White-collar crime can involve any number of types of fraud against the government or private parties. One that isn’t usually thought about but can result in serious jail time involves conspiracies to obtain government contracts fraudulently by setting up bogus small and minority-owned businesses in order to qualify for government preferences.
In the past few months in the Eastern District of Virginia, several businesspeople have been sentenced to serve time in prison after pleading guilty to their roles in a scheme that improperly won them more than $31 million in government contracts that were intended for small, minority-owned businesses but were diverted fraudulently to other businesses that didn’t qualify.
In June, businessman Joseph Richards was sentenced to 27 months in federal prison after he pleaded guilty to his role in the scheme. He was the first major participant to be sentenced.
Richards and his co-conspirators were gaming the system and abusing the federal program that provides so-called 8(a) set-asides for minority businesses. As outlined in a statement of facts to which Richards stipulated, he and the co-conspirators set up “Company B,” a shell company owned by a woman named Dawn Hamilton, who is of Portuguese descent and thus eligible for the set-aside. However, Hamilton was only a figurehead owner, and “Company A,” run by Richards and other non-minority individuals, actually did the work on the government contracts. Earlier this month, Hamilton was sentenced to four years in federal prison.
For example, the memorandum states: “From 2009 until at least February 2012, when [Hamilton] began to work more frequently for Company B, Richards knew that [Hamilton] nevertheless reported to [co-conspirator Keith Hedman], who controlled Company B notwithstanding [Hamilton’s] “on-paper” Company B ownership. Richards also knew that [Hedman] kept a stamp of [Hamilton’s] signature in [Hedman’s] desk drawer and that [Hedman] repeatedly used the stamp to forge [Hamilton’s] name and signature on various documents, including checks and other documents submitted to the U.S. government.” Hedman, the ringleader of the scheme, was sentenced to six years in prison.
In order to make their scheme work, Richards and his co-conspirators repeatedly created fraudulent documents, including fraudulent leases and false responses to government inquiries about their 8(a) status.
These guilty pleas and sentences are indications that federal prosecutors are capable of going after government contract fraud in a concerted manner. The investigation that landed these guilty pleas, among others, was conducted by a large inter-agency team, including the offices of inspector general of the National Aeronautics and Space Administration, the Small Business Administration, the General Services Administration, the Department of Health and Human Services, and the Defense Criminal Investigative Service, with assistance from the Defense Contract Audit Agency.
The fact that the companies involved actually performed the work satisfactorily for various government agencies is, of course, no defense. It is a basic type of fraud to make false representations to obtain benefits – in this case government contracts – to which one is not entitled by law.
Of course, it’s pretty clear that for every one of these scams that are investigated by authorities and end in guilty pleas, there must be five or ten that are never found out. If the Small Business Administration and other agencies got wind of more of these conspiracies, they could do more to ensure that truly deserving companies received these set-aside contracts.
A recent decision by U.S. District Judge John Gleeson in the Eastern District of New York may be the harbinger of new limits on the government’s ability to use a prosecutorial tool of which it has become very fond lately – the deferred prosecution agreement. Judge Gleeson’s assertion that a district court has a right to approve or disapprove the use of a DPA in a criminal case has the potential to change entirely the way in which the government uses these agreements.
The government frequently uses DPAs in criminal cases against large companies as a means of leveraging the threat of criminal conviction to get the company to correct practices that the government believes to be illegal.
A DPA is a formal written agreement that customarily provides that criminal proceedings against the company will be held in abeyance for a period of years during which the company agrees to take steps, subject to monitoring, to correct its past misdeeds. The DPA is commonly filed along with a criminal information that commences a criminal case, and the parties then request that the court stay any proceedings in the case for the period defined in the DPA. If the company complies with the terms of the DPA, the government will dismiss the case at the conclusion of that period.
