What Was the Offshore Portfolio Investment Strategy (OPIS)?
Let me explain the Offshore Portfolio Investment Strategy, or OPIS, which was an abusive tax avoidance scheme pushed by KPMG, one of the Big Four accounting firms, from 1997 to 2001. This happened during a period when fraudulent tax shelters were rampant in the global financial services industry. OPIS stood out as one of many such products that accounting firms were offering to help clients dodge taxes.
Key Takeaways
- The Offshore Portfolio Investment Strategy (OPIS) was a tax avoidance product from the accounting firm KPMG.
- OPIS was among numerous tax avoidance schemes that accounting firms promoted in the 1990s.
- These schemes involved setting up shell companies to record phony transactions and investments, generating losses to offset company profits and reduce taxes owed.
- The IRS eventually outlawed these schemes because they had no real purpose beyond evading taxes, costing the government significant revenue.
- Companies caught up in these scandals ended up paying millions in damages.
Understanding the Offshore Portfolio Investment Strategy (OPIS)
You need to know that OPIS relied on investment swaps and shell companies based in the Cayman Islands to fabricate accounting losses. These fake losses were then applied to offset taxes on real taxable income, essentially defrauding the IRS. In many cases, the fabricated losses far exceeded any actual financial hits.
While plenty of tax shelters started from legitimate tax-planning methods, they ballooned into a massive industry. That's why the IRS started cracking down on these abusive setups, which grew increasingly convoluted. According to the Government Accountability Office, they cost the U.S. government about $85 billion from 1989 to 2003.
The Design of the Offshore Portfolio Investment Strategy (OPIS)
Accounting firms, including those auditing companies, engineered financial losses through various shady practices. They used these losses to counterbalance real profits from operations or capital gains, which lowered reported profits and, in turn, the taxes due.
Consider this example: If a company shows $20,000 in pre-tax profits and faces a 10% tax rate, they'd owe $2,000, leaving them with $18,000 after taxes. But if an accounting firm cooks up $5,000 in fake losses, the pre-tax profits drop to $15,000. Now the tax is just $1,500, saving $500 that rightfully belongs to the government. That $500 either pads the company's pockets or the firm's, and often companies didn't even know about the fraud, leading to them owing back taxes later.
Here's how it worked: The firm would set up a shell company that logged a series of bogus transactions and investments, all designed to show losses. Since these weren't real, the losses were phony too, but they got used to wipe out actual profits.
The KPMG-Deutsche Bank Tax Shelter Scandal
The IRS officially deemed OPIS and similar shelters illegal in 2001-2002, as they served no genuine economic purpose beyond cutting taxes. Yet, emails revealed KPMG was talking about peddling new, similar shelters and not cooperating with probes.
In 2002, the U.S. Senate Permanent Subcommittee on Investigations launched a probe. Their November 2003 report exposed how global banks and accounting firms were pushing abusive and illegal tax shelters. It highlighted KPMG's OPIS, Deutsche Bank's Custom Adjustable Rate Debt Structure (CARDS), and Wachovia Bank's Foreign Leveraged Investment Program (FLIP). Banks such as Deutsche Bank, HVB, UBS, and NatWest provided loans to make these deals happen.
Settlements followed: PricewaterhouseCoopers settled with the IRS for an undisclosed sum in 2002, while Ernst & Young paid $123 million in 2013. KPMG admitted wrongdoing in 2005, coughing up a $456 million fine and agreeing to exit the tax shelter game, as negotiated by Attorney General Alberto Gonzales. Still, nine people, including six partners, faced indictments for $11 billion in fake tax losses that cost the government $2.5 billion.
Many firms that sold these shelters got sued by clients who had to repay the IRS with penalties. Lawsuits against Deutsche Bank showed it aided 2,100 customers in evading taxes, claiming over $29 billion in fraudulent losses from 1996 to 2002. The bank admitted criminal acts in 2010 and settled for $553.6 million.
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