From the early days of prohibition up through modern day, as long as there has been a demand, there has been a supply. From the back-house speakeasy of the 1920s, to the large organized crime rings of the 1980s, to today’s epidemic of medium-sized operations utilizing the proximity of Indian reservations to the Canadian border, smuggling operations have long been a problem plaguing the United States and foreign nations.
|Gonzaga Journal of International Law||
Cite as: Shannon L. Snider, Sorting Out the Mess: International Smuggling Schemes, Foreign Policy, and a Little Thing Called Justice, 9 Gonz. J. Int’l L. 1 (2005), available at http://www.gonzagajil.org.
SORTING OUT THE MESS:
International Smuggling Schemes, Foreign Policy, and a Little Thing Called Justice
Shannon L. Snider*
From the early days of prohibition up through modern day, as long as there has been a demand, there has been a supply. From the back-house speakeasy of the 1920s, to the large organized crime rings of the 1980s, to today’s epidemic of medium-sized operations utilizing the proximity of Indian reservations to the Canadian border, smuggling operations have long been a problem plaguing the United States and foreign nations. The legislative and executive branches have struggled to construct a solution to this re-occurring problem. Yet, in the process of legislative activism and statutory interpretation, a muddled mess found its way to the Supreme Court for review in the case of Pasquantino v. United States.
To combat smuggling operations that affect both the United States and foreign entities, Congress enacted the Anti-Smuggling Statute. In doing so, Congress expressly included a reciprocity clause, stating that prosecution of individuals who smuggle goods into another country will not occur unless that country has a reciprocal law prosecuting the same crimes committed in the United States. At the time of this article, no nation has enacted such a reciprocal law. Therefore, federal prosecutors have found a “work-around” in the Mail and Wire Fraud Statutes. In such cases, as long as there is some use of U.S. mail or wire systems across interstate borders in furtherance of the smuggling scheme, federal prosecutions are sought under these statutes.
Charging export smugglers under the Mail and Wire Fraud Statutes may be in conflict with the common law revenue rule. As its name indicates, the common law revenue rule is a historical common law rule that states one country will not enforce or recognize the revenue laws of another country. Because the “property” defrauded by export smugglers is a foreign country’s customs and tax revenue, defendants argue that they cannot be prosecuted because to do so would amount to recognition and enforcement of the revenue laws of another country. The Supreme Court granted certiorari to the case of Pasquantino II to determine if this revenue rule prohibits export smuggling convictions under the Mail and Wire Fraud Statutes.
The issues that export smuggling schemes present are three-fold:By utilizing the Mail and Wire Fraud Statutes to prosecute export smuggling crimes, federal prosecutors are acting against clear congressional intent and thus undermining the foreign policy Congress set when enacting the Anti-Smuggling Statute.
The second issue pertains to the intended purpose of the Mail and Wire Fraud Statutes; regardless of the revenue rule implication, does the term “fraud” in the Mail and Wire Fraud Statutes include the act of smuggling?
Finally, the paramount issue that brought this case before the Court was determining whether unassessed tax revenue owed to a foreign sovereign constitutes “property” for purposes of the Mail and Wire Fraud convictions. It is here that the revenue rule is implicated, potentially barring any U.S. court from engaging in the analysis of this question.
This article will investigate the history, background, and purpose of the implicated laws, as well as discuss the various states of the law in circuits that have addressed this issue. Additionally, this article will methodically address each issue as it logically arises rather than prematurely address the issue of the revenue rule. The article will then analyze the Supreme Court’s recent decision in Pasquantino v. United States. Finally, the article will summarize the information and arguments presented herein.
II. The Applicable Laws
Several laws are implicated in the prosecution of international export smuggling under the Mail and Wire Fraud Statutes. The proper application of these laws is at the heart of this debated issue. These laws include: the Anti-Smuggling Statute, the Mail and Wire Fraud Statutes, and apparently most importantly, the common law revenue rule. The crime of export smuggling is specifically addressed by the Anti-Smuggling Statute, yet federal prosecutors charge defendants under the Mail and Wire Fraud Statutes, because they are unable to obtain convictions under the Anti-Smuggling Statute. Facing such charges, defendants argue that they cannot be prosecuted under these statutes because of the common law revenue rule.
A. Congressional Intent – The Anti-Smuggling Statute
In 1998, Congress attempted to tackle the problem of international smuggling by enacting the Anti-Smuggling Statute, which made the smuggling of goods from the United States into foreign territories illegal. The statute states that any person who smuggles “merchandise into the territory of any foreign government in violation of” that foreign government’s laws “shall be fined under this title or imprisoned not more than two years, or both.” When it enacted this law, Congress clearly imposed a reciprocity clause; the statute would only be enforced “if under the laws of the foreign government any penalty or forfeiture is provided for violation of the laws of the United States respecting the customs revenue[.]” By nature of the reciprocity clause, Congress intended to prosecute acts of export smuggling only when the targeted country was committed to prosecuting smuggling into the United States. As of today, no foreign government has enacted such a reciprocal statute. Since no foreign government maintains a law that makes smuggling into the United States illegal, it follows that the Anti-Smuggling Statute cannot be utilized.
One may wonder what the intent of Congress was when enacting a statute that, at least at the time of enactment, was moot for lack of reciprocal laws in foreign nations. In 1935, Congress passed the Anti-Smuggling Act making it a crime to smuggle goods into the United States. Congress intended to fight a two-front battle against smuggling. Therefore, Congress enacted the 1948 Anti-Smuggling Statute, making it a crime to smuggle legally obtained goods out of the United States into a foreign territory. This was intended to be an incentive for foreign governments to also make smuggling goods into the United States a crime. As stated above though, no foreign government has yet to take a bite of this apple by enacting a reciprocal law.
B. Federal Prosecutors Find a Work-Around:
The Mail and Wire Fraud Statutes
In 1872, in order to make it a federal crime to use the United States mail system as a vessel to perpetrate or intend to perpetrate a fraudulent scheme, Congress enacted the Mail Fraud Statute. Under this statute, defendants found guilty of mail fraud may be fined or imprisoned up to twenty years unless the scheme affects a financial institution, in which case they may be fined up to one million dollars or imprisoned up to thirty years.
To keep up with the evolution of technology, in 1952 Congress enacted a nearly identical statute pertaining to the use of wire, radio and/or television communications, commonly known as the Wire Fraud Statute. Similarly, the statute makes it a federal crime to use interstate wires, radio and/or television signals in connection with a scheme to defraud. It is worth noting though, that neither the Mail nor the Wire Fraud Statute enumerates against whom exactly the illegal fraud must be perpetrated. Although the penalty clause of each statute states that schemes directed at financial institutions will carry a greater penalty, the statute is ambiguous regarding any other potential targets for such schemes. It is for this reason that federal prosecutors are able to liberally use the Mail and Wire Fraud Statutes to prosecute defendants who commit or intend to commit almost any fraudulent scheme, as long as they at some point use the mail or pick up the telephone.
In export smuggling cases, there is often an issue of whether the crime qualifies as “fraud” for purposes of mail and wire fraud convictions. “It is a well-established rule of construction that ‘[w]here Congress uses terms that have accumulated settled meaning under…the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.’” At the time of the enactment of both the Mail and Wire Fraud Statutes, the well-established common law meaning of fraud required a misrepresentation or concealment of a material fact. In application to the crime of smuggling, “the essence of the crime is concealment and fraud.” According to the Restatement (Second) of Torts, Section 527, where a representation is made that has two meanings, one of which the maker knows to be false, there is fraudulent misrepresentation. Using the Mail and Wire Fraud Statutes, coupled with the common law meaning of “fraud” as described in the Restatement, federal prosecutors seek to prosecute export smuggling.
