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New York Said to Be Cheated of Millions in Tax by Headhunter (1)

July 29, 2021, 8:46 AM; Updated: July 29, 2021, 12:22 PM

Global headhunter Egon Zehnder allegedly cheated the city and the state of New York out of millions under a 10-year tax dodge designed to underreport U.S.-based earnings while ginning up illegitimate losses, according to a recently unsealed tax whistleblower complaint.

The complaint accuses New York-based Egon Zehnder International Inc. (EZI USA) and its parent Zurich, Switzerland-based Egon Zehnder International AG (EZI AG) of an elaborate scheme to offshore $86 million in U.S.-based taxable income while onshoring $7 million in deductible losses from its foreign affiliates. The net effect of the scheme allegedly cheated the Empire State out of $13.25 million in state corporate franchise taxes, city general corporation taxes and Metropolitan Commuter Transportation Mobility taxes between 2003 and 2013.

Egon Zehnder issued a statement disputing the allegations and attributing the complaint to “a disgruntled former employee who was dismissed for poor performance” in 2012. The company said it plans to “vigorously defend against these false accusations.”

The tab for the firm could climb to $47 million if the case succeeds and a judge awards treble damages, penalties, and interest under New York’s unique False Claims Act—one of the few such statutes that permits whistleblowers to allege large-scale tax frauds on behalf of a state.

Features of the alleged scheme are laid out through a series of recorded conversations between senior corporate officials, which are recounted in court documents. The recordings indicate managers were aware of the fraudulent conduct, and discussed strategies to hide their scheme from the Internal Revenue Service and an outside tax preparation firm.

Management was “Repeatedly Warned”

The complaint specifies senior management was “repeatedly warned that their conduct was improper, illegal, and even fraudulent.” In one instance, EZI USA’s top financial officer warned the company’s co-managing partner, “you know, it’s fraud when it comes right down to it,” the complaint says.

“They were specifically told early on that they were engaging in tax fraud,” said Randall Fox, counsel for the whistleblower and a partner at Kirby McInerney LLP. “In response to those conversations, they either did nothing or thought of ways to explain to the IRS that they never knew what they were doing was wrong. What they did not do is get to the root of the problem or seek professional advice.”

New York’s law permits whistleblowers to step into the shoes of the attorney general and file suits, known as qui tam actions, against parties that knowingly perpetrate fraud against the state. Whistleblowers are motivated by rules permitting judges to award a bounty of between 15% and 30% of any proceeds won, plus attorneys’ fees.

Egon Zehnder is a leader in the headhunting and consulting industry, working with hundreds of private and publicly traded clients around the world. The company describes itself online as the world’s “preeminent leadership consulting firm,” offering clients executive search, board advisory, management succession, and organizational development services. The firm has 2000 employees working from 68 offices in 40 countries, according to its website.

The complaint was originally filed under seal in state court in 2017. New York’s false claims law grants the state broad latitude to intervene, but Attorney General Letitia James has declined to participate.

In its statement, Egon Zehnder highlighted the attorney general’s decision not to intervene and added it had fully complied with the state’s inquiry. However one legal scholar said the attorney general’s posture is not necessarily meaningful.

“It is black letter law and well understood that the government’s decision not to intervene is not a statement on whether the government thinks the qui tam is or is not meritorious,” said Gregory Krakower, an adjunct law professor at Cardozo Law School and one of the original authors of New York’s tax qui tam law.

The case involves only state and city tax issues, and the IRS has no role in the litigation, Fox said.

New York County Judge James d’Auguste formally unsealed the complaint July 21, giving the whistleblower authority to pursue the case on behalf of the state. The documents in the matter haven’t yet been posted on the docket of the Supreme Court.

The complaint doesn’t disclose the identity of the whistleblower—known in legal terms as a qui tam relator. It only characterizes the relator as American Advisory Services LLC, a Wyoming-based pass-through company.

Two Sets of Books

The opportunity for fraud emerged as the company’s affiliate offices across the globe coordinated on placements and later allocated the resulting revenue across the affiliates, according to the complaint. That process, Fox said, gave rise to a scheme to fool revenue agencies and tax preparers under a “classic two-sets-of-books fraud.”

The company’s so-called “performance books” revealed the true revenues attributable to each office, featuring the actual revenue splits between offices working together on behalf of a client, the complaint alleges. A second set of books, described as the “legal books,” showed a fraction of those revenues for the New York office after taxable income was off-shored to affiliates and deductible expenses were on-shored. The legal books were allegedly then used to calculate the company’s federal and state tax liabilities.

During the 10 years of the alleged fraud, the complaint says EZI USA posted performance book revenues of $128.2 million. Meanwhile, the company reported only $42.5 million to tax authorities, which would be roughly one third of its actual revenue.

The case is New York ex rel. American Advisory Services LLC v. Egon Zehnder Int’l Inc., N.Y. Sup. Ct., No. 100115/2017, unsealed 7/12/21.

(Adds detail in eighth paragraph. Corrects misspelling of Zehnder's name in earlier version of July 29 story.)

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com

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