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The common-law principle that federal courts will not enforce foreign tax judgments was not subverted when Congress toughened money laundering provisions in the wake of Sept. 11, an Eastern District of New York judge ruled Tuesday. Dismissing three lawsuits brought by countries that charged major tobacco companies were undermining tax collections by encouraging cigarette smuggling, Judge Nicholas G. Garaufis said Congress did not intend to abrogate the common-law “revenue rule” when it added money laundering to the federal racketeering statute with the passage of the so-called USA Patriot Act in October 2001. The ruling came in the lead case of The European Community v. RJR Nabisco, 01-CV-05188, and two other actions consolidated before Garaufis in Brooklyn. Member states of the European Community brought suit in the Eastern District under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. � 1962, alleging that the tobacco companies not only undercut tax revenues by scheming to smuggle contraband cigarettes, but also that they conspired with drug traffickers and money launderers. The lawsuit implicated the revenue rule, a common-law concept, developed in the 18th century, that holds that the courts of one sovereign will not enforce the final tax judgments or unadjudicated tax claims of other sovereigns. The one exception to the rule, Garaufis said, is that “where the plaintiff can show adequate manifestation of executive or legislative will sufficient to allay the foreign relations and separation of powers concerns underlying the revenue rule, suit may proceed.” The 2nd U.S. Circuit Court of Appeals reaffirmed the validity of the revenue rule last year in a case similar to the one before Garaufis, Attorney General of Canada v. R.J. Reynolds Tobacco Holdings Inc., 268 F.3d 103 (2d Cir. 2001). After the 2nd Circuit’s holding, Congress passed the Patriot Act last year. Section 315 of that act amended and expanded � 1956(c)(7) of RICO, which established money laundering as a predicate act for purposes of proving racketeering. The plaintiffs argued that the legislative history of � 315 shows a clear intention on the part of Congress to abrogate the revenue rule and allow federal courts to enforce, through the new money laundering provision in the racketeering statute, the tax collection efforts of foreign governments. “This court acknowledges that the Patriot Act’s legislative history offers persuasive evidence that the 107th Congress would not allow the revenue rule to bar civil suit under RICO for injury such as that alleged in the instant case,” Garaufis said. “But Plaintiffs must make more than a showing of what Congress wants or even believes RICO to be.” The judge said the burden was on the plaintiffs to show that Congress “affirmatively acted to abrogate the revenue rule with RICO,” however the “legislative history of the Patriot Act fails to make that showing.” The plaintiffs had argued that a key indicator of congressional intent was a Rule of Construction considered, but then rejected, by the House of Representatives. The Rule of Construction said nothing in the amendments under consideration “shall expand the jurisdiction of any Federal or State court … for the nonpayment of taxes or duties under the revenue laws of a foreign state . … “ But Judge Garaufis said that the decision of the House of Representatives to abandon this Rule of Construction “is simply too slender a reed upon which to effect an abrogation of the revenue rule and a consequent reversal of Attorney General of Canada.” “Alternatively, Plaintiffs may be heard to argue that the legislative history demonstrates that Congress intended to abrogate the revenue rule when it passed RICO in 1970,” he said. “Again, however, Plaintiffs do not present this court with sufficient evidence to find clear abrogation.” Kevin Malone of Krupnick Campbell Malone Roselli Buser Slama Hancock McNelis Liberman & McKee in Fort Lauderdale, Fla., and John Halloran of Speiser Krause Nolan & Granito in New York argued the motion to dismiss for the plaintiffs. Arguing the motion to dismiss for the defendant tobacco companies were Irvin Nathan of Washington, D.C.-based Arnold & Porter; Ronald Rolfe of New York-based Cravath Swaine & Moore; and William Plesec of Cleveland-based Jones, Day, Reavis & Pogue.

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