Tuesday, June 06, 2017

A very hungry Caterpillar

Many years ago – 22 in fact – I went on a sales call at Caterpillar in Peoria, Illinois.

The trip out there was memorable for a number of reasons.

The first is, of course, that while my colleague and I were driving back to Chicago after the ruinous meeting at Caterpillar, we heard reports on the radio of the Oklahoma City bombing. We were driving through AM country – soybean fields, I think – and the radio stations kept drifting in and out, but I remember that we kept saying that we must be mishearing things. Who would bomb a daycare center? It was only when we got to Chicago and checked into our hotel that we got the full story.

Anyway, we didn’t get the deal at Caterpillar.

We realized in the first three seconds of the call that we were just there to satisfy a due diligence checklist – column fodder, as we used to say – and the people we were speaking with were not all that Midwest nice.

(The trip wasn’t a total loss, as we’d had an excellent meeting with our customers at State Farm, who went out and bought more stuff from us. Plus we got to eat in their caf, where they had several forms of jello mold on offer. If only I could have brought a take-home bag back for my mother. Plus, we’d gotten to stay at an idiotically decorated hotel in Bloomington called Jumer’s Chateau.)

If I recall correctly, Caterpillar also had more security than was the corporate norm back in those days.

Anyway, I never did like Caterpillar…

So I was interested to read that they’re looking at a whopping past-due bill from the IRS. And that the accountant who’d blown the whistle on their corporate malfeasance was looking at a whopping pay day for himself.

Here’s the story:

Nearly a decade ago, accountant Daniel Schlicksup was attending a Caterpillar off-site at which the upper-ups were hammering home an ethics message.

Anyone aware of financial malfeasance or trickery was obliged to report it immediately. Later, then-Chief Executive Officer Jim Owens pressed the point, saying he slept well because he couldn’t imagine Caterpillar experiencing the sorts of ethical lapses that had doomed Enron Corp. and other companies. (Source: Bloomberg)

Epiphany, Mr. Schlicksup.

He’d been telling his bosses that the company was engaged in an overseas tax arrangement that, by his reckoning, had helped it illegally avoid more than $1 billion in taxes. Now, as Owens spoke, Schlicksup concluded that no one had passed his warnings to the CEO. “I thought to myself, ‘Jim, it’s happening here,’  ” Schlicksup later said in sworn testimony. “ ‘You just don’t know it.’  ”

So he went and started internally blowing the whistle, which included a) a memo describing how his bosses had retaliated when he tried to raise these issues, and b) over 100 pages documenting how Caterpillar, hand and glove with PwC, “had devised a way to shift billions in profit to Switzerland to avoid U.S. taxes.”

This eventually resulted in the Feds being whistled in, and an eventual conclusion that Caterpillar had done some fancy tax avoidance on more than $8billion in revenue.”

And it ain’t over yet. Caterpillar is still being investigated – the IRS et al. raided their offices in March - and criminal charges may be brought against some of their past and present execs.

Caterpillar, meanwhile, maintains that its position on how they handled the tax situation is correct. Like any other company, they were looking to profit maximize within the constraints of our apparently draconian corporate tax code. In other words, they were just being a very hunger caterpillar for profits. Just like any other red-blooded American company.

Not surprisingly, Schlicksup has left Caterpillar. (Without, I’m disappointed to say, updating his LinkedIn profile.) And, not surprisingly, part of Caterpillar’s defense of themselves is an attack on him.

The company has portrayed him in court filings as a paranoid, self-righteous employee who buried his own future there.

But if the IRS ends up prevailing, and claws back the $2B is believes Caterpillar cheated them out of, Schlicksup stands to make $600M. This will far surpass the relative chump-change $104M that a former UBS banker was awarded. (He couldn’t collect until he’d done some time. But he appears to be enjoying life. His LinkedIn profile describes his position as “UBS Whistleblower” and touts his book, Lucifer’s Banker: The Untold Story of How I Destroyed Swiss Bank Secrecy. And in his profile picture, he appears to be wearing some type of Oktoberfest outfit and hefting a beer stein. Prost!)

If you want to read about how a tax avoidance scheme works, check out the Bloomberg article. It’s plenty interesting. So’s the take on Schlicksup and his set-to’s with his managers, and his being kicked aside to an IT job he wasn’t qualified for or interested in, but which he stuck with even after he went public with his whistleblow. (He later negotiated his departure from Cat.) Schlicksup comes across as  something of a hectoring noodge. Not that there’s anything wrong with that, mind you. (It takes a hectoring noodge to know one…) Anyway, the corporate (non-tax-dodge story) is plenty interesting, too.

Even if there ends up being no criminal prosecution, the IRS may still go after the back taxes. And:

The IRS has a standard formula for whistleblower awards: It pays 15 percent to 30 percent of what it collects.

Which could end Schlicksup up with that payday being in the $600M range. That’d make anyone want to whistle(blow) while they worked.

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