Because the government implements a DPA through the commencement of a criminal proceeding, however, it must contend with the application of the speedy trial statute during the period of deferral. The parties usually request jointly that the time period be excluded from the calculation of the 70-day period within which the trial must otherwise commence pursuant to statute. 18 U.S.C. § 3161(c)(1).
In United States v. HSBC Bank USA, N.A., 12-CR-763 (E.D.N.Y.), the government filed an information on December 11, 2012, charging HSBC Bank USA, N.A. with violations of the Bank Secrecy Act, 31 U.S.C. § 5311 et seq. (including, among other things, willfully failing to maintain an effective anti-money laundering policy) and with willfully facilitating financial transactions on behalf of sanctioned entities in violation of the International Emergency Economic Powers Act, 50 U.S.C. §§ 1702 & 1705 and the Trading with the Enemy Act, 50 U.S.C. App. §§ 3, 5, 16. On that same day, the government also filed a DPA, a Statement of Facts, and a Corporate Compliance Monitor agreement. The government filed these documents as exhibits to a letter requesting that the court hold the case in abeyance for five years in accordance with the terms of the DPA and that the court exclude that time from the speedy trial clock.
In responding to this request, Judge Gleeson surprised the parties by asserting that he had the authority not only to rule on the request to exclude time from the speedy trial clock, but also to accept or reject the DPA itself. In a written opinion issued on July 1, 2013, Judge Gleeson acknowledged that the court’s authority did not stem from Fed. R. Crim. P. 11(c)(1)(A) (dealing with plea agreements to predetermined sentences) or from Section 6B1.2 of the United States Sentencing Guidelines (which addresses policy statements on the acceptance of such pleas). Rather, Judge Gleeson concluded that the court’s general supervisory power over criminal cases – to ensure that the integrity and fairness of those proceedings – vested the court with authority to approve or reject the DPA.
In so concluding, Judge Gleeson noted that the government retains “absolute discretion not to prosecute,” and noted that a non-prosecution agreement “is not the business of the courts.” Judge Gleeson further noted that the government “has near-absolute power under Fed. R. Crim. P. 48(a) to extinguish a case that it has brought.” But once the government and the defendant chose to build into their DPA the filing and maintenance of a criminal prosecution – albeit one expected to be held in abeyance – the government gave up its largely unfettered discretion. “There is nothing wrong with that,” Judge Gleeson observed, “but a pending federal criminal case is not window dressing.”
“Nor is the Court,” Judge Gleeson noted, using Brendan Sullivan’s famous observation from the Iran-Contra hearings, “a potted plant.” If the parties chose to seek the court’s imprimatur on the DPA by involving the court in the process, they also subjected the DPA to the review and approval of the court pursuant to its supervisory authority over its proceedings.
Judge Gleeson’s self-described “novel” application of the court’s supervisory powers in this context is part of a pattern of increased judicial scrutiny of certain tools used in obtaining the cooperation of companies that are the focus of criminal investigations. Judge Gleeson noted the recent history of cases in which efforts to gain corporate cooperation had run afoul of companies’ attorney-client privilege and work product protections or its employees’ Fifth or Sixth Amendment rights, and noted that there are other hypothetical situations in which a company’s obligation to cooperate could be used in an improper manner.
Ultimately, Judge Gleeson approved the DPA in this case but also noted that the court’s approval was subject to continued monitoring of its execution and implementation.
If other judges follow Judge Gleeson’s lead, this may signal a change in the way in which prosecutors use DPAs. Historically, a DPA permitted the government to retain virtually unlimited discretion in its dealings with the party that entered into that agreement. To the extent that courts will now be more alert to potential abuses of cooperation arrangements, DPAs may be fairer to companies but may also become less attractive to prosecutors.
In asserting authority to approve or reject a DPA, Judge Gleeson readily acknowledged the broad discretion of the Executive Branch in exercising prosecutorial discretion. But if DPAs continue to incorporate the filing of criminal informations that are then held in abeyance, the courts may indeed be more than just drop-boxes for those filings – or more than just potted plants.
