Accusation of tax fraud in France is latest black eye for McKinsey

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FILE – French President Emmanuel Macron speaks during a media conference at an EU summit in Brussels, Friday, Oct. 22, 2021. One of President Joe Biden’s toughest meetings at the G-20 summit may be with the leader of America’s oldest ally: France. Biden and French President Macron will huddle Friday, Oct. 29, 2021, in Rome as Paris is still seething over a U.S.-British submarine deal with Australia. (Aris Oikonomou/Pool Photo via AP, File)

After pledging to shell out more than half a billion dollars over its role in the U.S. opioid crisis and promising to give back tens of millions to companies in South Africa following corruption probes, the hugely influential management consulting company McKinsey has found itself at the center of another investigation, this time in France. 

French prosecutors this week announced a probe into the firm “on the count of money laundering aggravated by tax fraud” days ahead of the first round of presidential elections in the country, potentially delivering a blow to President Emmanuel Macron’s chances for reelection. 

It’s only the latest scandal to beset the nearly 100-year-old McKinsey, the largest of the “Big Three” management consultant giants. 

The firm’s vast portfolio of both public and private sector clients has ranged from dozens of contracts with the U.S. Department of Defense to work for a Chinese state company that has played a part in military tensions with the U.S., an apparent conflict of interest that led Sen. Marco Rubio (R-Fla.) to question the company directly. 

“The senator asked McKinsey if it sought to avoid working with Chinese clients in areas of critical national security interest to the U.S., including telecommunications, the military and health care,” Rubio’s office said in a statement last year, referring to a letter sent the year prior. 

“The firm did not directly answer the question but said it could not disclose information on specific clients or engagements because of its ‘contractual and professional obligations to maintain confidentiality,’” the statement went on. 

The senator wrote that McKinsey “either wittingly or unwittingly — is aiding the Chinese Communist Party’s attempt to supplant the United States.” 

Meanwhile, this week, Democratic senators including Patty Murray (Wash.) and Maggie Hassan (N.H.) called for an investigation into McKinsey over it allegedly failing “to disclose potential conflicts of interest” when simultaneously working with the Food and Drug Administration (FDA) on issues related to opioids and with numerous drug manufacturers, including Purdue Pharma. 

“While working for clients involved in manufacturing, distributing, and selling opioids, McKinsey simultaneously worked on projects for FDA, including projects for the FDA center responsible for approving new drugs, like opioids,” said a statement from the Senate Committee on Health, Education, Labor and Pensions. 

Following reports that surfaced in 2021 about McKinsey’s work with opioid producers, the opioid-regulating FDA said it didn’t know about any such collaboration. 

But the Democratic senators attested the agency didn’t conduct any additional contract reviews or discuss with McKinsey any potential conflicts of interest, nor did it bring up the firm’s failure to disclose them in earlier contract applications.  

“Furthermore, it is unclear whether FDA has altered or improved its processes and procedures to prevent similar nondisclosures of conflicts of interest in future contracts,” they wrote. 

For its role in the opioid crisis, McKinsey agreed to pay back nearly $600 million and issued a rare and direct apology, saying, “We deeply regret that we did not adequately acknowledge the tragic consequences of the epidemic.” 

A similar admission of error in South Africa prompted McKinsey to give back the entirety of the fees it earned on projects with pipeline company Transnet and South African Airways after they were “brought into disrepute,” according to a company statement. 

That came after the repayment of another set of fees following what the firm called “procedural irregularities” at South African electricity public utility Eskom. 

The current investigation into McKinsey in France could increase both public and private scrutiny of the firm, which has long catered to bases of institutional power in both sectors.

The French investigation was prompted by a report from the nation’s Senate that found a company executive had likely given false information during sworn testimony about the amount of taxes the firm paid to the French government. 

McKinsey Paris partner Karim Tadjeddine was quoted in the report: “I say it very clearly: We pay corporation tax in France and all salaries are in a company governed by French law which pays its taxes in France.” 

However, the French Senate alleged the company’s tax “payments have been at zero euros for the last ten years” despite the fact that “the McKinsey firm is indeed subject to corporation tax [in] France.” 

Asked for comment, the company said it “complies with applicable French tax and social security rules. Over the years we have applied a consistent tax approach in the countries where we operate, an approach that is consistent with the OECD guidelines and has been shared with the French tax authorities.” 

McKinsey was able to avoid paying taxes, according to the French Senate report, through its manipulation of what’s called a transfer pricing, which allows the company’s French entities to effectively exchange funds with their parent company in Delaware through rules that simulate a market mechanism where there really isn’t one. Delaware has some of the most opaque ownership laws in the country.  

The way that McKinsey applied these transfer prices made the “tax result in France zero or negative, for at least 10 years,” a maneuver the French government described as a “caricatural example of tax optimization.” 

“Transfer pricing often gets depicted as voodoo magic,” Elizabeth J. Stevens, an international tax attorney at Caplin Drysdale, said in an interview. “But it’s a set of rules that companies are required to comply with. The issue here is not that McKinsey engaged in transfer pricing, the issue is that it allegedly didn’t follow the rules.” 

The investigation by the French Ministry of Justice’s financial crimes division comes as Macron’s government is facing criticism for its increasing reliance on the work of private sector advisers and consultants, exacerbated by the pandemic and what many in France have seen as a slow rollout of coronavirus vaccines. Spending on consultants has more than doubled during Macron’s presidency to 894 million euros in 2020 from 379 million euros in 2018, an increase described by the Senate as a “sprawling phenomenon.” 

McKinsey said it was “surprised by the focus on the firm, when we account for only 1% of government consulting purchases, as mentioned in the Senate committee report.” 

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