Free Motion to Stay - District Court of Federal Claims - federal

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U.S. Department of Justice

(8
Robert S. Bennett, Esq. Skadden, Aips, Slate, Meagher & Florn LLP 1440 New York Avenue, N.W.
Washington, D.C. 20005-2111

United States Attorney
Southern District of New York

The Silvio J. Mollo Building
One Saint Andrew 's Plaza

New York. New York /0007

August 26, 2005

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Re: KPMG - Deferred Prosecution Agreement
Dear Mr. Bennett:

Pursuant to our discussions and written exchanges, the United States
Attorney's Offce for the Southern District of

New York (the "Office") and the defendant

KPMG LLP ("KPMG"), by its undersigned attorneys, pursuant to authority granted by its Board of Directors in the form of a Board Resolution (a copy of which is attached hereto
as Exhibit A), hereby enter into this Deferred Prosecution Agreement (the "Agreement").

The Criminal Information

1. KPMG wil consent to the fiing of a one-count Information (the
"Information") in the United States District Court for the Southern District of New York
(the "Court") charging KPMG with participating in a conspiracy in violation of 18
U.S.C. § 371 to (i) defraud the United States and its agency the Internal Revenue Service
(hereinafter "IRS"); (ii) commit tax evasion in violation of26 U.S.c. § 7201; and (iii)

- EXHIBIT z .;

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make and subscribe false and fraudulent tax returns, and aid and assist in the preparation
and fiing of said tax retas in violation of26 U.S.C. § 7206. A copy of

the Information

is attached hereto as Exhibit B.

Acceptance of Responsibiltv for Violation of Law

2. KPMG admits and accepts that, as set forth in detail in the
Statement of

Facts, attached hereto as Exhibit C, through the conduct ofc~rtain KPMG

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tax leaders, partners, and employees, during the period from 1996 through 2002, KPMG: Assisted high net worth United States citizens to evade United States individual income taxes on bilions of dollars in capital gain
and ordinary incorne by developing, promoting and irnplernenting

unregistered and fraudulent tax shelters. A number ofKPMG tax
parters engaged in conduct that was unlawful and fraudulent,

including: (i) preparng false and fraudulent tax returns for shelter clients; (ii) drafting false and fraudulent proposed factual recitations and representations as part of the docurnentation underlying the shelters; (iii) issuing opinions that contained those false and fraudulent statements and that purported to rely upon those representations, although the KPMG tax partners and the high net worth individual clients knew they were not true; (iv) actively taking steps to conceal from the IRS these shelters and the true facts regarding them; and (v) impeding the IRS by knowingly failing to locate and produce all documents called for by IRS summonses and misrepresenting to the IRS the nature and extent ofKPMG's role with respect to certain tax shelters.
3. KPMG agrees that it wil pay a total of $456,000,000 to the United

States as part of this Agreement, which payments are attributable to the following: a fine
çonsisting ofdisgorgement of 5128,000,000 of

fees received by KPMG from the

activities described in the Statement of Facts; restitution to the IRS of $228,000,000 for

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actual

losses suffered as a result of, among other things, the running of statutes of

limitations because of aIfong other things, KPMG's failure to register its tax shelters,
KPMG's failure to disclose its participation in certain fraudulent shelter trans~ctions to
the IRS in response to summonses, and KPMG's misrepresentation to the IRS of

its

involvement in those transactions, as detailed in the Statement of Facts; and an IRS
penalty of $1 00,000,000 to settle the IRS's promoter penalty examination 9f KPMG
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pursuant to the closing agreement described in paragraph 19, below. KPMG agrees that

it wil satisfy this obligation with an initial payment of $256,000,000 to be paid on or
before September 1, 2005, a second payment of $1 00,000,000 to be paid on or before

June 30, 2006, and the remaining balance of $100,000,000 to be paid on or before

December 21, 2006. In the event that KPMG fails to make these payments on a timely
basis, the Office, in its sole discretion, can treat the failure to pay as a violation of the

term of the Agreement or require KPMG to extend the length of the Deferred
Prosecution for a period of up to an additional eighteen (18) months.

