United States v. Yusuf

Opinions of the United

2008 Decisions States Court of Appeals

for the Third Circuit

6-17-2008

USA v. Yusuf

Precedential or Non-Precedential: Precedential

Docket No. 07-3308

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 07-3308

UNITED STATES OF AMERICA;

GOVERNMENT OF THE VIRGIN ISLANDS,

Appellant

v.

FATHI YUSUF MOHAMMED YUSUF

a/ka FATHI YUSUF;

WALEED MOHAMMED HAMED a/k/a WALLY HAMED;

WAHEED MOHAMMED HAMED a/k/a WILLIE YUSUF;

MAHER FATHI YUSUF a/k/a MIKE YUSUF;

ISAM MOHAMAD YOUSUF a/k/a SAM YOUSEF;

UNITED CORPORATION, d/b/a PLAZA EXTRA;

NEJEH FATHI YUSUF

On Appeal from the District Court of the Virgin Islands

(Division of St. Croix)

(District Court No. 05-cr-00015)

District Judge: Hon. Raymond L. Finch

Argued December 11, 2007

Before: SMITH, NYGAARD and ROTH, Circuit Judges

(Opinion filed: June 17, 2008)

Richard T. Morrison, Esquire

Acting Assistant Attorney General

S. Robert Lyons, Esquire (Argued)

Anthony J. Jenkins, Esquire

Alan Hechtkopf, Esquire

United States Attorney

United States Department of Justice

Tax Division

P. O. Box 502

Washington, D. C. 20044

Counsel for Appellant

Gordon C. Rhea, Esquire (Argued)

Richardson, Patrick, Westbrook & Brickman, LLC

1037 Chuck Dawley Boulevard, Building A

Mt. Pleasant, SC 29464

Counsel for Appellee

2

Randall P. Andreozzi, Esquire

Marcus, Andreozzi, Fickess, LLP

6255 Sheridan Way, Suite 302

Williamsville, NY 14221

Pamela L. Colon, Esquire

27 & 28 King Cross Street

Christiansted, St. Croix

USVI, 00820

John K. Dema, Esquire

1236 Strand Street, Suite 103

Christiansted, St. Croix

USVI, 00820

Derek M. Hodge, Esquire

Mackay & Hodge

P. O. Box 303678

Charlotte Amalie, St. Thomas

USVI, 00803

Thomas Alkon

Alkon & Meaney

2115 Queen Street, Suite 101

Christiansted, St. Croix

USVI, 00820

Counsel for Appellee

3

Henry C. Smock, Esquire

Smock Law Offices

Palm Passage, Suite B18-23

P. O. Box 1498

Charlotte Amalie, St. Thomas

USVI, 00804

Counsel for Appellee

OPINION

ROTH, Circuit Judge:

The government has appealed the District Court’s pre-

trial order, dismissing from the indictment various counts and

allegations based on international money laundering.1 The

narrow issue on appeal is 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). We hold that such unpaid taxes are

“proceeds” of mail fraud for purposes of sufficiently stating an

1

The government also appeals from the District Court’s

order to release notices of lis pendens with respect to various

properties listed in the indictment.

4

international money laundering offense. For this reason, we will

vacate the orders of the District Court and remand the case for

further proceedings consistent with this opinion.

I. Background

Because we have previously outlined the facts of this

case in United States v. Yusuf, 461 F.3d 374 (3d Cir. 2006) and

United States v. Yusuf, 199 Fed.Appx. 127 (3d Cir. 2006), we

recite only those facts pertinent to our analysis in this particular

appeal.

There are seven defendants in this case: (1) United

Corporation, a family-owned business located in the Virgin

Islands that operates a chain of three Plaza Extra Supermarket

stores in St. Thomas and St. Croix; (2) Fathi Yusuf, the primary

shareholder of United; (3) Maher “Mike” Yusuf, Fathi’s son,

who is a part-owner of United and manager of one of the Plaza

Extra stores; (4) Waheed “Willie” Hamed, Fathi’s nephew, who

manages the second Plaza Extra store; (5) Waleed “Wally”

Hamed, Fathi’s nephew and Waheed's brother, who manages the

third Plaza Extra store; (6) Isam “Sam” Yousef, Fathi’s nephew,

who is a resident of St. Maarten, Netherlands Antilles, and owns

and operates a retail furniture and appliances store; and (7)

Nejeh Fathi Yusuf, Fathi’s son, who is an owner and employee

of United and who participated in the operation of the Plaza

Extra stores.

