7th Circuit on Prostitution and Money Laundering

Michael O'Hear has a detailed and interesting discussion of two 7th Circuit opinions in prostitution cases in his weekly roundup:

The next two cases both deal with spas in Rockford, Illinois, that were run as fronts for prostitution.  (Yes, if you thought the “Paradise Health Spa” in Rockford sounded too good to be true, you were right.)  The various owners of the businesses collected money from the johns, put it into business accounts, and drew on the accounts to pay rent, utilities — customers at the “Royal Health Spa” were given a shower along with their “massage” — and advertising.  (With all of the “spas” in Rockford, the competition for customers must have been fierce!)  The owners were plainly guilty of many crimes, but how about money laundering? ...

But the two Rockford cases, United States v. Hodge (Nos. 06-3485 & 06-3502) and United States v. Lee (Nos. 06-3029 et al.), presented a difficulty: in the time since Scialabba had been decided, the Supreme Court issued its own pronouncement on the meaning of “proceeds” in United States v. Santos – a pronouncement whose implications for Hodge and Lee were not entirely clear....

In the view of the Hodge and Lee panels, Stevens’ position was consistent with Scialabba when it came to rent and utilities: these are normal business expenses for a brothel, and their payment should not give rise to money-laundering liability.  But advertising might be in different category: in Easterbrook’s words, “It is possible to carry on organized crime without advertising it.”  Thus, “Justice Stevens may well conclude that . . . advertising costs are not subtracted when defining ‘proceeds.’”  Ultimately, though, this tentative conclusion was as far as the court got in resolving the advertising issue.  In both Hodge and Lee, the jury instructions failed to make clear the important distinctions that had to be made with regard to the definition of “proceeds,” and it was possible that the defendants were convicted on the basis of paying their rent and utility bills (which would not be money laundering) instead of on the basis of their advertising expenditures (which might or might not count as money laundering).  Given the risk of conviction on an improper basis, the defendants’ convictions had to be reversed — leaving a definitive resolution of the advertising question for another day.

So, the cases are much more about money laundering than sex crimes, but the law involved is incredibly interesting. Money laundering statutes are incredibly hard to draft and courts often struggle with deciding how to apply such laws in particular cases.