Offshore Portfolio Investment Strategy (OPIS)

Offshore Portfolio Investment Strategy (OPIS) was an abusive tax avoidance scheme sold by KPMG, one of the Big Four accounting firms, between 1997 to 2001. This was a time when fraudulent tax shelters had proliferated across the global financial services industry.

Offshore Portfolio Investment Strategy (OPIS) used investment swaps and shell companies in the Cayman Islands to create fake accounting losses that were used to offset taxes on legitimate taxable income – and defraud the Internal Revenue Service (IRS). Some of these fake accounting losses were more than 100 times larger than the real financial loss.

Many tax shelters were based on legal tax-planning techniques. But they became such big business that IRS began a crackdown on abusive tax shelters and their increasingly complex structures — which had deprived the U.S. government of $85 billion between 1989 and 2003, according to the Government Accountability Office.

The IRS formally declared OPIS and similar tax shelters unlawful in 2001-2002, because they had no legitimate economic purpose other than reducing taxes. However, email messages showed that KPMG had subsequently discussed selling new shelters that were similar to the banned version – and failed to cooperate with investigators.

The U.S. Senate Permanent Subcommittee on Investigations began an investigation in 2002. Its report, in November 2003, found that numerous global banks and accounting firms had promoted abusive and illegal tax shelters. Along with KPMG’s OPIS products, it singled out Deutsche Bank’s Custom Adjustable Rate Debt Structure (CARDS) and Wachovia Bank’s Foreign Leveraged Investment Program (FLIP) products. Banks like Deutsche Bank, HVB, UBS and NatWest, had provided loans to help orchestrate the transactions.

PricewaterhouseCoopers and Ernst & Young reaching settlements with the IRS in 2003, while KPMG ended up admitting unlawful conduct and paying a $456 million fine in 2005. Fearing that an indictment would put KPMG out of business, soon after the Enron scandal had destroyed accounting firm Arthur Andersen – which would have left only three international firms to audit large corporations — Attorney General Alberto Gonzales settled for KPMG’s promise to stay out of the tax shelter business. But eight partners, including the chief of KPMG’s tax practice, were indicted for creating $11.2 billion in false tax losses and depriving the U.S. government of $2.5 billion of tax revenue.

Subsequently, many of the firms which had helped sell these tax shelters were sued by clients who had had to pay the IRS back taxes and penalties. Investors who sued Deutsche Bank in 2004 brought to light that it had helped 2,100 customers evade taxes report more than $29 billion in fraudulent tax losses between 1996 and 2002. It admitted criminal wrongdoing in 2010 and settled with the U.S for $553.6 million.