4. KPMG agrees that no portion of the $456,000,000 that KPMG
has agreed to pay to the United States under the terms of this Agreement is deductible on
any Federal or State tax or information return.
5. KPMG has represented to the United States that no portion of

the

$456,000,000 that it has agreed to pay to the United States under the 'terms of

this

Agreernent will be covered by any insurance policy in existence at the time of the

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conduct alleged in the Information or at the time any notice of claim was made to its

insurer(s), which representation was material to the United States in determining
KPMG's ability to rnake full restitution and pay penalties to the United States,. which
amounts, in the Government's view, were far in excess of

the $456,000,000 agreed to

herein. KPMG agrees that, in the event that any portion ofKPMG's $456,000,000
obligation to the United States is ultimately covered by insurance, 50 percant of any
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insurance funds received by KPMG shall be remitted to the United States. The payment
to the United States of a portion of

the amounts received from insurance shall be over

and above the $456,000,000 that KPMG has agreed to pay, but in no event shall the total
payments made by KPMG to the United States (which total payments includes both the

underlying $456,000,000 and insurance proceeds) exceed $600,000,000. In addition,

KPMG agrees that it wil not enter into any agreement or understanding with its
insurance carrieres) to receive insurance coverage for any portion of that $456,000,000 in
exchange for increased insurance premium payments made by KPMG in the future.

Permanent Restrictions On And Elevated Standards For KPMG's Tax Practice
6. KPMG agrees to the following permanent restrictions and
elevated standards for its tax practice:

(a). KPMG wil cease its private client tax practice by February 28,
2006, and wil take on no new clients or engagements in its private client tax practice

after the signing of this Agreement (provided, however, that it wil not be a violation of

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this provision for KPMG, during the 30 days following the signing of

this Agreement,

inadvertently to take on á'new client or engagement, provided that the engagement is
promptly terminated upon discovery of

the error);

(b). KPMG wil cease its compensation and benefits tax practice
(exclusive of

technical expertise maintained within its Washington National Tax

practice) by February 28,2006, or by such other later date as is reasonab1y~determined by

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the Monitor, and promptly after the signing of

this Agreernent will commence a process

to transition out of

this practice;

(c). KPMG wil not develop or assist in developing, market or assist
in marketing, sell or assist in selling, or implement or assist in implementing, any prepackaged tax product;

(d). KPMG wil not participate in marketing, implementing, or
issuing any "covered opinion" (as defined below in subparagraph (i)(I)) with respect to
any "listed transaction" (as defined below in subparagraph (i)(III));

(e). KPMG wil not provide any tax services under any conditions of
confidentiality (as defined in 26 C.F.R. § 1.6011-4(b)(3)(ii));

(f). KPMG wil not charge or accept fees subject to contractual
protection (as defined in 26 C.F.R. § 1.6011-4(b)(4)) or any fees that are not based
exclusively on the number of hours worked at set hourly rates, which rates may not
exceed twice KPMG's standard rates, provided that (I) KPMG may charge or accept fees

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described in 31 C.F.R. § 10.27(b) in the case of

reverse sales and use tax audits, (II)

KPMG may enter into arrangements to limit the total fees in any matter to a maximum

amount or to limit fees to a specified amount per return, in each case where th~ fees to be

charged under such arrangement would not exceed the amount that would be charged if
the fees were instead based on the number of hours worked at hourly rates not more than

twice KPMG's standard rates, and (III) this subparagraph (f) does not apply,with respect

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to engagements involving a claim for refund or application for other tax incentives where

the claim or application has been fied prior to the date of this Agreement;

(g). KPMG wil comply with the ethics and independence rules
concerning independence, tax services, and contingent fees as adopted by the Public

Company Accounting Oversight Board on July 26,2005, or as thereafter amended, as of
the effective date of

those rules;
(h). Except as provided in subparagraphs (a) or (k), KPMG wil not

prepare tax returns, or provide tax advice of any kind to any individual clients except that

KPMG wil be permitted to provide: (n individual tax planning and compliance services
to individuals who are owners or senior executives of privately held business clients of
KPMG, (II) individual tax services as part of its international executive services practice,

which provides advice regarding the tax obligations of personnel of public company or
private, entity clients of KPMG who are stationed outside of

their home country, and (III)

bank trust outsourcing services where KPMG prepares trust tax returns for trust

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departments of large financial institutions;
(i). K.PMG wil comply with the minimum opinion thresholds set

forth in the following table for opinions issued after September 28,2005, and ,wil

comply with the minimum return position thresholds set fort in the following tables for

tax returns that are fied after October 17,2005:
Standard for:
Covered Opinion
on Principal

Standard for:

Stadard for:

Stl9dard for:

Tax Return
Preparation on

CLIENT TYPE

Purpose Transactions
Should

Principal Purpose
or Listed

Covered Opinion on Other Transactions

Tax Return
Preparation on

Other Transactions
More likely than not More likely than not

Transactions
Individuals
Other private

Should Should
Should

Should
Should

Should Should Should

entities
Large private

More likely than not More likely than not

Realistic pos~ibílity

entities

of success
Should

Public companies

Realistic possibility of success

For purposes of

this subparagraph (i):
(I) The term "covered opinion" has the meaning set fort in 31 C.F.R.

