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UNITED STATES v. RICHTER

April 5, 1985

UNITED STATES OF AMERICA, PLAINTIFF,
v.
JACK RICHTER, SLOBODAN PAVLOVIC, HRISTO MANGOVSKI AND NIKOLA KONSTANTINOV, DEFENDANT.



The opinion of the court was delivered by: Aspen, District Judge:

  MEMORANDUM OPINION AND ORDER

In a sixteen count indictment*fn1 the government charges the four defendants with conspiracy to defraud the United States, in violation of 18 U.S.C. § 371, and with violating reporting provisions of the so-called "Bank Secrecy Act," codified at 31 U.S.C. § 5311 et seq. and implemented by 31 C.F.R. § 103.11 et seq. (1984). The gist of the indictment is that the defendants "laundered" money by using a scheme to send large sums to Switzerland without alerting the watchful eye of the Internal Revenue Service ("IRS"). The defendants have filed a flurry of pretrial motions, the most significant being motions to dismiss the indictment under several theories. For the reason stated below, those motions are granted in part and denied in part: only Counts XI through XVI of the indictment are dismissed.

Facts

We have gleaned the following facts from the indictment, which we assume to be true for the purposes of the motions before us. In late 1982, defendant Nikola Konstantinov ("Konstantinov") met several times with federal agents, whom he believed to be drug dealers. They allegedly discussed laundering of drug money. On March 10, 1983, Konstantinov introduced Agents Perez and Perry to defendant Slobodan Pavlovic ("Pavlovic"), and the four talked about money-laundering. Pavlovic and Perry met several more times that spring. On June 6, 1983, Pavlovic introduced Perry and Agent Ahern to defendant Jack Richter ("Richter"), a lawyer in private practice. Pavlovic had been in the real estate business and, according to the defendants, was one of Richter's clients. On June 10, 1983, the agents gave Richter and Pavlovic $25,000 in cash to launder. That day the two defendants deposited amounts of about $9,600, $7,500 and $7,800 to Richter's client escrow account, keeping the rest as a fee. Three days later, they wired $23,000 to a Swiss bank account.

Similar transactions occurred throughout that summer. For example, on June 21, 1983, Richter and Pavlovic opened accounts at several Chicago banks, and they deposited another $85,000 of the agents' money in those accounts, with $9,900 going to eight of the accounts and $5,800 going to a ninth. On August 24, 1983, they received $115,000 and deposited the money in twelve accounts in $9,500 increments. All of this money was eventually wired to Switzerland, with Pavlovic and Richter deducting about 6% for fees.

Richter and Pavlovic broke up the large sums into units of less than $10,000 in order to prevent the federal government from learning about them. Under the Bank Secrecy Act and its implementing regulations, a "financial institution" must file a report with the IRS when it engages in a "transaction in currency" of more than $10,000. See 31 U.S.C. § 5313; 31 C.F.R. §§ 103.11, 103.22 (1984).*fn2 Richter and Pavlovic allegedly knew that single deposits of more than $10,000 would have required the bank to file a "Currency Transaction Report" ("CTR") on "Form 4789" with the IRS. Through the above scheme they intended to and managed to deposit and transfer some $225,000 to Switzerland without alerting the government.

On October 4, 1983, Richter and Pavlovic met with Agent Reger to discuss a new laundering scheme, which would involve the use of a diplomat from Yugoslavia to "match" deposits in U.S. banks with deposits in Yugoslavia. On November 28, 1983, Agent Ahern gave them $15,000 to launder, and they showed him a copy of a plane ticket in defendant Hristo Mangovski's ("Mangovski") name to indicate that he was in Yugoslavia working out the mechanics of the new scheme. On January 24, 1984, the three defendants caused $12,750 to be wired from the "Stopanska Banka Skopje" in Yugoslavia to Switzerland.

