Commercial Litigation and Arbitration

Extraterritorial Application of RICO — Case Law Split as to Whether to Focus on Enterprise vs. Pattern to Determine Whether Statute Being Improperly Applied Extraterritorially

United States v. Chao Fan Xu, 2013 U.S. App. LEXIS 93 (9th Cir. Jan. 2, 2013):

Viewed as a whole, the activities subject to count one encompass a unified scheme, wherein the Defendants: stole as much money as possible from the Bank of China; transferred the stolen funds out of China; escaped, through immigration fraud, to a safe harbor in the United States; and then spent the funds in, among other places, Las Vegas casinos. Defendants were thus engaged in an international enterprise, using many of the tools of the global economy. We therefore consider RICO's application in a multinational context.

B. Extraterritorial Application of RICO

Defendants argue that their count one convictions are invalid because the charged conspiracy was extraterritorial and outside the reach of RICO. We review de novo a challenge to the extraterritorial application of criminal statutes. See Vasquez-Velasco, 15 F.3d 833, 838-40 (9th Cir. 1994); see also United States v. Felix-Gutierrez, 940 F.2d 1200, 1203-04 (9th Cir. 1991); Chua Han Mow v. United States, 730 F.2d 1308, 1311 (9th Cir. 1984).

In Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869, 2875 (2010), the Supreme Court confronted the question whether § 10(b) of the Securities Exchange Act applies extraterritorially. The Court began its analysis under the premise that "[w]hen a statute gives no clear indication of an extraterritorial application, it has none." Id. at 2878. The Court then concluded that, because § 10(b) contained no "affirmative indication" of extraterritorial effect, it could not be applied extraterritorially. Id. at 2883.

In the wake of Morrison, this circuit has not considered whether RICO applies extraterritorially. We have previously held, however, that RICO is silent as to its extraterritorial application. See Poulous v. Caesars World, Inc., 379 F.3d 654, 663 (9th Cir. 2004). Other courts that have addressed the issue have uniformly held that RICO does not apply extraterritorially. See generally Norex Petroleum Ltd. v. Access Indus., Inc., 631 F.3d 29, 33 (2d Cir. 2010); European Cmty. v. RJR Nabisco, Inc., 2011 WL 843957, at *5 (E.D.N.Y Mar. 8, 2011); In re Toyota Motor Corp., 785 F. Supp. 2d 883, 913 (C.D. Cal. 2011); Sorota v. Sosa, 842 F. Supp. 2d 1345, 1349 (S.D. Fla. 2012). Although those cases addressed the civil rather than the criminal RICO statute, they are faithful to Morrison's rationale: "Rather than guess anew in each case, this Court applies the presumption [against extraterritorial application] in all cases, preserving a stable background against which Congress can legislate with predictable effects." Morrison, 130 S. Ct. at 2881. Therefore, we begin the present analysis with a presumption that RICO does not apply extraterritorially in a civil or criminal context.

Defendants argue that because RICO does not apply extraterritorially, the government cannot apply the statute in this case because the conspiracy took place in China and Hong Kong, not the United States. Defendants define the enterprise as having two parts. Indeed, Defendants were charged here with membership in a criminal enterprise that involved not only embezzlement against the Bank of China that occurred in China and Hong Kong (part one) but also immigration fraud to escape to the United States with their ill-gotten gains (part two). Accordingly, we must determine whether under the circumstances of this case RICO can be lawfully applied to any, or all, of Defendants' conduct--foreign or domestic. See id. at 2884 (the "presumption here (as often) is not self-evidently dispositive, but its application requires further analysis.").

C. Determining RICO's Focus

Morrison frames the extraterritorial inquiry in terms of "the 'focus' of congressional concern" in enacting the statute. Id. The Morrison Court further defined the concept of focus in terms of the "objects of the statute's solicitude" and "th[e] transactions that the statute seeks to regulate." Id. (internal quotation marks omitted).

The inquiry into RICO's focus is far from clear-cut. See In re Toyota, 785 F. Supp. 2d at 914 ("It is unclear how Morrison's logic, which evaluates the 'focus' of the relevant statute, precisely translates to RICO." ). The Second Circuit side-stepped the issue by summarily declaring in Norex that the defendants' "slim contacts with the United States . . . are insufficient to support extraterritorial application." Norex, 631 F.3d at 33 (2d Cir. 2010). Given Morrison's detailed analysis regarding the focus of the Exchange Act, however, our best path forward is to determine RICO's focus.

