KPMG settles tax case with US$456m fine

NEW YORK - Accounting firm KPMG has agreed to pay US$456 million ($656 million) to settle accusations it sold fraudulent tax shelters, as it sealed a deal with the government to avoid a criminal indictment that might have crippled the firm.

While KPMG, the smallest of the major US accounting houses, itself escaped an indictment of the kind that destroyed Arthur Andersen when it was convicted of destroying documents, eight former partners, including its former deputy chairman, and a KPMG lawyer, were indicted for selling the tax shelters to wealthy clients.

An outside monitor, Richard Breeden, a former Securities and Exchange Commission (SEC) chairman, was appointed to oversee the firm's compliance with the settlement, which includes an agreement to shut down its tax practice for high net worth individuals within six months.

"That is a big blow, it was one of their flagship businesses that was quite profitable," said Robert Willens, accounting and taxation analyst with Lehman Brothers.

Those charged include the firm's former deputy chairman, Jeffrey Stein and others who were involved in its tax practice.

Andersen's indictment, stemming from the Enron Corp. scandal, caused clients to flee and the firm to collapse, throwing thousands of people out of work.

Federal agents for more than three years have been investigating tax shelters that were sold by KPMG mostly to wealthy individuals between 1996 and 2002.

"KPMG is pleased to have reached a resolution with the Department of Justice. We regret the past tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having learned much from this experience," said the firm's Chairman and CEO Timothy P. Flynn.

KPMG said publicly in mid-June that it accepted "full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred."

The shelters at issue are no longer sold by KPMG. The accounting industry generally has scaled back its shelter business amid a surge of official probes and bad publicity.

Separately, the SEC said that it was pleased with the agreement between the audit firm and the DOJ. It said it was not considering any action against KPMG as the tax shelters did not violate any securities laws.

"Commission staff will of course monitor the situation in view of the Commission's responsibilities to investors and markets," said SEC Chief Accountant Donald Nicolaisen.

According to federal government documents on the probe, KPMG sold three "abusive" tax products from 1997 to 2001 which were used to claim losses on tax returns totaling several billions of dollars. They were Bond-Linked Issue Premium Structure, or BLIPS, Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS).

A lawyer for Richard Smith, one of the indicted former partners, criticized the Monday's settlement saying it was an attempt to "criminalize" the type of tax planning that tax professionals engage in on a daily basis.

"There is nothing hidden, fraudulent or criminal about the BLIPS transaction. It was fully and openly reviewed and approved by many KPMG professionals and independent law firms who believed that BLIPS complied with the tax law. No court has ever held that the BLIPS transaction does not work," said Robert Fink of law firm Kostelantez & Fink, LLP.

"If the government wants to put an end to these types of transactions, the proper response is for Congress to change the law, not to scare professionals away with indictments. It is a misuse of prosecutorial discretion to use criminal prosecutions to change accepted and legitimate standards of conduct," Fink added.

- REUTERS