In a unanimous decision, the Supreme Court held last month in United States v. Davila that a guilty plea does not need to be automatically vacated, regardless of whether there has been prejudice to the defendant, when a magistrate judge improperly advises a defendant to plead guilty.
In 2009, Anthony Davila was charged with conspiracy to defraud the United States by filing false income tax returns. While the charges were pending, Davila requested new court-appointed counsel, complaining that his current public defender was telling him to take a guilty plea without advising him about alternative strategies. The Magistrate Judge held a private, closed hearing at which Davila and his attorney, but no representative of the prosecution, appeared. At the hearing, the Magistrate Judge told Davila that the court would not appoint a different lawyer and that, given the strength of the prosecution’s case, it would be wise for him to take a guilty plea. The magistrate offered this advice in violation of Rule 11(c)(1) of the Federal Rules of Criminal Procedure, which states that “[t]he court must not participate in [plea] discussions.”
Three months later, Davila entered a guilty plea before a U.S. District Judge. Before the sentencing hearing, however, Davila backtracked and moved to vacate his plea and dismiss the indictment. He did not mention the magistrate judge’s advice in his motion to vacate, instead stating that he agreed to plead as a “strategic move” that ultimately backfired. Finding that Davila’s plea had been knowing and voluntary, the District Judge denied the motion.
On his appeal to the U.S. Court of Appeals for the Eleventh Circuit, for the first time Davila raised the issue of the magistrate’s improper participation in plea discussions. The Court of Appeals found that the court’s error in weighing in on the plea affected Davila’s substantial rights. This was a key finding, as errors that do not affect substantial rights are considered “harmless” under Rule 11(h) and cannot form the basis for vacating a plea. The Court of Appeals concluded that the magistrate judge’s violation of Rule 11(c)(1) required Davila’s guilty plea to be automatically vacated, without any inquiry into whether the error was prejudicial.
On appeal, however, the U.S. Supreme Court ruled otherwise. In a ruling released on June 13, 2013, the high court found that under Rule 11(h), the court is not required to automatically vacate a guilty plea if the record does not show that the defendant was prejudiced by the violation of Rule 11(c)(1). The Supreme Court concluded that a violation of Rule 11(c)(1) would not undermine the fairness of the entire criminal proceeding such that it would trigger automatic reversal. Rather, in reviewing Rule 11 errors the court must consider the full circumstances of the individual case.
Here, the Supreme Court noted that Davila’s guilty plea was entered three months after the magistrate judge advised him to plead guilty and that the District Judge thoroughly examined and provided Davila the opportunity to raise any questions before accepting his plea. Therefore, in light of the full record, it is possible that a court would not determine it necessary to vacate the plea. The Supreme Court remanded the case to the Eleventh Circuit to review the surrounding circumstances and determine whether it was probable that, but for the Magistrate Judge’s advice, Davila would have decided against entering a guilty plea and would have instead elected to go to trial.
The Supreme Court is generally reluctant to recognize new “structural errors” in trials that require an automatic reversal without an inquiry into the surrounding circumstances. This is understandable, as structural errors are generally fundamental constitutional errors that involve issues such as denial of choice of counsel, denial of self-representation, and denial of a public trial.
While the Supreme Court made the right call in refusing to find that this error required automatic reversal, on remand the Eleventh Circuit must recognize the massive influence that a judge’s words could have on a defendant who is deciding whether to go to trial or take a plea, and weigh that heavily in an analysis of the surrounding circumstances leading to the plea.
When is a committee not a committee? When it is a subcommittee.
More than just a punchline, this is one of the key facts that led a U.S. district judge recently to dismiss charges against an employee of British Petroleum arising from his statements made in response to inquiries from a Congressional subcommittee regarding the BP Horizon oil spill in the Gulf of Mexico.
