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ENGLISH & SMITH

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February 3, 2000

HOUSE JUDICIARY SUBCOMMITTEE ON CRIME

Hearing on Money Laundering Act of 1999

Prepared Statement of David B. Smith.

Distinguished members of the Committee. I appear today as an individual defense attorney who is an expert on our nation's money laundering and forfeiture laws. In the interest of full disclosure, I want you to know that I serve as co-chair of the Forfeiture Abuse Task Force of the National Association of Criminal Defense Lawyers and have testified in that capacity before the House Judiciary Committee in support of Chairman Henry J. Hyde's Civil Asset Forfeiture Reform Act, HR 1658. I have been deeply involved from the start in the reform effort that led to the Hyde bill. The views I express here are my own; however, I would hope that if I was speaking on behalf of the NACDL, my statement would not differ significantly from what it is. Many years ago, I was the deputy chief of the then-newly organized Asset Forfeiture Office of the DoJ's Criminal Division. I was responsible for supervising all of the government's forfeiture litigation and helped draft some of the forfeiture laws on the books today. I am also the author of the leading treatise on forfeiture law, Prosecution and Defense of Forfeiture Cases (Matthew Bender 1999).

The Administration bill you are considering today is by and large a forfeiture bill. Many of the provisions in this bill are also found in the Senate bill introduced by Senator Sessions on behalf of the Department of Justice as an alternative to the Hyde bill. The Sessions bill, S. 1716, is, as I write, in competition with S. 1931, the Civil Asset Forfeiture Reform Act sponsored by Senate Judiciary Committee Chairman Orrin Hatch and Senator Leahy, the Ranking Member. S. 1931 is basically the Hyde bill--albeit some of its more far-reaching provisions are watered down to smooth passage through the Senate. The Sessions bill contains none of the reforms found in the Hyde bill, which the House Judiciary Committee approved by a vote of 27-3. Instead, the Sessions bill is merely a DoJ wish list for expanding its forfeiture powers with only a whiff of procedural reform thrown in. The bill you have before you today has the forfeiture-expanding provisions of the Sessions bill--along with many other provisions designed to aggrandize the government's forfeiture powers--and no forfeiture reforms whatsoever.

I have to wonder why this Subcommittee would now want to consider proposed forfeiture legislation the Full Committee rejected last year when it approved the Hyde bill--particularly at the very moment when the Senate Judiciary Committee is getting ready to vote on many of the same DoJ proposals. I also have to wonder whether the Subcommittee on Crime should be in a position to, in effect, review and possibly undercut the splendid work of the full House Judiciary Committee last year. The House approved the Hyde bill (HR 1658) by a vote of 375-48. With all due respect, I believe this bill is, in part, an effort to make an end run around the Hyde legislation when the ink on the Hyde bill is barely dry. To what purpose?

Nonetheless, some of the new forfeiture provisions in the bill may have solid merit. I am particularly sympathetic to the government's need for greater authority to combat foreign money laundering. Thus, I would support sections 6, 7, 8, 25, 26 and 27 of the bill you have before you. There are many other provisions in the bill that I have no problem with--so long as they are part of a package that includes much needed reforms as well. The other provisions I find unobjectionable are sections 3 (Illegal Money Transmitting Businesses), 4 (Criminal Forfeiture for Money Laundering Conspiracies), 10 (Subpoenas for Bank Records), 11 (Charging Money Laundering as a Course of Conduct), 12 (Venue in Money Laundering Cases), 13 (Technical Amendment to Restore Wiretap Authority for Certain Money Laundering Offenses), 19 (Discovery Procedure for Locating Laundered Money), 20 (Repatriation of Property Placed Beyond the Jurisdiction of the Court), 21 (Laundering Proceeds of Terrorism), 28 (Restoring Recovered Property to Victims), 29 (In Personam Judgments), 30 (Use of Subpoenaed Records), 33 (Including Tribal Governments in the Definition of a Financial Institution), and 36 (Penalties for violations of geographic targeting orders and certain record keeping requirements).

Other provisions in the bill have merit but need to be modified in some way. For example, I could support section 4 (Restraint of Assets of Person Arrested Abroad) of the provision if it provided a right to a meaningful post-restraint hearing. Although the section by section analysis states that a party whose property is restrained would have such a right, the language of the bill says nothing about that. Amazingly, an American citizen whose property is seized or restrained in a criminal forfeiture case has no statutory right to a post-restraint hearing and the courts are divided as to whether and under what circumstances there is a constitutional right to such a hearing. If Congress is going to provide foreigners arrested abroad with a right to challenge the restraint order, as it should, why not take this opportunity to provide American citizens facing criminal forfeitures in this country with the same basic due process right?

