WASHINGTON – The Supreme Court on Monday agreed to hear an appeal from three New York men convicted in Maryland of wire fraud for a scheme to smuggle liquor into Canada.
At issue is whether the United States can prosecute people for violating the tax codes of foreign countries, or if a centuries-old common law, known as the revenue rule, bars such prosecutions.
The revenue rule says that one country cannot enforce the tax codes of another country in its own courts, and attorneys for the three men said this rule prevents prosecution of this case in the United States.
“If Canada thinks that an American has violated a Canadian law — a criminal law — we have a treaty with Canada that obligates the United States to bring an American citizen and have them report to a Canadian court,” said Bruce Bryan, an attorney representing defendant Carl Pasquantino. “That wasn’t done in this case, and the defendants in this case have repeatedly said that they would do that.”
But the 4th U.S. Circuit Court of Appeals disagreed in July 2002, upholding the convictions of Pasquantino and his brother, David, on six counts each of wire fraud and Arthur Hilts’ single wire fraud conviction.
Bryan and another defense attorney, Laura Brill, said the 4th Circuit’s decision could have ramifications far beyond this case if left to stand by the high court.
The appellate court’s decision “introduces a whole new level of risk into corporate America,” said Brill, who represents Hilts. It could hurt American businesses abroad if the decision stands, both attorneys said, because other countries could try to prosecute American citizens in foreign courts for violating U.S. tax laws.
This case is “pressing the limits of prosecutorial power of the United States,” Bryan said.
But the Justice Department argued in a brief to the Supreme Court that the revenue rule has a “more limited scope.” It said criminal prosecutions under the wire fraud law do not violate the revenue rule because the United States is not trying to “collect tax revenue for the foreign government.”
“Instead, it acts to vindicate the United States’ sovereign interest in preventing persons from using the wires in this country to commit fraud,” the brief said.
Justice Department officials declined comment on the case Monday.
The government said the scheme began in 1996, shortly after the Canadian government had increased taxes on alcohol and cigarettes, creating a “black market for such goods.”
The three men were convicted in February 2001 for ordering more than 39,000 cases of liquor from Maryland stores by phone from upstate New York, then smuggling it in to Canada without paying the required taxes and liquor duties. They evaded more than $5.8 million Canadian in duties and taxes, court documents said, or about $4.4 million U.S., from 1996 to 2000.
The brothers were sentenced to nearly five years in prison each and Hilts was sentenced to almost two years. All three are currently free while their case is pending.
The men appealed in June 2001 to a three-judge panel in the 4th Circuit, which reversed their convictions, agreeing with a 1996 ruling in the 1st Circuit that said the wire fraud law “does not authorize” the prosecution of cases that violated foreign tax codes.
But the government appealed to the full 4th Circuit. The full court reinstated the convictions in July 2002, saying that federal law does not clearly state whether or not the courts of one country can prosecute someone involved in a scheme to defraud a foreign country. That decision echoed a 1997 ruling in the 2nd Circuit, which also upheld such prosecutions.
The defense attorneys had said they hoped the split between the circuits would push the high court to review the case. Court officials said the case will likely be heard in the Supreme Court session that begins in October.
-30- CNS 04-05-04