this Agreement it is not interpreted to include: (A) any advice rendered to any entity for purposes of permitting that entity or its auditors the entity) to determine whether a (including KPMG, when KPMG acts as auditor of previously booked tax benefit is required to be reversed pursuant to F AS 109 (taking into account the provisions of the proposed interpretation thereof released by the Financial Accounting Standards Board on July 14,2005 and any subsequent interpretations) or any similar provisions of international accounting standards, or (B) any advice rendered within KPMG for purposes of determining whether the firm, when acting as auditor of any entity, can attest to the manner in which the entity's financial statements reflect any tax benefit or contingent liability for unpaid taxes pursuant to F AS 109 (taking into account the provisions of the proposed released by the Financial Accounting Standards Board on July interpretation thereof 14,2005 and any subsequent interpretations) or any similar provisions of
§ 10.35(b)(2), and for purposes of

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international accounting standards;
(II) The term "principal purpose transaction" has the meaning set forth in 31

C.F.R. §§ 10.35(b)(2)(i)(B) and l0.35(b)(lO):
(III) The term "listed transaction" has the meaning set forth in 31' C.F .R.
§ 10.35(b)(2)(i)(A);

(IV) The term "large private entity" means any privately held entity with prior year gross revenues of$300,000,000 or more, but only ifthe audited financial
statements of

the entity are prepared (1) in a rnanner that is comparable~1n all material

respects to F AS 109 (including the proposed interpretation thereof reletsed by the Financial Accounting Standards Board on July 14,2005 and any subsequent interpretations), and (2) are either prepared in accordance with U.S. GAAP or are prepared in accordance with international/foreign country financial reporting

stadards;
(V) In the event the Treasury Department promulgates regulations or rules of practice establishing higher standards than those set forth in the table above, the above table wil be deemed amended to incorporate such higher standards;
location all covered opinions issued during the 30 days following the date of this Agreement in order to facilitate review of those opinions by KPMG's compliance office and by the Monitor; and
(VI) KPMG wil collect in a central

(VII) In order to provide a limited exception to the standards set forth in the above table for "tax returns preparation on other transactions" for "individuals" and for "other private entities," for situations that are difficult to foresee and that (A) are identified shortly before the due date of the return, and (B) do not meet the elevated standards set forth in the above table, the parties agree that if, despite the exercise of reasonable due diligence, KPMG discovers within sixty days of the date on which a tax return is required to be fied (taking into account applicable extensions) that a position taken on the return does not meet the applicable standard set forth above for "other transactions," then KPMG wil recommend to the client the adoption of an alternative return position that does meet the applicable standard, and if such alternative position is rejected by the client, KPMG wil resign from its engagement to prepare or review the tax return unless (A) the taxpayer agrees to include a disclosure statement with the tax return on Form 8275-R (or any similar form prescribed by the IRS that includes a detailed description of the transaction and the position taken on the tax return), and (B) the completion of the engagement is
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approved by KPMG's tax compliance personneL. KPMG wil compile in a central all Forms 8275-R location, available for review by the IRS and the Monitor, copies of
(or similar form descfibed above) prepared by KPMG pursuant to this paragraph of the Agreement. The Monitor may review the application of this exception and recommend changes as appropriate.

0). KPMG wil not rely on an opinion issued by other professional
firms to determine whether it complies with the minimum standards set forth in

subparagraph (i) above unless KPMG concurs with the conclusions of sucn opinion; and
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(k). With respect to KPMG's federal, state and local tax controversy
representation, (I) KPMG wil not represent persons or entities other than public
companies, private entities, or persons for whom KPMG is permitted to prepare tax

returns under subparagraph (h); (II) KPMG will not defend any transaction that is or

becomes a "listed transaction," and (III) after February 28,2006, KPMG will not defend
any transaction with respect to which the firm could not render an opinion or prepare a
return in compliance with the standards set forth in subparagraph (i).

Cooperation
7. KPMG acknowledges and understands that its cooperation with
the criminal investigation by the Office is an important and material factor underlying the

Office's decision to enter into this Agreement, and, therefore, KPMG agrees to cooperate

fully and actively with the Offce, the IRS, and with any other agency ofthe government
designated by the Office ("Designated Agencies") regarding any matter re1ating to the

Office's investigation about which KPMG has knowledge or information.

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8. KPMG agrees that its continuing cooperation with the Offce's
investigation shall includè, but not be limited to, the following:
(a). Completely and trthfully disclosing all information i~ its

possession to the Offce and the IRS about which the Office and the IRS may inquire,
including but not limited to all information about activities of

KPMG, present and former
~/

partners, employees, and agents of KPMG;
(b).