Because defendant United conducts business through its

Virgin Islands supermarkets, it is required to comply with

statutorily-mandated monthly reporting of gross receipts and

5

payment of tax on those receipts. Section 43(a), Title 33, of the

Virgin Islands Code provides, in pertinent part, that “[e]very

individual and every firm, corporation, and other association

doing business in the Virgin Islands shall report their gross

receipts and pay a tax of four percent (4%) on the gross receipts

of such business.” 33 V.I.C. § 43(a) (emphasis added). Section

44(c) provides for monthly returns and payments and states that

“[t]he returns and payments required by this subsection shall be

due within 30 calendar days following the last day of the

calendar month concerned.” 33 V.I.C. § 44(c). Thus, taxes

imposed on United’s gross sales receipts from its supermarkets

during a particular month were due and payable on the last day

of the following month.

In July 2001, the Federal Bureau of Investigation (FBI)

received a suspicious activity report from the Bank of Nova

Scotia in St. Thomas, U.S. Virgin Islands. The report stated

that, over a four day period in April 2001, $1,920,000 (in $50

and $100 bills) was deposited into United’s bank account. The

FBI began an investigation which revealed that defendants

allegedly conspired to avoid reporting $60,000,000 of the

supermarkets’ gross receipts on United’s Virgin Islands gross

receipts monthly tax returns and failed to pay the Virgin Islands

government the 4% tax that United owed on those unreported

gross receipts.2 The investigation further revealed that

2

Specifically, after Plaza Extra Supermarkets’ sales receipts

were collected each day, the funds were typically transferred to

the “cash room,” to which only certain individuals, including

defendants, were permitted access. In the cash room, Plaza

6

defendants allegedly engaged in various efforts to disguise and

conceal the illegal scheme and its proceeds.3 Such efforts

included allegedly depositing these monies into bank accounts,

controlled by defendants, outside of the United States.

On September 9, 2004, a grand jury in the Virgin Islands

returned a seventy-eight count, superseding 4 indictment,

charging various counts relating to mail fraud, tax evasion, and

Extra employees counted the sales receipts and prepared bank

deposit slips. The indictment alleged that defendants directed

the employees to withhold from deposit substantial amounts of

cash received from sales, typically in denominations of $100,

$50, and $20. Instead of being deposited into the bank accounts

with other sales receipts, this cash was allegedly delivered to

one of the defendants or placed in a designated safe in the cash

room. The indictment further alleged that, from 1996 through

2001, tens of millions of dollars in cash was withheld from

deposit in this manner and was not reported as gross receipts on

both Virgin Islands and federal tax returns filed by United.

3

For example, with the unreported cash, defendants allegedly

purchased, and directed other individuals to purchase, cashier’s

checks, traveler’s checks, and money orders, typically from

different bank branches and made payable to outside parties, in

order to disguise the cash as legitimate financial instruments and

to evade federal record-keeping mandates.

4

The grand jury handed down the original indictment in this

case on September 18, 2003.

7

international money laundering.5 At Counts 3 through 43, the

indictment charged forty mail fraud offenses, in violation of 18

U.S.C. § 1341, alleging in paragraphs 30 and 31 as follows:

Beginning at least as early as in or about

January 1996 and continuing through at least in or

about September 2002, in the District of the

Virgin Islands and elsewhere, [defendants]

knowingly and willfully devised and intended to

devise a scheme and artifice to defraud and to

obtain money and property, specifically money

5

The charges included conspiracy to commit mail fraud and

structure financial transactions, in violation of 18 U.S.C. § 371

(Count 1); conspiracy to commit money laundering, in violation

of 18 U.S.C. § 1956(h), (a)(2)(B)(i) (Count 2); mail fraud, in

violation of 18 U.S.C. § 1341 (Counts 3-43); international

money laundering, in violation of 18 U.S.C. § 1956(a)(2)(B)(I)

(Counts 44-52); structuring financial transactions, in violation

of 31 U.S.C. § 5324(a)(3), (d)(2) (Counts 53, 54, 77);

conspiracy to evade taxes, in violation of 33 V.I.C. § 1522

(Count 55); causing the filing of false tax returns, in violation of

33 V.I.C. § 1525(2) (Counts 56-60); causing the filing of false

tax returns, in violation of § 26 U.S.C. § 7206(2) (Counts 61-

74); engaging in criminal enterprise, in violation of 14 V.I.C. §

605(a) (Count 75); conspiracy to engage in a criminal enterprise,

in violation of 14 V.I.C. § 605(d) (Count 76); and obstruction of

justice, in violation of 18 U.S.C. § 1503. The indictment further

contained an asset forfeiture allegation, pursuant to 18 U.S.C. §

982, 21 U.S.C. § 853, and 14 V.I.C. § 606.

