The Revenue Rule

Author:International Law Group
SUMMARY

In multiple RICO actions for damages and injunctive relief filed by European Union and Colombian departments against major tobacco producers for conspiring to smuggle cigarettes into plaintiffs' territories, Second Circuit holds that common-law "revenue rule" bars lawsuits that directly or indirectly aid plaintiffs to enforce their tax laws

 
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In these multiple, but closely related, civil actions in New York federal court, the plaintiffs are the (1) European Community (EC) representing itself along with most of its Member States and (2) twenty-five constituent Departments of the State of Colombia. The defendants make tobacco products and include Philip Morris, RJR Nabisco, Brown & Williamson Tobacco Corp., British American Tobacco, Japan Tobacco, Inc., and each company's affiliated entities.

Plaintiffs claimed that the defendants have been violating the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Section 1961 et seq., by contriving several ongoing stratagems to smuggle contraband cigarettes into the plaintiffs' territories. To achieve these goals, the defendants allegedly conspired to commit mail and wire fraud, money laundering, misrepresentations to customs authorities, and various common law torts. These unlawful activities have caused plaintiffs economic harm mainly in the form of lost tax revenues and increased law enforcement costs.

According to the complaints, defendants directed and facilitated cigarette bootlegging in several ways. They found out more effective smuggling routes, they got in touch with savvy runners and they provided them with cigarettes in packages that allowed the defendants to oversee and control the smuggling process. Defendants would then siphon off the profits as bonuses and kickbacks for their executives. Advancing the smuggling trade also made it possible for the defendants to argue to the public that, by imposing high import taxes, the EC's Member States were nurturing a black market in cigarettes.

The complaint also averred that the defendants were, or should have been, aware that the smugglers got the money to buy the cigarettes from the sale of illegal drugs in the U.S. After going through a laundering process, these funds would end up in defendants' coffers.

The Colombian plaintiffs made many of the same allegations. In addition, they alleged that defendants were keeping a tight control over the smugglers, were secreting the proceeds in Swiss banks and, at the same time, were lobbying for the reduction of Colombian import taxes.

The plaintiffs stated that the defendants took part in a RICO conspiracy [see 18 U.S.C. Section 1961(4)]. For example, they carried out several predicate acts such as racketeering, along with wire and mail fraud. There was also money laundering arising from both the defendants' acceptance of the proceeds from narcotics trafficking as payment for cigarettes and their attempts to conceal their bootlegging profits, and violations of the Travel Act, 18 U.S.C. Sections 1952, 1961 (1)(B).

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