C. The Common Law Revenue Rule: Existence and Justifications
The common law revenue rule resonates back to English common law, and provides that no U.S. court will recognize, apply, or rule upon the validity of any revenue law of a foreign government. The original purpose of the revenue rule was to protect lucrative British trade from oppressive foreign taxes and customs and encourage British commerce. Regardless of its original intent, American courts accepted and implemented the rule, often referring to it as the rule of private international law. One of the primary justifications for adoption of this rule in the United States is that “[o]ur courts customarily refuse to enforce the revenue and penal laws of a foreign state, since no country has an obligation to further the governmental interests of a foreign sovereign.” In their interpretation of the revenue rule, the authors of the Restatement (Third) of Foreign Relations find that non-recognition of foreign revenue laws is discretionary, not mandatory; however, some U.S. courts interpret the common law revenue rule to be a mandatory rule imposed upon all U.S. courts. In 2004, the Supreme Court granted certiorari to Pasquantino II in order to determine the scope and proper application of the common law revenue rule, particularly in cases where recognition of another country’s revenue laws is necessary to determine if a U.S. defendant defrauded that country of “property”.
There are three primary justifications that proponents of the revenue rule typically argue. The first argument leans heavily on the issue of U.S. foreign policy, and argues that the revenue rule is necessary to maintain respect for other countries’ laws by not passing judgment upon them. While the original purpose of the revenue rule was to protect British trade, in 1929, Judge Learned Hand restated the purpose of the rule as one of foreign policy:To pass upon the provisions for the public order of another state is, or at any rate should be, beyond the powers of a court; it involves the relations between the states themselves, with which courts are incompetent to deal, and which are [entrusted] to other authorities. It may commit the domestic state to a position which would seriously embarrass its neighbor. Revenue laws fall within the same reasoning; they affect a state in matters as vital to its existence as its criminal laws. No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper.The concern is that American courts would be in a position to pass judgment on foreign laws that may conflict with American ideals.
The second argument for upholding the revenue rule is a separation of powers argument. Proponents of the revenue rule argue that where a court makes a judgment on the application of a foreign revenue law, such a ruling interferes with the executive and legislative branches’ right to make and set foreign policy. Which branch of government is empowered to set foreign policy has been hotly debated? The Constitution itself does not expound upon the proper source of foreign policy, but it does list the powers the President and Congress have which affect foreign policy. While Congress has the power “[t]o regulate Commerce with foreign Nations,” the President has the power “to appoint…and remove ambassadors,…recognize foreign states and governments, establish diplomatic relations with them, communicate official positions of the United States…, conduct negotiations, conclude international agreements, dispatch agents on international missions…, and protect the secrecy of diplomatic and intelligence documents.” Despite the uncertainty of foreign policy power among the executive and legislative branches, it is clear that the judicial branch has no power to make foreign policy. Proponents of the revenue rule argue that should the rule not be applied to export smuggling cases, courts would affect foreign policy by passing judgment on the validity of implicated foreign laws.
A third justification for the revenue rule is the argument that U.S. courts are not required to, nor should they seek to, interpret and apply a foreign body of law of which they know nothing about. Where the conviction or suit in the United States is contingent upon a finding of fact that the defendant violated the laws of a particular foreign nation, the finder of fact would have to determine whether those foreign laws have been violated, assuming that the defendant does not admit to violation of the foreign law. In other federal criminal cases, where the court is compelled to try the issue of a violation of foreign law,  the Government must obtain foreign experts to testify that the foreign law was violated, a process that is ripe with difficulties. Because of these inherent difficulties, coupled with the burdens placed on the U.S. courts, proponents of the revenue rule argue that the rule should remain as a bar for export smuggling prosecutions under the Mail and Wire Fraud Statutes.
III. Circuit Splits: The Current State of
the Common Law Revenue Rule
Like many difficult areas of law, the application of the common law revenue rule and the Mail and Wire Fraud Statutes is fractured among the circuit courts. Only the First, Second, and Fourth circuits have addressed this application. The likely reason that only three circuits have addressed this issue is simply because of the geographic limitations inherent in the fact scenarios. In the three cases discussed in detail below, the defendants were all operating their schemes in the northeast region of the United States, advantageously using their proximity to the Canadian border to carry out their smuggling operations. While the defendants in the three cases discussed below acted similarly, the three circuits have not. The varying methods the circuits have used to address export smuggling prosecutions under the Mail and Wire Fraud Statutes is exhibited in the opinions of the courts.
A. First Circuit: United States v. Boots
In March 1996, the First Circuit Court of Appeals decided the case of United States v. Boots, setting the First Circuit’s precedent where the Mail and Wire Fraud Statutes and the common law revenue rule conflict. In Boots, defendants engaged in a scheme to transport legally obtained tobacco into Canada “without paying the taxes and excise duties levied upon the importation of tobacco by Canadian laws.” Defendants’ scheme came to the attention of the Federal Bureau of Investigation (“FBI”) when informant Frederick Moore, chief of police, was approached by defendants to aid in the scheme. In furtherance of the crime, defendants obtained large amounts of tobacco products on Indian reservations located in northern New York. The tobacco was then transported into Canada via border crosspoints from the reservation, passing across the St. Lawrence River in a boat. Defendants would meet their Canadian contacts, who paid for the illegally imported tobacco. Over the course of the scheme, approximately 1,850 kilograms of tobacco was smuggled into Canada by defendants. According to a witness for the prosecution, $106.47 was due to Canada per kilogram of tobacco as excise duties, totaling nearly two hundred thousand dollars in unpaid Canadian taxes. As there were several intrastate telephone conversations made in furtherance of the crimes, prosecutors were able to bring actions against defendants under the Wire Fraud Statute.
As part of defendants’ defense, they argued that their intent was not to defraud Canada out of its due taxes, but rather that they carried out their activities with “a good faith belief in an aboriginal right to trade tobacco freely with Canada.” In its analysis of the district court’s finding, the First Circuit addressed two issues that pertained to the wire fraud convictions. First, the court addressed whether defendants’ act of transporting tobacco into Canada could be considered “fraud,” an element necessary for conviction under the statute, in the absence of any affirmative misrepresentation. Second, the court addressed the issue of whether unpaid Canadian tax revenue constituted “property,” as intended under the Wire Fraud Statute.
As support for its proposition that an act “not to declare the tobacco was a sufficient form of deceit to meet the requirements of § 1343[,]” the prosecution cited several cases where similar failures to declare were sufficient for a finding of fraud; however, the court distinguished the prosecution’s supporting citations from the case at hand, noting that “the object of the scheme…was exclusively to defraud a foreign government, rather than our own, of customs and tax revenue imposed under foreign law.” In one paragraph of the opinion, the court simply reasoned that because the intent to defraud was directed at a foreign country, “this added factor pushe[d] defendants’ scheme beyond the parameters of the frauds cognizable under § 1343 [the Wire Fraud Statute].”
Regarding the second issue, the prosecution again relied on case law to support its argument that unpaid tax revenues constituted “property” for purposes of prosecution under the Wire Fraud Statute. The court noted that all of the Government’s citations failed to deal specifically with the instance where the fraud “involved a scheme to deprive a foreign government of its own taxes and similar exactions.” Thus the court rejected the Government’s argument that “[f]ederal wire prosecutions have been based on frauds against private foreign businesses and individuals[,]” and distinguished that “schemes aimed at depriving a foreign government of duties and taxes are not the same as domestic tax frauds, nor are they even the same as private commercial frauds aimed at foreign business entities or individuals.” The court further stated that because a foreign sovereign’s revenue laws may conflict with the ideals of the United States citizenry, it has long been held that no such laws would be enforced in United States courts. In its analysis, the court alluded to the supporting arguments of the revenue rule: that courts are not competent to, nor should they be burdened with interpretation of foreign tax laws, and to do so interjects the judicial branch into the arena of foreign policy, an area reserved for the legislative and executive branches. The court stated:
The rationale of the revenue rule has been said to be that revenue laws are positive rather than moral law; they directly affect the public order of another country and hence should not be subject to judicial scrutiny by American courts; and for our courts effectively to pass on such laws raises issues of foreign relations which are assigned to and better handled by the legislative and executive branches of government.
