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Last month, the Supreme Court upheld use of the federal anti-fraud statutes against evasion of foreign taxes. In Pasquantino v. United States, 125 S. Ct. 1766 (April 26, 2005), it held that, despite the common law revenue rule, which bars enforcement in American courts of foreign revenue laws, the wire fraud statute, 18 U.S.C. 1343, applied to a scheme to defraud Canada of excise taxes by smuggling liquor from the United States into Canada. Two of the petitioners, in New York, ordered liquor from Maryland by telephone, and arranged for it to be driven by the third petitioner and others into Canada. The liquor was hidden in the vehicles used, and was not declared on Canadian customs forms, so the applicable Canadian taxes were not paid. Section 1343 prohibits, inter alia, the transmission by wire communication in interstate commerce of any sounds for the purpose of executing “any scheme . . . to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” Under the statute, the object of the fraud must be ” ‘property’ in the victim’s hands.” Cleveland v. United States, 531 U.S. 12, 26 (2000). Here, proof of the scheme required proof of a tax liability to Canada and, therefore, proof of Canadian tax law as applied to the petitioners. In the trial court, the petitioners contended that there was no violation of � 1343 because the government had no interest in enforcing Canadian tax laws. Their arguments were rejected, and they were convicted. Their sentences reflected the amount of tax revenue Canada lost due to the scheme. But the government declined to invoke the Mandatory Victims Restitution Act of 1996, 18 U.S.C. 3663A-3664, on the ground that its application here would be “inappropriate.” No restitution was ordered. U.S. Supreme Court affirms 4th Circuit The convictions initially were reversed by a divided panel of the 4th U.S. Circuit Court of Appeals, but were affirmed en banc. The Supreme Court granted certiorari to resolve a conflict in the circuits, and it affirmed. The court first considered whether Canada’s interest in the excise tax revenues was “property.” In Cleveland, the court held that a state’s interest in an unissued video poker license was not property because the interest in selecting a licensee was regulatory, not economic. 531 U.S. at 22-23. The Pasquantino court distinguished Cleveland on the grounds that Canada’s interest in receiving tax revenue was plainly economic, and that a right to be paid money is a property right. The court also considered whether the petitioners made a fraudulent representation. They argued that mere failure to disclose in the absence of a duty to disclose is not a fraud, and that here any duty depended on Canadian law, but the prosecution gave no notice under Fed. R. Crim. P. 26.1 that it intended to rely on Canadian law. The court held simply that, by concealing the liquor and failing to declare it, “they represented to Canadian customs officials that their drivers had no goods to declare.” 125 S. Ct. at 1772-73 The principal question presented was whether � 1343 reaches a scheme to evade a foreign tax liability. Justice Ruth Bader Ginsburg’s dissent reasoned that it does not. First, there is a presumption against extraterritorial application of federal statutes (see EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991)); and nothing in � 1343 suggests that Congress affirmatively intended extraterritorial application. Second, 18 U.S.C. 546 expressly addresses international smuggling, and provides for American criminal enforcement of foreign customs laws only of those nations that reciprocate by enacting laws against smuggling into the United States. Canada has no such law. Third, a treaty between the United States and Canada addresses collection of taxes, but did not apply here because the taxes at issue had not been finally determined, and because the treaty does not apply to evasion of Canadian taxes by U.S. citizens, such as the petitioners. Fourth, courts entertaining such prosecutions unavoidably become involved in the interpretation of foreign tax law. Fifth, there was an alternative to prosecution in U.S. courts: indictment under Canadian law and extradition to Canada. The petitioners had been indicted in Canada, but Canada had not requested extradition. The court rejected concerns about extraterritorial application of � 1343 by observing that the petitioners were convicted for conduct in the United States. For purposes of � 1343, the criminal conduct was not the smuggling into Canada, but, rather, the use in the United States of telephone wires in aid of the scheme to smuggle. The court held that the common law revenue rule did not apply because, as of 1952, when � 1343 was enacted, there was no precedent for holding that the rule precludes prosecution under a domestic criminal statute