Years of federal scrutiny lead to Caterpillar HQ raid
Years of federal scrutiny over Caterpillar’s overseas business practices and tax strategies came to a head Thursday with a raid on the heavy machine maker’s Peoria headquarters.
Authorities from three agencies, including the Internal Revenue Service, arrived before 11 a.m. at the headquarters and two nearby facilities. Initially only confirming the raid, Caterpillar later in the day acknowledged it was tied to the same issue that has dogged the company for eight years: its use of a parts subsidiary based in Switzerland and tax-saving practices that sparked a Senate investigation, shareholder lawsuits and a $1 billion penalty.
The raid is the latest shock to a city still adjusting to Caterpillar’s January announcement that it would relocate its headquarters from Peoria to the Chicago area.
Long a global and domestic powerhouse in the world of mining and construction equipment, Caterpillar has been under investigation by federal authorities for years.
In 2014, a Senate investigation found the company had used its Swiss affiliate to take advantage of a corporate tax rate it negotiated and avoided paying at least $2.4 billion in U.S. taxes. Soon after, shareholders filed lawsuits against the company and its accounting firm, PwC, alleging breach of fiduciary duties. That matter is ongoing.
A technical change Caterpillar made in 1999 shifted most of the profits from replacement parts sold outside the U.S. to the Swiss subsidiary, Caterpillar SARL, or CSARL, but “did not ... otherwise change how Caterpillar’s replacement parts business functioned on the ground,” according to a Senate report.
The Senate investigation grew out of a whistleblower suit filed in 2009 by then-Caterpillar employee Daniel Schlicksup, alleging the company shifted profits to avoid taxes.
In 2015, the company said the IRS had proposed tax increases and penalties of about $1 billion after examining returns from 2007 to 2009. It also wanted to tax profits from the Switzerland-based affiliate, but the company maintained that it paid all the taxes it owed.
In its most recent annual report, filed last month, the company noted that it received a grand jury subpoena in January 2015 requesting financial documents and information dealing with its U.S. and foreign subsidiaries, including the Swiss affiliate.
Besides the company’s downtown Peoria headquarters, federal authorities executed search warrants at company locations in East Peoria and Morton, said Sharon Paul, a spokeswoman for the U.S. attorney’s office for the Central District of Illinois.
The Morton facility is responsible for shipping and receiving replacement parts to dealers and parts facilities around the world, according to Caterpillar’s website.
Agencies involved in Thursday’s searches included the Internal Revenue Service’s Criminal Investigation Division; the Office of Export Enforcement at the U.S. Department of Commerce’s Bureau of Industry and Security; and the Federal Deposit Insurance Corp.'s Office of Inspector General, Paul said. She declined additional comment.
Caterpillar said in a statement that it is cooperating with law enforcement.
“While the warrant is broadly drafted, we believe the execution of this search warrant is regarding, among other things, export filings that relate to the CSARL matter first disclosed in Caterpillar’s Form 10-K filed on February 17, 2015, and updated in Caterpillar’s most recent Form 10-K filed with the SEC on February 15, 2017,” the company said in a statement.
The current site of Caterpillar headquarters is seen at 100 NE Adams St. in Peoria, on Jan. 31, 2017. The company announced it will move its headquarters to the Chicago area.(John J. Kim / Chicago Tribune)
Prairie grass grows in front of the Caterpillar Visitors Center on Jan. 31, 2017, in Peoria. The company has announced it will move its headquarters to the Chicago area, though many workers will remain in Peoria.(John J. Kim / Chicago Tribune)
The Caterpillar Visitors Center in Peoria is seen Jan. 31, 2017. The company announced it will move its headquarters to the Chicago area. It said the “vast majority” of 12,000 Peoria jobs, which include manufacturing and white-collar positions, would remain in central Illinois.(John J. Kim / Chicago Tribune)
People exit the Caterpillar Visitors Center in Peoria on Jan. 31, 2017. The company said it will move its headquarters to the Chicago area. The new headquarters will house about 100 workers by the end of the year and ultimately grow to 300 employees.(John J. Kim / Chicago Tribune)
Men walk on Adams Street in downtown Peoria, a block from the Caterpillar Visitors Center, on Jan. 31, 2017. The company announced it will move its headquarters to the Chicago area; it has not decided on whether to locate in the city or suburbs.(John J. Kim / Chicago Tribune)
Also mentioned in the company’s most recent annual report is a subpoena issued in September 2014 from the Securities and Exchange Commission for information concerning Caterpillar’s 2011 acquisition of mining equipment manufacturer Bucyrus International.
The company also responded to concerns from the SEC on possible business operations in other far-flung locales that are subject to U.S. sanctions. The SEC asked Caterpillar in 2014 for further explanation of operations in Syria and Sudan and to explain a news article that mentioned delivery of Caterpillar products from a Ukrainian tractor plant to Cuba. The three countries were designated by the State Department as state sponsors of terrorism, and subject to export controls, according to the SEC filings.
Caterpillar responded to the concerns, pointing out that sales in Syria and Sudan were a small fraction of its total revenues and that some of the subsidiaries have since stopped “accepting orders” in those countries. The company’s subsidiaries in Sudan were dealing with products such as service parts, engines and generators, according to SEC documents. Caterpillar denied doing any business in or with Cuba, noting that a news article the SEC cited was unrelated to the company.
The maker of mining and construction equipment announced in January its plans to move to the Chicago area, though it has yet to name a location. While most of Caterpillar’s 12,000 jobs will remain in the Peoria area, the announcement of the move was a blow to the town, which is entwined economically with the company.
On Thursday in Peoria, the lunch crowd at Adams Street Cafe, which is kitty-corner from Caterpillar’s headquarters, was unusually light, owner Joe Slyman said. Only about one-third of the typical 100-plus diners showed up, and that crowd is usually more than half Caterpillar employees, he said.
Take a look at some of the equipment Caterpillar produces. The company is planning on moving its headquarters from Peoria to the Chicago area.
A line of more than a dozen official-looking vehicles filled the block outside the restaurant, Slyman said. Most were unmarked SUVs and vans, led by an Illinois State Police SUV. Slyman said one of his regular customers walked over not long after the vehicles pulled up around 11 a.m., took a selfie and encouraged the agents to stop by for lunch.
Several Illinois state troopers were on scene for security, requested by the Department of Commerce, Illinois State Police Master Sgt. Jason Bradley said.
News of the raid sent down Caterpillar’s stock. Shares closed at $94.36 Thursday, down 4.28 percent.
Chicago Tribune’s Lauren Zumbach contributed.
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