8

belonging to the Virgin Islands in the form of

territorial gross receipts tax revenue, by means of

material false and fraudulent pretenses,

representations and promises, knowing that the

pretenses, representations and promises were false

when made, as more particularly described in

paragraphs 9 through 12 and 14 through 20 6 of

this Indictment.

On or about the dates specified in each

count below, the defendants, for the purpose of

executing and attempting to execute and in

furtherance of the aforesaid scheme and artifice to

defraud and for obtaining money and property by

means of material false and fraudulent pretenses,

representations and promises, did knowingly

cause to be sent and moved by the United States

Postal Service, at the East End United States Post

Office in St. Thomas, Gross Receipts Monthly

Tax Returns, Forms 720 V.I., addressed to the

6

Paragraphs 9 through 12 alleged that defendants “defrauded

the Virgin Islands of money in the form of tax revenue,

specifically territorial gross receipts taxes [owed by United ] as

well as corporate income taxes [owed by United], by failing to

report at least $60 million in Plaza Extra sales on gross receipts

tax returns and corporate income tax returns” filed by United.

Paragraphs 14 through 20 alleged that defendants concealed the

fraud and its proceeds by smuggling checks and currency and by

structuring cash transactions to evade reporting requirements.

9

Virgin Islands Bureau of Internal Revenue, St.

Thomas, Virgin Islands, 00802.

At Counts 44-52, the indictment charged nine substantive

international money laundering offenses, in violation of 18

U.S.C. § 1956(a)(2)(B)(i), alleging in paragraph 33 as follows:

On or about the dates listed in each count

below, in the District of the Virgin Islands and

elsewhere, the [defendants] transported and

transferred, and attempted to transport and

transfer, monetary instruments and funds in

amounts described below from a place in the

United States, specifically the United States

Virgin Islands, to and through a place outside the

United States, specifically, Amman, Jordan,

knowing that the monetary instruments and funds

involved in the transportation and transfer

represented the proceeds of some form of

unlawful activity and knowing that such

transportation and transfer was designed in whole

or in part to conceal and disguise the nature,

location, source, ownership, and control of the

proceeds of a specified unlawful activity, that is,

mail fraud, in violation of Title 18, United States

Code Section 1341.

Thus, the indictment relied on mail fraud as the predicate

offense, or “specified unlawful activity,” to support the money

laundering charges against defendants. See 18 U.S.C. §

1956(a)(2)(B)(i).

10

Defendants moved to dismiss the substantive money

laundering charges on the basis that any unpaid taxes disguised

and retained as a result of filing false tax returns through the

U.S. mail do not equate to “proceeds” of mail fraud and,

accordingly, Counts 44 through 52, charging money laundering,

failed to state an offense. On February 13, 2007, the District

Court granted the motion and dismissed the nine substantive

money laundering counts for failure to state an offense. For the

same reason, the District Court also dismissed the charge of

money laundering conspiracy (Count 2); struck from two

structuring counts the sentence-enhancing allegations grounded

upon money laundering (Counts 53 and 54); and dismissed

paragraphs of Criminal Forfeiture Allegation 1, which were

grounded upon money laundering. The District Court reasoned

as follows:

Defendants contend that a tax savings resulting

from filing false tax returns does not “represent

the proceeds of some form of unlawful activity,”

and that, therefore, Counts 44 through 52 fail to

state an offense. In the Third Circuit, “‘proceeds’

as that term is used in § 1956 means simply gross

receipts from illegal activity.’” United States v.