In United States v. David Rainey, the defendant was charged inter alia with a violation of Title 18, United States Code section 1505, which criminalizes the obstruction of “the due and proper exercise of the power of inquiry under which any inquiry or investigation is being had by either House, or any committee of either House or any joint committee of the Congress.” The charges against Rainey were based upon allegedly false statements that he made to the House Subcommittee on Energy and Environment of the Committee on Energy and Commerce. One basis on which the defendant sought to dismiss the charge against him was the argument that the statute does not include the term “subcommittee” and therefore did not apply to his conduct.
In granting Rainey’s motion to dismiss, U.S. District Judge Kurt D. Engelhardt of the Eastern District of Louisiana emphasized that, “where a criminal defendant’s strict reading of a criminal statute is reasonable, the court is not free to choose among reasonable interpretations the version that (in the court’s view) represents better policy or better accomplishes a perceived broad congressional purpose.” The Court noted that a generic reading of the term “committees” would include subcommittees, as the government argued, but that “[w]ithin Congress, the terms ‘committee’ and ‘subcommittee’ have distinct meanings” and are “terms of art.” Because the Court could not “say with certainty” that Congress intended section 1505 to reach subcommittee inquiries, the Court dismissed the charge under that statute relating to Rainey’s statements to the subcommittee.
To the extent that Congress pursues investigative inquiries through its subcommittees, the Rainey case obviously provides a cautionary tale for prosecutors who seek to bring criminal charges based on the conduct of those who respond to those inquiries. Given that the purpose of Congressional inquiries is not specifically to entrap individuals in criminal conduct, this ruling – even if followed by other courts – is not likely to change the way in which Congress pursues its inquiries. The case is notable, however, as an excellent example of careful parsing of a criminal statute that may be useful to defense counsel seeking to apply the same rule of lenity to other criminal statutes.
Earlier this week, attorneys for convicted computer hacker Andrew “Weev” Auernheimer filed their opening brief in their appeal to the U.S. Court of Appeals for the Third Circuit to have his conviction overturned.
In 2010, Auernheimer’s co-defendant Daniel Spitler, who agreed to plead guilty in 2011, discovered a flaw in AT&T’s iPad user database, that he used to collect 114,000 email addresses. Auernheimer then disclosed those email addresses to Gawker, who published a redacted form of some of the account information. The disclosure of the email addresses attracted significant media attention and ultimately forced AT&T to change their security protocols.
Last November, Auernheimer was found guilty by a jury after a five day trial of violating the Computer Fraud and Abuse Act (CFAA) and conspiracy to gain unauthorized access to a computer without authorization. He was sentenced in March to 41 months imprisonment to be followed by three years of supervised release.
The CFAA prohibits accessing a computer without proper authorization, which is the same statute that Internet activist Aaron Swartz was convicted of violating. The law has faced steep criticism for being overly broad and allowing prosecutors wide discretion by allowing them to charge individuals who have violated a website’s terms of service. Last month “Aaron’s Law” was introduced in Congress, which would amend the CFAA to prevent prosecutors from charging an individual with violation a company’s terms of service and from bringing multiple charges against an individual for the same act.
The government’s brief is due on July 22 and Auernheimer will then have the opportunity to file a reply brief by August 5.
We will know in a matter of months how the Third Circuit will rule on Auernheimer’s appeal and whether his conviction and sentence will be upheld. This case raises some very interesting issues on the scope of computer crime laws and prosecutorial discretion. Is the conduct of Auernheimer the type that we need to devote government resources to send a person with no criminal record to prison for a significant period of time?
For all its benefits, social media has posed some significant challenges for our criminal justice system. One of the more common problems – Internet-related juror misconduct – has been the subject of numerous criminal appeals lately. It has also burdened federal and state governments with added costs for misconduct hearings and retrials. It is no wonder, then, that the Cuyahoga County Prosecutor’s office in Ohio took swift and decisive action when confronted with Internet-related misconduct by one of its own.
