US Money Laundering Law and Foreign Tax Evasion

In the Pasquantino case, (96 AFTR 2d 2005-5392 (2005), the U.S. Supreme Court determined that a foreign government has a valuable property right in collecting taxes and that right may be enforced in a U.S. court of law.

Under the CRS Report for Congress, Money Laundering:  An abridged overview of 18 U.S.C. Sec.1956 and Related Federal Criminal Law, Charles Doyle, Senior Specialist, American Law Division (7/18/08), specified unlawful activities (“SUAs”) which are predicate offenses for money laundering offenses, include:  state crimes, foreign crimes and federal crimes (SUAs are listed in 18 U.S.C. Sec. 1956(c)(7).

As stated in the U.S. Dept. of Justice Criminal Tax Manual, Chapter 25, 25.03(2)(a), tax evasion as a predicate offense for money laundering is a financial transaction involving the proceeds of specified unlawful activity with the intent either to promote that activity or to violate IRC Sec. 7201 (willful attempt to evade tax, IRC Sec. 7206), (false and fraudulent statements made to the IRS) with the tax involved in the transaction being any type of tax including but not limited to:  income tax, employment tax, estate tax, gift tax and excise tax.

In Pasquantino, the defendants evaded Canadian excise taxes in a liquor smuggling scheme.  The U.S. government prosecuted the taxpayers under a wire fraud statute, based on communications made within the U.S.  In addition, it appears the defendants committed tax evasion in Canada, which under the cited authority (CRS Report for Congress, money laundering, the U.S. Dept. of Justice Criminal Tax Manual) would be predicate offenses (i.e. SUAs) for money laundering.

In the U.S. “wire fraud” is governed under 18 U.S.C. Sec. 1343 which provides:  “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 $1M or imprisoned not more than 30 years, or both.”

The wire fraud statute (18 U.S.C. 1343) forbids schemes to obtain “money or property” by fraud.  If no property or money is involved, the statute does not reach the conduct in question.

The defendants in Pasquantino objected to being tried under the wire fraud statute on the grounds that uncollected Canadian taxes were not “property” for purposes of the wire fraud statute.  The court disagreed, concluding that because the defendants would have paid taxes had they disclosed the liquor to border officials, their failure to pay taxes inflicted economic injury on Canada “no less than had they embezzled funds from the Canadian treasury”.

In concluding that Canada had a property right in its attempt to collect tax, it states:  “Petitioners used interstate wires to execute a scheme to defraud a foreign sovereign of tax revenue.  Their offense was complete the moment they executed the scheme inside the United States; “the wire fraud statute punishes the scheme, not its success”.  (United States v. Pierce, 224 F.3d 158, 166 (CA-2, 2000); (internal quotation marks and brackets omitted).  See Durland, 161 U.S. at 313 (“the significant fact is the intent and purpose”).  This domestic element (i.e. the wire fraud in the U.S.) is what the government is punishing in this prosecution, no less than when it prosecutes a scheme to defraud a foreign individual or corporation, or a foreign government acting as a market participant.”

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  1. US Money Laundering Law and Foreign Tax Evasion... - 20. Jul, 2016

    […] In the Pasquantino case the U.S. Supreme Court determined that a foreign government has a valuable property right in collecting taxes and that right may be enforced in a U.S. court of law.  […]