Evasion of Foreign Tax Can Be Mail Fraud

The Second Circuit, however, rejected the Boots rationale and held that a similar scheme is cognizable under the federal wire fraud statute. United States v. Trapilo, 130 F.3d 547 (2d Cir. 1997). According to Trapilo, the federal wire statute applies to all schemes to defraud involving the use of the U.S. telecommunications system; consequently, the revenue rule does not restrict the wire fraud statute because under that statute, the identity and the location of the victim are irrelevant. The Second Circuit reasoned that the wire fraud statute “neither expressly, nor impliedly, precludes the prosecution of a scheme to defraud a foreign government of tax revenue, and the common law revenue rule, inapplicable to the instant case, provides no justification for departing from the plain meaning of the statute.”

In Pasquantino, the Fourth Circuit en banc had addressed the conflict and rejected defendants' contention that the revenue rule prohibits any nation from “recognizing” the tax laws of a foreign sovereign. It held the revenue rule inapplicable to prosecutions under the wire fraud statute because they do not seek to enforce tax judgments or revenue laws of a foreign sovereign, but rather seek “only to enforce the federal wire fraud statute for the singular goal of vindicating our government's substantial interest in preventing our nation's interstate wire communication systems from being used in furtherance of criminal fraudulent enterprises.”

The Supreme Court Addresses the Issue

A 5-4 majority resolved the conflict by affirming the Fourth Circuit. First, the Court noted that Canada's right to uncollected excise taxes is “property” under the wire fraud statute The scheme was “aimed at depriving Canada of money to which it was entitled by law. Canada could hardly have a more 'economic' interest than in the receipt of tax revenue,” and that “this right is an entitlement to collect money from petitioners, the possession of which is 'something of value' to the Government of Canada.” The Court distinguished Cleveland v. United States, 531 U.S. 12 (2000), which involved a scheme to obtain a license in Louisiana to operate video poker machines by making false statements in the license application. The license was not “property” and so that scheme could not be prosecuted as mail fraud. “Canada's entitlement to tax revenue is a straightforward 'economic' interest'” whereas in Cleveland “there was no suggestion … that the defendant aimed at depriving the State of any money due under the license … ”

To determine whether the wire fraud statute incorporates an exception based on the revenue rule, the Court analyzed revenue rule jurisprudence as of 1952, the year the federal wire fraud statute was enacted, and the traditional rationales for the rule.

No pre-1952 cases established that the revenue rule barred the prosecution; actions traditionally barred involved the enforcement of tax liabilities of one sovereign in the courts of another sovereign. The Court distinguished those cases, reasoning that they applied the revenue rule to prohibit the collection of tax obligations of foreign nations, whereas this case “is not a suit that recovers a foreign tax liability, like a suit to enforce a judgment. This is a criminal prosecution brought by the United States in its sovereign capacity to punish domestic criminal conduct.” A prosecution such as this one “poses little risk of causing the principal evil against which the revenue rule was traditionally thought to guard: judicial evaluation of the policy-laden enactments of other sovereigns.” The present prosecution created “little risk of causing international friction through judicial evaluation of the policies of foreign sovereigns” because this action was “brought by the Executive to enforce a statute passed by Congress” and that the Executive “has ample authority and competence to manage 'the relations between the foreign state and its own citizens.'” The Court expressly did not reach the issue of whether foreign tax evasion can be used as a mail or wire fraud predicate offense in a civil RICO case. Several courts have held that the revenue rule does prohibit such civil RICO suits. See, e.g., Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103 (2d Cir. 2001).