Grasso, 381 F.3d 160, 169 (3d Cir. 2004)

[overruled by United States v. Santos, _S.Ct._,

2008 WL 2229212 (U.S. June, 2, 2008)].

“‘[P]roceeds’ are something which is obtained in

exchange for the sale of something else as in,

most typically, when one sells a good in exchange

for money.” United States v. Maali, 358

F.Supp.2d 1154, 1158 (M.D. Fla. 2005)[,] [aff’d

11

sub nom. United States v. Khanani, 502 F.3d 1281

(11th Cir. 2007)]. The Court agrees with the final

analysis in Maali, that “[h]aving ascertained the

plain and ordinary definition of ‘proceeds,’ it is

clear that the term does not contemplate profits or

revenue indirectly derived . . . from the failure to

remit taxes.” Id. at 1160. The cost savings theory

was also rejected in Anderson v. Smithfield Foods,

Inc., 209 F.Supp.2d 1270, 1275 (M.D. Fla. 2002):

The money that Defendants

allegedly illegally obtained to

violate RICO and environmental

laws, and to allegedly commit mail

and wire fraud, was money that

D efendants legally obtained

through the operation of its

business. Saving money as a result

of the alleged noncompliance with

the requirements of an

environmental statute does not

make the money illegally obtained

for the purposes of the money

laundering statute.

The mailing of the allegedly false gross tax

returns did not result in proceeds, as that term is

commonly interpreted. Accordingly, [the counts

charging money laundering] are dismissed for

failure to state an offense.

12

Accordingly, in the District Court’s view, the tax savings (i.e.,

unpaid taxes) cannot be considered “proceeds” of mail fraud

because such tax savings (1) represented a percentage of

unreported gross receipts that were lawfully obtained in the day

to day business of Plaza Extra Supermarket, and, thus, such tax

savings cannot thereafter be categorized as “proceeds” from an

unlawful activity; and (2) were merely retained, rather than

obtained, money resulting from defendants’ noncompliance with

the Virgin Islands’ gross receipts reporting statute.

On June 25, 2007, the District Court denied the

government’s motion for reconsideration and ordered the

government to release its notices of lis pendens with respect to

various properties listed in the indictment. The government

appealed the February 13 order dismissing the substantive

money laundering counts (and paragraphs) and the two June 25

orders denying reconsideration and ordering release of the

notices of lis pendens.

III. Jurisdiction and Standard of Review

The District Court had subject matter jurisdiction

pursuant to 18 U.S.C. § 3231 and 48 U.S.C. § 1612(c). We have

jurisdiction under 18 U.S.C. § 3731 and 28 U.S.C. § 1294(3).

The “sufficiency of an indictment to charge an offense is

a legal question subject to plenary review.” United States v.

Conley, 37 F.3d 970, 975 n.9 (3d Cir. 1994). “An indictment is

generally deemed sufficient if it: (1) contains the elements of the

offense intended to be charged, (2) sufficiently apprises the

defendant of what he must be prepared to meet, and (3) allows

13

the defendant to show with accuracy to what extent he may

plead a former acquittal or conviction in the event of a

subsequent prosecution.” United States v. Rankin, 870 F.2d

109, 112 (3d Cir. 1989) (internal quotation marks and citations

omitted). An indictment does not state an offense sufficiently

if the specific facts that it alleges “fall beyond the scope of the

relevant criminal statute, as a matter of statutory interpretation.”

United States. v. Panarella, 277 F.3d 678, 685 (3d Cir. 2002).

IV. Discussion

There is no dispute that the indictment sufficiently

alleges mail fraud, pursuant to 18 U.S.C. § 1341. There is also

no dispute that mail fraud is a predicate offense for a charge of

international money laundering, pursuant to 18 U.S.C. §§

1956(a)(2)(B)(i) (elements of international money laundering) 7 ,

7

The federal money laundering statute, 18 U.S.C. §

1956(a)(2), provides:

Whoever transports, transmits, or transfers, or

attempts to transport, transmit, or transfer a

monetary instrument or funds from a place in the

United States to or through a place outside the

United States or to a place in the United States

from or through a place outside the United States

...

(B) knowing that the monetary

instrument or funds involved in the

transportation, transmission, or

transfer represent the proceeds of

14

1956(c)(7)(A) (the term “specified unlawful activity” includes

any racketeering activity under RICO) and 1961(1)(B) (mail

fraud is a racketeering activity)8 . The narrow issue in this

appeal is whether unpaid taxes 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 an offense for money laundering.

some form of unlawful activity and

knowing that such transportation,

transmission, or transfer is designed

in whole or in part--

(i) to conceal or

disguise the nature,

the location, the

source, the

ownership, or the

control of the

proceeds of specified

unlawful activity; . . .

shall be sentenced to a fine of not more than

$500,000 or twice the value of the monetary

instrument or funds involved in the transportation,

transmission, or transfer whichever is greater, or

imprisonment for not more than twenty years, or

both.

