American International Group (AIG) has settled a lawsuit associated with seven cross-border transactions made in the mid-1990s that it allegedly used as abusive tax shelters
to lower its US taxes.

These transactions between the AIG Financial Products unit and foreign banks were designed by the company to create bogus foreign tax credits, the US Department of Justice alleged.

The company has agreed to pay a 10% penalty and forego over $400m in foreign tax credits to resolve the case.

The US attorney noted that there was ‘overwhelming evidence’ that the transactions had no economic substance and were made to bring down the insurer’s US tax liabilities for the 1997 tax year.

In 2009, the insurer filed a lawsuit against a 2008 decision by Internal Revenue Service to disallow the tax credits and to impose a 20% tax penalty.

But the government, which opposed the move, said the seven transactions allowed AIG to ‘game’ the tax system by exploiting differences between foreign and US tax laws, and were used to generate hundreds of millions of dollars in tax profits.

Acting US attorney Audrey Strauss said: “AIG created an elaborate series of sham transactions that were designed to do nothing – and in fact did nothing – other than generate hundreds of millions of dollars in ill-gotten tax benefits for AIG.”

The US district judge Louis Stanton in Manhattan approved the settlement.

AIG spokesperson said in an emailed statement to Bloomberg: “After already reaching and disclosing our January 2018 agreement in principle regarding these transactions that date to the 1990s, we are pleased to put this longstanding matter behind us.”

Last year, AIG announced the formation of a new syndicate at specialist insurance marketplace Lloyd’s of London to target wealthy Americans.