U.S. v. Scialabba

• Decision Date: 28 February 2002
• Docket Number: No. 01-1292.,No. 01-1291.,01-1291.,01-1292.
• Citation: 282 F.3d 475
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Lawrence SCIALABBA and Robert T. Cechini, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 475

282 F.3d 475

UNITED STATES of America, Plaintiff-Appellee, v. Lawrence SCIALABBA and Robert T. Cechini, Defendants-Appellants.

No. 01-1291.

No. 01-1292.

United States Court of Appeals, Seventh Circuit.

Argued January 15, 2002.

Decided February 28, 2002.

Stephen D. Anderson (argued), Office of the U.S. Atty., Chicago, IL, for Plaintiff-Appellee.

Marc W. Martin, Chicago, IL, Alexander M. Salerno (argued), Berwyn, IL, for Defendants-Appellants.

Before FLAUM, Chief Judge, and COFFEY and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

A financial transaction involving the "proceeds" of crime, and designed to promote the carrying on of certain offenses, is unlawful money laundering. 18 U.S.C. § 1956(a)(1). Neither the Supreme Court nor this circuit has defined the word "proceeds", and there is no definition in the statute itself. This case presents the question whether "proceeds" refers to the gross income from an offense, or only the net income. We conclude that, at least when the crime entails voluntary, business-like operations, "proceeds" must be net income; otherwise the predicate crime merges into money laundering (for no business can be carried on without expenses) and the word "proceeds" loses operational significance.

The business in this case is gambling, which is unlawful in Illinois unless licensed by the state. OK Amusement, of which Robert Cechini was sole proprietor, provided video poker machines to bars, taverns, and restaurants (collectively, the retail outlets). Patrons dropped coins into the machines and received on-screen "credits" if they won. These credits could be used lawfully to continue playing, or unlawfully as the basis of cash payouts. Many retail outlets redeemed credits for cash. Later, when Cechini or Lawrence Scialabba, his assistant, opened the coin boxes, the contents would be split with the outlet's owner: some went to cover the payments made to customers, some was retained by the owner as compensation for his role in the business, and defendants kept the rest as compensation for the machines — which OK Amusement not only supplied but also fixed (if they broke down) or replaced (if they were seized in raids by the police).

Cechini and Scialabba have been convicted of running an unlawful gambling business, see 18 U.S.C. §§ 371, 1955; filing tax returns that failed to report their income from this business, see 26 U.S.C. § 7206(1); and conspiring to defeat tax collection from the outlets' owners, see 18 U.S.C. § 371. They do not appeal from any of these convictions. But they do appeal from the money laundering convictions, because under the version of the Sentencing Guidelines in force before November 1, 2001, the money laundering convictions substantially augmented their prison terms. Compare United States v. Buckowich, 243 F.3d 1081 (7th Cir.2001), with Amendment 634, effective November 1, 2001. See also United States v. Perez, 249 F.3d 583 (7th Cir.2001). Scialabba's base offense under the old version of U.S.S.G. § 2S1.1 was 31, producing a sentencing range of 108-135 months (and a sentence of 108 months); with no money laundering counts the offense level would have been 21 and the range 37-46 months. Cechini's base offense level was 34, with a range of 235-293 months; he received a sentence of 188 months (the bottom of the range for level 32, after the district court made an error in addition); but without the money laundering convictions his offense level would have been 23 and the sentencing range 84-105 months.

According to the prosecutor, Cechini and Scialabba violated § 1956(a)(1) when they handed some of the money in the coin boxes over to the outlets' owners and used more of that revenue to meet the expenses of the business (such as leasing the video poker machines and obtaining amusement licenses for them from the state). This is equivalent to saying that every drug dealer commits money laundering by using the receipts from sales to purchase more stock in trade, that a bank robber commits money laundering by using part of the loot from one heist to rent a getaway car for the next, and so on. An embezzler who spent part of the take on food and rent, in order to stay alive to cook the books again, would be a money launderer too. Yet none of these transactions entails financial transactions to hide or invest profits in order to evade detection, the normal understanding of money laundering. Nor were Cechini or Scialabba charged with reinvestment in seemingly legitimate businesses or other means to whitewash (= "launder") the funds; the focus was entirely on the disposition of the gross income. Thus the money laundering convictions depend on the proposition that gross income is "proceeds" under the statute.

Here is the text of § 1956(a)(1):

Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity — (A)(i) with the intent to promote the carrying on of specified unlawful activity; or (ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or (B) knowing that the transaction 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; or (ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

The prosecutor's argument is plain meaning: Divvying up income with tavern owners is a "financial transaction which involves the proceeds" (etc.). According to the United States, two opinions support its plain-meaning view: United States v. Conley, 37 F.3d 970 (3d Cir.1994), and United States v. Mankarious, 151 F.3d 694, 706 (7th Cir.1998). We do not read these cases so; and the meaning of this statute is not at all plain because it lacks a definition of "proceeds" and the context does not reveal whether the reference is to gross receipts or net income.

Treating the word as a synonym for receipts could produce odd outcomes. Consider a slot machine in a properly licensed casino. Gamblers insert coins, and the machine itself returns some of them as winnings. Later the casino opens the machine and removes the remaining coins. What are the "proceeds" of this one-armed bandit: what's left in the cash...