18 U.S.C. § 1956(a)(2)(B)(i) (emphasis added).

8

Under 18 U.S.C. § 1961(1), mail fraud is a “specified

unlawful activity,” but tax fraud simpliciter is not.

15

As a threshold matter, we first address the District

Court’s view that funds originally procured through lawful

activity can be classified only as proceeds of that lawful activity

and cannot thereafter be converted into proceeds of a specified

unlawful activity.

Although the federal money laundering statute does not

define what constitutes “proceeds” of a specified unlawful

activity, see United States v. Santos, _S.Ct._, 2008 WL

2229212, at *4 (U.S. June, 2, 2008), it specifically identifies

which criminal offenses constitute “specified unlawful

activities.” 18 U.S.C. § 1956(c)(7). The term “specified

unlawful activity” covers a broad array of offenses.9 For

example, the fraudulent concealment of a bankruptcy estate’s

assets is categorized as a “specified unlawful activity.” See 18

U.S.C. §§ 1956(c)(7)(A), 152(1) (criminalizing the concealment

of assets relating to § 152). Thus, property which is required to

be included in a bankruptcy debtor’s estate but is instead

undeclared, and thus retained, is “proceeds” of a bankruptcy

fraud offense under 18 U.S.C. § 152(1). United States v.

Brennan, 326 F.3d 176, 190 (3d Cir. 2003) (the defendant,

debtor-in-possession, transferred bonds belonging to the

9

That term is defined, in pertinent part, by reference to those

criminal activities that constitute racketeering under RICO. 18

U.S.C. § 1956(c)(7)(A) (“”[T]he term ‘specified unlawful

activity’ means any act or activity constituting an offense listed

in section 1961(1) of this title . . ..”). As previously noted, mail

fraud is categorized as a racketeering act and thus falls within

the purview of the money laundering statute.

16

bankruptcy estate to a third person who cased the bonds and

invested the proceeds for the defendant’s benefit). Moreover,

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. See

United States v. Ladum, 141 F.3d 1328, 1340 (9th Cir. 1998)

(sustaining money laundering conviction where the defendant

concealed rental income derived from lawfully operated retail

stores); United States v. Levine, 970 F.2d 681, 686 (10th Cir.

1992) (sustaining money laundering conviction where the

defendant concealed corporate tax refund checks deposited in a

hidden bank account). Accordingly, we reject the suggestion

that to qualify as “proceeds” under the federal money laundering

statute, funds must have been directly produced by or through a

specified unlawful activity, and we agree that funds retained as

a result of the unlawful activity can be treated as the “proceeds”

of such crime.

Furthermore, the Supreme Court, in United States v.

Santos, recently clarified that the term “proceeds,” as that term

is used in the federal money laundering statute, applies to

criminal profits, not criminal receipts, derived from a specified

unlawful activity. 2008 WL 2229212, at * 5 (applying the rule

of lenity to interpret the ambiguous term “proceeds” to mean

“profits” of a criminal activity rather than “receipts”). In

Santos, the defendants were convicted of violating 18 U.S.C. §

1956(a)(1)(A)(i)–the subsection of the federal money laundering

statute that criminalizes financial transactions using the proceeds

of a specified unlawful activity with the intent to promote the

carrying on of such activity. The Supreme Court affirmed the

trial court’s decision to vacate the money laundering convictions

17

because the transactions on which such convictions were based

involved the gross receipts, as opposed to the profits, of the

specified unlawful activity–the operation of an illegal lottery.10

The Supreme Court reasoned that the transactions upon which

the money laundering charges were based could not be

considered to have involved “proceeds” of the illegal lottery’s

operation because such transactions involved the mere payment

of the illegal operation’s expenses rather than the operation’s

profits.11 Santos, 2008 WL 2229212, at * 6. Accordingly, we

10

In that case, defendant Santos operated an illegal lottery.

He employed individuals known as “runners” to collect the

gamblers’ bets. Upon receipt of the bets, the runners retained a

small portion as their commission and handed over the

remaining money to individuals known as “collectors,” one of

whom was defendant Diaz. The collectors would then deliver

such money to Santos, who used a portion of it to pay the

collectors’ salaries and pay the winners. The payments to the

runners, collectors, and winners were identified in an indictment

as the “transactions” upon which money laundering charges

were based under 18 U.S.C. § 1956(a)(1)(A)(i) (criminalizing

transactions which promote criminal activity).