I wish I had time to provide a detailed critique of the remaining provisions in the bill, which I oppose. A number of these proposals have been unsuccessfully put forward by the DoJ since 1994 as part of an ever-expanding wish list of forfeiture legislation. Some of them reflect an unseemly desire to overrule Supreme Court decisions that have correctly rejected the government's position on issues like fugitive disentitlement and excessive fines under the Eighth Amendment. I and others have critiqued these provisions before, both in the House and recently in the Senate. I would be happy to share these critiques with you.of Serial No. 94. As NACDL observed, "there is no valid reason to treat non-production of foreign account information any differently than any other failure to comply with a legitimate discovery request. Under the Federal Rules of Civil Procedure, a party can move the court for appropriate relief for an opposing party's failure to comply. Each case should be determined on its own merits as all are present discovery disputes." The section by section analysis says that a judge would have discretion to dismiss the claim for failure to produce the foreign account records. The bill actually requires a judge to dismiss the claim. There is no discretion. Some of the less controversial proposals may make it into the Senate forfeiture reform bill or a conference committee bill and become law--thereby obviating the need for this Subcommittee to consider them further. However, some of the forfeiture proposals are ill-conceived attempts to get around the Hyde reform bill provisions the House has overwhelmingly approved. Section 35 (Limitations period for challenges to cash seizures) directly conflicts with the Hyde and the Hatch/Leahy bills. Those bills follow current law by giving a claimant six years from the date he discovers that his property was forfeited without notice to him to file suit. Claimants who actually wait years--without good cause--before filing suit have had their cases thrown out based on the equitable defense of laches raised by the government. Thus, there is no need for a change in the law to protect the government against stale claims.

In my view, consideration of the forfeiture provisions of the bill should be deferred until we see what emerges from the Senate Judiciary Committee later this month--and from a conference committee after that. The remaining forfeiture provisions on the DoJ agenda could then be taken up as part of a follow-up package of forfeiture legislation that addresses issues not included in the forfeiture reform legislation I expect Congress to finally pass this year. There are many other reforms I would like to see enacted. I have my own wish list of criminal forfeiture reforms that I would like to share with you. Please ask me for a copy of it if you are interested in that subject. The Hyde bill does not address criminal forfeiture at all. Nor does it address the need to narrow the scope of some our overly broad forfeiture statutes, among which I would place the money laundering forfeiture provisions at the top of the list.

Consider the fact that the money laundering forfeiture provisions have been construed--at the government's urging--to authorize the forfeiture of an entire legitimate business simply because some criminal proceeds are deposited in a bank account owned by the company! This is preposterous and must be changed. Congress should clarify the overly broad scope some courts have given to the "any property involved in" language of 18 U.S.C. §981(a)(1)(A) and §982(a)(1). If $100 of dirty money is deposited in a bank account owned by General Motors, all of General Motors is not property "involved in" the money laundering violation. At most, only the bank account is.

If the government wants to expand its forfeiture (and money laundering) enforcement powers, it should be prepared to try to find common ground with responsible critics who believe that its current forfeiture (and money laundering enforcement) powers go too far in some other respects. In short, it should be ready to negotiate a broader bill that attempts to rationalize and improve the forfeiture (and money laundering) laws and to reduce the grave potential for abuse that will exist even after the Hyde reforms are enacted. Therefore, this bill is objectionable because it tremendously expands the government's already awesome powers in this area without any countervailing, long-overdue reforms to balance the legislation. The days when the DoJ could expect Congress to rubber stamp its one-sided proposals are, I hope, over. The money laundering statutes and their forfeiture provisions have been indiscriminately expanded year after year without adequate consideration--and often without any real consideration at all. But the political climate today is quite different and many civic groups are now paying much greater attention to what goes on here. The battle over forfeiture reform illustrates that point. Any further expansions of the money laundering and forfeiture statutes must be accompanied by reforms. It is no longer a question of just satisfying the government's continual demands for more drastic powers.