Finally, the court stated that in the case of export smuggling, Congress manifested its intent in the Anti-Smuggling Statute. Specifically, Congress meant to affect foreign policy by prosecuting such crimes only where the foreign country possess a reciprocal arrangement to do the same. To allow prosecutions for the same crimes the Anti-Smuggling Statute is intended to curtail would undermine the clear intent of Congress. Although the court addressed and argued on behalf of upholding the revenue rule’s application, it ultimately rested its reversal of defendants’ wire fraud convictions on the rule stating that “foreign tax and customs frauds… are not schemes to defraud within the meaning of § 1343[.]” Boots set the First Circuit precedent that export smuggling schemes could not be prosecuted under the Mail and Wire Fraud Statutes, not because such prosecutions were barred by the revenue rule, but because such schemes did not constitute “fraud” under the meaning of the statutes.
B. Second Circuit: United States v. Trapilo
In 1997, the Second Circuit Court of Appeals, in United States v. Trapilo, held that the revenue rule did not bar prosecutions under the Mail and Wire Fraud Statutes. In Trapilo, the defendants engaged in a scheme in upstate New York on the St. Regis Mohawk Indian Reservation, which extends into both United States and Canadian territory. Defendants’ scheme included ordering large quantities of liquor, and making use of interstate wires via phone calls, facsimiles, and wire transmissions. The legally-obtained liquor was then transported into Canadian territory from the United States via the St. Lawrence River. Other participants then delivered the products to black marketers operating in Montreal and Toronto. Criminal actions were brought against defendants under the Wire Fraud Statute. Defendants moved to dismiss, arguing the reasoning in Boots, that “the government did not have the authority to prosecute wire fraud aimed at defrauding a foreign government of tax or customs revenue.” The district court agreed with the reasoning in Boots, and concluded that “the common law ‘revenue rule’ and other prudential considerations precluded application of the federal Wire Fraud Statute in alleged schemes to defraud foreign governments of tax revenue.” Accordingly, the district court dismissed defendants’ indictment.
On appeal, the Government argued that the court in Boots erred, and that “the Wire Fraud Statute condemns any scheme to defraud where interstate or foreign telecommunications systems are used, and does not require the court to determine the validity of Canadian tax law prior to finding a violation of the statute.” The Second Circuit agreed. The court’s analysis began with the application of statutory interpretation principals, reasoning that the plain meaning of the statutory language must be applied in absence of clear Congressional intent to the contrary. Applying this reasoning, the court stated that a plain reading of the Wire Fraud Statute clearly prohibits any scheme intended to defraud. The court further stated that the focus on the Mail and Wire Fraud Statutes is not on the property that is defrauded, but rather on the intent to defraud. As such, the Mail and Wire Fraud Statutes prohibit the scheme, rather than the actual defrauding of property. To support its determination that the scheme is the focus, the court further stated that Second Circuit precedent has upheld convictions where the defendant intended to defraud the state of New York of tax revenue, but ultimately failed to do so. The court stated, “[t]he identity and location of the victim and the success of the scheme are irrelevant.”
In applying this reasoning to schemes where the intent is to evade foreign taxation, the court reasoned that as long as the scheme involves the misuse of wires in furtherance of the scheme, the conviction is valid under the statute. “The intent to defraud does not hinge on whether or not the appellees were successful in violating Canadian revenue law, as ‘[s]ection 1341 punishes the scheme, not its success.’” In a footnote, the court alluded that their reasoning was, at least partly, couched in conspiracy law application and analysis, noting that their reasoning is “consistent with the law of conspiracy.” For these reasons, Second Circuit Court of Appeals held that the common law revenue rule was improperly implicated in the analysis of this case, and accordingly, defendants’ indictments were reinstated. With this case, the Second Circuit set the precedent that the revenue rule was not implicated in export smuggling cases because the determination of “property” was an irrelevant part of the convictions.
IV. United States v. Pasquantino II:
A. Facts of the Case and Case History
Defendant brothers David and Carl Pasquantino engaged in a smuggling operation that began in 1996 and continued through May 2000. Defendants smuggled vast quantities of legally obtained liquor into Canada to be sold on the black market, an operation envisioned after Canada significantly increased its sin taxes on liquor[.] The intent of the scheme was to circumvent the excise duties and tax revenues that would otherwise be paid on legally-imported goods and reap the profits.
The defendants were residents of Niagara Falls, New York, where they placed large orders for low-end liquor by telephone with various discount liquor stores located in Maryland. A driver, usually not one of the defendants, would rent a truck, pick up the liquor orders and transport them back to New York for storage. Later, another driver would smuggle smaller quantities of the liquor across the Canadian border in the trunk of a car.
The United States Bureau of Alcohol, Tobacco and Firearms (“ATF”) became suspicious after discovering that eight discount liquor stores in Maryland had purchased unusually large quantities of low-end liquor from their wholesalers. With cooperation from several liquor store owners, ATF agents were able to pursue an investigation which netted “numerous telephone, truck rental, and motel records, all which evinced the scheme.” A joint investigation by ATF agents and the Royal Canadian Mounted Police led to surveillance of defendants and associates “loading liquor in Maryland and unloading it in Canada;” marked bottles of liquor were subsequently found in Canada.
On April 13, 2000, the three defendants and four other individuals were indicted on six counts of wire fraud and aiding and abetting wire fraud. Defendant petitioners moved to dismiss “on the ground that the United States did not have a justiciable interest in their putative smuggling scheme against Canada, a foreign sovereign.” The motion was denied.
Prior to the trial, the Government failed to give notice under Federal Rule of Criminal Procedure 26.1 that it intended to prove violation of a foreign law. Instead, during the Government’s case in chief, Canadian Customs Intelligence Officer Gina Jonah (“Officer Jonah”) presented testimony that a Canadian federal excise tax and general sales tax existed, which approximated about one-hundred American dollars per case of liquor imported from the United States into Canada. Officer Jonah’s testimony did not include her procedure for calculating such an amount, nor did her testimony explain the Canadian excise tax laws. Defendants were subsequently convicted and sentenced to fifty-seven months imprisonment each, which included “an enhancement based on the government’s estimate of ‘intended loss’ to Canada and the province Ontario pursuant to U.S.S.G. § 2F1.1 (2000).”
A Fourth Circuit Court of Appeals panel reversed the convictions in September 2002, relying on the “long-standing common law doctrine providing that courts of one sovereign will not enforce final tax judgments or unadjudicated tax claims of other sovereigns[.]” In support of its decision, the panel commended the decision of the First Circuit in United States v. Boots, in which a conviction of wire fraud based on failure to pay foreign taxes was barred by the revenue rule. The court further stated that the Second Circuit issued a “flawed” decision in the case of United States v. Trapilo, where the court found that the revenue rule did not bar such a conviction. The Fourth Circuit reheard the case en banc, and concluded with a decision that overturned the panel’s adjudication and reinstated defendants’ convictions. The Fourth Circuit refused to presume that when Congress enacted the Wire Fraud Statute, it meant to never allow convictions whereby such convictions required the recognition of a foreign tax law. Without being able to make such a finding, the court stated that it was bound by the “plain language of the wire fraud statute[,]” and thus defendants’ convictions were supported.
