Moody’s captive under fire for tax fraud from whistleblower


Moody’s Corporation, the holding company for rating agency Moody’s Investors Service, is facing allegations from a former employee who has claimed that Moody’s and its advisors defrauded New York State of potentially millions of dollars of tax revenues, with it’s captive Moody’s Assurance Company (MAC) accused of underpaying the state.

In an opinion issued by the Appellate Division of the New York Supreme Court, Judge Sallie Manzanet-Daniels held that the complaint against Moody’s sufficiently alleges that the defendants knowingly submitted false claims concerning the appropriate amount of tax to be paid on account of MAC. The New York State appellate court sided with the whistleblower's allegations.

In 2002 Moody’s Corporation formed MAC as the captive insurer of Moody’s Investors Service, domiciled in New York. It provides coverage for acts of terrorism, excess commercial liability coverage, and reputational damage, among other things.

In 2009 the New York State legislature amended the law governing the taxation of captives in response to concerns they were depriving the state of tax revenue on their non premium income. In order for a captive to qualify for favourable tax status going forward, the majority of the subsidiary’s revenue would have to consist of “bona fide” insurance premiums. Following amendments to this law in 2014, a captive that did not satisfy this requirement would be deemed an “overcapitalised captive insurance company”, a term replaced in 2014 with “combinable captive insurance company”.

Under section 189 (g) of the New York False Claims Act (NYFCA), the plaintiff alleged that Moody’s knew its captive MAC “did not qualify for the protections of the laws governing captive insurance companies,” yet submitted “materially false and fraudulent” tax returns  treating MAC as a legitimate captive.

The complaint alleges that 2009 restructuring in response to changes in the New York legislature was ineffectual and did not change the “sham nature” of MAC, and that the insurance it offered was not “bona fide” under the 2009 amendment.

The plaintiff also alleges that he was unlawfully terminated by Moody’s in response to raising concerns surrounding the tax treatment of MAC.

Moody’s moved to dismiss the complaint, asserting that the tax treatment of its captive both before and after the 2009 amendment of the statute was proper as a matter of law; that the complaint did not sufficiently allege that Moody’s knowingly submitted false tax claims required by NYFCA; and that the closing agreements barred the plaintiff’s claims for the tax years covered by those agreements.

Law firm Kirby McInerney attorney David Kovel represented the whistleblower and argued the appeal. The firm stated the whistleblower client “brought to light pervasive tax fraud by Moody's and its consultants”.

"We are proud of the work that our whistleblower client and our team has done in this case, and we look forward to continuing the litigation," said Kovel.

Moody’s was not immediately available for comment.

Moody's, Moody's Assurance Company, Captive insurance, Tax, New York, North America

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