Cleveland-area prosecutor Aaron Brockler was recently fired for contacting trial witnesses on Facebook to dissuade them from providing testimony on behalf of defendant Damon Dunn. Dunn was on trial for aggravated murder in connection with a May 2012 shooting, and Brockler was lead prosecutor on the case.
Before trial, the defense team notified Brockler that two of Dunn’s former girlfriends were prepared to provide an alibi for the defendant, testifying that he was on the other side of town when the murder victim was shot. Brockler was concerned that Dunn might walk free, so the prosecutor decided to contact the witnesses on Facebook. First, Brockler created a fake Facebook profile and “friended” the alibi witnesses. In a series of chats, Brockler told the witnesses he was the defendant’s ex-girlfriend and the mother of Dunn’s child. According to Brockler, the women went “crazy” at the news. As a result, one witness decided she would not lie for Dunn, and the other admitted she wasn’t with him when the crime occurred.
The witnesses later complained that they were being harassed on Facebook. Investigators in the Prosecutor’s Office traced the online activity to Brockler’s office computer. Ultimately, Brockler admitted to his online chats with the women, but denied any wrongdoing. According to him, “[l]aw enforcement, including prosecutors, have long engaged in the practice of using a ruse to obtain the truth.” Brockler’s former colleagues disagreed. County Prosecutor Timothy McGinty said it best: “By creating false evidence, lying to witnesses as well as to another prosecutor, Aaron Brockler damaged the prosecution’s chances in a murder case where a totally innocent man was killed at his work.”
After Brockler was fired, the entire prosecutor’s office was recused from the case, and the matter was handed over to the office of Ohio’s attorney general. A pretrial hearing is scheduled for July 11.
Many laypersons are unaware (and many lawyers forget) that, as officers of the court, lawyers are prohibited from making false statements of material fact or law. It is true that in limited circumstances, police officers are permitted to lie to suspects about the nature of the evidence in their possession and similar matters, but police officers are not considered officers of the court and are subject to cross-examination as witnesses; this is not true of prosecutors.
In Ohio, as in every other U.S. jurisdiction, attorneys admitted to the practice of law are required to be truthful. In particular, Rule 4.1(a) of the Ohio Rules of Professional Conduct states that, in the course of representing a client, a lawyer “shall not knowingly . . . make a false statement of material fact or law to a third person.” Lawyers are also bound by certain restrictions on communications with a third party depending on whether or not the third party is represented by counsel.
Brockler’s Facebook chats violated Ohio’s requirement for truthfulness in the course of representation because Brockler conducted the chats using a fake profile. Brockler contacted the defense witnesses by posing as Dunn’s fictitious ex-girlfriend and the mother of Dunn’s child; he used the misrepresentations to foment the witnesses’ anger against the defendant so they would change their testimony or refuse to testify on his behalf.
One could argue that Brockler’s deception seemed to aid the search for truth in Dunn’s case, but the deception might just as easily frustrate the search for truth in another case. The rules avoid this problem by prohibiting a lawyer’s knowing deception across the board.
If Brockler’s ruse had not been discovered, it may have helped him win a conviction. But there are crucial societal values that also must be upheld and that are more important than winning a conviction at all costs.
Very lively oral arguments were held today, June 26, in the U.S. Court of Appeals for the Third Circuit on the New Jersey sports betting law, in a case that will have an enormous impact on the future of sports betting in the United States.
At issue in the case is the federal Professional and Amateur Sports Protection Act of 1992 (PASPA), which prohibits any state from offering sports betting unless that state had a sports betting scheme in place between 1976 and 1990. Last year, New Jersey Governor Chris Christie signed into law a bill authorizing single-game sports betting in the state. In August, the four major professional sports leagues and the National Collegiate Athletic Association (NCAA) filed suit arguing that the state’s sports gambling law was in violation of federal law.
