KPMG tax 'sham' could lead to criminal investigation, experts say

A KPMG tax avoidance scheme in the Isle of Man could lead to a criminal investigation if the Canada Revenue Agency can support allegations that the accounting firm's offshore structure intended to deceive authorities, two tax experts have told CBC News.

"It is clearly a case where it could lead to a criminal investigation, because obviously there were things that were done here that were not in line with reality," LavalUniversity tax professor Andre Lareau told CBC News during a trip to the Isle of Man this summer.

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CBC asked Lareau, an internationally recognized expert on tax law, to visit the renowned offshore haven in the Irish Sea in a bid to track down answers about a KPMG tax scheme that the CRA is alleging was "intended to deceive" authorities.

"It really is a textbook case of a sham, when you look at the documents," Lareau concluded.

But he also cautioned that a criminal investigation would require a higher burden of proof, both to collect evidence in the first place and to obtain a conviction.

And that the CRA would need to show that KPMG and its clients knowingly deceived tax authorities.

"They have to prove the intention to defraud the system," he said.

Shroud of secrecy

CBC News and Lareau arrived in the Isle of Man on Tynwald Day, the national holiday, and spoke directly to Steve Rodan, the speaker of the legislature who insisted the Isle of Man was not a tax haven.

"It's a tax-efficient jurisdiction," he said.

"'Tax haven' is a term of abuse these days. We are open and transparent, anyone can come in and look at the books. There's no secrecy here, no banking secrecy," Rodan told CBC News.

But when CBC and Lareau went looking for the offices, shareholders and directors of the Ogral corporation which was set up more than a decade ago by the Cooper family of Victoria, B.C. on advice from KPMG Canada the reporters were stonewalled.

Anne Couper Woods, a "nominee director" of Ogral Corporation and dozens of other Isle of Man companiesbased in Douglas, the capital, refused to discuss the KPMG case with CBC News.

"We wouldn't comment at all," she told CBC reporters. She declined to answer questions about how KPMG Canada first got in touch with her to set up the shell companies. "I have no further comments," she said.

Sandra Georgeson, another Isle of Man director of Ogral Corporation was a little more forthcoming. She admitted that one of the shareholdersanother company called Korderry was simply a "nominee service" used to protect the identity of the true owners of Ogral.

"It's just so that you can provide a shareholder," she told CBC News in an interview from her office on Athol Street. When CBC producer Harvey Cashore asked her the reason behind providing a nominee shareholder, she replied simply, "confidentiality."

She also declined to say who were the real owners of the company.

When Lareau went to the offices of KPMG in downtown Douglas, he says he was told that KPMG would never get involved in an alleged scheme that would have clients pretend to give away their money to an Isle of Man corporation.

Back in Canada, KPMG lawyers don't dispute they advised the Cooper family to set up the Ogral company.

They claim, however, that the money in Ogral did not belong to the Coopers. Court documents show that KPMG was rewarded with hundreds of thousands of dollars in commissions, and was promoting the Isle of Man scheme to other multi-millionaire clients.

Internal KPMG memos told tax advisers the firm was promoting a "no tax" plan and could charge fees "in the range of 15 per centof annual savings."

CRA alleges 'sham'

In civil court documents, CRA alleges that KPMG, as well as some of its wealthy clients, knowingly participated in a "grossly negligent" tax avoidance scheme that deliberately deprived the federal treasury of millions in unpaid taxes.

The tax planning product "is a sham and was intended to deceive the minister," the CRA court filings allege.

Still, the CRA's current court action against KPMG and its clients remains strictly in the civil arena.

The CRA has required at least three of the known KPMG clients i.e. the Cooper family to pay substantial penalties as well as the taxes owed. The Coopers are appealing the case.

The CRA has also launched civil court action against KPMG, demanding that it hand over the names of all the multi-millionaire Canadian residents who set up offshore companies in the Isle of Man.

KPMG is appealing a judge's order to hand over the names and that case has been stalled for more than two and a half years.

• KPMG statement

• Peter Marshall Cooper Notice of Appeal, March 9, 2015

• Marshall Cooper Notice of Appeal, March 9, 2015

• Richard Cooper Notice of Appeal, March 9, 2015

• CRA vs. RICHARD COOPER Amended Reply, July 10, 2015

• CRA vs. PETER MARSHALL COOPER Amended Reply, July 13, 2015

• CRA vs. MARSHALL COOPER Amended Reply, July 13, 2015

KPMG prosecuted in U.S.

Michael Hamersley, a former KPMG lawyer turned whistleblower in the U.S., also reviewed the documents filed in court in Canada.

His testimony helped the Internal Revenue Service convict three KPMG U.S. executives in a different tax shelter scheme in the mid-2000s. In that case, KPMG U.S. also agreed to pay a fine of nearly half a billion dollars.

The KPMG Canada case "resonates plenty," Hamersley said. "It's exactly the type of behaviour that I saw in the U.S. at the time."

"When your transaction and the tax results are dependent upon hiding the true facts, you start to cross into potential criminal liability," Hamersley told CBC News.

KPMG Canada declined to speak with CBC News about the Isle of Man offshore scheme.

"Professional standards and obligations preclude us from disclosing, responding to, or discussing any matters that involve clients," Kira Froese, KPMG Canada's director of communications, wrote in an email. "It is inappropriate for us to comment on matters that may be before the courts."

Canada's Department of Justice did not return an email or phone calls by the time of publication asking about the delay in the case.

For more on this story watch the documentary "The Isle of Sham" on The National in the days to come.
For tips on this story please email investigations@cbc.ca or call Harvey Cashore at 416-526-4704.