The federal government has powerful tools to freeze bank accounts, real estate, investments, and other property before a criminal case ever reaches trial.
In federal fraud, health care fraud, money laundering, drug, and forfeiture cases, this can create an immediate problem for a defendant:
What happens when the government freezes the money the defendant needs to hire an attorney?
The answer depends significantly upon whether the assets are tainted by the alleged criminal activity or are the defendant’s legitimate, untainted assets.
In Luis v. United States, 578 U.S. 5 (2016), the United States Supreme Court held that the pretrial restraint on a defendant’s legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment.
The distinction between tainted and untainted property can therefore become critically important at the beginning of a federal criminal case.
Federal criminal defense attorney Michael J. Petro has more than 35 years of criminal defense experience representing individuals in federal criminal investigations and prosecutions, including fraud, financial crimes, forfeiture, sentencing, and challenges to government seizures.
What Is a Federal Pretrial Asset Freeze?
Federal law permits the government in certain circumstances to seek an order preventing a defendant from transferring, withdrawing, selling, or otherwise disposing of property before trial.
The government’s objective may be to preserve property for:
- Criminal forfeiture
- Restitution
- Statutory penalties
- Recovery of fraud proceeds
- Other remedies following conviction
An asset freeze can affect:
- Bank accounts
- Investment accounts
- Real estate
- Businesses
- Vehicles
- Cash
- Other valuable property
Because the restraint can occur before the defendant has been convicted, the consequences can be immediate.
A defendant may suddenly discover that money previously available to operate a business, support a family, or retain defense counsel is no longer accessible.
Tainted Assets Versus Untainted Assets
One of the most important concepts in federal forfeiture law is the distinction between tainted and untainted assets.
Tainted property is property sufficiently connected to alleged criminal activity.
Depending upon the applicable forfeiture statute, this can include:
- Proceeds of the alleged offense
- Property obtained through the offense
- Property traceable to criminal proceeds
- Property used to facilitate certain crimes
Untainted property is fundamentally different.
It is legitimate property belonging to the defendant that was not obtained through and is not traceable to the alleged criminal conduct.
Examples might include legitimate wages earned before the alleged offense, inherited property, legitimately acquired savings, or other assets unrelated to the alleged crime.
The constitutional difference between these two categories was at the heart of Luis v. United States.
Luis v. United States
Sila Luis was charged in federal court with offenses related to an alleged health care fraud scheme.
The government alleged that she had fraudulently obtained approximately $45 million.
According to the Supreme Court, most of that money had already been spent.
The government therefore sought to preserve approximately $2 million of assets that remained in Luis’s possession for possible restitution and other criminal penalties.
There was a significant problem:
Some of the remaining property was not connected to the alleged fraud.
The Government Froze Legitimate Assets
The government proceeded under 18 U.S.C. § 1345, which provides powerful injunctive remedies in certain federal fraud and health care cases.
The statute permits the Attorney General, under specified circumstances, to seek orders preventing the withdrawal, transfer, removal, dissipation, or disposal of qualifying property. Current § 1345 expressly addresses property obtained from or traceable to certain offenses and, in the specified circumstances, property of equivalent value.
In Luis’s case, the restraining order reached assets that were not proceeds of the alleged fraud.
Those legitimate assets were important because Luis wanted to use them to hire the attorney of her choice.
The Sixth Amendment Right to Counsel of Choice
The Sixth Amendment guarantees a criminal defendant the right to the assistance of counsel.
For a defendant who can afford an attorney, that protection includes a fundamental right to a fair opportunity to retain qualified counsel of the defendant’s own choosing.
The government argued that it had an important interest in preserving Luis’s assets so money would remain available if she were convicted and ultimately ordered to pay restitution or other penalties.
The Supreme Court recognized the government’s interests.
But the Court concluded that those interests did not permit the government to freeze legitimate, untainted assets needed to retain counsel of choice before trial.
The Supreme Court Ruled for Luis
The Supreme Court vacated the Eleventh Circuit’s judgment.
The controlling result was that:
The pretrial restraint of legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment.
The nature of the property was critical.
The assets were not criminal proceeds.
They were not traceable to the alleged crime.
They belonged to Luis.
The government hoped to eventually use the property to satisfy financial obligations if it obtained a conviction, but that future interest did not permit the government to prevent Luis from using the innocent property she needed to exercise her Sixth Amendment right to counsel of choice.