Providing to the Offce, by December 31,2005, a complete and

truthful analysis and complete and detailed description of the design, marketing and
implementation by KPMG of all the transactions listed on Exhibit A to the IRS Closing
Agreernent described below in paragraph 19, including where necessary and appropriate
a detailed description of representative client transactions;
(c). Volunteering and providing to the Offce any information and

documents that come to KPMG's attention that may be relevant to the Office's
investigation;
(d), Assembling, organizing, and providing, in responsive and prompt

fashion, and, upon request, expedited fashion, all docurnents, records, information, and
other evidence in KPMG's possession, custody, or control as may be requested by the
Office or the IRS;
(e). Not asserting, in relation to the Office, any claim of

privilege

(including but not limited to the attorney-client piivilege and the work product

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protection) as to any documents, records, information, or testimony requested by the

Offce related to its investigation, provided that:
(I) notwithstanding the provisions of

this subparagraph (e), KPMG

may assert the attorney-client privilege, work product protection, or other privileges

with respect to (A) privileged communications between KPMG and its counsel that
post-date February 1,2004 and that concern the Office's investigation, ;(B) privileged

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communications between KPMG and Skadden, Arps, Slate, Meagher & Flom LLP,
concerning the IRS's prornoter penalty audit, or (C) any private civil

litigation; and

(II) by producing privileged materials pursuant to this subparagraph
the attorney-client privilege,

(e), KPMG does not intend to waive the protection of

work product protection, or any other applicable privilege as to third parties.
(£). Using its reasonable best efforts to make available its present and

former partners and employees to provide information and/or testimony as requested by

the Offce and the IRS, including sworn testimony before a grand jury or in court
proceedings, as well as interviews with law enforcernent authorities, and to identify
witnesses who, to KPMG's knowledge and information, may have material information

concerning the Offce's investigation, including but not limited to the conduct set forth in
the Information and the Statement of Facts;
(g). Providing testimony or information necessarj to identify or

establish the original

location, authenticity, or other basis for admission into evidence of

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documents or physical evidence in any criminal or other proceeding as requested by the

Office or the IRS, includî'g information and testimony concerning the Office's

investigation, including but not limited to the conduct set forth in the Informt~on and the
Statement of

Facts; and
(h). With respect to any information, testimony, documents, records

or physical evidence provided by KPMG to the Office or a grand

jury, KPN-,G consents
(

to any and all disclosures of such materials to such Designated Agencies as the Office, in

its sole discretion, deems appropriate. With respect to any such materials that constitute
"matters occurrng before the grand jury" within the meaning of Rule 6( e) of the Federal

Rules of Criminal Procedure, KPMG further consents to: (I) any order sought by the

Office permitting such disclosures; and (II) the Offce's ~ parte or in camera application
for such orders.

9. KPMG agrees that its obligations to cooperate will continue even
after the dismissal of

the Information, and KPMG wil continue to fulfill the cooperation

obligations set forth in this Agreement in connection with any investigation, criminal

prosecution or civil proceeding brought by the Office or by or against the IRS or the
United States relating to or arising out of the conduct set forth in the Information and the

Statement of Facts and relating in any way to the Offce's investigation. KPMG's
obligation to cooperate is not intended to apply in the event that a prosecution against

KPMG by this Offce is pursued and not defened.

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Deferral of Prosecution
10. -In consideration ofKPMG's entry into this Agreement and its

commitment to: (a) accept and acknowledge responsibility for its conduct; (b), cooperate
with the Office and the IRS; (c) make the payments specified in this Agreement;

(d) comply with Federal criminal laws, including Federal tax laws; and (e) otherwise
cornply with all of the terms of this Agreement, the Office shall recommenp. ,to the Court

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that prosecution ofKPMG on the Information be deferred for the period through
December 31, 2006. KPMG shall expressly waive indictment and all rights to a speedy

tral pursuant to the Sixth Amendment of the United States Constitution, Title 18,
United States Code, Section 3161, Federal Rule of

Criinal Procedure 48(b), and any

applicable Local Rules of

the United States District Court for the Southern District of

New York for the period during which this Agreement is in effect.

11. The Office agrees that, if KPMG is in compliance with all of its

obligations under this Agreement, the Offce wil, at the expiration of the period of
deferral (including any extensions thereof), seek disrnissal without prejudice as to KPMG
of the Information fied against KPMG pursuant to paragraphs 1 and 10 of

this

Agreement. Except in the event of a violation by KPMG of any term of this Agreement,

the Office will bring no additional charges against KPMG relating to its: (1)
development, marketing, and implementation of

FLIP, OPiS, BLIPS, and SOS and their

variants, as described in the Statement of Facts, or any of the transactions described in

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Exhibit A to the Closing Agreement described below in paragraph 19; and (2) efforts to
impair and impede the IRS and Senate investigations by concealing such transactions, as
described in the Statement of

Facts and Information. This Agreement does nO,t provide

any protection against prosecution for any crimes except as set forth above and does not

apply to any individual or entity other than KPMG. KPMG and the Offce understand
that the Agreement to defer prosecution of KPMG must be approved by th~ Court, in

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accordance with 18 U.S.c. § 3161(h)(2). Should the Court decline to approve the
Agreement to defer prosecution for any reason, both the Office and KPMG are released
from any obligation imposed upon them by this Agreement, and this Agreement shall be
null and void.

