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
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
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.
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
(1) The indictment does not allege cognizable
conspiracy offenses or violations of the Bank
(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
(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
(6) The government's undercover operation was
outrageous in violation of the Due Process
Clause, warranting dismissal of the
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
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 ...