Ernst & Young settle decade long tax avoidance scandal for $123m to avoid criminal prosecution.

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Posted in:Banking and Finance|March 10, 2015 | Join the mailing list


Leading tax expert firm Ernst & Young (“E&Y”) have this week brought to an end their decade long tax avoidance scandal. Whilst PwC and HSBC Switzerland have recently joined the ranks of financial institutions exposed for tax avoidance, The Guardian reported
on 3 March 2015 that E&Y have settled with US regulators to pay $123 m (£82m) to avoid criminal prosecution. The tax firm have also admitted that senior tax partners between 1999 and 2004 were involved in “developing, marketing and defending tax avoidance
schemed to dodge taxes worth $2bn faced by about 200 wealthy individuals.”

Outside of the settlement, the tax avoidance scandal saw four employees sentenced in 2010 to serve time in jail for their involvement in tax evasions and obstructing the US Internal Revenue Service (“IRS”); although two had their convictions overturned last
year on appeal.

The specialist department known as Viper (Value Ideas Produce Extraordinary Results), set up in 1999 and embroiled at the centre of the scandal assisted wealthy individuals syphon income of more than $20m away from the visibility of the taxman. The various
products created by Viper, such as “Cobra” (Currency Options Bring Reward Alternatives) although visible and appeared as investments to the IRS, were marketed to millionaire clients as “pre-planned steps that would defer, reduce or eliminate tax bills”.

Unlike the recent HSBC scandal, where leaked documents have revealed that HSBC Switzerland were aware of their clients’ business reasons for tax avoidance, E&Y have admitted that their tax experts purposefully did not create a “paper trail” that would make
their motives or that of their clients transparent.

Although this seems like an end to the decade-old scandal for E&Y, one must question whether the $123m settlement goes far enough to penalise what clearly has been demonstrated to be pre-meditated and motivated for tax avoidance by E&Y at the highest level.
The agreed settlement only represents the amount that E&Y received in fees from the four admitted avoidance structures; does this send out the right message from a regulatory perspective?

In the UK, a report made in 2013 by John Dixon (E&Y UK Tax Chief) called for companies to be prepared that public demand would increase the need for greater transparency in their tax affairs. Despite this, at the end of January this year, E&Y were amongst four
firms accused by Margaret Hodge (Chair of the Public Accounts Committee) of exploiting a loophole that allowed their clients (amongst whom sit Amazon, Facebook and Google) to pay much lower corporation tax than their rivals.

It occurs to Berg that E&Y, together with those more recently exposed for their parts in tax avoidance schemes will only learn their lesson when they are faced with a punishment that goes further than $183m, where at a much greater loss to tax payers, $2bn
was avoided in taxes.

If there are any issues in this update or more generally that you would like to discuss, please contact
Alison Loveday
or one of our Banking and Financial Regulatory team on 0161 833 9211.

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of this article.)

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