12. It is further understood that should the Office in its sole
discretion determine that KPMG has, after the date of the execution of this Agreement:
(a) given false, incomplete or misleading information, (b) committed any crirne other
than a minor state violation, or (c) otherwise violated any provision of

this Agreement,

KPMG shall, in this Offce's sole discretion, thereafter be subject to prosecution for any
federal criminal violation of which the Office has knowledge, including but not limited

to a prosecution based on the Information or the conduct described therein. Any such
prosecution may be premised on any information provided by or on behalf of KPMG to

the Offce or the IRS at any time. Any such prosecutions that are not time-barred by the
applicable statute of limitations on the date of this Agreement may be commenced

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against KPMG within the applicable period governing the statute of limitations. In
addition, KPMG agrees To toll, and exclude from any calculation of time, the running of the criminal statute of limitations for a period of 5 years from the date of the e:xecution of

this Agreement. By this Agreement, KPMG expressly intends to and hereby does waive
its rights in the foregoing respects, including any right to make a claim premised on the
statute of limitations, as well as any constitutional, statutory, or other clairrr ~onceming

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pre-indictment delay. Such waivers are knowing, voluntary, and in express reliance on

the advice ofK.MG's counseL.

13. It is further agreed that in the event that the Office, in its sole
discretion, determines that KPMG has violated any provision of this Agreement,
including KPMG's failure to rneet its obligations under this Agreement: (a) all statements

made by or on behalf of KPMG to the Offce and the IRS, including but not limited to
the Statement of

Facts, or any testimony given by KPMG or by any agent ofKPMG

before a grand jury, or elsewhere, whether before or after the date of this Agreement, or
any leads from such statements or testimony, shall be admissible in evidence in any and

all criminal proceedings hereinafter brought by the Office against KPMG; and

(b) KPMG shall not assert any claim under the United States Constitutìon, Rule ll(f) of
the Federal Rules of Criminal Procedure, Rule 410 of the Federal Rules of

Evidence, or

any other federal rule, that statements made by or on behalf of KPMG before or after the

date of this Agreement, or any leads derived therefrom, should be suppressed or

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otherwise excluded from evidence. It is the intent of this Agreement to waive any and all
rights in the foregoing respects.

14. KPMG agrees that, in the event that the Offce determine~ during
the period of deferral of prosecution described in paragraph 10 above (or any extensions
thereof) that KPMG has violated any provision of this Agreement, a one-year extension
of the period of deferral of prosecution may be imposed in the sole discret~on of the

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Office, and, in the event of additional violations, such additional one-year extensions as

appropriate, but in no event shall the total term of the deferral-of-prosecution period of
this Agreement exceed five years.

15. KPMG agrees that it shall not, through its attorneys, agents,
partners, or employees, make any statement, in litigation or otherwise, contradicting the
Statement of

Facts or its representations in this Agreement. Consistent with this

provision, KPMG may raise defenses and/or assert affirmative claims in any civil

proceedings brought by private parties as long as doing so does not contradict the
Statement of

Facts or such representations. Any such contradictory statement by KPMG,

its present or future attorneys, agents, partners, or employees shall constitute a breach of
this Agreement and KPMG thereafter shall be subject to prosecution as specified in

paragraphs 10 through 13, above, or the deferrai-or-prosecution period shall be extended
pursuant to paragraph 14, above. The decision as to 'vvhether any such contradictory

statement wil be imputed to KPMG for the purpose of determining whether KPMG has

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breached this Agreement shall be at the sole discretion of

the Office. Upon the Offce's

notifying KPMG of any ~uch contradictory statement, KPMG may avoid a finding of

breach of this Agreement by repudiating such statement both to the recipient ~f such

statement and to the Office within 48 hours after receipt of notice by the Offce. KPMG
consents to the public release by the Offce, in its sole discretion, of any such
repudiation.
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The Compliance & Ethics Pro~ram
16. In addition to the remedial actions that KPMG has taken to date,