The three defendants again changed their operation. On February 2, 1984, the agents gave $35,000 to Richter and Pavlovic, who in turn gave it to Mangovski. He deposited the money in several increments of less than $10,000 in the account of "Stopanska Banka-Skopje" at the Gainer National Bank in Merrillville, Indiana. On February 21, 1984, a matching amount, less a fee, was wired from the Yugoslavia Banka to Switzerland. On March 1, 1984, a similar scheme was carried out with another $75,000, and on March 20, 1984, the agents gave another $1,000,000 to Richter and Pavlovic. They in turn gave the money to Mangovski, deducted another fee and were apparently arrested sometime before consummating this last act of alleged misconduct.

Count One of the indictment charges that all four defendants conspired to defraud the United States in violation of 18 U.S.C. § 371. Konstantinov is not named as a defendant or mentioned in the remaining fifteen counts. Counts Two, Four and Six rest on the theory that Richter and Pavlovic were de facto financial institutions and charge them with three acts of failing to file CTRs, in violation of 31 U.S.C. § 5313 and 5322(b). Counts Three, Five and Seven charge those two with causing banks to fail to file CTRs, in violation of 31 U.S.C. § 5313, 5322(b) combined with 18 U.S.C. § 2(b). Counts Eight, Nine and Ten charge Richter, Pavlovic and Mangovski with failing to file CTRs concerning the "Yugoslavian" transaction, in violation of 31 U.S.C. § 5313, 5322(b) and 18 U.S.C. § 2. The remaining counts charge Richter and Pavlovic with various acts of wire fraud in violation of 18 U.S.C. § 1343.

The defendants have made various statutory and constitutional challenges to the indictment. They argue principally that:

  (1) The indictment does not allege cognizable
      conspiracy offenses or violations of the Bank
      Secrecy Act.
  (2) The alleged violations of the Act are legally
      impossible because all of the money belonged
      to the government.
  (3) The indictment does not state cognizable wire
      fraud offenses.

(4) The indictment is impermissibly vague.

  (5) The Act as applied violates the Search and
      Seizure Clause of the Fourth Amendment and
      the Self-Incrimination Clause of the Fifth
      Amendment.
  (6) The government's undercover operation was
      outrageous in violation of the Due Process
      Clause, warranting dismissal of the
      indictment.

The Motion to Dismiss the Conspiracy Count

Count One of the indictment alleges that all four defendants conspired to defraud the United States, in violation of 18 U.S.C. § 371. That section states in relevant part:

  If two or more persons conspire either to commit
  any offense against the United States, or to
  defraud the United States, or any agency thereof
  in any manner or for any purpose, and one or more
  of such persons do any act to effect the object
  of the conspiracy, each shall be fined not more
  than $10,000 or imprisoned not more than five
  years, or both.

This section has two prongs. It reaches both conspiracies to commit substantive federal offenses and those to commit frauds against the United States which are not made criminal by other legislation. Paragraph 2 of Count One tracks both prongs. First, it charges the defendants with conspiring to defraud the United States by structuring their currency transactions to impair the lawful functions of the Department of the Treasury in collecting data about transactions greater than $10,000. See 31 U.S.C. § 5311 et seq.; 31 C.F.R. § 103.11 et seq. Second, it accuses the defendants of conspiring to conceal and cover-up, by scheme and device, material facts in a matter within the jurisdiction of the Treasury Department, in violation of 18 U.S.C. § 1001.*fn3 In sum, Count One does not allege any violations of other substantive criminal offenses. It simply charges a conspiracy to defraud the United States and to violate 18 U.S.C. § 1001. We will first consider the alleged conspiracy to defraud.