11

The Supreme Court reasoned as follows:

Transactions that normally occur during the

course of running a lottery are not identifiable

uses of profits and thus do not violate the money-

laundering statute. More generally, a criminal

who enters into a transaction paying the expenses

of his illegal activity cannot possibly violate the

18

recognize that the Supreme Court’s holding in Santos overrules

this Court’s decision in United States v. Grasso, which was

relied upon by the District Court. Grasso, 381 F.3d 160, 169

(3d Cir. 2004) (holding that “‘proceeds,’ as that term is used in

the money laundering statute, means gross receipts [from illegal

activity] rather than profits”).

Moreover, we have previously determined that “proceeds

are derived from an already completed offense, or a completed

phase of an ongoing offense, before they can be laundered.”

United States v. Conley, 37 F.3d 970, 980 (3d Cir. 1994).

Having thus elucidated the definition of “proceeds,” we

will next consider how the term “proceeds” relates to the

predicate offense of mail fraud. The mail fraud statute provides:

Whoever, having devised or intending to

devise any scheme or artifice to defraud, or for

obtaining money or property by means of false or

fraudulent pretenses, representations, or promises

. . . for the purpose of executing such scheme or

artifice or attempting so to do, places in any post

office or authorized depository for mail matter,

any matter or thing whatever to be sent or

money-laundering statute, because by definition

profits consist of what remains after expenses are

paid. Defraying an activity’s costs with its

receipts simply will not be covered.

Santos, 2008 WL 2229212, at * 6.

19

delivered by the Postal Service . . . shall be fined

under this title or imprisoned not more than 20

years, or both.

18 U.S.C. § 1341. Stated plainly, the elements necessary to

establish the offense of mail fraud are (1) a scheme or artifice to

defraud for the purpose of obtaining money or property and (2)

use of the mails in furtherance of the scheme. Therefore, once

these two requirements are met, mail fraud has been committed.

The Supreme Court has previously interpreted the

elements of mail fraud. A scheme to defraud need not

contemplate the use of mails as an essential part of the scheme

so long as the mailing is “incident to an essential part of the

scheme.” Schmuck v. United States, 489 U.S. 705, 710-11

(1989) (citing Pereira v. United States, 347 U.S. 1, 8 (1954) and

quoting Badders v. United States, 240 U.S. 391, 394 (1916)).

Under the mail fraud statute, the mailing must be for the

“purpose of executing the scheme.” 12 Kann v. United States,

323 U.S. 88, 94 (1944). Furthermore, a mailing cannot be said

to be in furtherance of a scheme to defraud, nor can a mailing be

12

In Kann, the defendants cashed fraudulently obtained

checks at various banks, knowing that the checks would be

forwarded to a drawee bank for collection. The Supreme Court

found that the mailing was not material to the consummation of

the scheme and thus concluded that there was no mail fraud.

323 U.S. at 94 (“It cannot be said that the mailings in question

were for the purpose of executing the scheme, as the statute

requires.”).

20

considered even incident to an essential part of the scheme,

when it occurs after the scheme has reached fruition. Id. at 94-

95.

In Schmuck, the defendant was a used-car distributor who

purchased used cars, rolled back their odometers and sold the

vehicles to retail dealers at prices he was able to inflate by

reason of the low-mileage readings. The dealers, unaware of the

fraud, resold the automobiles to their customers, who also paid

inflated prices. The Supreme Court held that the mailing

element was satisfied by the dealers' mailings of title application

forms to the state of Wisconsin on behalf of the customers,

explaining that “a rational jury could have found that the

title-registration mailings were part of the execution of the

fraudulent scheme, a scheme which did not reach fruition until

the retail dealers resold the cars and effected transfers of title.”

Schmuck, 489 U.S. at 712. Finding that the scheme would have

come to an end if the dealers had lost faith in the distributor or

were unable to re-sell the cars, the Court concluded that

“although the registration-form mailings may not have

contributed directly to the duping of either the retail dealers or

the customers, they were necessary to the passage of title, which

in turn was essential to the perpetuation of Schmuck's scheme.”

Id.