Courts that have addressed the issue fall essentially into two camps. One camp asserts that RICO's focus is on the enterprise. See, e.g., Cedeno v. Intech Group, Inc., 733 F. Supp. 2d 471, 473 (S.D.N.Y. 2010); European Cmty., 2011 WL 843957, at *5; Farm Credit Leasing Servs. Corp. v. Krones, Inc. (In re Le-Nature's, Inc.), 2011 WL 2112533, at *3 n.7 (W.D. Pa. May 26, 2011) (adopting the enterprise-focused model but acknowledging that "RICO may have more than one 'focus'--including, for example, the pattern of racketeering activity required by the statute."); Mitsui O.S.K. Lines, Ltd. v. Seamaster Logistics, Inc., 2012 WL 1657108, at *4 (N.D. Cal. May 10, 2012); In Re Toyota, 785 F. Supp. 2d at 914; United States v. To, 144 F.3d 737, 744 (11th Cir. 1998) (a pre-Morrison case); United States v. Hoyle, 122 F.3d 48, 51 (D.C. Cir. 1997) (a pre-Morrison case).

The other camp asserts that RICO's focus is on the pattern of racketeering activity. See, e.g., Agency Holding v. Malley-Duff, 483 U.S. 143, 154 (1987) ("the heart of any RICO complaint is the allegation of a pattern of racketeering.") (emphasis in original omitted); United States v. Philip Morris USA, Inc., 783 F. Supp. 2d 23, 29 (D.D.C. 2011) (addressing the possibility that domestic conduct could provide the basis for a foreign corporation's RICO liability); CGC Holding Co. v. Hutchens, 824 F. Supp. 2d 1193, 1209 (D. Colo. 2011) (citing Philip Morris, 783 F. Supp. 2d at 29); Chevron Corp. v. Donziger, 2012 WL 1711521, at *7-8 (S.D.N.Y. May 14, 2012) (quoting CGC Holding Co., 824 F. Supp. 2d at 1209-10); In re Le-Nature's Inc., 2011 WL 2112533, at *3 n.7; accord Note, R. Davis Mello, Life After Morrison: Extraterritoriality and RICO, 44 Vand. J. Transnat'l L. 1385, 1411 (2011) (arguing that courts should "apply RICO in any case where a plaintiff alleges the commission of enough predicate acts in the United States within the statutory time period to establish a 'pattern of racketeering activity,' even if the 'enterprise' is a foreign enterprise or the scheme involves the commission of predicate acts in a foreign jurisdiction.").

We address both models in turn.

1. Focus on the Enterprise

Two district courts in the Second Circuit have concluded that the focus of RICO is on the enterprise — specifically, domestic enterprises.

In Cedeno, 733 F. Supp. 2d at 472, the district court addressed extraterritorial application of RICO in a civil action seeking damages arising out of a wide-ranging money laundering scheme through which Venezuelan nationals used United States banks as conduits for fraudulently obtained funds. The scheme's contacts with the United States were limited to the movement of currency into and out of New York bank accounts. Id. After determining that the focus of RICO is on "the enterprise as the recipient of, or cover for, a pattern of racketeering activity," the court held that "RICO does not apply where . . . the alleged enterprise and the impact of the predicate activity upon it are entirely foreign." Id. at 474.

In European Community, 2011 WL 843957, at *5, the district court, upon examining the elements of RICO, concluded that "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." Thus, the "object of [RICO's] solicitude, and the focus of the statute" is the enterprise. Id. (internal quotation marks omitted). The court concluded that a RICO enterprise "must be a domestic enterprise." Id.

Determining the geographic location of an enterprise--whether foreign or domestic--is a difficult inquiry, however. See Chevron, 2012 WL 1711521, at *6 ("the emphasis on whether the RICO enterprise is domestic or foreign simply begs the question of how to determine the enterprise's character."). Two district courts have addressed the issue of determining geographic location by utilizing the "nerve center" test. See European Cmty., 2011 WL 843957, at *5-6; Mitsui O.S.K. Lines, 2012 WL 1657108, at *4-5. The nerve center test originated as "the vehicle of choice" in determining the principle place of business for a corporation when analyzing a federal court's diversity jurisdiction. See European Cmty., 2011 WL 843957, at *5 (internal quotation marks omitted) (citing Hertz Corp. v. Friend, 130 S. Ct. 1181, 1192 (2010)). The nerve center test focuses on where the enterprise's decisions are made, as opposed to carried out, and thus centers on the "brains" of an enterprise, not the "brawn". European Cmty., 2011 WL 843957, at *6.