B. The Fourth Circuit Court’s Ruling
In Pasquantino II, the case to which the United States Supreme Court granted certiorari, the Fourth Circuit Court, sitting en banc, held that the common law revenue rule does not bar convictions under the Mail and Wire Fraud Statutes.
On appeal, the defendants argued that their convictions under the Wire Fraud Statute should be vacated for violation of the revenue rule. The court began its analysis of the application of the revenue rule by attempting to ascertain the scope and history of the revenue rule. The court stated that “[u]nder relevant Supreme Court precedent, the only circumstance under which we may hold that this conduct is beyond the reach of the wire fraud statute is if, at the time Congress enacted the Wire Fraud Statute in July 1952, well established common law provided that the courts of one sovereign were prohibited from recognizing the existence of the revenue laws of a foreign sovereign.” The court further stated the various articulations of the revenue rule. The court looked primarily at the Restatement (Third) of Foreign Relations Law of the United States (1987), articulating that the Restatement has often been relied upon by the courts in determining the application of the revenue rule. Specifically, the Restatement restates the revenue rule as “Courts in the United States are not required to recognize or to enforce judgment for the collection of taxes, fines, or other penalties rendered by the courts of other states.” The court also cited Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., in support of this interpretation, quoting “‘a longstanding common law doctrine providing that courts of one sovereign will not enforce final tax judgments or unadjudicated tax claims of other sovereigns.’” Finally, the court cited Her Majesty the Queen ex rel. B.C. v. Gilbertson, stating that this was the first federal case to invoke the revenue rule, a case which “described the common law revenue rule as an exception to the general rule in that judgments from a foreign country are recognized by the courts of this country when the general principals of comity are satisfied.”
Defendants argued in their brief to the Fourth Circuit that the revenue rule’s proper interpretation must be one of a mandatory rule, rather than a discretionary rule as the Restatement would have it; however, the court dismissed this argument as being unsupported by proper authority, as defendant’s support was taken from alleged dicta. The court determined that the common law revenue rule, regardless of its application, is a broad, permissive interpretation, allowing United States courts to choose when to enforce foreign revenue laws. It is also important to note, as the dissent does, that at some point in its reasoning, the Fourth Circuit narrowed its interpretation of the scope of the revenue rule to the term “enforcement” and did not include the term “recognition.”
The Fourth Circuit additionally addressed whether the common law revenue rule is applicable to the Mail and Wire Fraud Statutes, even if it is assumed that the revenue rule is narrow in scope and requires courts not to recognize or enforce foreign revenue laws. The court found that the Mail and Wire Fraud Statutes do not seek to enforce the revenue laws of another sovereign, but rather to prevent the misuse of our mail and wire systems. “Thus, the fact that the property at issue in the [d]efendants’ wire fraud scheme belonged to foreign governments by virtue of these governments’ respective revenue laws is merely incidental to prosecution under the federal wire fraud statute.” Further, the defendants argued that to allow courts to address validity issues of a foreign sovereign’s revenue laws interferes with foreign policy, an area of law reserved for the executive and legislative branches, and thus raises separation of powers issues. The court dismissed defendants’ separation of powers concerns with very little reasoning: “to the extent matters of foreign policy were implicated by prosecution of the [d]efendants on the wire fraud charges in this case, such matters were passed upon by the only two branches of our federal government charged by our Constitution with the power to make foreign policy decisions.” The court reasoned that because Congress enacted the statute, and because federal prosecutors under the authority of the executive branch initiated the charge under the statute, the constitutional limitations of foreign policy were met.
The Fourth Circuit distinctly separated the issue of the applicability of the revenue rule from the factual determination that unpaid potential tax revenue constituted “property” for purposes of the wire fraud conviction. After determining that the revenue rule was inapplicable due to its historical scope, the court then addressed the issue of whether the “property” element of the wire fraud statute was satisfied. Defendants argued that as unrealized tax revenue, there was no “property” defrauded from Canada. To recognize the unrealized tax revenue as “property” is to recognize a property right in something that has yet, and might not, come into existence. While there may be rights to unrealized property, a staple tenet of property law, the Mail and Wire Fraud Statutes do not address property rights, only realized property. In response to this argument, the court reasoned that the purpose of the Mail and Wire Fraud Statutes is to prohibit the misuse of the communication systems. As such, the focus of the statute is on the scheme employed or intended to be employed, not the ultimate property defrauded.
In sum, the Fourth Circuit employed a much deeper analysis than the courts of Boots and Trapilo, and ultimately held that the proper interpretation of the revenue rule is that it is a discretionary rather than a mandatory limit on courts, and that in the event that the revenue rule is applied to mail and wire fraud convictions, the nature of the statutes do not require the court to pass judgment on the validity of the property defrauded.
The dissent took a differing view. First, the dissent attacked the court’s interpretive use of the Restatement’s articulation of the revenue rule, specifically that the court ignored the Restatements’ phrase “to recognize”. The dissent argued that “[w]ith its constrained application of the revenue rule, the majority has created new law that does not find support in the Restatement, Supreme Court precedent, nor in any of the rulings from our sister circuit.” In the dissent’s view, the proper interpretation of the revenue rule was the mandatory interpretation. For support, it cited the case of Banco Nacional de Cuba v. Sabbatino, a case where the Supreme Court implied that the revenue rule applied to any effect a foreign revenue law had upon the courts in the United States and that the rule was not limited only to instances where the foreign revenue law was attempting to be enforced. The dissent criticized the majority’s narrow interpretation of the revenue rule, and noted that in making its ruling, the court created a circuit split that was unwarranted and unnecessary. Finally, the dissent argued that should the revenue rule’s application be permissive as the majority would have it, the policy considerations and rationales behind the rule “forcefully support[ed] its application” in export smuggling cases.
The dissent also criticized the majority’s holding that unrealized Canadian tax revenue constituted “property.” It argued that the existence of “property” depends upon a factual finding that the revenue laws of Canada had been violated. But in export smuggling cases, defendants are not accused of defrauding a foreign sovereign of actual property but of a property right. Accordingly, to impose convictions upon the defendants meant that “this court would have to conclude that Canada’s and Ontario’s ‘right to be paid money’ had materialized.” In the event that defendants challenged the validity of such laws, the dissent stated that “‘our courts would have to pass on defendants’ challenges to such law and any claims not to have or intended to violate them.’” The dissent weighted this determination as having the potential for grave consequences on United States foreign relations with other countries, which strongly encourages upholding the revenue rule’s application.
Additionally, the dissent took exception to the manner in which the district court determined that Canadian tax revenue had accrued and the amount of tax monies allegedly owed to Canada and Ontario. The court relied only upon the non-expert testimony of a Canadian Customs officer, who neither offered evidence of the existence of the Canadian revenue laws allegedly violated, nor the method she employed to determine the amount of tax revenue allegedly owed. The dissent strongly criticized the district court for failing to determine if thee allegations of tax evasion were accurate as a matter of Canadian law and for relying on the unsupported figures to impose defendants’ sentences. Finally, the dissent pointed out that to vacate defendants’ convictions would not leave them unpunished. Defendants were indicted in Canada for failure to file excise taxes and for the unlawful importation of spirits. The executive branch could choose to extradite. Because of these reasons, the dissent believed that the defendants’ convictions should have been overturned.
V. Analysis of the Implicated Issues
A complicated set of issues was before the Court in Pasquantino v. United States. While it appears that the true crux of cases such as Pasquantino is the determination of the revenue rule and its application to the Mail and Wire Fraud Statutes, it is this very issue that has led to the current confusion. To parse out exactly what lay before the Court in Pasquantino, a methodical and logical path must be followed. Prior to jumping ahead to the revenue rule issue, a clear analysis of each step leading to issue must first be overcome. Following such an analysis shows that the issue of the revenue rule is improperly implicated because convictions for smuggling goods into another country are improperly prosecuted under the Mail and Wire Fraud Statutes. The practice federal prosecutors have employed of “working around” the Anti-Smuggling Statute is in direct conflict with clear congressional intent, and accordingly is improper.