The Court's broad interpretation of the federal mail and wire fraud statutes was criticized by Justice Ginsburg in her dissent (joined by Justice Breyer, and joined in part by Justices Scalia and Souter), which describes the majority opinion as ascribing “an exorbitant scope to the wire fraud statute in disregard of our repeated recognition that 'Congress legislates against the backdrop of the presumption against extraterritoriality.'” For Justice Ginsberg, prosecuting a U.S. citizen who commits criminal violations of Canadian law is best handled by a Canadian court, which is in a better position than a United States court to decide “whether and to what extent, the defendants have defrauded the governments of Canada … out of tax revenues owed pursuant to their own, sovereign, excise laws.” Justices Ginsburg and Breyer also disagreed with the majority's treatment of the “property” issue.

Policy Implications

The policy implications of the Pasquantino decision are significant. The decision raises the prospect of U.S. prosecutors becoming involved in the enforcement of foreign tax laws to an unprecedented extent. While the smuggling schemes involved in Pasquantino itself and in some of the other recent cases do not appear to be complex or sophisticated, it is certainly conceivable that in the future, U.S. prosecutors may be moved to bring charges under the mail and wire fraud statutes where the underlying issues of foreign tax law are not so readily understood. The most troubling aspect may be the problems that the decision poses for multinational corporations that operate under the tax laws of many different countries. Under Pasquantino, such corporations must now be careful to ensure not only that they do not draw legal attacks from foreign tax enforcement agencies, but they must also be concerned about the possibility that U.S. prosecutors will use claims of foreign tax violations as the basis for bringing criminal charges under the mail and wire fraud statutes.

The Supreme Court has decided that the Federal mail and wire fraud statutes can be used in prosecutions involving schemes to defraud a foreign government of tax revenue. The April 26 decision, written by Justice Thomas, expansively interpreted the words of 18 U.S.C. '' 1341 and 1343 and narrowly interpreted the common law “revenue rule,” which some courts had viewed as limiting the reach of these statutes in cases involving foreign tax evasion. Pasquantino v. United States , 125 S.Ct. 1766 (2005).

Split in the Circuits

Three circuit courts had recently addressed the applicability of the revenue rule to prosecutions under the federal mail and wire fraud statutes in cases involving international smuggling to evade foreign taxes. In United States v. Boots , 80 F.3d 580 (1st Cir. 1996), the First Circuit held that a scheme to smuggle tobacco products into Canada in order to evade Canadian taxes could not be prosecuted as wire fraud because the revenue rule prohibits the enforcement of the revenue laws of a foreign state. According to the First Circuit, the revenue rule holds that “courts generally will not enforce foreign tax judgments … ” Despite the fact that the prosecution did not involve the enforcement of a foreign tax judgment, the First Circuit nevertheless held that the revenue rule barred defendants' convictions because of public policy considerations. “ Where a domestic court is effectively passing on the validity and operation of the revenue laws of a foreign country, the important concerns underlying the revenue rule are implicated,” said the court.

The Second Circuit, however, rejected the Boots rationale and held that a similar scheme is cognizable under the federal wire fraud statute. United States v. Trapilo , 130 F.3d 547 (2d Cir. 1997). According to Trapilo, the federal wire statute applies to all schemes to defraud involving the use of the U.S. telecommunications system; consequently, the revenue rule does not restrict the wire fraud statute because under that statute, the identity and the location of the victim are irrelevant. The Second Circuit reasoned that the wire fraud statute “neither expressly, nor impliedly, precludes the prosecution of a scheme to defraud a foreign government of tax revenue, and the common law revenue rule, inapplicable to the instant case, provides no justification for departing from the plain meaning of the statute.”

In Pasquantino, the Fourth Circuit en banc had addressed the conflict and rejected defendants' contention that the revenue rule prohibits any nation from “recognizing” the tax laws of a foreign sovereign. It held the revenue rule inapplicable to prosecutions under the wire fraud statute because they do not seek to enforce tax judgments or revenue laws of a foreign sovereign, but rather seek “only to enforce the federal wire fraud statute for the singular goal of vindicating our government's substantial interest in preventing our nation's interstate wire communication systems from being used in furtherance of criminal fraudulent enterprises.”

