Territoriality or Extraterritoriality of RICO Determined by Location of Enterprise — Hertz & Boyle Set Standards for Determination

From European Community v. RJR Nabisco, Inc., 2011 U.S. Dist. LEXIS 23538 (E.D.N.Y. Mar. 8, 2011):

Plaintiffs' Second Amended Complaint — a structureless morass of allegations, devoid of any sequential description of events — generally asserts that Defendants engaged in a global money-laundering scheme. *** Plaintiffs allege a representative scheme as follows: First, Colombian and Russian criminal organizations smuggle cocaine and heroin, respectively, into Europe, where they generate large cash proceeds, in Euros, from drug sales. *** Those criminal organizations then trade those Euros, located in Europe, for local currency in the criminal organizations' home countries, through a European black market "money broker." *** Next, illicit cigarette importers purchase those Euros from the money broker at a discount to the prevailing exchange rate. *** Those importers then use the Euros to purchase Defendants' cigarettes from U.S. and European wholesalers. *** The wholesalers then purchase cigarettes from Defendants, and ship the cigarettes to the importers. ***

As for Defendants' involvement in this scheme — beyond their selling of cigarettes to U.S. and European wholesalers — Plaintiffs allege that Defendants "utilized certain companies" to handle the illicit transactions, who "maintained lists of 'direct customers of RJR' which included special handling instructions for shipments for [customers that] Defendants knew were involved in criminal activities." *** Plaintiffs further allege that Defendants traveled around the world "for the purpose of meeting and negotiating business agreements with individuals who [Defendants] knew, or should have known, were involved in the laundering of narcotics proceeds." ***

A. Extraterritoriality of Plaintiffs' RICO Claims

Defendants argue that, following Morrison and Norex II, Plaintiffs' RICO claims are impermissibly extraterritorial, and must be dismissed under Federal Rule of Civil Procedure 12(b)(6). ***

1. Extraterritoriality of RICO

In measuring the territorial reach of a federal statute, Morrison commands that "when a statute gives no clear indication of an extraterritorial application, it has none." 130 S. Ct. at 2878. In Norex II, Second Circuit concluded that its prior precedent "holds that RICO is silent as to any extraterritorial application." 2010 WL 4968691, at *3 (citing N. S. Fin. Corp. v. Al-Turki, 100 F.3d 1046, 1051 (2d Cir. 1996)). Therefore, in light of Morrison, this silence prohibits any extraterritorial application of RICO. Id. at *3.

2. The Focus of RICO

In determining whether a claim seeks an extraterritorial application of a federal statute, the court must look to the "focus" of that statute. See Morrison, 130 S. Ct. at 2883-84. This focus is not necessarily the "bad act," or the actus reus, prohibited by the statute. Id. at 2881. Rather, it is "the object[] of the statute's solicitude," the activities "the statute seeks to regulate [and] parties or prospective parties to those [activities] that the statute seeks protect." Id. (internal citations and quotation marks omitted). ***

While the Second Circuit has not addressed the "focus" of RICO, the statutory analysis in Morrison proves illuminating. The RICO statute contains four operative subsections. ***

Each of the three primary subsections — (a), (b), and (c) — contains three elements: the "person," the "enterprise," and the "pattern of racketeering activity." *** With respect to these elements, the statute does not punish the predicate acts of racketeering activity — indeed, each predicate act is, itself, a separate crime — but only racketeering activity in connection with an "enterprise."*** RICO, therefore, seeks to regulate "enterprises" by protecting them from being victimized by or conducted through racketeering activity. *** Even the name of the statute suggests that it places its focus on the "enterprise" — RICO is, after all, the Racketeer Influenced and Corrupt Organizations Act. ***

3. Location of a RICO Enterprise

Because the "focus" of RICO is the "enterprise," a RICO "enterprise" must be a "domestic enterprise." *** While there are no cases suggesting how a court may determine the geographic location of a RICO enterprise, other cases have analogously discussed how to determine the geographic location of a corporation. In Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010), for example, the Supreme Court adopted the "nerve center test" as the vehicle of choice in determining a corporation's "principal place of business."***

RICO enterprises, however, may not have a single center of corporate policy. Although the "nerve center test" compels the court to determine a principal, i.e., single place of business for a corporation, though there may be many, the test is still instructive in determining the geographic location of "enterprise." ***

Indeed, the divide-and-command coordination structure mentioned in Hertz is the same type of organization contemplated by the Court in Boyle in regard to RICO enterprises. There, the court admitted that a RICO enterprise

need not have a hierarchical structure or a "chain of command"; decisions may be made on an ad hoc basis and by any number of methods--by majority vote, consensus, a show of strength, etc. Members of the group need not have fixed roles; different members may perform different roles at different times.

Boyle v. United States, 129 S. Ct. 2237, 2245 (2009). Nonetheless, a RICO enterprise must have some semblance of "interpersonal relationships and a common interest," id. at 2244, and must "must function as a continuing unit," id. at 2245. Applying the nerve center test here, to determine an "enterprise's" location, similarly avoids the "weigh[ing of] corporate functions, assets, or revenues different in kind, one from the other." Hertz, 130 S. Ct. at 1194. An analysis of the territoriality of an "enterprise" in a RICO complaint, therefore, should focus on the decisions effectuating the relationships and common interest of its members, and how those decisions are made.

4. Territoriality of Plaintiffs' RICO Claims

The enterprise alleged in Plaintiffs' Complaint comprises of Defendants, "associated distributers, shippers, currency dealers, wholesalers, money brokers, and other participants." *** Plaintiffs assert that Defendants participated in the management of the enterprise through a pattern of racketeering activity, (Id. ¶ 171), and conspired with the other entities involved in the enterprise to violate RICO***. The Member States allege that they were harmed as a result of this conduct. ***

Plaintiffs' accusations concerning the operation of the enterprise can be characterized as encompassing a series of steps governed by "interpersonal relationships." *** As discussed above, those steps are the "drug smuggling step" performed by the Colombian and Russian mob***; the "currency swap step" between those mob organizations and European money brokers***; the "currency purchase step" between the money brokers and cigarette importers***; the "cigarette purchase step" performed by importers and wholesalers***; and the "cigarette shipping step" performed by wholesalers and Defendants***.

Nothing in Plaintiffs' Complaint even remotely suggests that Defendants had any hand in the planning, decisions, or "overall corporate policy" of the drug smuggling, currency swap, or currency purchase steps. In fact, the Complaint very clearly and repeatedly articulates that the "overall corporate policy" regarding these steps originates with organized criminal organizations in Europe and South America. ***

***[T]he Complaint, when read as a whole, strongly suggests the money laundering cycle was directed by South American and European criminal organizations. It is those organizations that began the money laundering process by smuggling drugs; those organizations that swapped currency with money brokers in Europe; and those organizations that controlled the cigarette importers, and thereby completed the money laundering cycle. Defendants' appear to be nothing more than sellers of fungible goods in a complex series of transactions directed by South American and Russian gangs. If there was an "overall corporate policy" of the money laundering enterprise alleged in the Complaint, it issued from those criminal organizations located in South America and Russia — not Defendants in the United States. Because Plaintiffs RICO claims, Counts I through V, are extraterritorial, they do not state a "legally cognizable right of action," and the court must dismiss them under Federal Rule of Civil Procedure 12(b)(6).

Share this article:


Recent Posts