A. Acting Against Clear Congressional Intent
As stated above, Congress enacted the Anti-Smuggling Statute, clearly making smuggling goods into another country in violation of its tax laws a federal crime, but only if that country has a reciprocal relationship with the United States to do the same. When federal prosecutors turn to the Mail and Wire Fraud Statutes to obtain a conviction that is otherwise unobtainable under the Anti-Smuggling Statute, they are effectively preempting clear congressional intent.
In order to maintain sovereign revenue considerations and promote international diplomacy, Congress has long enacted international tax treatises to handle international transactions. Therefore, Congress was well-versed in the idea of reciprocal laws at the time it enacted the Anti-Smuggling Statute in 1939. The congressional record shows that when Congress was drafting the Anti-Smuggling Statute, its primary concern was the importation of alcohol from Canada into the United States. At the time, prohibition of alcoholic spirits was still in effect, and Congress hoped the Anti-Smuggling Statute would be an incentive for Canada to enact laws making smuggling alcohol into the United States a Canadian offense. The irony is not lost in the present-day cases of export smuggling; however, the original intent of the seventy-sixth Congress must still be adhered to. Arguably, allowing mail and wire fraud convictions for export smuggling crimes undermines the express intent of Congress. Allowing the convictions to remain and federal prosecutors to continue to use the statutes to indict export smugglers effectively grants a greater enforcement of Canadian revenue laws in the United States than the United States revenue laws are afforded in Canada. This is against the intent of the seventy-sixth Congress’s enactment of the Anti-Smuggling Statute.
B. Is a Failure to Disclose Smuggled Goods Actually “Fraud”?
As argued in the preceding paragraph, mail and wire fraud convictions for export smuggling violate the clear congressional intent behind the Anti-Smuggling Statute; however, to conclude the analysis here would be premature. Therefore, notwithstanding the violation of congressional intent, where the Mail and Wire Fraud Statutes are applied to export smuggling operations, the next question in the analysis is whether smuggling legally-obtained goods into another country constitutes “fraud.”
Defendants in export smuggling cases often argue that failure to disclose goods potentially subject to excise taxes is not “fraud” under the common law meaning of the word. To determine the answer to this issue, the starting point is an application of traditional statutory interpretation. Where Congress enacts a statute, “[i]t is a well established rule of construction that… ‘[w]here Congress uses terms that have accumulated settled meaning under… the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.’” The well-established meaning for actionable fraud is a misrepresentation or concealment of material fact. Accordingly, defendants often argue that their actions cannot be actionable as “fraud” because a “scheme” is not actual deceit or affirmative misrepresentation. This argument is often rejected. As the court in Trapilo determined, “[t]he term ‘scheme to defraud’ is measured by a ‘non-technical standard. It is a reflection of fair play and right dealing in the general [and] business life of members of society.’” “Because the act of smuggling violates fundamental notions of honesty, fair play and right dealing, it is an action within the meaning of a ‘scheme to defraud.’” For these reasons, where there is an issue of determining whether the act of smuggling constitutes “fraud” for purposes of convictions under the Mail and Wire Fraud Statutes, arguably the answer must be affirmative.
C. Determining if Lost Tax Revenue is “Property”
The next issue that logically follows in the analysis of this case is the determination of whether the tax revenue allegedly owed and accrued via export smuggling schemes constitutes “property” for purposes of mail and wire fraud convictions. This is the ultimate issue that brought Pasquantino II before the Supreme Court. The various circuit courts’ analysis of this issue has differed, and accordingly the circuit courts have erroneously, at times, failed to discern that there are two approaches to answering this question, each of which must be addressed. The first question in the analysis of this issue is whether unassessed tax revenue is “property”, as intended by Congress when they enacted the Mail and Wire Fraud Statutes by applying the common law meaning of the term “property”? The second inquiry into the issue is: If the answer to the first question is affirmative, then the second inquiry is whether recognizing this alleged “property” or determining the amount of the tax revenue allegedly owed violates the common law revenue rule? The analysis under each question could effectively bar prosecutions. It is not until a full and proper analysis of all the issues of an export smuggling cases are addressed that one can see exactly where a revenue rule analysis fits in. To jump to this determination without logically going through prior analysis is premature and results in erroneous conclusions.
1. Determining Congressional Intent, Revisited: Did Congress Mean for Unassessed Tax Revenue to Constitute “Property” Under the Mail and Wire Fraud Statutes?
Black’s Law Dictionary defines a property right as a claim or interest in tangible or intangible property. Specifically, “property” is defined as “any external thing over which the rights of possession, use, and enjoyment are exercised[.]” “Property interests…are not created by the Constitution. Rather, they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law.’” In Neder, the Court reasoned and upheld a long-time canon of congressional intent: “Under the rule that Congress intends to incorporate the well-settled meaning of the common-law terms it uses, we cannot infer from the absence of an express reference to materiality that Congress intended to drop that element from the fraud statutes.”
The Court addressed the question of determining “property” for purposes of the Mail and Wire Fraud Statutes in 2000, when it decided Cleveland v. United States. In Cleveland, defendants were initially convicted under the Mail Fraud Statute for scheming to obtain video poker licenses from the state of Louisiana via bribing state legislators. In its review of this case, the Court focused its inquiry on the determination of whether the fraudulent scheme to obtain the video poker licenses constituted a scheme to defraud the state of Louisiana of “property”. The Cleveland Court looked to the question of whether the interest alleged to be “property” is regulatory, and whether the interest is transferable. First, the Court determined that Louisiana’s interest in granting licenses (and obtaining the revenue flowing there from) was regulatory in nature, and second, that this was a long-time recognized property right. The Court reasoned that because Louisiana’s right to require the licenses was coupled with criminal penalties for failure to comply with law, the law imposing the license requirement was regulatory in nature. The Court also poignantly noted that although the regulation created an expected stream of revenue for the state, this was incidental and did not create a property right by creating an expectation. Second, to support its finding, the Court cited precedent when ruling that the Mail and Wire Fraud Statutes were only meant to protect individual property rights, and, as a secondary consideration, because mail fraud is a predicate offense for purposes of RICO convictions, the scope of “property” should be defined narrowly. Therefore, under the ruling of Cleveland, a court must look to whether the alleged property right is transferable, if it has traditionally been considered a property right, and if it is held by an individual.
In the case of Pasquantino II, as well as other export smuggling cases, the only “property” of which the foreign sovereign was defrauded was the right to collect revenue, coupled with criminal penalties for failure to comply with Canadian excise tax laws. Under the reasoning in Cleveland,  this does not qualify as “property” for purposes of mail and wire fraud convictions, because the right to collect Canadian tax money is not held by an individual and is not transferable. Although the right to collect money owed is a traditional property right, on balance, it is difficult to find that the interest of a foreign government in collecting alleged tax revenues was meant to be protected by the Mail and Wire Fraud Statutes. In dicta, the Cleveland Court added that “[e]ven when tied to an expected stream of revenue, the State’s right of control does not create a property interest any more than a law licensing liquor sales in a State levies a sales tax on liquor. Such regulations are paradigmatic exercises of the State traditional police powers.” Such clear reasoning and statements by the Court in Cleveland warrant upholding the standard that alleged tax revenue is merely a regulation and not an intended property right for purposes of mail and wire fraud convictions.
