SCOPE OF FEDERAL RAID OF CATERPILLAR MAY GO BEYOND TAX STRATEGY
PEORIA — The federal government’s extraordinary decision to seek and execute search warrants at the Caterpillar Inc. global headquarters this week indicates company officials have not been as forthcoming as previously claimed.
That’s the interpretation of former federal prosecutors who spoke generally Friday about the pending criminal investigation of the world’s largest manufacturer of earth- moving equipment but who do not have specific knowledge of the government’s case.
“Investigations like this tend to take years, and the government is often doing things outside of public view,” said Renato Mariotti, a former assistant U. S. attorney in the Northern District of Illinois who prosecuted whitecollar crimes and is now partner with Thompson Coburn in Chicago.
“The government throughout the covert part of the investigation has found things that they believe would be of significant concern, and they have probable cause to believe a crime has been committed,” Mariotti said. “That’s why you would get a search warrant, so you could quickly act.”
Dozens of agents from the Internal Revenue Service, the Federal Deposit Insurance Corp. and U. S. Department of Commerce Bureau of Industry and Security Office of Export Enforcement converged on Caterpillar headquarters in downtown Peoria, a data center in East Peoria and the logistics center in Morton on Thursday.
In a message to employees issued late Thursday night, CEO Jim Umpleby said the company has cooperated with investigators regarding offshore tax strategies but that the government investigation may be looking elsewhere, too.
Investigators returned Friday, seizing documents and electronic records related to a broad swath of the company’s business operations, with a particular focus on the movement of money and parts to Switzerland — an apparent continuation of investigations into the company’s Swiss tax strategy— but also authority to take records related to all export business and more.
The company’s offshore tax structures first came to light through a federal employment lawsuit filed in the Central District of Illinois in 2009, and a U. S. Senate probe into those details in 2013 found the company avoided $ 2.4 billion in U. S. taxes over 13 years by shifting parts profits on paper to a Swiss subsidiary while still maintaining related business operations in the United States.
The IRS has proposed a $ 2 billion tax penalty related to those findings, which the company continues to contest.
The penalty proposal by the IRS, however, indicates that a criminal investigation into Caterpillar that began with federal grand jury subpoenas in the Central District of Illinois in January 2015 has broadened beyond the scope of the tax strategy alone.
Lee Smith, a former assistant U. S. attorney in the Central District of Illinois who is now the partner- in- charge of the Peoria office of Hinshaw & Culbertson, said itwould be unusual for a criminal investigation into the company’s tax strategy to follow a proposed civil penalty, such as the one already leveled by the IRS.
“We know that tax investigation has been going on for at least two years, maybe before that, as well,” but the search warrants do not contain references to tax statutes,” Smith said.
Instead, the warrants reference esoteric export information laws, which have been on the books for decades but appear to have resulted in few if any previous criminal prosecutions.
The Securities and Exchange Commission raised concerns in 2014 about possible Caterpillar business operations in Syria, Sudan and Cuba. The subsidiaries in Sudan were dealing with products such as service parts, engines and generators, according to SEC documents. The company pointed out that sales to those countries were a fraction of its total revenues and that some of the subsidiaries have since stopped accepting deals in Syria and Sudan. Caterpillar denied doing any business in or with Cuba, noting that a news article the SEC cited was unrelated to the company.
The current criminal investigation may be as focused on those types of export controls at Caterpillar as the tax strategy that has already been dissected in public.
Thedecision to seek search warrants also is a significant departure from the typical course of white- collar crime investigations, which usually rely on subpoenas and voluntary testimony. The decision to seek such warrants for a Fortune 100 company would be debated at a high level in Washington, D. C.