The Supreme Court Addresses the Issue

A 5-4 majority resolved the conflict by affirming the Fourth Circuit. First, the Court noted that Canada's right to uncollected excise taxes is “property” under the wire fraud statute The scheme was “aimed at depriving Canada of money to which it was entitled by law. Canada could hardly have a more 'economic' interest than in the receipt of tax revenue,” and that “this right is an entitlement to collect money from petitioners, the possession of which is 'something of value' to the Government of Canada.” The Court distinguished Cleveland v. United States , 531 U.S. 12 (2000), which involved a scheme to obtain a license in Louisiana to operate video poker machines by making false statements in the license application. The license was not “property” and so that scheme could not be prosecuted as mail fraud. “Canada's entitlement to tax revenue is a straightforward 'economic' interest'” whereas in Cleveland “there was no suggestion … that the defendant aimed at depriving the State of any money due under the license … ”

To determine whether the wire fraud statute incorporates an exception based on the revenue rule, the Court analyzed revenue rule jurisprudence as of 1952, the year the federal wire fraud statute was enacted, and the traditional rationales for the rule.

No pre-1952 cases established that the revenue rule barred the prosecution; actions traditionally barred involved the enforcement of tax liabilities of one sovereign in the courts of another sovereign. The Court distinguished those cases, reasoning that they applied the revenue rule to prohibit the collection of tax obligations of foreign nations, whereas this case “is not a suit that recovers a foreign tax liability, like a suit to enforce a judgment. This is a criminal prosecution brought by the United States in its sovereign capacity to punish domestic criminal conduct.” A prosecution such as this one “poses little risk of causing the principal evil against which the revenue rule was traditionally thought to guard: judicial evaluation of the policy-laden enactments of other sovereigns.” The present prosecution created “little risk of causing international friction through judicial evaluation of the policies of foreign sovereigns” because this action was “brought by the Executive to enforce a statute passed by Congress” and that the Executive “has ample authority and competence to manage 'the relations between the foreign state and its own citizens.'” The Court expressly did not reach the issue of whether foreign tax evasion can be used as a mail or wire fraud predicate offense in a civil RICO case. Several courts have held that the revenue rule does prohibit such civil RICO suits. See, e.g., Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc. , 268 F.3d 103 (2d Cir. 2001).

The Court's broad interpretation of the federal mail and wire fraud statutes was criticized by Justice Ginsburg in her dissent (joined by Justice Breyer, and joined in part by Justices Scalia and Souter), which describes the majority opinion as ascribing “an exorbitant scope to the wire fraud statute in disregard of our repeated recognition that 'Congress legislates against the backdrop of the presumption against extraterritoriality.'” For Justice Ginsberg, prosecuting a U.S. citizen who commits criminal violations of Canadian law is best handled by a Canadian court, which is in a better position than a United States court to decide “whether and to what extent, the defendants have defrauded the governments of Canada … out of tax revenues owed pursuant to their own, sovereign, excise laws.” Justices Ginsburg and Breyer also disagreed with the majority's treatment of the “property” issue.

Policy Implications

The policy implications of the Pasquantino decision are significant. The decision raises the prospect of U.S. prosecutors becoming involved in the enforcement of foreign tax laws to an unprecedented extent. While the smuggling schemes involved in Pasquantino itself and in some of the other recent cases do not appear to be complex or sophisticated, it is certainly conceivable that in the future, U.S. prosecutors may be moved to bring charges under the mail and wire fraud statutes where the underlying issues of foreign tax law are not so readily understood. The most troubling aspect may be the problems that the decision poses for multinational corporations that operate under the tax laws of many different countries. Under Pasquantino, such corporations must now be careful to ensure not only that they do not draw legal attacks from foreign tax enforcement agencies, but they must also be concerned about the possibility that U.S. prosecutors will use claims of foreign tax violations as the basis for bringing criminal charges under the mail and wire fraud statutes.