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Next term, the U.S. Supreme Court, in Pasquantino v. United States, will consider the applicability of the common law revenue rule in the criminal context. The revenue rule prevents courts from enforcing, either directly or indirectly, foreign revenue laws, such as tax and customs laws. The revenue rule is analogous to the more familiar rule that prevents courts from enforcing foreign penal laws. Although the revenue rule is firmly recognized in the civil context, the federal courts of appeals are divided on its applicability in the criminal context. In Pasquantino, the defendants were convicted of wire fraud for executing a scheme to defraud the Canadian government of taxes by smuggling liquor into Canada. The initial panel decision relied upon the revenue rule to reverse the convictions. United States v. Pasquantino, 305 F.3d 321 (4th Cir. 2002). The court relied heavily upon the decision of the 1st U.S. Circuit Court of Appeals in United States v. Boots, 80 F.3d 580 (1st Cir. 1996), which used the revenue rule to reverse a wire fraud conviction for unpaid taxes on tobacco smuggled into Canada. Sitting en banc, the 4th Circuit rejected Boots and upheld the convictions. United States v. Pasquantino, 336 F.3d 321 (4th Cir. 2003) (en banc). In doing so, the 4th Circuit followed the 2nd Circuit’s decision in United States v. Trapilo, 130 F.3d 547 (2d Cir. 1997), which held that the revenue rule is inapplicable when a criminal action is brought by the United States. Part of what makes the issue complicated is the dearth of case law applying the revenue rule. Although the revenue rule has an ancient lineage, see Don Alonso v. Cornero, (1611) Hobart 212; 2 Brownlaw 29, no case applying the rule in the international context was brought in this country until 1979. See Her Majesty the Queen in Right of the Province of British Columbia v. Gilbertson, 597 F.2d 1161 (9th Cir. 1979) (using the revenue rule to prevent Canada from enforcing a Canadian tax judgment in an American court). Recently, however, a number of federal courts have relied upon the revenue rule to reject various civil Racketeer Influenced and Corrupt Organizations Act (RICO) and common law claims brought by foreign governments to recoup tax revenues allegedly lost through smuggling. See European Community v. RJR Nabisco Inc., 355 F.3d 123 (2d Cir. 2004); Republic of Honduras v. Philip Morris Cos. Inc., 341 F.3d 1253 (11th Cir. 2003); Attorney Gen. of Canada v. R.J. Reynolds Tobacco Holdings Inc., 268 F.3d 103 (2d Cir. 2001). In the civil litigation, the United States argued successfully as amicus that RICO was drafted against the backdrop of the revenue rule and that there was no evidence that Congress intended to repeal the revenue rule in that context. Brief for the United States as Amicus Curiae at 7 (Civ. No. 01-1317), Attorney Gen. of Canada v. R.J. Reynolds Tobacco Holdings Inc., 537 U.S. 1000 (2002). Nevertheless, the government argues that the same criminal RICO predicate at issue in the civil cases — wire fraud — should apply differently when the United States is a party. From the government’s perspective, the revenue rule operates only when litigation is brought by foreign sovereigns or by private parties. The government attempts to justify its position by claiming that it is consistent with the policy behind the revenue rule. Although the revenue rule was originally defended by English courts on the ground that the courts had no interest in furthering foreign law and that it was in England’s interests to profit from outbound smuggling, the more modern justifications for the rule are more noble. Judge Learned Hand typically is credited with first describing the modern justifications for the rule. See Moore v. Mitchell, 30 F.2d 600, 604 (2d Cir. 1929) (L. Hand, J., concurring), aff’d on other grounds, 281 U.S. 18 (1930). Judge Hand explained that foreign revenue laws may conflict with American public policy. It is not difficult to imagine, for example, foreign governments placing a discriminatory head tax on unpopular racial or ethnic minorities, on the sale of Bibles or on the importation of American products. In Hand’s view, it is not enough for courts to refuse to enforce those types of laws because American courts could greatly offend foreign governments by deeming some country’s revenue laws repugnant to our public policy while enforcing the revenue laws of other countries. A blanket prohibition is required. EXECUTIVE BRANCH AUTHORITY The government argues that the policy behind the revenue rule is not supported when a criminal action is brought by the United States. The government maintains that it is within the executive branch’s authority to determine which foreign revenue laws it would be in the interests of the United States to further. The executive branch’s decision to prosecute a criminal case is a determination that the policies that ordinarily justify the revenue rule should not apply. The government undoubtedly is correct that the policies behind the revenue rule hold less force in the criminal context, when the litigation is initiated by the executive branch, than when a foreign government or private party initiates the litigation and asks the judicial branch to decide which foreign revenue laws should be enforced. But from the defendants’ perspective, the question is not whether the executive branch would like to see the case prosecuted, but whether Congress intended for the criminal laws it enacted to protect foreign revenue laws. There is no question that Congress could abrogate the revenue rule, just as it could abrogate any common law rule, if it so chose, but the defendants argue that there is no evidence that Congress sought to create an exception to the revenue rule when the United States brings a criminal action for wire fraud. Just as the government argued in the civil cases, the defendants argue that Congress enacted the criminal laws against the backdrop of the revenue rule and there is no evidence to suggest that Congress sought to modify the revenue rule in this context. Because of the presumption that Congress retains common law rules when it enacts a statute, the real question for the Supreme Court may be whether the United States is arguing for an exception to the revenue rule or a determination that the revenue rule never applied in the criminal context in the first place. From the defendants’ perspective, the presumption