Moreover, in United States v. Morelli, we affirmed a

district court’s judgments of conviction and sentence and

concluded that unpaid taxes that were unlawfully disguised and

retained constituted “proceeds” of wire fraud for purposes of

21

supporting a conviction on a federal money laundering charge.13

169 F.3d 798, 806 (3d Cir. 1999) The defendant in Morelli was

involved in a “daisy chain” 14 scheme which included a series of

13

Wire fraud, like mail fraud, is a racketeering activity and

thus a predicate offense for money laundering. See 18 U.S.C. §§

1956(a)(2)(B)(i), (c)(7)(A); see also 18 U.S.C. §1961(1). The

federal wire fraud statute, 18 U.S.C. § 1343, is nearly identical

to the federal mail fraud statute. See Morelli, 169 F.3d at 806

(stating that “[w]ire fraud consists of (1) a scheme to defraud

and (2) a use of a wire transmission for the purpose of

executing, or attempting to execute, the scheme”); see also id.

at 806 n.9 (explaining that the federal wire fraud and mail fraud

statutes “differ only in form, not in substance, and cases...

interpreting one govern the other as well”); see also United

States v. Tarnopol, 561 F.2d 466, 475 (3d Cir.1977) (“[T]he

cases interpreting the mail fraud statute are applicable to the

wire fraud statute as well.”).

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The elements of “daisy chain” schemes have previously

been detailed in this circuit and others. See, e.g., United States

v. Sertich, 95 F.3d 520, 522 (7th Cir.1996), cert. denied, 519

U.S. 1113 (1997); United States v. Veksler, 62 F.3d 544, 547 (3d

Cir.1995); United States v. Macchia, 35 F.3d 662, 665-66 (2d

Cir.1994); United States v. Victoria-21, 3 F.3d 571, 573 (2d

Cir.1993); In re Assets of Martin, 1 F.3d 1351, 1353 (3d

Cir.1993); United States v. Tarricone, 996 F.2d 1414, 1416-17

(2d Cir.1993); United States v. Aracri, 968 F.2d 1512, 1514-17

(2d Cir.1992); United States v. Musacchia, 900 F.2d 493,

495-96 (2d Cir.1990), vacated, 955 F.2d 3 (2d Cir.1991).

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transactions that resulted in the embezzlement of excise taxes

from fuel sales. The “daisy chain” scheme operated as follows:

The particular scheme in which the

defendants participated was termed “the

Association.” The Association organized a group

of companies, all of which it controlled, into a

“daisy chain,” for the purpose of embezzling the

excise taxes on the sale of certain kinds of fuel.

Typically, the companies would sell oil down the

chain in a series of paper transactions, through

what was referred to as the “burn company.”

Eventually, the company at the bottom of the

chain, the “street company,” would sell the oil to

a legitimate retailer, i.e., a particular gas station,

for a price slightly below the tax-included market

price. This retailer would pay money to the street

company, which would send money back up the

chain in a series of wire transfers.

This scheme was illegal because it was set

up as a means to avoid excise taxes. The daisy

chain was established so that the burn company

was the one legally responsible for collecting the

excise taxes on the fuel sales and transmitting

them to the government. In the Association's

scheme, the burn company would collect the taxes

for a time, and then disappear without ever paying

the taxes to the government. As a result, the

Association could keep the money representing

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the excise taxes without the government being

able to determine where it had gone.

Id. at 803. On appeal, the defendant claimed that the money

represented the “proceeds” of tax fraud, not the “proceeds” of a

wire fraud, because the wiring itself had nothing to do with the

Association’s coming into possession of the money. We did not

agree.

In affirming the trial court’s judgments of conviction and

sentence on the money laundering charge, we held that the

money wired up through the “daisy chain” constituted

“proceeds” of wire fraud based on the nature of the entire

ongoing fraudulent scheme. 169 F.3d 806-07. We reasoned as

follows:

We think the money was the proceeds of

the entire ongoing fraudulent venture in which the

Association engaged in creating the daisy chain

scheme, and that this venture was a wire fraud

scheme. This ongoing venture consisted of all the

individual series of transactions upon which [the

defendant] focuses, not the discrete series of

transactions individually. Although each series

may have included discrete acts of wire fraud that

followed the creation of the proceeds related to

that series, the fact is that the entire program,

encompassing all of the acts charged in the

indictment, constituted one large, ongoing wire

fraud scheme. Each wiring in each series

furthered the execution of each and every

individual act of tax fraud, and helped to create

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the proceeds involved in each succeeding series of

transactions. This is primarily because each

wiring, whether it occurred before or after a given

act of tax fraud, served to promote and conceal

each individual embezzlement of taxes, either ex

ante or ex post. More precisely, each wiring,

including those that occurred before a particular

transaction, made it more difficult for the

government to detect the entire fraudulent scheme

or any particular fraudulent transaction or series

of transactions. In sum, the money gained in each

series of transactions (save the initial one) was the

proceeds of wire fraud because the money was the

proceeds of a fraud that was furthered by the prior

wirings.