European Community and Mitsui O.S.K. Lines entailed a fairly straightforward application of the nerve center test that resulted in different conclusions regarding extraterritoriality. The European Community court concluded that a money-laundering scheme that originated in South America and Europe "issued from those criminal organizations located in South America and Russia--not . . . in the United States," and, consequently, the enterprise was extraterritorial. 2011 WL 843957, at *2-3, *7. Mitsui O.S.K. Lines involved a fraudulent shipping scheme conceived by United States corporations but executed primarily overseas. 2012 WL 1657108, at *1, *7. In that case, the decision making process of the criminal enterprise "occurred substantially within the territory of the United States," and, thus, the enterprise was considered domestic. Id. at *7.

Both courts emphasized the administrative ease, familiarity, and consistency of the nerve center test. European Cmty., 2011 WL 84397, at *6; Mitsui O.S.K. Lines, 2012 WL 1657108, at *5. Both courts realized, however, that application of the nerve center test could lead to "artificially simplified results," Mitsui O.S.K. Lines, 2012 WL 1657108, at *4, and that "hard cases" will arise that do not "in all instances, automatically generate a result," European Cmty., 2011 WL 84397, at *6. Indeed, as the Supreme Court has noted, "it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States." Morrison, 130 S. Ct. at 2884 (emphasis in original).

The case before us presents just such a hard case that illuminates the inadequacy of the nerve center test and the enterprise-based model upon which it relies. As the Chevron court pointed out, the nerve center test could "produce absurd results" when applied to a hypothetical criminal prosecution of two separate corporate entities--one foreign and one domestic--both engaged in the same pattern of criminal activity in the territorial United States. See Chevron, 2012 WL 1711521, at *6. The court labeled "risible" the notion that the domestic corporation would be culpable whereas the foreign corporation would be immune from prosecution simply because its ringleaders had the forethought to incorporate overseas. Id. This is sound reasoning.

The geographic location of an enterprise may be relevant under certain factual scenarios, like the criminal schemes at issue in European Community and Mitsui O.S.K. Lines. But in a case like this one, where the "brains" of the operation were located overseas but the enterprise violated United States immigration law in the United States, "there is no necessary or . . . even probable connection between where the RICO enterprise makes its decisions and whether the application of RICO to the racketeering activity at issue . . . was the sort of activity with which Congress would have been concerned." Chevron, 2012 WL 1711521, at *7. Moreover, while administrative simplicity may be "a major virtue in a jurisdictional statute." Hertz , 130 S. Ct. at 1193, a statute's extraterritorial reach is a merits question, not a question of subject-matter jurisdiction. See Morrison, 130 S. Ct. at 2877 ("to ask what conduct [a statute] reaches is to ask what conduct [a statute] prohibits, which is a merits question."). Therefore, an inquiry into the application of RICO to Defendants' conduct is best conducted by focusing on the pattern of Defendants' racketeering activity as opposed to the geographic location of Defendants' enterprise.

2. Focus on the Pattern of Racketeering Activity "[T]he heart of any RICO complaint is the allegation of a pattern of racketeering." Agency Holding, 483 U.S. at 154 (emphasis in original omitted); see also H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 236 (1989) (describing "RICO's key requirement of a pattern of racketeering"). As noted, several post-Morrison courts have determined that RICO's focus is on the pattern of racketeering activity for purposes of analyzing extraterritorial application of the statute. Philip Morris, Inc., 783 F. Supp. 2d at 29; CGC Holding Co., 824 F. Supp. 2d at 1209; Chevron, 2012 WL 1711521, at *7-8.

