TPM Muck: A Brief History Of AIG's Three Decade Duty Free Bermudan Adventure

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A Brief History Of AIG's Three Decade Duty Free Bermudan Adventure

By Moe Tkacik - March 31, 2009, 3:27PM

Yesterday we noticed the focus of the Case Against AIG And The Reckless Executives Inhaling Our Money had begun to shift from the exotic, futuristic sounding world of synthetic credit derivatives to the Old Economy business of dodging taxes. In fact, the two are inextricably intertwined -- AIG FP was by far the biggest underwriter of the exotic options that could generate the kind of phony capital gains losses that rich people and companies use to get out of paying taxes. To really understand what Cassano and his gang were up to, it helps to have a working knowledge of the company's history of run-ins with the IRS. Again and again AIG has been involved in schemes the IRS has deemed illegal, forcing the insurer and its clients to cough up some billions of dollars in back taxes over the past decade. The only real factor obscuring the magnitude of the malfeasance at AIG was arguably the many hundreds of banks, corporations and individuals who played along.

UPS: The platonic "ideal" tax structure
AIG has been a go-to source for IRS shortchanging expertise at least since 1983, when it helped UPS form a Bermuda "reinsurance" subsidiary in 1983 to divert certain "excess value" charges into an ingenious tax haven from which the IRS, following a five year legal battle eventually recovered $1.44 billion of $2.3 billion in uncollected taxes. After the jaw-dropping penalty was announced, the insurance trade journal National Underwriter quoted KPMG partner Mark Anderson saying he still looked to AIG's UPS tax haven as an "ideal" when structuring his own clients' tax havens.

KPMG: The accounting industry folds
But the taxman came for KPMG next, after discovering the firm had peddled tax shelter schemes -- a few of which came bundled with liability "insurance" to protect the tax benefits from AIG FP -- to hundreds of companies, including the baseball card manufacturer Upper Deck, which ended up suing AIG after coughing up almost a hundred million dollars in taxes after KPMG coughed up its client list as part of a half billion dollar plea agreement. Seventeen ex-KPMG executives were indicted in the "S2" tax shelter case, which was prosecuted in the aftermath of accounting scandals that nearly decimated all the industry's entrenched players. They didn't decimate AIG, however, which refused to make good on Upper Deck's insurance.

What Happens To A Prosecution Deferred...
Shortly thereafter AIG FP's inimitable chief Joseph Cassano was charged in assisting PNC Financial in a similar fraud, though the three firms avoided formal criminal indictments by coughing up fees in deferred-prosecution agreements that in AIG's case anyway, meant the company was required to pay a government-appointed attorney to report on the company's operations.

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http://tpmmuckraker.talkingpointsmemo.com/2009/03/yesterday_we_noticed_the_focus.php#more

[depakid]

1. "the three firms avoided formal criminal indictments"

And therein lies the key. Monetary penalties alone aren't going to be a deterrent because over time, they rnd up making money on these deals especially when you factor in the chances of getting caught (and the fact that they've gotten away with many more such schemes).