Morelli, 169 F.3d at 806-07 (emphasis added); see also id. at

808 (quoting Schmuck, 489 U.S. at 712 (“Each wiring ‘was

essential to the perpetuation of [the Association]’s scheme.”)).

Finally, we concluded that, under the reasoning in Schmuck,

each wiring contributed to the entire scheme and made each

subsequent individual fraudulent transaction series more likely

to be successful and less likely to be detected. See Morelli, 169

F.3d at 807.

Based upon the Supreme Court’s decisions in Santos,

Schmuck, and Kann, and our decision in Morelli, we hold 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. Here, 4% of the

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unreported gross receipts that should have been paid as tax to

the Virgin Islands but were instead included in the lump sums

of money which the defendants sent to Amman, Jordan, were

clearly “proceeds” of the fraudulent scheme perpetuated by

defendants. Specifically, the defendants’ fraudulent scheme was

that of concealing certain gross receipts from the Virgin Islands

government through the mailing of fraudulent tax returns in

order to defraud, cheat, and deprive the government of the 4 %

gross receipts taxes it was owed, thus enabling the defendants to

unlawfully retain such government property and profit from

their scheme. See Pasquantino v. United States, 544 U.S. 349,

355-56 (2005) (holding that Canada’s right to uncollected excise

taxes on imported liquor is “property” in its hands, depriving

Canada of that money inflicts “an economic injury no less than

had they embezzled the funds from the Canadian treasury.”);

Hammerschmidt v. United States, 265 U.S. 182, 188 (1924)

(explaining that to defraud the United States primarily means “to

cheat the government out of property or money” and to deprive

the government of “something of value by trick, deceit, chicane,

or overreaching”). Here, the mailings were both for the purpose

of executing the scheme and were material to the consummation

of the scheme. See Kann, 323 U.S. at 94. The 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.

See Schmuck, 489 U.S. at 711; Pereira, 347 U.S. at 8.

Furthermore, the mailings of the fraudulent tax returns

resulted in “proceeds” of mail fraud based on the nature of the

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entire ongoing fraudulent scheme because the unpaid taxes

unlawfully retained by defendants represented the “proceeds” of

a fraud that was also furthered by previous mailings. See

Morelli, 169 F.3d at 806-07. Each mailing, whether it occurred

before or after a given act of tax fraud, served to promote and

conceal each month’s unlawful retention of taxes, either ex ante

or ex post, and made it more difficult for the government to

detect the entire fraudulent scheme. See id. Moreover, each

mailing of the fraudulent tax forms “contributed directly to the

duping” of the Virgin Islands government, and subsequent

mailings were essential to keep defendants’ scheme going

because it would have come to an end if the tax collecting

authorities did not continue to receive these mailings. See

Schmuck, 489 U.S. at 712. Accordingly, it logically follows that

the unpaid taxes, unlawfully disguised and retained through the

mailing of the tax forms, were “proceeds” of defendants’ overall

scheme to defraud the government. This scheme was both

dependant on and completed by the monthly mailing of the false

Virgin Islands gross receipts tax returns.

Finally, in light of the Supreme Court’s decision in

Santos, we recognize that the “proceeds” from the mail fraud in

this case also amount to “profits” of mail fraud. See 2008 WL

2229212, at * 5-6. By intentionally misrepresenting the total

amount of Plaza Extra Supermarkets’ gross receipts through the

mailing of fraudulent tax returns, the defendants were able to

secretly “pocket” the 4% gross receipts taxes on the unreported

amounts which were the property of the Virgin Islands

government. Cf., Pasquantino v. United States, 544 U.S. 349

(2005) (recognizing no material difference between defrauding

a government of taxes due and embezzling money from the

27

treasury, the Supreme Court held that unpaid tax constituted

property under the wire fraud statute). Other than some small

expenses incurred in perpetuating the mail fraud–i.e., the

postage stamp affixed to their monthly tax return or any other

preparation fees relating to the return– the unpaid taxes retained

by defendants amounted to profits. Once these profits were

included in the lump sums sent abroad by defendants, the

offense of international money laundering was complete.

V. Conclusion

Based on the foregoing, we will vacate the District

Court’s February 13, 2007, and June 25, 2007, orders and

remand this case for further proceedings in accordance with this

opinion.

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