Given the short amount of time I had to prepare this Statement, I cannot lay out for you a complete list of reform proposals that I would like to see enacted to compliment the DoJ proposals. I would be glad to provide you with that later. But I can advocate that you take a careful look at the whole statutory framework with a view to fundamentally revising the extremely broad scope of the money laundering laws. For example, instead of tinkering with §1957, as Section 17 of this bill would do, I would ask whether section 1957 serves any rational purpose, and if it does, whether the sanctions for violating section 1957 are not far too severe. Many people believe that section 1957 makes little, if any, policy sense. And there is no doubt that the provision has been used to impose punishment way out of proportion to the offense of engaging in a "monetary transaction" over $10,000 at a financial institution with knowledge that the transaction involves proceeds of some unlawful activity. This isn't a money laundering statute at all. It's a law against knowingly depositing or withdrawing more than $10,000 that is the proceeds of some crime. Should that be a crime? If a businessman commits a fraud, and his secretary knowingly deposits a check representing $10,000 of the fraud proceeds in a bank account in the business' true name, with no attempt to conceal anything, the secretary has committed a §1957 offense that is punished much more severely than the underlying fraud committed by her boss. Why? The act of depositing the fraud proceeds in a bank harms no one. Would society be better off if the proceeds were hidden under the fraudster's mattress? But the Sentencing Guidelines treat the §1957 offense as far more serious than the fraud offense. It is obviously far less serious than the fraud. Indeed, it should not even be a crime.

The Sentencing Commission has tried to amend the money laundering guidelines to reduce the tremendous disparity between the punishment for the less serious predicate offenses and the money laundering offenses. But Congress rejected the Commission's proposals at the urging of the DoJ. The Commission is working on another such reform of the laundering guidelines. I hope Congress will not reject this vitally needed change again. I do agree with the DoJ that the sentencing guidelines for fraud offenses are too low and that a reform of the money laundering guidelines should be accompanied by an increase in the punishment for fraud offenses.

Section 1956 also needs fundamental revision. The provision should be limited to true laundering of very large sums of money that involves either significant efforts at concealment of the proceeds of unlawful activity or the systematic avoidance of a transaction reporting requirement. It should not reach the mere deposit or withdrawal of criminal proceeds in a bank account "with the intent to promote the carrying on of specified unlawful activity." §1956(a)(1)(A)(i). Almost any deposit or withdrawal of criminal proceeds can be shown to have been made with such an intent. Why should a routine deposit or withdrawal of one dollar of criminal proceeds subject the person who makes the deposit or withdrawal to draconian penalties far in excess of the underlying criminal activity? Again, it makes no sense. But the DoJ isn't asking you to change that. It wants line prosecutors to be able to threaten defendants with these draconian penalties for "money laundering" in virtually every case, regardless of how inappropriate they are. That makes it easier to exact onerous guilty pleas. Unlike the RICO statute, which is also so broadly written that it can be used in almost any criminal case, the DoJ has never significantly restricted the line prosecutor's ability to charge money laundering whenever he sees fit. Because DoJ keeps a tight, central rein on the RICO statute, there are only about 75 federal RICO prosecutions each year, compared with thousands of money laundering indictments. Yet the money laundering statute is even more easily abused than the RICO statute. That is why it has become the newest darling in the prosecutors' nursery.

It is not only defense attorneys who object to this oppressive, freewheeling use of the ill-conceived money laundering statutes. The courts have also become increasingly concerned about the government's over-use of the money laundering laws. Some courts are allowing steep downward departures from the sentencing guidelines for money laundering or even mandating the use of the guideline for the less severely punished predicate offense to prevent what they regard as a manifest injustice. The best case to read on this important issue is U.S. v. Smith, 186 F.3d 290 (3d Cir. 1999). In Smith, the Third Circuit explains how the money laundering guidelines were written with the most serious, large-scale drug money laundering activity in mind--the type of activity the government told Congress the statute was designed to combat. The actual use of the money laundering statute as an indiscriminate blunderbuss weapon against the typical small-time defendant has been radically different from how the Commission expected the statute to be used. The statute has been misused to impose wildly disproportionate punishment on countless individuals and companies.

In conclusion, I would not support further expansion of the money laundering laws--however much some limited expansion of those laws may be needed to deal with problems like foreign money laundering--until they are fundamentally reformed. There should be a quid pro quo. If the government will not consider any reform, it should not be rewarded with further expansions of the scope of the statute and its enforcement powers.