How does one determine if illegal goods were accepted if an individual who has both legal and illegal source of income pays another party?

Question

Lets say that an individual, Bob, has a regular job which covers his daily expenses, but also has an illegal side job. A decent percentage of his disposable income is due to Bob's illegal activities, but he has some disposable income coming from his legal activities. Both sources of income are placed into a bank, and bob then makes payments using a credit/debit card.

I'm wondering where the line is drawn for stating that someone has received illegal goods, as there is no longer a way to tell what money was legally earned and what was illegally earned. I'm wondering both in cases in which one is aware of bobs illegal activities and in cases where the receiver of the money does not know it's illegal, but could still be compelled to refund it if it were illegally obtained.

A few examples of the ambiguous situations I can think of:

I assume if Bob buys a single drink at a local bar this would not be ruled as spending illegal money and the bar would not be committing an offense even if the owner of the bar was aware that Bob had an illegal income source, as Bob could easily purchase a drink with his legal income.

Likewise I assume if bob goes out to buy a Yacht that he could never afford with his legal income it would be considered to be purchased with illegal profits.

However, what about a more ambiguous case. If bob buys an expensive fur coat for someone, which he could afford to do with his legal income, but which he likely wouldn't have chosen to spend money on if he didn't have the additional illegal income, does the coat count as profiting from illegal goods?

What if Bob offers a smaller sum of money to many people, small enough that Bob could easily afford to give such a gift to one person, but the combined cost of so many small gifts adds up to an amount bob couldn't/wouldn't have been able to afford without his supplementary income? Could someone argue that the gift they received from Bob came from his legal income, but the other gifts Bob made to others was due to Bob's illegal activities, by claiming Bob was likely to give a gift to them without the extra illegal income but not to the others etc?

Answer 1

For the offense of receiving stolen goods, "tracing" does not usually apply. It must be the actual good stolen and not proceeds of illegal activity.

Tracing could come up in an effort to impose a "constructive trust" (usually by a private party) or "civil forfeiture" (usually by law enforcement) on the proceeds of embezzlement or fraud, for example. Tracing in this circumstance is governed by broad considerations of equity law and are highly fact specific. The methods are fairly ad hoc and mostly come down to rules of reason.

For example, a court might find that anything clearly purchased with clean assets that were not comingled with dirty assets are not subject to forfeiture or a constructive trust, but that the entire amount of comingled assets might be subject to forfeiture or a constructive trust up to the total amount less the amount of clean assets which were comingled.

This issue came up in the U.S. Supreme Court of Luis v. United States in 2014 over whether clean funds of someone subject to fraud liability could be frozen to protect the solvency of someone who may have already squandered the dirty funds when the defendant wants to use the clean funds for an expensive legal defense of the case (SCOTUS said that assets purely traceable to clean sources can't be tied up so as to prevent them from being used in a legal defense of the case.)

Tracing generally does not extend to a bona fide purchaser for value (i.e. someone with no knowledge of wrongdoing is paid fair market value for something or pays fair market value for an asset) of something from the person engaged in misconduct because there was no economic benefit from the transaction to either party's net worth.

What if Bob offers a smaller sum of money to many people, small enough that Bob could easily afford to give such a gift to one person, but the combined cost of so many small gifts adds up to an amount bob couldn't/wouldn't have been able to afford without his supplementary income? Could someone argue that the gift they received from Bob came from his legal income, but the other gifts Bob made to others was due to Bob's illegal activities, by claiming Bob was likely to give a gift to them without the extra illegal income but not to the others etc?

In this situation, the gifts would be a "fraudulent transfer" because absent his illegal assets, Bob would probably be insolvent (i.e. have debts in excess of his assets), and transfers made without receiving substantially equivalent value in exchange can be unwound by his creditors if he is insolvent himself within a certain number of years. His solvency at the time of the gift rather than tracing from legal or illegal income respectively, would be the relevant legal issue. Of course, if the amounts of the gifts were small, it might not be economic to sue for their return.

Answer 2

Money is a negotiable instrument - that means that it comes into your possession lawfully (i.e. you are not complicit in any illegality) then it is yours even if the person you received it from obtained it unlawfully.