In addition to the above reasoning, and in particular to the case at hand, there is no evidentiary basis for affirming the district court’s determination that Canada was due tax revenue. During the trial of the Pasquantino II defendants, the court determined that Canada and Ontario were due tax revenue, as well as the amount owed based upon the non-expert testimony of a Canadian customs officer. This officer offered no support for why the duties were owed in this case or for her computation of the alleged taxes owed. Under the Federal Rules of Evidence, opinions offered for scientific, technical, or other specialized skill are considered “expert opinions” and, as such, must (1) be based upon sufficient facts, (2) be the product of reliable principles and methods, and (3) be the product of the application of these principles and methods to the facts of the case. Where the witness is not testifying as an expert, however, the Rules require that the witness’s testimony only be based on personal opinions or inferences. Additionally, according to the Federal Rules of Civil Procedure, should an expert testify, the rules of discovery require that in the party’s initial disclosures, “a written report prepared and signed by the witness” must be provided. The testimony of Officer Jonah failed to comply with the above-stated rules. If her testimony was offered as non-expert testimony, then she failed to stay within the limits of lay witness testimony, as defined by Federal Rule of Evidence 701. If her testimony was offered as expert testimony, the prosecution failed to comply with Federal Rule of Civil Procedure 26(a)(2)(A) and provide an export report. Since Officer Jonah’s testimony failed to qualify in substance as lay testimony or in form as expert testimony, it is an insufficient basis for finding proof of lost Canadian tax revenue.
At this point in the article, the issues preceding the revenue rule analysis for export smuggling convictions have been addressed. As one can see, there is strong argument for disallowing prosecutions of export smuggling under the Mail and Wire Fraud Statutes. Notwithstanding this argument, the next logical step in the analysis of mail and wire fraud prosecutions of export smuggling is to address the revenue rule’s application.
2. The End of the Road: Does the Common Law Revenue Rule Bar the Factual Determination that Defendants Defrauded Canada of “Property”?
Finally, in addressing this issue, the starting point is to determine the original scope of the common law revenue rule, such as the court in Pasquantino II attempted to do. As articulated by the Pasquantino II court, the Restatement (Third) of Foreign Relations states that the common law revenue rule is a discretionary rule, meaning that courts of the United States are not required to enforce or recognize a foreign sovereign’s tax laws. On the other hand, other courts have treated the common law revenue rule as a mandatory rule, one where courts have no discretion to choose whether to exercise the rule or not. The answer and analysis of this question alone warrants a whole other discussion. Assuming, arguendo, that the common law revenue rule is a mandatory rule adopted from England, such a reading of the rule is routinely upheld by the courts to further the often-cited justifications. The policy considerations underlying the revenue rule support holding that the revenue rule bars export smuggling prosecution under the Mail and Wire Fraud Statutes.
To create the precedent that federal prosecutors can prosecute a United States citizen who fails to pay an alleged tax owed to another country imposes a huge burden on the United States court system, and creates inherent difficulties in doing so. These burdens are not only felt by the agents of the court, but they also strain the resources of the executive branch and impose greater litigation costs on defendants. According to Federal Rule of Criminal Procedure 26.1, any party wishing to invoke foreign law bears the burden of proving that foreign law. Though this may seem no more burdensome than any factual determination that must be proven in the course of a trial, experience and precedent has shown that the inquiry is much more problematic. In United States v. BCCI Holdings (Luxemburg) S.A., the court stated that interpretations of foreign law are not merely factual determinations, but are findings of law. For this reason, when courts are faced with the determination of a foreign law, they either inadequately determine the application, breadth and/or validity of the foreign law, or are forced to rely on expansive investigations and information provided by the litigants. In BCCI Holdings, to establish the foreign law and application thereof, the prosecution presented six experts, ranging from Bangladeshi Supreme Court justices to advocates of that court. Not only does this demonstrate the expansive lengths that must be employed to prove a foreign law, it also demonstrates a court’s reliance on witness testimony to determine law.
The determination of how a court should go about determining the applicability of foreign law is also a complicated issue. “[M]any countries do not agree on the definition of [tax] evasion… due to differing attitudes toward constituent elements of evasion[.]” In Universal Sales Co. v. Silver Castle, Ltd., the appellate court held that the district court’s denial to consider an expert’s opinion on the applicability of Japanese trademark law was erroneous. The district court believed that it was free to deny consideration of the expert’s opinion under Federal Rule Civil Procedure 44.1, a rule that allows a court to conduct its own research in determining foreign law. Instead, the appellate court held that because the district court failed to do its own investigation into the law, that it could not ignore the expert testimony.
To further complicate matters, under statutory regulation, court-approved experts are limited to a fee of one thousand six hundred dollars ($1,600). Although litigants may obtain an exception to this rule from the magistrate, such determinations have often proved complicated and difficult. Additionally, where an indigent defendant clearly shows that he has a particularized need of expert testimony, the trial court is obligated to appoint such experts at the expense of the state. Therefore, the limitation of expert fees coupled with the complicated issue of providing expert witnesses to indigent defendants further burdens the judicial system in cases where foreign laws are sought to be applied.
There is no argument against allowing litigants to prove the existence of violation of a foreign law in American courts, a practice well-employed in the United States. The inherent complications of tax and revenue laws, as well as the multitude of purposes for enacting revenue and tax laws, strongly discourage judicial inquiry into the validity of foreign revenue laws. As Judge Learned Hand argued, where a revenue law carries with it penal authority, to recognize the application of the law a court must inquire into the moral purpose of the law, and where this moral purpose conflicts with our inherent sense of morality in the United States, the court is put into a very precarious position: either enforce the law against its conscience, or not enforce the law on moral reasons and risk embarrassing or angering the foreign sovereign. The common consensus among both the general populace, as well as Congress, is the groan that the tax laws of this State are vastly complicated and laborious. Indeed, the Supreme Court of the United States has recognized this fact. Although it is a common canon of criminal prosecution that ignorance of the law is no excuse, successful criminal prosecutions for tax fraud or evasion of United States tax laws requires proving defendant’s intent. Congress inserted the element of “willfulness” into the tax statutes requiring specific intent to violate tax laws. The purpose of the “willful” element is disrespected when defendants of foreign tax evasion claim good-faith as a defense and the court subsequently ignores it.
The separation of powers concerns that arise are another consideration for upholding the revenue rule’s application to export smuggling cases. There has long been discourse about the breadth of each branch’s scope of power in foreign policy-making; however it is uncontested that this determination is between the executive and legislative branches, and that the judicial branch has no place in setting foreign policy. The Government argues that the Mail and Wire Fraud Statutes implicitly grant authority to the executive branch to use its discretion in determining which export smuggling prosecutions will not offend the current state of foreign policy. By asserting this argument, the Government implies that the separation of powers issues are circumvented because the executive branch, i.e. federal prosecutors, will maintain the status quo of foreign policy via their discretion in choosing which cases to bring. Therefore, by exercising this discretion, the executive branch ‘shields’ the judicial branch from having to decide cases that may interfere with foreign policy and foreign relations; however, “[t]here is no evidence of ‘legislative authorization’ for the executive… branch to take upon themselves the delicate task of interpreting the revenue and penal law of foreign sovereigns.” This argument, though, presumes that Congress meant to circumvent the revenue rule when enacting the Mail and Wire Fraud Statutes. Further, it seems impractical to believe that each federal prosecutor’s independent decisions will consistently comport with the executive branch’s foreign policy initiatives. Although the Government argues that there really are no separation of powers concerns, their arguments lack legislative support and practicality.
The arguments for upholding the revenue rule in export smuggling and Mail and Wire Fraud cases have been misplaced in the analysis. A methodical analysis of the issues leading up to the question of the revenue rule show that although the arguments are proper, they must be placed in the correct order of the analysis in order to be effective. But once the revenue rule issue is properly reached, policy considerations support the finding that it is indeed applicable to mail and wire fraud prosecutions of export smuggling.
