Offshore Portfolio Investment Strategy (OPIS)

What Was the Offshore Portfolio Investment Strategy (OPIS)?

The 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. OPIS was one of many tax avoidance products offered by accounting firms.

Understanding the Offshore Portfolio Investment Strategy (OPIS)

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 significantly more than the real financial loss.

Many tax shelters were based on legal tax-planning techniques. But they became such big business that the 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 Design of the Offshore Portfolio Investment Strategy (OPIS)

Accounting firms that audit companies created financial losses using a variety of accounting practices. These losses were then used to offset actual profits from operations or from capital gains, resulting in a lower reported profit and therefore a lower amount taxed.

For example, if a company reported $20,000 in profits before taxes and had to pay 10% tax on those profits, they would owe $2,000 ($20,000 x 10%) and their profits after taxes would be $18,000 ($20,000 - $2,000). Now, if an accounting company was able to generate additional losses through false accounting practices, say, in the amount of $5,000, the company's profits before taxes would be $15,000 instead of $20,000.

The tax the company would now pay would be $1,500 ($15,000 x 10%), which is $500 ($2,000 - $1,500) less than what they should legally be paying. This was $500 that was robbed from the government and added to its pockets, or to the pockets of the accounting firm if the company was not aware of the fraudulent practice, which in many cases they weren't, resulting in the payment of back taxes owed.

The manner in which an accounting firm would conduct this tax avoidance scheme was through the creation of a shell company. The shell company would record a variety of transactions and investments, all that would result in losses. These losses were not of course real as the transactions and investments were not real. These fake losses were then used to offset the actual profits of a company.

The KPMG-Deutsche Bank Tax Shelter Scandal

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 that they 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.

In 2002, PricewaterhouseCoopers reached a settlement for an undisclosed amount with the IRS while Ernst & Young finalized their $123 million settlement in 2013. In the meantime, KPMG ended up admitting unlawful conduct and paying a $456 million fine in 2005. Part of the settlement Attorney General Alberto Gonzales negotiated was KPMG’s promise to stay out of the tax shelter business. But nine individuals, including six partners, were indicted for creating $11 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 to pay the IRS back taxes and penalties. Investors who sued Deutsche Bank brought to light that it had helped 2,100 customers evade taxes, reporting more than $29 billion in fraudulent tax losses between 1996 and 2002. It admitted criminal wrongdoing in 2010 and settled for $553.6 million.