wmlro.com: US court separates fraud and laundering its proceeds

When Donald Ayers and Roger Faulkenberry were convicted of fraud they were also convicted of laundering the proceeds of their crime.

But a Judge in a US Circuit Court has over-turned the conviction for money laundering saying that the prosecution had failed to prove its case.

HH Judge Ray Kethledge said "we conclude that there is ample evidence to vindicage the jury's finding of guilt as to the fraud counts. But money laundering is a different animal [to] fraud and we conclude that the government did not prove money laundering here."

The USA had prosecuted charges of fraud, wire fraud, money laundering and conspiracy. But the nebulous conspiracy charges were not, specifically, conspiring to launder the proceeds of the frauds.

The fraud related to the actions of the two who were officers of health-care finance company National Century and the defrauding of investors before it failed. The figures being bandied about are substantial - some USD2,400 million.

National Century operated a form of invoice discounting: it bought accounts receivables from healthcare providers at a discount then bundled them into packages, selling the packages as bonds in a scheme disturbingly similar to the sub-prime mortgage crisis. And with a similar effect. Many of the invoices were not collectable and the underlying value of the bonds was therefore questionnable at best - and worthless at worst.

But the company went one step further: it raised money in its own name through share offers and then loaned money to health care providers without security - and without taking discounted invoices. In a system called "fronting" they handed over money with insufficient documentation and no fixed plan for repayment. The Judge said "they apparently just fronted these investor moneys with the hope that - someday - the provider would pay them back."

But the scheme was dubious for many reasons not the least of which was that some of the poorly documented loans were to companies owned by Ayers and National Century CEO Lance Paulson who is one of a total of 10 people convicted of a range of offences. Paulson has also appealed his conviction.

Prosecutors are considering their next step: they could refer it to a full panel of the federal appeals court.

The case raises the fascinating prospect that juries cannot be invited to infer the obvious in relation to money laundering, at least in relation to US federal prosecutions. It would appear to be a clear case of res ipsa loquiter: if a person uses fraudulently obtained funds for his own benefit, then that appears to fall squarely within the definition of money laundering, even under the USA's slightly distorted view of the offence.

But what the Court's decision does is undermine the US's approach to loading charge sheets with a money laundering offence, often as a bargaining chip. The assumption has always been that a conviction for laundering is an automatic consequence of a conviction for any financial crime. If that is not so, the pressure to compromise a heavy charge sheet with a plea bargain is reduced.

And that means that prosecutors will have to be more diligent in their preparation and that more money laundering cases will actually come to trial rather than being pleaded out.

The USA's strategy of pleading out cases loaded with wire fraud and money laundering charges has been one of its reasons for criticising countries such as Singapore for a low number of money laundering prosecutions. However, Singapore argues that proving money laundering is expensive and complex and that, if the same sentencing result can be obtained more quickly, cheaply and reliably by prosecuting the predicate offence, then that is a satisfactory result.

The cases of Ayers and Faulkenberry may demonstrate to the USA that the approach of Singapore and other countries who adopt a similar approach has much to recommend it.

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Nigel Morris-Cotterill is Head, The Anti Money Laundering Network, parent company of Vortex Centrum Limited, publishers of BankingInsuranceSecurities.Com