KPMG shall implement and maintain an effective compliance and ethics program that
fully comports with the criteria set forth in Section 8B2.! of

the United States Sentencing
the Compliance & Ethics

Guidelines (the "Compliance & Ethics Program"). As part of

Program, KPMG shall rnaintain a permanent compliance offce and a permanent
educational and training program relating to the laws and ethics governing the work of
KPMG's partners and employees, paying particular attention to practice areas that pose

high risks, including the determination whether transactions in which KPMG and its

clients are involved constitute "reportable transactions" within the meaning of26 C.F.R.
§ 1.60 ll-4(b), and the determination of whether the appropriate level for opinions and
advice set forth in paragraph 6(i) of this Agreement and all applicable laws have been

satisfied. KPMG agrees that all KPMG professionals and any employees of KPMG shall
receive appropriate training pursuant to the Compliance & Ethics Program within one

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year of

the execution of

this Agreement, and shall be given such training on a regular

basis but in any event no-less than annually for the tax practice and no less than every
two years for other practices at KPMG. Also as part of

the Compliance & Et~ics

Program, KPMG shall (1) ensure that an effective program be maintained to punish

violators of laws, policies, and standards, and reward those who report such violators;
(II) ensure that no parter, employee, agent, or consultant of KPMG is pentlized in any

way for providing information relating to KPMG's compliance or noncompliance with

laws, policies, and standards to any KPMG offcial, government agency, compliance
officer, or the Monitor appointed pursuant to paragraph 18; and (III) ensure that all
KPMG partners and employees have access to a hot-line or other means to provide

information to KPMG's compliance offce relating to KPMG's compliance or
noncompliance with laws, policies, and standards. KPMG shall take steps to audit the

Compliance & Ethics Program to ensure it is carring out the duties and responsibilities
set out in this Agreement.

17. KPMG shall take such additional personnel actions for wrongdoing
as are warranted.

Independent Monitor
18. KPMG agrees to oversight and rnonitoring by a monitor
appointed by the Offce as described below (hereinafter the "Monitor"), whose powers,
rights and responsibilities shall be as set forth below.

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(a). Jurisdiction. Powers. and Oversight Authority. The Monitor

shall:
(1). review and monitor KPMG's compliance with this Agreernent and

make such recommendations as the Monitor believes are necessar to cornply
with this Agreement;
(II).
review and monitor KPMG's maintenance and execution,

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of

the

Compliance & Ethics Program and recommend such changes as are necessary

to ensure conformity with the Sentencing Guidelines and this Agreement, and
that are necessary to ensure that the Program is effective;
(III). review and monitor the implementation and execution of personnel

decisions regarding individuals who engaged in or were responsible (either by

act or omission) for the ilegal conduct described in the Information and may
require any personnel action, including termination, regarding any such
individuals;

(IV). review and monitor KPMG's compliance with the restrictions on the tax
practice outlined in paragraph 6 above, and recommend such changes as are
necessary to comply with those restrictions; and

(V). review and monitor the operations and decisions of any practice area
involving "reportable" or "listed" transactions to ensure that those practices are
complying with the restrictions outlined in paragraph 6 above and all

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applicable laws.

It is the intent of this Agréement that the provisions regarding the Monitor's jurisdiction,
powers and oversight authority and duties be broadly construed. KPMG shall ,adopt all

recommendations submitted by the Monitor unless KPMG objects to any

recommendation and the Offce agrees that adoption of such recommendation should not
be required.

'/
(b). Access to Information. The Monitor shall have the authority to

take such reasonable steps, in the Monitor's view, as necessary to be fully informed

about those operations of KPMG within or relating to his or her jurisdiction. To that
end, the Monitor shall have:
(I). access to, and the right to make copies of, any and all books, records,

accounts, correspondence, fies, and any

and all other documents or electronic

records, including e-rnails, of KPMG and its parters, agents and ernployees,
within or relating to his or her jurisdiction.
(II). the right to interview any parer, employee, agent, or consultant of

KPMG and to participate in any meeting concerning any matter within or
relating to his or her jurisdiction.

The Monitor shall take appropriate steps to maintain the confidentiality of any non-public
information entrusted to him or her and shall share such information only with the

Office, the IRS, or any Designated Agency. The Offce and KPMG agree that the

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Monitor's performance of

his or her duties pursuant to this Agreement constitutes a

"quality review" pursuant to 26 C.F.R. § 301.7216-2(0). In addition, to furter facilitate
the Monitor's performance of his duties and to effectuate the intent of

this Agieement,

KPMG consents to the entry of

an order

pursuant to 26 U.S.c. § 7216(b)(1)(B)
the Monitor), and by
L

permitting disclosures by KPMG to the Monitor (and any agents of

the Monitor to the Offce. A proposed order is attached hereto as Exhibit P. It is the
intent of the parties to this Agreement that this proposed Order be issued by the Court
contemporaneous with the Court's acceptance of

this Agreement.