that the revenue rule should apply in the criminal context is justified because governments historically have not used their criminal laws to protect foreign revenue laws. Boots appears to be the first prosecution in the country’s history to proceed on such a theory, so it is fair to assume that Congress never imagined that its criminal laws would be used in this way when they were enacted. From the government’s perspective, the fact that governments traditionally have not used their criminal laws to protect foreign revenue laws means that there is no case law on point. Nevertheless, the view that the revenue rule applies in all cases is supported by dicta in the leading cases applying the revenue rule. Perhaps the most cited statement of the revenue rule comes from Lord Willam Murray Mansfield’s statement that “no country ever takes notice of the revenue laws of another.” Holman v. Johnson, 98 Eng. Rep. 1120, 1121 (K.B. 1775); see also Planch v. Fletcher, 99 Eng. Rep. 164, 165 (1779) (“One nation does not take notice of the revenue laws of another.”) (K.B. 1779) (Mansfield, J). Earlier cases spoke in equally categorical terms. See Boucher v. Lawson, 95 Eng. Rep. 53 (K.B. 1734) (Hardwick, C.J.) (“[O]ne state will not enforce the revenue measures of another.”). While it is true that these statements are dicta, particularly as they did not arise in the criminal context, they do state an understanding of the policy position governments took toward enforcing foreign revenue laws then and in the centuries that followed. Just as courts presume that statutes are not intended to apply extraterritorially absent some contrary indication by Congress, the defendants argue that a similar presumption should be employed when statutes implicate the revenue rule. CONGRESSIONAL INTENT The defendants also argue that it is Congress’ policy not to enforce foreign revenue laws. In 1936, Congress enacted 18 U.S.C. 546, which makes outbound smuggling a crime, but only if the country receiving the smuggled goods has a reciprocal law making smuggling into the United States a crime. The purpose of the statute was not to prosecute outbound smuggling because it was against American interests, but to offer an incentive for foreign governments to prevent smuggling into the United States. Following Prohibition, Congress had expected liquor smuggling into the United States to stop, but the higher taxes on alcohol in the United States caused smuggling — particularly from Canada — to continue. Modeled after the International Opium Convention of 1912, which successfully used a similar reciprocal criminal-enforcement scheme, Congress hoped for the same result in the more general contraband context. H.R. Rep. No. 868, 74th Cong., 1st Sess. 2 (1935); S. Rep. No. 1036, 74th Cong., 1st Sess. 2 (1935). Thus far, however, no nation — including Canada — has enacted reciprocal legislation that would make prosecution under �546 possible. Now that the tables have turned and liquor currently is smuggled from the United States into Canada, Canada encourages the United States to bring prosecutions like Pasquantino. The defendants argue that the unilateral prosecution of outbound smuggling into Canada would undermine Congress’ strategy for obtaining reciprocal criminal enforcement. The government maintains that �546 is irrelevant because when Congress provides multiple statutes addressing similar conduct, it is free to prosecute under whichever it chooses. The defendants argue, however, that the existence of �546 undermines the assumption that Congress intended to override the revenue rule by enacting general criminal laws, like the wire fraud statute. Section 546 is a more specific statute than the wire fraud statute at issue in Pasquantino, and the defendants argue that the very purpose of the statute — the incentive for other countries to enact laws preventing smuggling into the United States — would be undermined if the executive branch prosecuted such offenses regardless of whether a reciprocal law exists. IS SMUGGLING FRAUD? Pasquantino may force the high court to address two other issues related to the anti-fraud statutes as well. First, there is a question as to whether clandestine smuggling can be considered fraud. While federal courts once interpreted the term fraud under the statutes quite expansively (see Trapilo, 130 F.3d at 530 n.3 (concluding that smuggling constituted fraud because it violates “fundamental notions of honesty, fair play and right dealing”)), the Supreme Court has reined in those decisions by making it clear that the fraud prohibited by those statutes means common law fraud. See United States v. Neder, 527 U.S. 1, 23-24 (1999). At common law, fraud required that there be a misrepresentation of fact, and no representations of any kind are made when someone sneaks across a border with contraband. One court already has noted that “smuggling [is] an act unlikely to constitute an act of common law fraud.” In re Sumitomo Copper Litigation, 995 F. Supp. 451, 455 (S.D.N.Y. 1998). If the Supreme Court finds the requirements of common law fraud strictly applicable in the wire fraud statute, these convictions may fall. Second, the wire fraud statute requires that a person be defrauded of “property” and there is a question as to whether unassessed taxes are property. Prior to the Supreme Court’s decision in Cleveland v. United States, 531 U.S. 12 (2000), which held that a state did not have a property interest in licenses even though the state derived revenue from the licenses, many courts held that unassessed taxes were property. Subsequently, the 4th and 2nd circuits have held that the prior cases remain good law. See Pasquantino, 336 F.3d at 332; Fountain v. United States, 357 F.3d 250, 258 (2d Cir. 2004). The defendants argue that unassessed taxes are not property in the hands of the state and are not property as that term is defined in Cleveland. The task for the court will be to decide whether the case law that traditionally has viewed unassessed taxes as property should survive. Christopher D. Man ([email protected]) is an associate in the compliance and enforcement practice group in the Washington office of Willkie Farr & Gallagher (www.willkie.com). He represented members of the tobacco industry in several civil cases brought by foreign governments that were found barred by the revenue rule. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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