reach of the statute. Therefore, it is useful to consider the arguments.

Where cost savings are made by the defendants through their payment of unlawfully low wages to undocumented workers, money is “retained”.

Costs are typically paid out of the gross receipts of the business. For example, a business may sell jeans to customers, receive a certain sum for them and then, out of it, pay their various expenses, including employees’ wages. Therefore, the reduction of the wage costs will result in a higher proportion of the gross receipts being retained by the business.

However, the defense may argue that it is not at all certain that, had the business not violated the immigration laws, it would have employed the same number of documented workers at, at least, the minimum wage. Perhaps it would have employed fewer workers, or for fewer hours.

The many variables in business mean this might not have resulted in lower proceeds or at least that it cannot be proven. Even in a manufacturing business, it could be argued that proceeds are dependent not solely on the number of items produced, but also the number of those items which the business is able actually to sell.

Hence they could argue that there are too many unknowns for the Government to be able to show that any money at all was retained by the defendants as a result of their crimes, let alone how much.

There may well, therefore, be uncertain cases. None of these difficulties, however, preclude the bringing of a money laundering charge in such cases as a matter of law: whether or not cost savings had been retained by the defendants, as a result of their crimes, in a given a case would ultimately be a matter for the jury to decide.

The success already experienced both by the Government and (on appeal) by the private plaintiffs in the Tyson Foods litigation shows that such cases can successfully be brought.

The arguments in favor of a money laundering charge arising from violations of environmental protection laws would be the same as those in relation to the employment of undocumented workers.

The business earns gross receipts from its operations. Some of those receipts it then has to spend on certain costs; these include the disposal of waste and other by-products through particular processes, in compliance with the various legal and regulatory requirements.

Failure to comply with these measures is a crime, but it saves considerable costs. The costs saved are therefore moneys which should legally have been spent but which were not. As such, they were retained through the committing of a criminal offense within the wording of §1956(c)(9).

Their quantification could be achieved through the establishment, very probably through the evidence of expert witnesses, of what the cost would have been of the measures necessary for compliance, be they proper processing of waste or the fitting of the required filters to a factory’s chimneys.

Since the saved costs are re-invested in the ongoing business enterprise, the intent to use the funds to promote the carrying on of a specified unlawful activity will also be established.

The conclusion is clear. In the United States, cost savings, at least where they relate to the employment of undocumented workers or to violations of environmental protection laws, are now capable of constituting proceeds of crime for the purposes both of a money laundering prosecution and a forfeiture action.

Where businesses commit violations in order to reduce their costs, this should be treated as the financial crime that it is. No longer should their managers be able to count, if caught, on receiving nothing more than a moderate fine that they view as simply a cost of doing business: they should expect serious penalties which ensure that the violation is not worthwhile.

Forfeiture of the moneys saved, plus a severe fine for the business entity and, quite possibly, prison sentences for its managers will achieve this. If this is done, the United States will be able to build on the 2009 reforms to continue to take the lead in the fight against economic, including corporate, crime.

Endnotes 

1. E.D. Tenn., Feb. 4, 2003
2. 370 F 2d 602, 6th Circuit, 2004.
3. 18 U.S.C. §1956(c)(9).

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