Luis Does Not Protect Criminal Proceeds
The rule from Luis should not be overstated.
The Supreme Court did not hold that a defendant has an unlimited right to use any frozen property to pay an attorney.
The constitutional protection in Luis concerned:
Legitimate + untainted + defendant-owned assets + needed to retain counsel of choice.
That is substantially different from attempting to pay a lawyer with proceeds of the alleged crime.
The distinction becomes clearer when Luis is compared with earlier Supreme Court forfeiture cases.
United States v. Monsanto: Tainted Assets Are Different
In United States v. Monsanto, 491 U.S. 600 (1989), the Supreme Court addressed assets subject to forfeiture due to their connection to alleged criminal activity.
The Court permitted pretrial restraint of those assets even though the defendant wanted to use the property to pay his attorney.
The rationale is materially different from Luis.
When property constitutes or is traceable to criminal proceeds and is ultimately forfeitable, the government may have an interest in that property.
In Luis, by contrast, the property was untainted and belonged legitimately to the defendant. The Supreme Court expressly relied on this distinction in explaining why Monsanto did not control the result.
Caplin & Drysdale and Attorney’s Fees
The Supreme Court reached a related conclusion in Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989).
A defendant does not have a Sixth Amendment right to spend forfeitable criminal proceeds on attorney’s fees merely because the defendant would prefer to use those assets to hire counsel.
Again, the critical issue is the character of the property.
The Constitution protects the defendant’s ability to use his or her own legitimate assets to retain counsel.
It does not necessarily confer on the defendant a constitutional right to use property that legally constitutes proceeds of criminal activity and is forfeitable to the government.
The Source of the Money Matters
When federal agents freeze a bank account, the account balance does not answer the forfeiture question.
The source of the money matters.
Suppose an account contains $500,000.
The government alleges that $200,000 consists of fraud proceeds.
The remaining $300,000 came from legitimate income earned before the alleged scheme.
The government may contend that the entire account can be restrained under the applicable statute or tracing principles.
The defense may contend that identifiable portions are legitimate, untainted property protected by Luis if needed to retain counsel.
That can turn the case into an asset-tracing dispute.
Asset Tracing Can Be Critical
Federal financial investigations frequently involve money moving through multiple accounts.
Funds may be:
- Deposited into operating accounts
- Transferred between businesses
- Used to purchase property
- Mixed with legitimate income
- Used to repay loans
- Invested
- Transferred to family members
- Used for ordinary living expenses
The government may claim that later assets are traceable to the alleged offense.
The defense may disagree.
Determining whether property is actually tainted may require analysis of:
- Bank statements
- Wire transfers
- Deposit records
- Checks
- Business records
- Tax returns
- Property records
- Closing documents
- Accounting records
- Loan documents
- Investment records
The label the government places on an asset does not necessarily resolve whether it is legally traceable to criminal activity.
Commingled Bank Accounts Can Create Difficult Issues
Asset tracing becomes especially complicated when alleged criminal proceeds are deposited into an account that already contains legitimate funds.
Suppose an account contains $100,000 in legitimate savings.
The government alleges that another $100,000 in fraud proceeds is subsequently deposited.
Money then moves into and out of the account.
Which dollars are tainted?
Which dollars remain legitimate?
The answer can depend on the governing forfeiture statute and applicable tracing principles.
This is one reason defense counsel should obtain the financial records and reconstruct the account rather than accepting a generalized assertion that an entire account consists of criminal proceeds.
What Are Substitute Assets?
Federal forfeiture law also recognizes the concept of substitute property in certain circumstances.
For example, under 21 U.S.C. § 853(p), if property otherwise subject to criminal forfeiture cannot be located, has been transferred, is beyond the court’s jurisdiction, has substantially diminished in value, or has been commingled so that division is difficult, the court may order forfeiture of other property of the defendant up to the value of the unavailable forfeitable property.
That is different from saying that the substitute property itself represents proceeds of the offense.
The timing and availability of restraints against substitute property can raise significant statutory and constitutional issues.
Luis Involved Property of Equivalent Value
The distinction was particularly important in Luis because § 1345 authorized the government, in the circumstances addressed by that statute, to seek restraint of property of equivalent value.
The government was attempting to preserve innocent property so it would remain available to satisfy potential future financial obligations arising from the alleged fraud.
