KPMG Nears Agreement On Tax-Shelter Abuses

Domenick DeGiorgio, a former HVB Group banker, this month pleaded guilty to defrauding the Internal Revenue Service.
Domenick DeGiorgio, a former HVB Group banker, this month pleaded guilty to defrauding the Internal Revenue Service. (By Rick Maiman -- Bloomberg News)
By Carrie Johnson
Washington Post Staff Writer
Tuesday, August 23, 2005

KPMG LLP is nearing agreement on a deal with federal prosecutors that would avert an indictment against the nation's fourth-largest accounting firm for its sale of abusive tax shelters, according to sources familiar with the pact.

The agreement calls for KPMG to pay between $300 million and $500 million and to open its operations to independent review as a condition for avoiding prosecution, according to people briefed on the deal. The sources spoke on condition of anonymity because the settlement, known as a deferred prosecution, has not been publicly announced.

Under the conditions of the settlement, KPMG must stay out of trouble for a set period of time. If the firm succeeds, the charges will be dropped by the U.S. Attorney for the Southern District of New York. A federal judge in Manhattan must approve the agreement, which is likely to be presented in court later this week.

The deal would mark an end to months of intense negotiations among prosecutors and KPMG leaders, who took the unusual step of issuing a public statement in June that said the firm took "full responsibility for the unlawful conduct by former KPMG partners."

Several of those former partners could face criminal charges by a New York grand jury within the next few days related to their work on the shelters, which brought the firm $124 million in fees between 1997 and 2001, according to Senate investigators.

KPMG officials aggressively peddled tax-avoidance strategies to wealthy clients, ultimately helping them create more than $1.4 billion in tax losses, according to an April report by the Senate permanent subcommittee on investigations.

This month, former HVB Group bank official Domenick DeGiorgio, who worked with KPMG to sell the shelters, pleaded guilty to tax evasion and fraud charges, becoming the first executive involved in the tax shelters to be charged with a crime. If he cooperates with prosecutors, DeGiorgio could receive far less time than the 12- to 15-year prison term he now faces.

Defense lawyers for former senior-level KPMG partners say that the tax shelters they sold did not break the law and that they did their work in the open, not intending to violate the tax code. They point out that no federal court has declared the shelter known as BLIPS, which is at the heart of DeGiorgio's guilty plea, to be improper.

The prospect of criminal charges against KPMG itself generated widespread debate. Federal prosecutors convicted Arthur Andersen LLP of obstructing justice in 2002, and the firm eventually went out of business, leaving just four audit firms to review the books of large, publicly traded clients. The U.S. Supreme Court reversed Andersen's conviction May 31.

Defense lawyer Robert S. Bennett had implored senior-level Justice Department officials in Washington not to bring an indictment against the firm. KPMG has fired or forced the retirement of more than a dozen tax officials, has capped its own payments of attorneys' fees for those executives and has "undertaken significant change in its business practices," according to the firm's June 16 news release.

KPMG spokesman Tom Fitzgerald declined to comment yesterday, as did Herbert Hadad, a spokesman for U.S. Attorney David N. Kelley in New York.

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