(c). Hiring Authority. The Monitor shall have the authority to

employ legal counsel, consultants, investigators, expert, and any other personnel
necessary to assist in the proper discharge of

the Monitor's duties.

(d). Implementing Authority. The Monitor shall have the authority to
take any other actions that are necessary to effectuate his or her oversight and monitoring
responsibilities.
(e). Miscellaneous Provisions.

(1). Term. The Monitor's authority set forth herein shall extend for a period
of

three years from the Monitor's entry on duty, except that in the event the

Offce determines during the period of the Monitorship (or any extensions
thereof), thàt KPMG has violated any provision of this Agreement, a one-year
extension of the period of the Monitorship may be imposed in the soLe

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discretion of

the Offce, and, in the event of additional violations, an additional

one-year exteñsion, but in no event shall the total term of the Monitorship
exceed five years.
(II). Selection of

the Monitor. The Office shall consult with KPMG using

its best efforts to select and appoint a mutually acceptable Monitor (and any
replacement Monitors, if

required) as promptly as possible. In t!:tt event that

I

the Offce is unable to select a Monitor acceptable to KPMG, the Office shall
have the sole right to select a Monitor (and any replacement Monitors, if
required).
(III). Notice regarding the Monitor: Monitor's Authority to Act on

Information received from Employees: No Penalty for Reporting. KPMG shall
establish an independent, toll-free answering service to facilitate

communication anonymously or otherwise with the Monitor. Within 10 days
of the commencement of the Monitor's duties, KPMG shall advise each of

its

partners and employees in writing of

the appointment of

the Monitor, the

Monitor's powers and duties as set forth in this Agreement, the toll-free
number established for contacting the Monitor, and email and mail addresses

designated by the Monitor. Such notice shall inform employees that they may
communicate with the Monitor anonymously or otherwise, and that no partner,
agent, consultant, or employee of

KPMG shall be penalized in any way for

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providing information to the Monitor. In addition, such notice shall direct that, if a part~r or employee is aware of any violation of any law or any
unethical conduct that has not been reported to an appropriate federal, state or
municipal agency, the partner and employee is obligated to report such

violation or conduct to KPMG's compliance office or the Monitor.

(IV). Reports to the Office. The Monitor shall keep records o(!iis or her
,'1

activities, including copies of all correspondence and telephone logs, as well as

records relating to actions taken in response to correspondence or telephone

calls. If potentially ilegal or unethical conduct is reported to the Monitor, the
Monitor may, at his or her option, conduct an investigation, and/or refer the

matter to KPMG's compliance office, the Offce, the IRS, or a Designated

Agency. The Monitor rnay report to the Offce whenever the Monitor deems
fit but, in any event, shall file a written report not less often than every four

months regarding: the Monitor's activities; whether KPMG is complying with
the terms of this Agreement; and any changes that are necessary to foster

KPMG's compliance with any applicable laws and standards. Such periodic

written report are to be provided to KPMG and the Office. The Office may,
in its sole discretion, provide all or part of any such periodic written report, or

other information provided to the Offce by the Monitor, to the IRS or any
Designated Agency. Should the Monitor determine that it appears that KPMG

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has violated any law, has violated any provision of this Agreement, or has
engaged in anýconduct that could warrant the modification of

his or her

jurisdiction, the Monitor shall promptly notify the Office, and when,
appropriate, KPMG.

(V). Cooperation with the Monitor. KPMG and all of its parters,
employees, agents, and consultants shall have an affirmative duty

/ to cooperate

with and assist the Monitor in the execution of his or her duties and shall
inform the Monitor of any information that rnay relate to the Monitor's duties

or lead to information that relates to his or her duties. Failure of any KPMG
partner, employee, or agent to cooperate with the Monitor may, in the sole discretion of the Monitor, serve as a basis for the Monitor to recommend
dismissal or other disciplinar action.

(VI). Compensation and Expenses. The compensation and expenses of

the

Monitor, and of the persons hired under his or her authority, shall be paid by

KPMG. The Monitor, and any persons hired by the Monitor, shall be
compensated in accordance with their respective typical hourly rates. KPMG
shall pay bills for compensation and expenses promptly, and in any event

within 30 days. In addition, within one week after the selection of the

Monitor, KPMG shall make available offce space, telephone service and

clerical assistance sufficient for the Monitor to carr out his or her duties.

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(VII). Indemnification. KPMG shall provide an appropriate indemnification
agreement to tHe Monitor with respect to any claims arising out of the
performance of

the Monitor's duties.

(VIII). No Affiiation. The Monitor is not, and shall not be treated for any

purose, as an officer, employee, agent, or affiiate ofKPMG.

Closine A2reement With The IRS
19.