The Supreme Court held that when those legitimate assets were needed to retain counsel of choice, the Sixth Amendment prohibited the pretrial restraint.
A Defendant Must Actually Need the Assets for Counsel
Another important limitation is sometimes overlooked.
Luis involved untainted assets needed to retain counsel of choice.
The constitutional claim therefore requires more than showing that the government froze innocent property.
When seeking relief under Luis, the defense should be prepared to establish the connection between the restraint and the defendant’s ability to retain counsel.
That may require demonstrating:
- The assets are legitimate
- The assets are untainted
- The defendant owns the assets
- The defendant needs access to the assets to retain counsel
- Other funds are insufficient or unavailable
- The requested attorney’s fee is reasonable
The precise showing required will depend upon the circumstances and controlling precedent.
Kaley v. United States and Challenging the Indictment
Another important Supreme Court decision is Kaley v. United States, 571 U.S. 320 (2014).
Kaley involved a pretrial restraint of assets alleged to be forfeitable.
The Supreme Court held that when a grand jury has determined probable cause to believe the defendant committed the charged offenses, the defendant generally cannot use an asset-restraint hearing to relitigate the grand jury’s probable-cause determination concerning guilt.
But that does not necessarily eliminate every issue at an asset hearing.
The defense may still have important questions concerning whether the particular assets are sufficiently connected to the alleged criminal conduct.
That distinction can be critical.
Challenging the Nexus Between the Crime and the Property
A defendant may not always be able to use an asset hearing to retry the government’s entire criminal case.
But the government may still need a legally sufficient basis to treat particular property as forfeitable.
The defense should examine:
What alleged offense produced the property?
How is this account connected to that offense?
What transaction creates the alleged traceability?
When was the property acquired?
What legitimate money entered the account?
What evidence supports the government’s tracing analysis?
The distinction between probable cause concerning the offense and the nexus between specific property and the offense can become extremely important.
Federal Health Care Fraud Cases Can Involve § 1345
Section 1345 is especially important in federal health care fraud investigations.
The current statute authorizes the Attorney General to seek civil injunctive relief when a person is committing or about to commit a federal health care offense. It also provides remedies concerning property obtained as a result of or traceable to specified violations and property of equivalent value.
That means a health care provider can face a substantial asset freeze at an early stage of the case.
Bank accounts used to operate a medical practice may suddenly become unavailable.
The resulting restraint can affect:
- Payroll
- Business operations
- Personal expenses
- Professional expenses
- Defense costs
Immediate analysis of the restraining order and the source of the frozen funds can therefore be essential.
The Government’s Forfeiture Allegation Is Not the End of the Analysis
A federal indictment may contain a forfeiture allegation.
That does not mean every asset owned by the defendant is automatically criminal property.
The defense should identify:
- The statutory basis for forfeiture
- The specific property alleged to be forfeitable
- Whether the government claims proceeds or facilitating property
- Whether the government claims traceability
- Whether substitute assets are involved
- Whether the property is legitimately acquired
- Whether a pretrial restraint is authorized
- Whether the property is needed to retain counsel
These are separate questions.
The Restraining Order Should Be Read Carefully
When assets are frozen, the first step should be to obtain the actual restraining order.
The defense should determine:
- What property is restrained?
- What statute authorized the restraint?
- Was the order entered ex parte?
- What factual findings were made?
- What does the government’s affidavit allege?
- Is there a hearing procedure?
- Does the order contain exceptions for living expenses?
- Does it address attorney’s fees?
- Does it include legitimate property?
- What must be done to challenge or modify the order?
The precise language of the order can determine the next step.
Timing Matters
Asset-restraint issues should be addressed early.
A defendant who waits months to challenge a frozen account may encounter practical problems that could have been addressed much sooner.
The financial records may also be extensive.
Tracing several years of transactions through multiple accounts takes time.
When the frozen assets are needed to retain counsel, delay can directly affect the defendant’s ability to prepare a defense.
The Defense Should Identify Legitimate Sources of Funds
If the government claims that an account is tainted, the defense should identify legitimate sources of money entering that account.
Examples may include:
- Salary
- Business income unrelated to the alleged offense
- Sale of legitimate property
- Inheritance
- Retirement funds
- Investment proceeds
- Preexisting savings
- Loans
- Gifts
- Insurance proceeds
Documentation can be crucial.
A claim that “this is my legitimate money” is substantially stronger when supported by records establishing exactly where the money came from.
