In the spring of 2008, finance executives from Caterpillar gathered for a few 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 $1bn 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 US taxes.
Federal agents raid Caterpillar’s Peoria headquarters.
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 $2bn in back taxes and penalties. In early 2014 a US Senate investigative committee, with input from Schlicksup, grilled executives and concluded the company had avoided taxes on more than $8bn 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.
US 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 US “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 $600mn, 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.” 
The corporate whistleblower is at once a celebrated and tortured figure in American culture. Think of Jeffrey Wigand, bane of the tobacco industry, and Enron scold Sherron Watkins, both portrayed in books and movies as people who told truth to power and paid a personal price.
Some get rich. Five years ago, the IRS awarded $104mn to Bradley Birkenfeld, a former banker at UBS Group, for telling investigators how the bank had helped thousands of Americans dodge taxes—the biggest IRS whistleblower award ever. But first, Birkenfeld had to serve prison time for his own involvement in the UBS scheme.
Schlicksup grew up near Peoria, one of eight children in a family with deep ties to the area. Bright and inquisitive, with a knack for numbers, he earned degrees in finance and law from Northern Illinois University, then a master of laws from Chicago-Kent College of Law. After several years in Chicago with the accounting company Arthur Andersen, Schlicksup moved back to Peoria and worked on the Caterpillar account for PwC. He jumped to Caterpillar’s tax staff in 1992, and his new bosses urged him to travel overseas and learn international tax law. From 1996 to 2000 he worked in Brussels and Geneva and established Cat’s first overseas tax department.
Caterpillar’s Geneva operation is in an elegant marble-and-glass building facing the Parc de la Grange on Lake Geneva. It was the base for Caterpillar Overseas, formed in 1960 to develop a global dealer network. As that network expanded, the Geneva office oversaw distribution of replacement parts around the world—a fabulously lucrative business. Caterpillar doesn’t disclose how much replacement parts contribute to its $38.5bn in annual revenue, but customers often spend two to three times as much on parts as on machines, according to the 2013 book The Caterpillar Way: Lessons in Leadership, Growth, and Shareholder Value. Former CEO Donald Fites saw a machine sale as “an annuity that continues to pay dividends over time” as customers keep their equipment running, the book says.
The parts are distributed from a vast warehouse in Morton, Ill., near Peoria. Morton is the hub of a global network of 25 parts warehouses, from which Caterpillar boasts of shipping 99% of orders within 24 hours. Along with Geneva and Peoria, Morton goes to the heart of the criminal investigation.
For years, Caterpillar accountants credited the Geneva office with 15% of the profits on parts sales, while the other 85% was allocated as earnings in the US The company paid an effective tax rate of a little less than 30% on those US profits. Around the time Schlicksup arrived in Geneva, Caterpillar embarked on a dramatic change in that accounting, led by Robin Beran, a tax manager in Peoria.
With the encouragement of PwC, where he’d once worked, and the law firm McDermott Will & Emery, Beran reorganised the Geneva operation as Caterpillar Société à Responsabilité Limitée, or CSARL. The move involved more than 70 transactions touching dozens of shell companies in more than a dozen countries, according to Schlicksup’s federal court filings. The objective: to cut the company’s tax bill so Cat could compete better with Komatsu and other foreign rivals that enjoyed lower corporate tax rates. In planning documents, PwC said, “We are effectively more than doubling the profit on parts.”
For all its complexity, the basics are easy enough to understand: Caterpillar essentially flipped the parts profit allocation so the new Swiss entity would be credited with 85% of the income on those sales. The company then paid taxes on those earnings at rates ranging from 4% to 6%, as negotiated with the Swiss tax authorities. A 2014 Senate hearing on Caterpillar’s tax strategy.
In effect, Caterpillar removed its US operations from the outbound supply chain of parts sold in foreign countries. Before the accounting change, Caterpillar in the US bought parts from third-party suppliers and resold them to Geneva for distribution overseas. After the change, CSARL bought parts directly from the suppliers. But that was merely on paper: US facilities continued to handle and manage the bulk of inventory, suppliers, and manufacturing. Of its 400 or so employees, the Geneva office had about 65 people working on parts, and Morton and other US operations had about 5,000. (To be continued)