RICO's statutory language and legislative history support the notion that RICO's focus is on the pattern of racketeering activity. For example, 18 U.S.C. § 1962(c), which forms the basis of Defendants' count one convictions, prohibits the conduct of a criminal enterprise's affairs "through a pattern of racketeering activity." Other sections prohibit the use of funds derived from a pattern of racketeering activity in the investment in or acquisition of an enterprise involved in interstate commerce. Id. §§ 1962(a)--(b). Furthermore, RICO's legislative history shows that the statute was enacted to promote "the eradication of organized crime in the United States by strengthening the legal tools in the evidence-gathering process, by establishing new penal prohibitions, and by providing enhanced sanctions and new remedies to deal with the unlawful activities of those engaged in organized crime." Organized Crime Control Act of 1970, Statement of Findings and Purpose, Pub. L. No. 91-452, 84 Stat. 922 (1970) reprinted in 1970 U.S. Code Cong. & Admin. News 1073 (emphasis added).

Given this express legislative intent to punish patterns of organized criminal activity in the United States, it is highly unlikely that Congress was unconcerned with the actions of foreign enterprises where those actions violated the laws of this country while the defendants were in this country. See Chevron, 2012 WL 1711521, at *6. Thus, to determine whether Defendants' count one convictions are within RICO's ambit, we look at the pattern of Defendants' racketeering activity taken as a whole.

3. Application to the Case at Hand

The second superseding indictment describes two parts of the enterprise: (1) "Enriching the members and associates . . . through among other things, fraud, money laundering, and foreign and interstate transfer of funds," and (2) "Enabling the members and associates . . . through marriage, passport, and visa fraud, to travel, among other countries . . . [including] the United States, and to flee China and Hong Kong in the event that the criminal activity of the Enterprise was discovered." One part consisted of racketeering activities conducted predominantly in China, and one part consisted of racketeering activities in the United States.

The first part centers on the Bank of China fraud and, to the extent it was predicated on extraterritorial activity, it is beyond the reach of RICO even if the bank fraud resulted in some of the money reaching the United States. See Cedeno, 733 F. Supp. 2d at 472 ("the scheme's contacts with the United States . . . were limited to the movement of funds into and out of U.S.-based bank accounts."); Norex, 631 F.3d at 33 ("The slim contacts with the United States . . . are insufficient to support extraterritorial application of the RICO statute.").

The second part, however, bound the Defendants' enterprise to the territorial United States. This second part involved racketeering activities conducted within the United States including the commission of RICO predicate crimes based on violations of United States immigration laws, as codified in 18 U.S.C. §§ 1542, 1546(a). Specifically, Defendants entered the United States using fraudulent visas and passports. Defendants traveled within the United States to execute documents in furtherance of their immigration fraud and to open bank accounts. Finally, Defendants were arrested in Kansas and Oklahoma in possession of these fraudulent immigration documents.

By conspiring to enter and hide out in the United States with the fruit of their ill-gotten gains, Defendants engaged in an enterprise that had the implicit goal to breach United States immigration law in furtherance of the overall goal of the enterprise. The dual parts of Defendants' enterprise were necessarily conjoined in pursuit of that goal--i.e., to steal large sums of money from the Bank of China and to get away with it in the United States. Defendants intended to use the immigration fraud to consummate the purpose of the enterprise: to acquire the money and safely enjoy it the United States, beyond the reach of Chinese law. Without the immigration fraud, the bank fraud would have been a dangerous failure. See, e.g., CGC Holding Co., 824 F. Supp. 2d at 1210 ("In the present case, the conduct of the enterprise within the United States was a key to its success.").

In sum, Defendants' violations of United States immigration laws fall squarely within RICO's definition of racketeering activity. See 18 U.S.C. § 1961(1)(B) (listing 18 U.S.C. §§ 1542, 1546 as RICO predicates); cf. Rocha v. United States, 288 F.2d 545, 548 (9th Cir. 1961) (sham marriages in violation of § 1542 are "crimes directed toward the sovereign itself [and] may be tried within the jurisdiction even though committed without") (internal quotation marks omitted). Defendants' pattern of racketeering activity may have been conceived and planned overseas, but it was executed and perpetuated in the United States. Under Morrison, we look "not upon the place where the deception originated," but instead upon the connection of the challenged conduct to the proscription in the statute. 130 S. Ct. at 2884. Having determined that RICO's focus is on the pattern of racketeering activity, we conclude that Defendants' criminal plan, which included violation of United States immigration laws while the Defendants were in the United States, falls within the ambit of the statute.

We affirm Defendants' count one convictions because the convictions are not based on an improper extraterritorial application of RICO, but rather are based on a pattern of racketeering activities that were conducted by the Defendants in the territorial United States.

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