D. A Secondary Consideration:
Racketeer Influenced and Corrupt Organizations Act
A caveat consideration that the Court could take into consideration is the affect that the ruling will have on Racketeer Influenced and Corrupt Organizations (“RICO”) Act cases. “RICO broadly created a civil treble damages remedy for any person injured in its business or property by reason of a violation of the statute.” “To establish a RICO claim, a plaintiff must show: (1) a violation of the RICO statutes…; (2) an injury to business or property; and (3) that the injury was caused by the violation of [RICO].” Foreign countries who are victims of export smuggling have attempted to utilize this statute to recover the tax revenue they believe they are due.
In Attorney General of Canada v. R.J. Reynolds Tobacco Holdings, Inc., the Second Circuit court frustratingly held in exact opposite to what it held in Trapilo. They held that even though the primary purpose of the RICO statute was to punish racketeering, the revenue rule barred finding that foreign tax revenue constituted property. To distinguish, four years earlier, the same court held that the revenue rule did not bar finding that foreign revenue constituted property in mail and wire fraud convictions.
In determining the application of the revenue rule to export smuggling schemes, the Court should consider the possible effects of its decision on RICO claims brought by foreign governments. Allowing tax revenue to qualify as “property” for purposes of mail and wire fraud convictions arguably allows the same finding for RICO claims. In such cases, successful RICO plaintiffs are attempting to force U.S. courts to enforce tax judgments on defendants. Such a practice violates the traditional notions of the revenue rule and, therefore, warrants upholding the revenue rule’s application.
VI. The Supreme Court Decides
On April 26, 2005, a strongly-divided Court rendered its decision in Pasquantino v. United States. Writing for the Majority, Justice Thomas held that the revenue rule was not a bar to prosecutions for export smuggling under the Wire Fraud Statute. Justice Ginsburg filed a dissenting opinion, joined by Justice Breyer and joined in part by Justices Scalia and Souter, arguing that export smuggling prosecutions were improper under the Wire Fraud Statute.
A. The Majority Opinion
After a quick recitation of the facts, Justice Thomas narrowed the scope of the case to the determination of “whether a scheme to defraud a foreign government of tax revenue violated the wire fraud statute.” Immediately in footnote one, he dismissed any implication of the Racketeer Influenced and Corrupt Organizations Act in this decision, and expressly stated that this decision has no bearing on the determination of whether export smuggling is a predicate offense to a RICO action. After dispensing with such disclaimers, the Majority launched into its analysis.
The first issue the Majority addressed was whether export smuggling may be considered proscribed by the Mail and Wire Fraud Statutes. The Court broke this analysis into two questions: (1) whether the defendant engaged in a “scheme or artifice to defraud”, and (2) whether the object of the fraud constituted ‘property’ under the Wire Fraud Statute. The Court addressed the second element first; concluding that the right to collect money is a “valuable entitlement” that constitutes a protected property interest. In coming to this quick conclusion, the Court stated that had petitioners complied with the revenue laws of Canada, Canada would have acquired property in the form of tax money. Therefore, circumventing these tax laws inherently deprived Canada of its property.
After concluding this, Justice Thomas had little difficulty finding that petitioner’s scheme to circumvent this property interest constituted a “scheme to defraud”. In further support, he turned to an analysis of common law fraud, and cited that the right to be paid money was a property right, deprivation of which constituted fraud. Finally, the Majority addressed the conflicting reasoning in Cleveland v. United States. The Court distinguished the reasoning in Cleveland, which held that a state’s interest in a video poker license was not a property interest. Justice Thomas argued that in Cleveland, the state interest in the licenses was “‘purely regulatory’ and ‘[could not] be economic.’” Using this apparent distinction, the Majority argued that Cleveland was different because, here, Canada’s interest was purely economic. Therefore, the Justice Thomas concluded that the reasoning in Cleveland is consistent with the ruling in the case before the Court.
After couching its ruling in the determination that the Wire Fraud Statute proscribes export smuggling, the Court then turned to the issue of Congressional intent and the Anti-Smuggling Statute. Justice Thomas concluded that neither through the Anti-Smuggling Statute nor through U.S. tax treaties did Congress mean to preempt mail and wire fraud convictions for export smuggling schemes. In short reasoning, the Majority stated that since the proscribed conduct is the domestic use of mail or wire systems, it is improper to narrow prosecutions under the Mail and Wire Fraud Statutes based on the location of their intended target. The Court dispensed with this critical issue in footnote four, stating that there are many instances where the same criminal activity is proscribed. With this reasoning, the Court concluded that even though Congress addressed export smuggling via the Anti-Smuggling Statute, this does not preclude the same activity for being prosecuted under the Mail and Wire Fraud Statutes.
The second issue Justice Thomas addressed is at the crux of this case: whether the common law revenue rule bars prosecution of the defendants. Justice Thomas began his analysis of this issue by applying the canons of statutory interpretation. “‘Statutes which invade the common law… are to be read with a presumption favoring the retention of long-established and familiar principals, except where a statutory purpose to the contrary is evident.’” Applying this analysis to the conflict of law here, he framed the question to be whether the Mail and Wire Fraud Statutes contradict the revenue rule principals. The Majority cited United States v. Craft, in which the Court stated, “[w]e must assume that Congress considered the impact of its enactment on the question now before us.” The Court applied this same reasoning to Pasquantino, and determined the question to be whether the revenue rule was well-established when Congress enacted the Wire (and Mail) Fraud Statutes. The Court began to answer this question by determining how clear the application of the rule was at the time the statutes were enacted, and how developed the ensuing case law was. In determining how developed the revenue rule was in 1952, the Majority narrowed its investigative scope to whether the revenue rule specifically precluded the present prosecution.
In making this determination, Justice Thomas cited the history of the common law revenue rule and its underpinnings couched in “the rule against foreign penal statutes[.]” “The basis for inferring the revenue rule from the rule against foreign penal enforcement was an analogy between foreign revenue laws and penal laws.” Distinguishing the present prosecution, Justice Thomas asserted that in the case at hand, the prosecution was based on a criminal activity that occurred on domestic ground, not the foreign tax liability. “A prohibition on the enforcement of foreign penal law does not plainly prevent the Government from enforcing domestic criminal law.” For this reason, the Court rejected petitioners’ contention that the revenue rule should act as a bar to their prosecutions because it indirectly encourages enforcement of Canadian tax law., Further, the Court explained that indirect enforcement of foreign revenue laws has never acted as a bar to the core prosecution. Therefore, any indirect revenue benefit that Canada may receive as a windfall to petitioners’ prosecutions does not invoke the principals of the revenue rule, and therefore does not bar the prosecutions.
“Having concluded that revenue rule jurisprudence is no clear bar to [petitioners’] prosecution,” the Court next asked whether the purposes of the revenue rule supported barring petitioners’ wire fraud prosecutions. In assessing this question, Justice Thomas addressed each principal justification for the revenue rule, and applied them purposes to the case at hand. The first revenue rule principal that the Court addressed is the principal against passing judgment on foreign law. The Court began by saying that “[t]he present prosecution created little risk of causing international friction through judicial evaluation of the policies of foreign sovereigns.” Explaining, the Court argued that the Executive branch of the Government is the sole organ of international relations, and as such, a decision by the Executive branch to bring a prosecution that implicates foreign law does not violate the principals of foreign relations. The Court also repeated a previous argument here, reminding that the present prosecution does not further Canadian interest (which in turn may affect foreign relations). Rather, the current prosecution’s “object” is to prevent the fraudulent use of U.S. mail and wire systems.
