Leading Banks Drawn Into KPMG Tax Shelter Enquiry

by Glen Shapiro, LawAndTax-News.com, New York

24 August 2005

According to a report in the UK's Independent newspaper this week, leading banks such as UBS and Deutsche Bank are being drawn into the US federal investigation into the sale of abusive tax shelters by accounting firm, KPMG.

The Independent revealed that prosecutors are examining the role played by the banks in the sale of the shelters, following the release in April of a Senate Permanent Subcommittee on Investigations report which stated that an unnamed UBS 'insider' had alerted the bank's management to the potentially abusive nature of the transactions.

Although UBS stopped all trades relating to the tax shelters in question for some months, it later resumed selling the products, leading the Senate subcommittee to observe that:

"The UBS documents show the bank was well aware that Flip and Opis were designed and sold to KPMG clients as ways to reduce or eliminate their US tax liability."

Meanwhile, speaking to the New York Times last week, sources close to negotiations between KPMG and federal prosecutors confirmed that the accounting firm is likely to avoid prosecution over its sale of the tax shelters.

KPMG announced in June that it "deeply regrets" the sale between 1996 and 2002 of unlawful tax sheltering arrangements such as Bond Linked Premium Structures (BLIPs) and Foreign Leveraged Investment Programmes (FLIPs).

It has been estimated that the sale of such schemes to customers brought the firm around $150 million, whilst depriving the US government of some $1.4 billion in lost revenue.

Althought it is not yet officially known whether the DoJ intends to push ahead with a criminal prosecution, observers have suggested that political pressure may mean that the Department opts for a deferred prosecution agreement, in order to avoid further reducing the 'Big Four' accounting firms in the United States to the 'Big Three'.

An unnamed source briefed on the progress of the talks certainly appeared to confirm this last Thursday, telling the NY Times that: "The discussions have all been directed at a negotiated resolution, not an indictment."

According to the NY Times report, whilst avoiding prosecution, it seems likely that the accounting firm will be obliged to pay up to $500 million in fines, and will need to clearly acknowledge its culpability in the matter and consent to the putting in place of an idependent monitor to ensure that it abides by US tax rules in the future.

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