'/

Contemporaneously with the execution of this Agreement, KPMG and

the IRS wil enter into a closing agreement pursuant to 26 D.S.C. § 7121 providing for
enhanced oversight and regulatory compliance and resolving the examination ofKPMG
under 26 D.S.C. §§ 6694, 6700, 6701, 6707, 6708, 7407, and 7408, and pursuant to
which KPMG wil pay the $100,000,000 prornoter penalty described in paragraph 3

above. The closing agreement provides, among other things, that following termination
of the three-year term of

the Monitor (and any extensions thereof), the IRS wíl monitor

KPMG's compliance with the restrictions and elevated standards established by
paragraph 6 of this Agreement for a period of two years, provided however that in no
event shall the period of IRS monitoring extend beyond the five-year anniversary of

the

Monitor's entry on duty. KPMG's failure to comply with any provision ofthe closing
agreement shall constitute a violation of this Agreement.
The Office's Discretion
20. KPMG agrees that it is within the Office's sole discretion to choose, in

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the event of a violation, the remedies contained in paragraphs 10 through 13 above, or
instead to choose to exteñd the period of deferral of prosecution pursuant to paragraph 14

and/or to extend the period of the Monitorship pursuant to paragraph 18. KPN.G
understands and agrees that the exercise of

the Office's discretion under this Agreement

is unreviewable by any court. Should the Offce determine that KPMG has violated this

Agreement, the Offce shall provide notice to KPMG of that determination'and provide

/

KPMG with an opportnity to make a presentation to the Offce to demonstrate that no
violation occurred, or, to the extent applicable, that the violation should not result in the

exercise of those remedies or in an extension of the period of deferral of prosecution or
the period of the Monitorship.
No Department Of Justice Debarment

21. KPMG has been involved in an engagement to audìt the Department of
Justice's financial statements. The Department of Justice's debarrng official has
determined that KPMG is currently a responsible contractor. The debarring official has

determined that suspension or debarment ofKPMG is not warranted because KPMG has
agreed to the terms of this Deferred Prosecution Agreement, in which, among other
things, KPMG has admìtted its involvement in unlawful conduct and has agreed to take

steps to ensure that KPMG, its leadership, parners, personnel, and clients wil adhere to
the highest standards of ethics and compliance with the United States tax laws.

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Limits Of This Ai:reement
22. It is understood that this Agreement is binding on the Offce and the

Departent of Justice but specifically does not bind any other Federal agencIt:s, any state
or local

law enforcement agencies, any licensing authorities, or any regulatory

authorities. However, if

requested by KPMG or its attorneys, the Office wil bring to the

attention .of any such agencies, including but not limited to any licensing aflthorities, the

/

Agreement, the cooperation ofKPMG and its compliance with its obligations under this
Agreernent.

Public Filne
23. KPMG and the Office agree that, upon filing of

the Information in

accordance with paragraph 1 and i 0 hereof, this Agreement (including the Statement of
Facts and the other attachrnents hereto) shall be filed publicly in the proceedings in the
United States District Court for the Southern District of

New York.
Inteiration Clause

24, This Agreement sets forth all the terms of the Deferred Prosecution

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Agreement between KPMG and the Offce. No modifications or additions to this
Agreement shall be valid unless they are in writing and signed by the Office, KPMG's
attorneys, and a duly authorized representative of

KPMG.
DA VID N. KELLEY United States Attorney Southern Distrct of New York
By:

j ~Aì(¡~ .W~J!Á. Justin S. Weddle Kevin M. Downing Stanley J. Okula, Jr. Assistant United States Attorneys

'/

~~ ::4h.~._ '.
Chief

Shirah Neiman Counsel to the U.S. Attorney
! iU ~rf .. .1... ,.Ñ" '/.~ 1.,;./) 1/lJ,;l ., ,y .V '..

/' i ) 1(" ; ,Irt/

Celeste Koeleveld ,f,ft

Chief, Criminal Division
Acceptec~ijia agreed to:

'..~ /(., ¡¡ ././~; ,~.,~~~;~;
.-.",~ ..' -"i" .i.',.. /.. ':,) ","""~ø"',:;:.J?~ ~....~. ~ ..,," --.. ':'--.;I,~. v,' " . .;f..,.- . _.,. .'/' .' /,:' : .. ,.

/ '/~;f ,f /.' .

Skadden, Arps, Slate, Meagher & Flom LLP Robert S. Bennett, Esq, Carl S. Rauh, Esq. Armando Gomez, Esq. Joseph L. Barloon, Esq.
Matthew,jV. Michael, Esq.

Attol1 ys for KlMG?p

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//., ,:,AAA\/(,;(",//Irf.!"". /' ~

MG LLP

28