Whiskey and the wires: the inadvisable application of the wire fraud statute to alcohol smuggling and foreign tax evasion.

Author:Friedman, Jason S.
  1. INTRODUCTION

    In Pasquantino v. United States, (1) the Supreme Court held that a scheme to defraud a foreign government of tax revenue violates the wire fraud statute. (2) The Court further held that the common law revenue rule does not preclude prosecutions for wire fraud violations arising from such a scheme. (3) In reaching these conclusions, the Court affirmed the convictions of three men who had been prosecuted under the wire fraud statute (4) for a scheme to evade Canadian excise taxes by smuggling alcohol into Canada from the United States. (5) The Supreme Court's decision is correct to the extent that it asserts that the wire fraud statute does not derogate from any well-established revenue rule principle barring prosecution for a scheme to evade foreign taxes. (6) However, the Court's ruling is, ultimately, erroneous because a scheme to evade foreign taxes does not properly fall within the scope of the wire fraud statute.

    This Note examines several reasons why wire fraud prosecutions arising from a scheme to evade foreign taxes are not barred by the common law revenue rule. First, the rule only prohibits domestic courts from direct enforcement of a foreign sovereign's tax judgments or unadjudicated tax claims. Within American revenue rule jurisprudence, no well-established principle bars prosecution for domestic criminal conduct when it may also result in the indirect enforcement of foreign revenue laws. (7) Second, the traditional rationales underlying the revenue rule--national sovereignty, separation of powers, and judicial competency--do not suggest that wire fraud prosecutions for a scheme to evade foreign taxes should be barred. (8) Finally, the revenue rule is discretionary in nature and does not sweep so broadly as to establish an absolute prohibition upon prosecutions involving any degree of recognition of foreign revenue laws. (9)

    This Note also argues that the Supreme Court's decision is wrong because it misinterprets the boundaries of the wire fraud statute and, in turn, gives it extraterritorial effect not clearly intended by Congress. At first glance, a scheme to evade foreign taxes appears to meet the statute's literal terms. (10) Yet, the statute's literal terms cannot be evaluated in a vacuum. Therefore, these terms must be assessed within a broader frame of reference that includes the statute's legislative history, principles of statutory construction, and related congressional enactments. (11) The legislative history weighs against the Court's ruling since the statute was drafted with a focus on domestic schemes, and concomitant domestic injuries resulting from misuse of United States wires. (12) Moreover, the decision runs afoul of the Court's long-held presumption that Congress ordinarily intends for its statutes to have only domestic, and not extraterritorial, application. (13) Prison sentences and restitution awards resulting from wire fraud convictions for smuggling schemes are calculated based on the combined impact of the domestic and extraterritorial conduct. (14) Absent a clearer directive from Congress, the Court's decision grants an unwarranted extension of the reach of federal criminal law to prosecute and punish strongly intertwined domestic and foreign conduct.

  2. BACKGROUND

    1. THE FEDERAL WIRE FRAUD STATUTE

      The Federal Communications Commission championed the adoption of a federal wire fraud statute out of concern that "the rapid growth of interstate communication facilities ... had given rise to a variety of fraudulent activities ... which were not within the range of existing law." (15) Enacted in 1952, the federal wire fraud statute reads as follows:

      Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. (16) Thus, to convict a person for a wire fraud violation, the government must show that there was: (1) a scheme or artifice to defraud; (2) money or property was the object of the scheme or artifice; and (3) use of the wires in furtherance of the scheme or artifice. (17) Also, the government must prove that the defendant possessed specific intent to defraud, which in turn requires a showing that the defendant meant for some harm to result from his deceit. (18) It is unnecessary to prove that the intended victim of the fraud was, in fact, harmed. (19) Rather, it is sufficient to show that the defendant contemplated doing actual harm; something more than merely deceiving the victim. (20) Finally, "although use of the wires is required, its role in the offense is merely perfunctory because the crux of the offense is the fraudulent conduct." (21)

      Also, the mail (22) and wire fraud statutes operate in a very similar fashion. (23) Scholars note that these statutes have been construed "to cover virtually any form of deceitful activity" involving the mail or wires. (24) Further, the elements of both statutes are, in relevant part, the same, and cases construing mail fraud apply equally to wire fraud. (25)

    2. THE COMMON LAW REVENUE RULE

      1. The Birth of the Revenue Rule: English Origins & Lord Mansfield's Dicta

        Originally, the revenue rule was meant to promote commerce, and it stood for the general principle that courts will refrain from enforcing the revenue laws of another sovereign nation. (26) The rule developed in the English courts in the context of cases in which the defendant pointed to foreign export, customs, or stamp laws as a defense against the alleged validity of a contract. (27) At the time in which the early English cases were decided, nations commonly imposed such measures to promote commercial convenience and advance their mercantile interests. (28)

        The roots of the revenue rule are typically traced to Lord Mansfield's oft-quoted dictum (29) in Holman v. Johnson that "no country ever takes notice of the revenue laws of another." (30) In Holman, a French citizen sought payment for tea that he had sold to Johnson, an Englishman. (31) Johnson purchased the tea with the intention of smuggling it into England and avoiding customs duties. (32) At trial, Johnson alleged that Holman was aware of this illegal aim at the time of the contract's formation and was not entitled to payment for the tea since this illegal objective made the contract invalid. (33) Lord Mansfield declined to apply the choice of law principle which states that the laws of the country in which the cause of action arose shall govern in disputes involving contracts formed abroad. (34) In essence, he modified the traditional conflicts of law rule to include an exception applicable to contract cases in which the disputed contract was made abroad with the aim of flouting English revenue laws. (35)

        Several years later, Lord Mansfield once again applied the revenue rule in Planche v. Fletcher. (36) In Planche, a cargo insurer refused to cover a client, alleging that he had fraudulently claimed that the cargo originated in London rather than Ostend, Belgium, in order to circumvent higher French duties on English goods. (37) Lord Mansfield ruled against the insurer and held that fraud had not occurred because the client simply acted in accordance with a common custom in the shipping trade. (38) He then proceeded to state, as dicta, "at any rate, this was no fraud in this country. One nation does not take notice of the revenue laws of another." (39)

        However, even in Lord Mansfield's day, the revenue rule did not bar all enforcement of foreign revenue law without exception. (40) For example, the English courts were fully prepared to invalidate foreign contracts which omitted certain tax stamps required under foreign revenue law. (41) By voiding foreign contracts, the English courts enforced foreign revenue law in, at least, an attenuated sense since the holdings encouraged the payment of foreign taxes. (42)

      2. The Revenue Rule Crosses the Atlantic: Learned Hand Contributes His Two Pence

        By the time the revenue rule was adopted in the United States, the primary justification for the rule had changed. The focus had shifted to the issues of judicial competence and direct enforcement of the revenue laws, final tax judgments, and unadjudicated tax claims of foreign sovereigns. (43) The new justification asserted that courts lack the competence to assess whether the enforcement of a foreign tax judgment would run counter to the local public policy and, therefore, whether the foreign revenue law should be enforced. (44) Thus, the common law revenue rule came to stand for the principle that the courts of one country will not enforce foreign tax judgments or unadjudicated tax claims.

        During the early twentieth century, American courts first applied the revenue rule in the domestic interstate context as a basis to reject suits brought by sister states to collect taxes. (45) In Moore v. Mitchell, (46) Judge Learned Hand penned the classic formulation of the revenue rule and its prohibition against one state collecting its taxes in the courts of another. (47) Hand concluded that:

        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 intrusted [sic] 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...

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