Crime & Federalism

Yesterday the Second Circuit handed down an extremely interesting decision, European Community v. RJR Nabisco (via AL&P), which touches the intersection of RICO and the revenue rule.

Under the revenue rule, American courts are barred from enforcing the tax laws of foreign nations.  Thus, foreign nations may not sue in federal court seeking recovery of unpaid taxes.  Last year, in European Community v. RJR Nabisco, several countries brought a RICO suit against RJR Nabisco.  Since the PATRIOT Act made smuggling a predicate action actionable under RICO, several foreign countries sought money damages for lost tax revenue and law enforcement costs. 

The Second Circuit dismissed the suit under the revenue ruling, holding that allowing "recovery of unpaid taxes would constitute 'direct enforcement' of a foreign sovereign’s tax laws, and recovery of law enforcement costs would constitute 'indirect enforcement.'"  Then came Pasquantino v. United States. 

In Pasquantino, a 5-4 Supreme Court incorrectly held that an American citizen could be convicted under the federal wire fraud statue for failing to pay Canadian taxes.  The losers in European Community petitioned for cert., and the Supreme Court remanded.  Surprisingly, the Second Circuit affirmed.  After considering the policies behind the revenue ruling, the panel seems to rely primarily on one factor, writing that "the involvement of the United States government was a key factor in determining the outcome of Pasquantino."

Thus, the Second Circuit's rule is that the revenue rule will bar civil but (perhaps) not criminal actions under RICO.  And presumably under the Second Circuit's holding, a violation of the mail or wire fraud statute could not serve as predicate acts in a civil RICO suit.  I'm not sure the civil-criminal distinction makes sense, and it seems to go against precedent.  I do not, however, think the Supreme Court will, if the plaintiffs petition, grant certiorari.