In December 2012, Judge Michael Shipp of the U.S. District Court for the District of New Jersey held oral arguments to determine whether the sports leagues had standing to bring the lawsuit and determined that they did have standing. The U.S. Department of Justice (DOJ) later intervened in the case to defend the constitutionality of the statute. Oral arguments were held in February, and Judge Shipp held that the New Jersey law was invalid as conflicting with PASPA, which he found to be a valid exercise of congressional power. In March, New Jersey filed an appeal with the Third Circuit, appealing both the standing and constitutionality rulings.
Today in the Third Circuit, the judges dictated the path that the oral arguments took for both sides. Ted Olson, a former United States Solicitor General arguing on behalf of New Jersey, began the arguments by stating that PASPA is “plainly unconstitutional.” Olson also argued that the sports leagues did not have standing to bring the lawsuit because they did not meet the Article III requirement that they actually suffered harm from the New Jersey wagering law.
On the issue of anti-commandeering, which could be crucial to the court’s decision on the constitutionality of PASPA, the judges peppered Olson with questions regarding precedent on the issue and whether “commandeering” is limited to instances in which the federal government forces a state to take affirmative steps. There seemed to be some skepticism from the judges that PASPA should be considered an instance of commandeering because New Jersey did not have to do anything to comply with the statute. Olson argued that PASPA is a federal initiative and the responsibility for enforcing it is on the states, thus making this an instance of commandeering.
The issue of state sovereignty was not an issue that New Jersey focused on in the district court or in their briefs in the Third Circuit, but today Olson focused more on the issue by citing Supreme Court decisions that were issued yesterday and today, arguing that those cases support the position that PASPA is a violation of state sovereignty. Olson took contention with the argument made by their opponents in the briefs that the issue of state sovereignty only applies to states that are newly admitted to the Union.
Paul Clement, also a former United States Solicitor General, argued for the sports leagues. He pointed to the Third Circuit’s previous decision in Office of the Commissioner of Baseball v. Markell, a case that he conceded did not directly address standing, to support his position that the leagues have standing in the case. Clement also pointed to other cases, such as copyright cases, that show that the leagues are entitled to protect their product, and in sports wagering, it is their product, the games, that is at issue.
Clement was questioned about the recent Supreme Court decisions and was asked why PASPA was not a violation of state sovereignty. Clement attempted to distinguish the cases by arguing that they did not apply to PASPA because it was passed under the Commerce Clause, which affords the federal government broad powers to regulate interstate commerce. The U.S. Attorney for the District of New Jersey, Paul Fishman, argued on behalf of the federal government and agreed with Clement’s stance that PASPA is distinguishable from those cases.
There is no definitive timetable for a decision in the case, but it may take several months before an opinion is issued. Regardless of the decision reached by the Third Circuit, the losing party will have the option of seeking a rehearing en banc in that court or filing for a writ of certiorari to the United States Supreme Court. However, both these steps are subject to court discretion.
The ruling from the Third Circuit in this case will have far-reaching implications. A decision in New Jersey’s favor would remove the primary hurdle preventing states from offering sports betting within their borders. The panel today left no clear impression about which way they are leaning in their decision. and ultimately it may take a Supreme Court ruling before there is a definitive answer on PASPA.
Two years ago, we anticipated a growing problem with jurors who disregard trial judges’ instructions concerning Internet use. In July 2011, we reported on the first known prosecution of a juror in Great Britain for Internet-related misconduct. Since then, a Florida judge sentenced a Sarasota County juror to three days in jail for criminal contempt. In that case, the juror contacted a civil defendant on Facebook during jury selection and then bragged about his subsequent dismissal after having been seated on the jury. One month later, a New Jersey court found a jury foreman guilty of criminal contempt. In that case, the juror was required to pay a $500 fine for conducting online research into possible penalties the defendant would face if convicted on drug charges.
Kansas has now followed suit. On May 20, 2013, a court in Topeka found James Reeder guilty of criminal contempt for posting online comments while serving as a juror in a murder trial. The trial involved Anceo Stovall, one of nine defendants charged with felony murder and robbery in connection with the shooting death of a Kansas attorney and the wounding of her companion. Stovall also faced charges for unrelated crimes, including burglary of a vehicle and aggravated robbery of a co-defendant. Throughout the month-long trial, the trial judge instructed jurors not to “seek out and read any media accounts” about the crime or the trial.
