The Whistleblower Behind Caterpillar’s Massive Tax Headache Could Make $600 Million

The construction giant faces a $2 billion IRS bill and possible criminal charges, while the accountant who tipped off the feds stands to make a windfall.
Days of meetings in the Peoria Civic Center, a few blocks from company headquarters. Early in the proceedings, Eugene Fife, chairman of the audit committee, reminded the attendees that they cradled Caterpillar’s reputation in their hands.
It would take just one or two wayward stewards to wreak havoc, Fife said, even at a company as mighty as Caterpillar, the world’s largest maker of bulldozers and other construction equipment. 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.
Listening with dismay was Daniel Schlicksup, an accountant who’d been with Caterpillar for 16 years. 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.’”
He walked back to Caterpillar’s offices and at 7:35 that evening sent an email to two of Owens’s top underlings, with the subject line “Ethics issues important to you, the Board and Cat Shareholders.” In a note, he alluded to his concerns about the tax strategy and described, in emotional terms, a systematic effort to shut him down. “I am now an example to my colleagues, peers, and others that they made the correct choice when they chose to not report ethical issues and ignore Company Policy,” he wrote. Attached to the email was a 15-page memorandum describing how his superiors had retaliated against him for speaking out. The next morning he sent 137 pages of documents purporting to show how, with the help of its auditor, PricewaterhouseCoopers, Caterpillar had devised a way to shift billions in profit to Switzerland to avoid U.S. taxes.

His missives began a chain reaction that’s still in motion. The IRS, aided by documents Schlicksup provided, concluded in 2013 that Caterpillar had employed an “abusive” tax strategy; the agency later demanded $2 billion in back taxes and penalties. In early 2014 a U.S. Senate investigative committee, with input from Schlicksup, grilled executives and concluded the company had avoided taxes on more than $8 billion in revenue.
Then, on the morning of March 2, 2017, agents from the IRS, Department of Commerce, and Federal Deposit Insurance Corp. showed up in Peoria with search warrants. They sequestered employees for interviews and carried off documents, computers, encryption devices, and other evidence that might be related to “false and misleading financial reports and statements,” according to the warrants. If criminal charges are brought, current or former Caterpillar executives could face jail time.
U.S. prosecutors almost never resort to splashy raids on mom-and-apple-pie companies such as Caterpillar, a huge exporter that’s kept 46,500 jobs in the U.S. “I love Caterpillar,” President Donald Trump declared in a White House meeting with CEOs one week before the March raid. The company declined to make executives available for interviews for this story. A spokeswoman says, “Caterpillar believes its tax position is right. We are in the process of responding to the government’s concerns and hope to be in a position to bring this matter to resolution within a reasonable time frame.”
Schlicksup, now 55, parted ways with Caterpillar five years ago. The company has portrayed him in court filings as a paranoid, self-righteous employee who buried his own future there. But if the IRS collects what it claims it is owed, Schlicksup might end up the best-paid whistleblower of all time, with a potential paycheck of $600 million, while Caterpillar, the 92-year-old pride of Peoria, will experience something unfamiliar:public humiliation.
In a 2011 deposition, a Caterpillar attorney asked Schlicksup if his actions threatened to hurt shareholders. “It is absolutely in the shareholders’ best interests to have the most accurate financial statements they can have,” Schlicksup replied. “I don’t think that the shareholders of Enron would think it would have been such a bad deal if somebody would have caught that before it bankrupted the company and they lost everything they had.”www.bloomberg.com