"Fraud" as meant in § 371 is broader than its common law namesake. Dennis v. United States, 384 U.S. 855, 861, 86 S.Ct. 1840, 1844, 16 L.Ed.2d 973 (1966); United States v. Turkish, 623 F.2d 769, 771 (2d Cir. 1980), cert. denied, 449 U.S. 1077, 101 S.Ct. 856, 66 L.Ed.2d 800 (1981). It embraces "any conspiracy for the purpose of impairing, obstructing, or defeating the lawful function of any department of government." Dennis, 384 U.S. at 861, 86 S.Ct. at 1844 (quotations and citations omitted). It is well established that the term "defraud" as used in § 371 not only reaches schemes which deprive the government of money or property, but also is designed to protect the integrity of the United States and its agencies, programs and policies. United States v. Johnson, 383 U.S. 169, 172, 86 S.Ct. 749, 751, 15 L.Ed.2d 681 (1966); United States v. Burgin, 621 F.2d 1352, 1356 (5th Cir. 1980), cert. denied, 449 U.S. 1015, 101 S.Ct. 574, 66 L.Ed.2d 474 (1980). The government charges that the defendants conspired to trick the banks into not filing CTRs with the IRS by breaking up their huge deposits into chunks of less than $10,000.

The defendants emphasize that the Bank Secrecy Act and its regulations imposed no duty on them to file CTRs as individuals.*fn4 Nor does any law specifically forbid them from making deposits in sums less than $10,000. Nor did they employ deceitful means, in the sense of using fictitious names or forging signatures. Rather, everything they did was in the "open." They agreed to make, and then made, deposits in their own names, with the hitch that they either made those deposits at several different banks or in increments at one bank. While, as we discuss later, the arguments are arguably relevant to whether the underlying substantive offenses were committed, they do not bear on whether an unlawful conspiracy was committed. The crime alleged in Count One is not the making of deposits of less than $10,000, but conspiring to use tricks to deprive the IRS of CTRs. To be held liable under the fraud prong of § 371, the defendants need not have agreed to commit, or actually committed, a substantive offense. They merely must have agreed "to interfere with or obstruct one of [the government's] lawful . . . functions by deceit, craft or trickery, or at least by means that are dishonest."*fn5 Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S.Ct. 511, 512, 68 L.Ed. 968 (1924). We think it plain that defendants' conspiracy contemplated "interfering with" or "obstructing" the government function of receiving CTRs. We also think that defendants' alleged means, while "open" in a limited sense, were "dishonest" in an overall sense. They clearly intended to disguise their transactions as something other than what they in fact were — deposits of greater than $10,000 — so that the government would not take notice of the movement of this money. See United States v. Hajecate, 683 F.2d 894, 896-97 (5th Cir. 1982) (acts which are themselves legal lose their legal character when they become elements of an unlawful scheme), cert. denied, 461 U.S. 927, 103 S.Ct. 2086, 77 L.Ed.2d 298 (1983).

Several other courts have held that similar agreements to "launder" money were indictable under § 371. See United States v. Puerto, 730 F.2d 627, 630-31 (11th Cir. 1984), cert. denied, ___ U.S. ___ 105 S.Ct. 162, 83 L.Ed.2d 98 (1984); United States v. Percival, No. 82-20026 (C.D.Ill. February 7, 1983) (Ackerman, J.).*fn6 As the Court in Puerto held:

  The government (IRS) has an interest in receiving
  accurate reports from financial institutions
  indicating when customers engage in transactions
  in excess of $10,000. It seeks this information
  in furtherance of its criminal, tax, and
  regulatory investigations and proceedings. In
  order for this lawful governmental function to
  proceed, it is vital that accurate reports be
  sent by financial institutions to the IRS. The
  Puertos and Everett interfered with and
  obstructed this lawful function of the IRS by
  conspiring to submit false CTRs to the financial
  institution. Thus, they interfered with and
  obstructed the lawful functions of the government
  in the collection of data and reports of currency
  transactions in excess of $10,000 for use in
  criminal, tax, and regulatory investigations and
  proceedings. The Puertos and Everett defrauded
  the United States Government, in violation of 18
  U.S.C.A. § 371, by conspiring to have the financial
  institution transmit false CTRs to the IRS.

730 F.2d at 631. It is true that the defendants in Puerto filed false documents, while the defendants here did not do so, but that is not important to the ...


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