Reeder didn’t heed the instruction. Soon after the jury began deliberating, Reeder visited the Topeka Capital-Journal’s website and read an article about the case. On July 21, Reeder posted a comment to the site using the pseudonym “BePrepared.” In response to another commenter, Reeder wrote, “Trust me that’s all they got in their little world, as you, I have been there. Remember the pukes names they will do it for ever [sic].”
Three days later, the jury announced that it could not reach a verdict on nine counts related to the felony murder. On the unrelated charges, Stovall was found guilty of aggravated robbery and not guilty of burglary. He requested a new trial on the robbery charge. Among other things, Stovall alleged juror misconduct based on evidence that Reeder had reviewed and commented on trial-related news in violation of the judge’s orders. As a result, Stovall’s robbery conviction was overturned and his motion for new trial granted. Months later, Stovall entered a plea deal and was sentenced to almost 11 years in prison.
Reeder appeared in court last month for his contempt hearing, arguing that his online post had not caused any harm. In one sense, his argument had appeal. The jury failed to reach a verdict on nine charges, so the case was going to be retried regardless. Additional costs for retrying the robbery charge would have been marginal. On the other hand, it was at least possible that Reeder’s misconduct had prevented the jury from reaching a unanimous decision on every count.
The trial judge didn’t care either way. In her view, “[t]here is great harm that results when someone in Mr. Reeder’s position of great trust violates in this way.” Having found the juror guilty of indirect criminal contempt, the court ordered him to pay a $1,000 fine or spend three days in jail. No doubt, the trial judge intends to send a message: jurors like “BePrepared” should be prepared to follow her instructions on Internet use or deal with the consequences.
On May 28, 2013, federal prosecutors unsealed an indictment charging seven men with allegedly operating an organization known as “Liberty Reserve,” which prosecutors allege was established for the sole purpose of creating an illegal digital currency that could be used to launder money. This is a case that anyone involved in businesses that rely in any way on bitcoins will definitely want to watch.
Prosecutors say that Liberty Reserve was used to aid in identity theft, computer hacking, and other illegal activities. The indictment alleged that Liberty Reserve was responsible for laundering more than $6 billion over the last seven years through 55 million transactions. The company allegedly has about one million users across the globe, including 200,000 in the United States.
The indictment comes just a few months after the Financial Crimes Enforcement Network (FinCEN), a branch of the United States Department of the Treasury, issued new guidelines stating that virtual currency exchanges should follow traditional money laundering rules. Virtual currencies, such as the well-known bitcoin, account for only a small percentage of global financial transactions, but their popularity is growing rapidly.
Like bitcoin, Liberty Reserve operated as a virtual currency exchange; however, there are some key differences between bitcoin exchanges and Liberty Reserve. Bitcoin transactions operate in a more transparent way than transactions on Liberty Reserve did. Bitcoin transactions are stored in a public ledger called a “block chain” to keep people from writing the equivalent of a bad check with bitcoins. It is that same public block chain that makes it possible to trace transactions years after they have occurred.
Earlier this month, federal authorities cracked down on Mt. Gox, the world’s largest bitcoin exchange. The basis of the crackdown on Mt. Gox was a failure to properly register as a money transmitter. There were no allegations by law enforcement that bitcoin currency itself violated state or federal law. Indeed, the Treasury Department regulations reflect that such currency is lawful, but subject to regulation.
This month’s actions by federal authorities against Mt. Gox and Liberty Reserve clearly show that law enforcement is monitoring virtual currency exchanges. Although there is no immediate reason to believe that a properly registered bitcoin exchange violates state or federal law, those companies operating virtual currency or bitcoin exchanges should be aware that law enforcement is following this trend and capable of quickly reacting to perceived violations of the law.