against domestic conduct. Therefore, the canon of statutory construction favoring preservation of common law rules was inapplicable. (The petitioners argued that the absence of such pre-1952 precedent reflected an understanding that the revenue rule precluded such prosecutions.) At oral argument in the Supreme Court, the government asserted that, despite the position it took in the district court, restitution should be awarded in such cases and would not violate the revenue rule. 125 S. Ct. at 1787 (Ginsburg, J., dissenting). The Supreme Court observed that a restitution order under 18 U.S.C. 3663A would not conflict with the revenue rule because the purpose of the order would be punishment, not tax collection, and that even if there were a conflict, the remedy would be an exception to � 3663A, not to � 1343. The court also concluded that the plain language of � 1343 makes no exception for frauds to evade foreign taxes. The court rejected concerns about entanglement of American courts in the intricacies of foreign tax policy. The prosecution was initiated by the executive branch, which also conducts American foreign policy. The court was willing to “assume that . . . the Executive has assessed this prosecution’s impact on this Nation’s relationship with Canada, and concluded that it poses little danger of causing international friction.” 125 S. Ct. at 1779. Moreover, Fed. R. Crim. P. 26.1, though not invoked here, provides sufficient means for ascertaining relevant foreign law. The court’s opinion opens some new opportunities for federal prosecutors. Many types of transnational activities may create foreign tax liabilities. Some types of concealment of those activities (or of those aspects that create the foreign tax liabilities) may be characterized as schemes to defraud a foreign government of tax revenue. Use of the U.S. mails or of wire communication in the United States may create a basis, under the mail fraud statute, 18 U.S.C. 1341, or � 1343, for prosecution for what amounts to evasion of foreign taxes. An amicus brief on behalf of the National Association of Criminal Defense Lawyers (NACDL) and the National Association of Manufacturers (NAM) argued that “businesses that take legitimate but aggressive positions with respect to their foreign tax liabilities could ultimately face criminal prosecution for failing to predict how a U.S. Court [sic] would interpret the foreign revenue laws that govern their conduct.” Brief of NACDL & NAM as Amici Curiae in Support of Petitioners 22 (available at 2004 WL 389423). Wire fraud is predicate offense under RICO Moreover, as the dissent points out, 125 S. Ct. at 1787 (Ginsburg, J., dissenting), wire fraud, like mail fraud, is a predicate offense under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1961(1), and the money laundering statute, 18 U.S.C. 1956(c)(7) (A). Thus, this decision broadens the reach of those statutes as well as the fraud statutes. The court’s opinion may signal a more general judicial reluctance to allow the specter of foreign-policy entanglements to bar litigation, including criminal prosecutions, initiated by the executive branch. There is no evident reason why the assumption of foreign-policy clearance for the prosecution of the Pasquantino petitioners should not apply as well in other cases brought by the Department of Justice. General application of that assumption, together with a focus on domestic conduct rather than the foreign objective of that conduct, both now endorsed by the Supreme Court, may lead to more frequent and aggressive prosecutions for transnational conduct that occurs, at least in part, in the United States. Such prosecutions need not be limited to conduct in the United States that is intended to evade foreign taxes, but may extend to U.S.-based conduct intended to defraud a foreign government or foreign private party in some other way and to conduct that, although directed to a foreign objective, occurs in the United States and violates some other U.S. criminal law. The government’s brief cited several such cases. Brief for the United States 10 (available at 2004 WL 1743937). Finally, as the dissent points out, the decision may lead to more frequent and aggressive federal prosecutions for using the mails or wire communication to evade state taxes. The government’s brief cited several such cases. Id. at 11. Such prosecutions could attack evasion not only of state income taxes but also state excise taxes and sales and use taxes, including those on expensive items such as some art objects. The credible threat of such charges could give prosecutors significant plea-bargaining leverage in some investigations of other types of crimes. Richard M. Cooper is a partner at Williams & Connolly LLP of Washington. He can be reached via e-mail at [email protected].

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