The second revenue rule principal that the Court addressed was the competency of U.S. courts to interpret and apply foreign law. The Court quickly dispensed with this core principal by stating that there is no particular complexity of the implicated Canadian laws here, and that even if there was, the Federal Rule of Criminal Procedure 26.1 addresses any concerns. The Majority reasoned that during petitioners’ trial, “uncontroverted” testimony of a Canadian official provided enough evidence that petitioners’ conduct had violated Canadian law; this was sufficient to support the court’s application of Canadian tax law. Also, Fed. R. Crim. P. 26.1 allows “a court, in deciding issues of foreign law, to consider any relevant material or source – including testimony – without regard to the Federal Rules of Evidence.” Therefore, the danger of misinterpretation of foreign laws by U.S. courts is circumvented.
Finally, the Majority addressed an argument raised not by petitioners, but rather by the dissent: that such a broad interpretation of the Wire (and Mail) Fraud Statutes give an extraterritorial effect to an otherwise domestic law. The Court reasoned that any extraterritorial effect of prosecuting export smuggling schemes under the Mail and Wire Fraud Statutes is merely incidental, and that the heart of the prosecution is punishing schemes that wholly took place within U.S. borders. Regardless of the location petitioners’ scheme targeted, the violation of the Wire Fraud Statute took place within the United States, and therefore warrants petitioners’ prosecutions. Additionally, the Majority reasoned that because the language of the Wire Fraud Statute expressly states intent to punish frauds “executed ‘in interstate or foreign commerce,’” Congress contemplated foreign application of this law.
The Court concluded that “the broad language of the wire fraud statute authorizes [prosecutions of export smuggling] and no canon of statutory construction permits us to read the statute more narrowly.” For these reasons, the Majority affirmed the Court of Appeals’ decision, and petitioners’ convictions were allowed to stand.
B. Four Justices Dissent
Although the Majority elected to uphold petitioners’ convictions in light of the revenue rule, Justice Ginsburg dissented from this election. Joined by Justice Breyer, and Justices Souter and Stevens in part, she issued a dissenting opinion that would have vacated petitioners’ convictions under the Wire Fraud Statute. First, Justice Ginsburg criticized the Majority for disregarding “our repeated recognition that ‘Congress legislates against the backdrop of the presumption against extraterritoriality.’” This principal states that unless Congress clearly expresses to the contrary, its legislation is presumed to have only a domestic effect. She additionally supported this notion by pointing out where Congress did intend to have a extraterritorial effect: the Export Smuggling Act, 18 U.S.C. § 546. According to Justice Ginsburg, the Court should defer to the established tax treaties between Canada and the United States, which provide for the collection of “taxes owed [that] have been finally determined.”
Justice Ginsburg began by pointing out that to procure a conviction under the Mail or Wire Fraud Statute, a predicate offense of a scheme to defraud must be found. In the case at hand, to establish this scheme, the Court must take notice of the existence of Canadian tax laws, and that petitioners’ conduct violated these laws. Illustrating this significant point, Justice Ginsburg hypothesized that had there been no Canadian excise tax, regardless of petitioners’ belief, their activities would not be prosecutable under the Wire Fraud Statute. At petitioners’ trial, the only proof the Government offered that Canadian excise taxes were evaded was non-expert testimony that included an “approximation” by a Canadian customs official. It troubled the dissent that petitioners’ sentencing phase also relied on the recognition and application of Canadian tax law. She criticized the “casual manner” in which the Government proffered evidence in support of its sentencing recommendation, stating that “the Customs official was not offered as an expert witness and ‘[t]he [D]istrict [C]ourt never determined whether [her] calculations were accurate as a matter of Canadian law.’” To Justice Ginsburg, the district court’s “deeply troubling” lack of inquiry into the validity of the Canadian custom official’s calculation demonstrates the inability and reluctance of the Government to “grapple with the details of foreign revenue laws.”
Additionally addressed by the dissent is the Majority’s holding in this case that essentially enforces Canadian tax law, despite prior precedent of the Court that “§1341 [is] limited in scope to the protection of property rights.” Justice Ginsburg argued that in the decision at hand, the Majority ignores the fact that Congress has not spoken with clear intent to give the Mail or Wire Fraud Statutes an extraterritorial effect. Absent this clear Congressional language, coupled with the backdrop of the presumption against extraterritoriality, the dissent found the application of the Mail and Wire Fraud Statutes to the schemes of export smuggling unsettling. The presence of international tax treaties that address issues where U.S. citizens owe Canadian tax revenue, coupled with the principals of statutory interpretation that unless Congress speaks clearly, legislation is presumed to have no extraterritoriality, led Justice Ginsburg to conclude in the first part of her opinion that the Mail and Wire Fraud Statutes do not extend to export smuggling schemes.
In the second part of her dissenting opinion, Justice Ginsburg, joined by Justices Scalia and Souter, concluded that the principals of the revenue rule bar the recognition of the “property” petitioners’ scheme allegedly targeted. In addition, there is no indication that Congress meant to displace the revenue rule when it enacted the Mail and Wire Fraud Statutes. In support for this contention, Justice Ginsburg turned to the Mandatory Victims Restitution Act. She pointed out that on one hand, Congress has expressly stated that the Restitution Act is to apply to all wire fraud prosecutions, while on the other hand, remains ambiguous regarding the extraterritorial scope of the Mail and Wire Fraud Statutes. For Justice Ginsburg, this is a strong Congressional indication that the Mail and Wire Fraud Statutes were not meant to extend to schemes to evade foreign tax collection.
In Justice Ginsburg’s third argument, again joined by Justices Scalia and Souter, she concluded that “the rule of lenity counsels against adopting the Court’s interpretation of [Section] 1343.” She couched this final reasoning in the long-held principal that where there are “two rational readings of a criminal statute, one harsher than the other, we are to choose the harsher only when Congress has spoken in clear and definite language.” Accordingly, Justice Ginsburg reasoned that the Majority’s finding exposes an individual to severe criminal penalties under the Mail and Wire Fraud Statutes, as well as both the RICO and money laundering statute, whereas the rule of lenity would counsel against petitioners’ convictions. For these reasons, the four dissenting justices would exclude export smuggling schemes from prosecution under the Mail and Wire Fraud Statutes.
To properly resolve the issues that arise in prosecuting export smuggling schemes under the Mail and Wire Fraud Statutes, the Court must step back and understand how lower appellate courts arrived at the issue at hand. First, Congress’s clear intent in dealing with international smuggling into a foreign sovereign cannot be ignored. Congress expressly dealt with the very fact pattern that the Court finds before it when enacting the Anti-Smuggling Statute. Federal prosecutors have erroneously circumvented the congressional intent of the Anti-Smuggling Statute, a maneuver not to be taken lightly. The next logical issue is determining if the act of smuggling constitutes “fraud” under the meaning of the Mail and Wire Fraud Statues. A look at the common law meaning of fraud at the time the Mail and Wire Fraud Statues were enacted supports finding that export smuggling schemes constitute “fraud”. Finally, the paramount issue that brings Pasquantino II before the Court is the determination of whether the allegedly owed tax revenue constitutes “property” for purposes of mail and wire fraud. Applying the basic principals of statutory interpretation, it seems that the Mail and Wire Fraud Statutes are not meant to include unassessed tax revenue as “property”. In the event that foreign tax revenue qualifies as “property” under the statutes, the policy considerations of the revenue rule support upholding it as a bar to mail and wire fraud convictions for export smuggling. Although the Court granted certiorari to determine the issue of the revenue rule’s application to the Mail and Wire Fraud Statutes, there are other reasons to hold that export smuggling cases should not be prosecuted under these statutes. For these reasons, the Court should have vacated defendants’ convictions, and condemned federal prosecutors’ circumvention of the Anti-Smuggling Statue, a practice that clearly violates the intent of Congress to affect foreign policy.
* Shannon L. Snider is a member of the Class of 2006 at Pepperdine University School of Law.