On May 31, the House Committee on Judiciary Over-Criminalization Task Force will begin a six-month investigation to determine whether the U.S. Code over-criminalizes relatively minor conduct. The bipartisan task force, composed of five Republicans and five Democrats, will conduct hearings and review thousands of federal criminal statutes for purposes of recommending consensus-based improvements to federal criminal law.
Legislators of all political stripes recognize the need for reform. Experts estimate that the U.S. Code contains 4,500 federal crimes and up to 300,000 regulations that provide for the imposition of criminal penalties. One-third of all federal criminal statutes were added to the U.S. Code within the last 30 years. This recent explosion in federal criminal law has added significant costs for prosecution, resolution, and incarceration. Sometimes Congress enacts new laws that overlap with existing state law, thus transferring enforcement costs from the states to the federal government.
Over-criminalization also burdens individuals. Indeed, the labyrinth of federal criminal statutes and regulations seriously undermines a basic tenet of criminal law — that people should have fair notice of what is against the law. Stories abound to show that the presumption can be as unrealistic as the real-world consequences are devastating:
• In 2003, Texas senior citizen George Norris was indicted in Miami for importing mislabeled orchids in violation of an international treaty as implemented by the Endangered Species Act. After pleading guilty to the charges, Norris was sentenced to 17 months in prison — part of which he served in solitary confinement — and two years of supervised release. He was also ordered to pay an assessment of $700. Although he had no prior record, the orchid-gardener-turned-felon cannot vote, own a gun, or keep alcohol in his home.
• In 2007, Lawrence Lewis was charged with discharging pollutants in violation of the Clean Water Act. Formerly the chief engineer at a military retirement home near D.C., Lewis made the ill-advised but well-intentioned decision to divert backed-up sewage into an outside storm drain to prevent flooding in an area where the military home’s most vulnerable residents lived. Lewis mistakenly believed that the storm drain emptied into a waste-treatment facility; instead, the drain emptied into a creek that feeds the Potomac River. Lewis decided the risks associated with fighting the charge were too great, so he pleaded guilty. He was sentenced to probation and ordered to pay a $2,500 fine.
• In 2011, 11-year old Skylar Capo rescued a baby woodpecker near Fredericksburg, Va. Two weeks later, an employee of the U.S. Fish and Wildlife Service traveled to the girl’s home to cite her for violation of the Migratory Bird Treaty Act, a misdemeanor punishable by up to six months in jail, a fine, or both. The federal agent confirmed that Skylar had already released the bird and canceled the citation. But the automated system processed the citation anyway, so Skylar received a notice requiring her to pay a $535 fine and threatening possible jail time. Although the Fish and Wildlife Service apologized for the error, the case illustrates the potential for abuse that exists due to over-criminalization.
No doubt, the task force will investigate ways to minimize such absurd results. It remains to be seen whether the investigation will produce meaningful change. On one hand, there is reason for hope: efforts to address over-criminalization have broad support among Republicans, Democrats, and a diverse coalition of groups including the Heritage Foundation, Cato Institute, the National Association of Criminal Defense Lawyers, the American Civil Liberties Union, and the American Bar Association.
On the other hand, history suggests that change will not come easy. The House Subcommittee on Crime, Terrorism, and Homeland Security conducted a hearing on over-criminalization almost four years ago, but congressional efforts to address the problem never gained traction. For example, current Task Force member Jim Sensenbrenner (R-Wis.) is a sponsor of the Criminal Code Modernization and Simplification Act, which would reduce the federal criminal code by one-third and otherwise consolidate and streamline federal criminal law.
Sensenbrenner introduced versions of the bill in 2006, 2007, 2009, and 2011, but none was enacted. He reportedly intends to reintroduce the bill this year. If the task force and its supporters are able to raise awareness of how over-criminalization burdens society and individual liberties, legislators on both sides of the aisle may find the political capital they need to get something done.