Real Estate Can Raise Similar Tracing Questions
The same issues arise with real estate.
Suppose the government seeks to restrain a home because it claims criminal proceeds were used to purchase or improve the property.
The defense may need to examine:
- Purchase date
- Purchase price
- Down payment
- Mortgage financing
- Source of the down payment
- Mortgage payments
- Improvements
- Equity accumulated before the alleged offense
- Contributions from spouses or other owners
A property can involve both legitimate and allegedly tainted value.
The tracing analysis should reflect the actual financial history.
Jointly Owned Property Requires Additional Analysis
Federal forfeiture can also affect property owned with a spouse, family member, business partner, or other third party.
The government’s claim against the defendant does not necessarily eliminate legitimate ownership interests held by other people.
Third-party interests can raise separate statutory procedures and factual questions.
When a jointly owned asset is restrained before trial, counsel should determine whose property is actually involved and what rights each owner possesses.
A Defendant Does Not Have to Accept the Government’s Characterization
One of the most important practical lessons is simple:
“Frozen” does not necessarily mean “forfeitable.”
The government may have obtained an order based on its version of the financial evidence.
The defense can investigate whether that characterization is correct.
A meaningful challenge may require reconstructing the money trail and demonstrating that particular assets came from legitimate sources.
Attorney’s Fees Are Constitutionally Important
The issue becomes especially significant when the frozen property is needed to retain defense counsel.
Federal criminal cases can involve:
- Massive electronic discovery
- Forensic accounting
- Expert witnesses
- Investigators
- Extensive motion practice
- Multiple defendants
- Complex sentencing issues
- Lengthy trials
The ability to retain qualified counsel can therefore be extremely important.
Luis recognizes that the government cannot simply preserve every dollar belonging to the defendant for potential future financial penalties when doing so prevents the defendant from using legitimate, untainted property to hire counsel of choice.
The Right Is to Counsel the Defendant Can Afford
The Sixth Amendment right to counsel of choice is not unlimited.
A defendant does not have a constitutional right to demand representation by an attorney who:
- Has a conflict of interest
- Is not admitted to practice
- Refuses the representation
- Cannot appear under applicable court rules
Nor does Luis create a right to unlimited defense spending from property that is legitimately subject to forfeiture.
The constitutional principle concerns the defendant’s ability to use lawfully owned, untainted assets needed to retain qualified counsel of choice.
What Should Be Done When Federal Agents Freeze Your Assets?
A defendant facing a federal asset freeze should act quickly.
Counsel should ordinarily determine:
- What was frozen?
- What legal authority did the government use?
- Why does the government claim the property is tainted?
- What evidence establishes the legitimate source of the assets?
- Are criminal proceeds actually traceable to the property?
- Are legitimate and allegedly tainted funds commingled?
- Are the frozen assets needed to retain counsel?
- What hearing or motion procedure is available?
- What financial records are needed to challenge the restraint?
- Does Luis provide a Sixth Amendment basis for relief?
Those questions should be answered before deciding how to challenge the restraint.
The Lesson From Luis v. United States
The government has substantial authority to seize and restrain property connected to federal criminal activity.
But that authority has constitutional limits.
The Supreme Court drew an important line in Luis:
Tainted property and legitimate property are not constitutionally identical.
When the defendant owns legitimate, untainted assets and needs them to retain counsel of their choice, the Sixth Amendment protects the defendant’s ability to use those assets for the defense.
The government cannot treat innocent property as though it already belongs to the government merely because the defendant might eventually be convicted and owe restitution or other financial penalties.
Experienced Federal Asset Forfeiture Attorney
Michael J. Petro has more than 35 years of criminal defense experience representing individuals in serious federal criminal investigations and prosecutions.
Federal asset seizure can affect a defendant’s ability to operate a business, support a family, and retain counsel at precisely the time when those resources are most important.
When the government freezes property before trial, the defense should immediately determine whether the assets are actually traceable to alleged criminal activity, whether legitimate funds have been swept into the restraint, what statutory authority the government is relying upon, and whether the frozen property is needed to exercise the Sixth Amendment right to counsel of choice.
If federal prosecutors or agents have frozen your bank accounts, restrained your property, or claimed that your assets are subject to forfeiture, contact federal criminal defense attorney Michael J. Petro to discuss the government’s seizure and whether the restraint can be challenged.