Caterpillar

Why did the federal government raid Caterpillar’s offices, and is it a sign of more raids to come?

By Tina Irgang

On March 2, federal agents working for the IRS’ criminal division, the U.S. attorney’s office of Central Illinois and two other agencies executed search warrants at Caterpillar’s office in Peoria, IL. The raid, during which computers and documents were seized, was part of an inquiry into the company’s offshore tax practices.

“It’s very rare for federal investigators to show up at a company like this,” says NPR’s Marketplace, which also notes that the closest historical parallel to the recent raid occurred 15 years ago, when the FBI appeared at Enron’s offices. It’s a more usual practice for federal investigators to trust companies to provide documents it has requested as part of an investigation, the article adds.

The fact that Caterpillar’s tax practices were being investigated was already public knowledge. “In its annual 10-K filing with the U.S. Securities and Exchange Commission last month, [the company] acknowledged a criminal investigation” related to a tax strategy that allowed Caterpillar to shift profits to shell companies in overseas tax havens, reports the Peoria Journal Star. “The company said in a statement that the search warrant related to that issue, ‘among other things.’”

(Side note: According to The Washington Post, the tax strategy under investigation was developed for Caterpillar by accounting firm PwC, recently at the center of an embarrassing mix-up at this year’s Academy Awards.)

Caterpillar also says it has been cooperating with the government in its investigation. But the plot thickened March 7, when reports surfaced of a new, government-commissioned study that “accuses the heavy-equipment maker of carrying out tax and accounting fraud. It is extremely rare to accuse a big multinational company of tax fraud, which could result in high penalties,” reports CNBC.

Senate: Caterpillar shifted profits abroad

According to Bloomberg, a 2014 U.S. Senate investigation found that Caterpillar had engaged in a concerted effort to shift profits away from the U.S. and into Switzerland, resulting in billions of dollars in tax savings for the company.

“The [Senate] inquiry drew no conclusions about whether Caterpillar had broken the law, but it appears to have piqued the interest of federal investigators. In January 2015, Caterpillar received a grand jury subpoena for documents related to the movement of cash between its American and overseas businesses,” reports The New York Times.

It’s unclear whether senior Trump administration officials knew about, or endorsed, the recent raid. In fact, it came just a week after President Donald Trump praised Caterpillar during a meeting of manufacturing executives at the White House, notes Bloomberg. The Trump administration also has said it would address offshore tax havens as part of corporate tax reforms, rather than investigating individual companies, The New York Times reports.

As a result, it would be a stretch to see the Caterpillar raid as the first in a series of enforcement measures against businesses with tax-haven subsidiaries. However, there are signs that Congress is inclined to crack down on tax dodging: “The scrutiny of Caterpillar’s offshore tax practices occurred after a series of Senate hearings sought to showcase how large companies — mostly technology businesses like Microsoft, Hewlett-Packard and Apple — had used complex maneuvers to avoid paying U.S. taxes,” reports The New York Times.

Another interesting component of the raid: As Bloomberg points out, one of the participating agencies was the Federal Deposit Insurance Corporation (FDIC), an independent agency created by Congress. The FDIC’s task is to protect consumers against predatory financial practices and “to maintain stability and public confidence in the nation’s financial system,” according to its website.

As the 2017 tax season proceeds, make sure to watch this space.

Tina Irgang is SmartCEO’s managing editor. Contact her at tina@smartceo.com.