The case is related to the Finance Ministry's money-laundering investigation into the $1-billion IPOC International Growth Fund Ltd., which is being carried out by KPMG Financial Advisory Services Ltd.

Court documents filed with the US District Court for the District of Columbia show that KPMG is claiming that Diligence LLC, a company based in Washington, DC, approached one of its employees, apparently looking for damaging information on IPOC for use in upcoming litigation.

The case has been brought by KPMG FAS and its managing directors Malcolm Butterfield and Michael Morrison, who are seeking $1 million in compensatory damages and $10 million in punitive damages, alleging one count each of fraud, conversion / misappropriation, and unjust enrichment.

They are also seeking an injunction against further digging by Diligence to "ensure that Plaintiffs can complete the IPOC Investigation and prepare their final report without further interference from the Defendant".

KPMG has claimed it found out that information about its IPOC investigation had gone astray last October when a bundle of papers was dumped at the offices of KPMG LLP in Montvale, New Jersey. The bundle of Diligence documents included internal e-mails and working papers. KPMG FAS brought the case against Diligence to court the following month.

Both parties have applied for certain aspects of the case to be kept secret. The court has complied with their wishes, to some extent, and has redacted, or whited out, names, lines and entire pages from the publicly available version of the case documents.

Diligence denies it has done anything illegal or improper. The court has rejected the company's efforts to get the case thrown out on the grounds that it should be heard in a Bermuda court.

According to the OffshoreAlert newsletter, which brought the case to light, a source close to Diligence said the company intends to claim that the information was passed on to it without financial inducement by a whistleblower within KPMG, motivated by a concern that the KPMG report would "whitewash the actions of Bermuda-based companies and individuals to spare Bermuda the embarrassment of being at the centre of one of the world's biggest money laundering operations".

Finance Minister Paula Cox, who hired KPMG FAS to carry out the probe, last month asserted that there would be "no cover-up".

"There will be no form of cover-up and any necessary follow-up action will be actioned," Ms Cox said. "Any suggestion to the contrary would be flagrantly untrue and palpably wrong," she said.

"We, together with the private sector expend considerable time and energy as a jurisdiction to protect, preserve and to enhance Bermuda's position in the international market-place."

She declined to say whether the report was made public. But she did address the question of why the politically-controlled Ministry of Finance has taken charge of the IPOC investigation, rather than the independent regulatory authority, the Bermuda Monetary Authority (BMA).

"Given the limits on the powers of the independent regulator ? the Bermuda Monetary Authority ? in law, the better view was to invoke the stronger powers of the Minister of Finance under the Companies Act, which also address the issue of enforcement and sanctions," she said.

Finance Ministry Permanent Secretary Donald Scott said yesterday that the investigation had reached the stage where those criticised in the report were given the opportunity to submit letters in response before the report was finalised.

We offered KPMG's Mr. Butterfield an opportunity to comment, but he did not respond by press time.

In January, the revealed that the mutual fund had been set up on the island five years ago by a convicted fraudster.

And the newspaper alleged that the fund was effectively a holding company for around $1 billion in telecommunications assets transferred through a network of shell companies and that the scandal went all the way up to the Russian IT and Communications Minister Leonid Reiman.

The Bermuda Police Service's fraud unit, as well as the Finance Ministry, has also been investigating aspects the IPOC Fund.

Among the submissions filed is a letter to Judge Paul Friedman from Finance Ministry Permanent Secretary Mr. Scott, dated November 21, 2005.

Mr. Scott wrote: "The inspectors have informed the Ministry of Finance that an intelligence-gathering firm based in the United States has been retained, apparently by an adversary of IPOC in various legal proceedings, to improperly obtain documents and/or information supplied to or created by the Inspectors in relation to the investigation and that this firm has by deception and fraudulent methods acquired confidential information.

"This apparent breach of the confidentiality of the investigation is a matter of great concern, indicating, as it does, a calculated attempt to attack the integrity of Bermuda's statutory processes. The Ministry of Finance therefore supports the inspectors in their efforts to seek all available remedies through the US Courts against the parties who have engaged in wrongful conduct.

"We understand that the inspectors have commenced an action in your Court seeking appropriate remedies to obtain disclosure about the misappropriation of their confidential materials, prevent further dissemination of such information and to ensure that there are no further attempts to interfere with their work.

"We respectfully request that the Court permit the Inspectors to take such measures as are available to protect the confidentiality of the investigation so that it may reach a successful conclusion.

"Notwithstanding this submission in support of the inspectors' actions in US Courts, the Government of Bermuda, through the Ministry of Finance, hereby states that this is the extent of its involvement in this application. Accordingly, the Government of Bermuda is not willing to be involved or joined in any direct way with the proceedings in the US Court."

Bermuda companies that have direct dealings with IPOC include the Bermuda Commercial Bank (BCB) and the law firm Wakefield Quin.

In an affidavit dated July 27, 2004 for separate court proceedings in the British Virgin Islands, Roderick Forrest, a senior counsel with Wakefield Quin, who was a director of IPOC, denied any knowledge of the fund being used for money laundering or any connection with Mr. Reiman.

Mr. Forrest told the court: "As a director of the Claimant (IPOC), I am of course ultimately responsible for its affairs and what I am about to say should not be taken as an attempt to shirk that responsibility.

"The role I perform when appointed director of my clients' companies is the customary role of an offshore resident director. I duly participate in board meetings and I have my say on resolutions. In order to be able to do so, my client keeps me generally informed of the company's business activities.

"However, those activities are usually carried on by my client outside Bermuda and I have no direct involvement in them. The role delegated to me is to look after the Bermuda side of my clients' affairs, and I therefore concentrate on regulatory and compliance issues. In reality, I have very little, if anything, to do with operational matters."

He added: "I wish to make it absolutely clear that I would never knowingly be involved in money laundering or be prepared to act for any client, or in connection with any transaction, in respect of which I harboured doubts about its legitimacy.

"If I were to do so, I would be risking my job (and with it the life I have been building up for myself here in Bermuda) and entire career."

BCB has provided the accounts for the IPOC Fund.

Washington company Diligence describes itself as "an intelligence gathering and risk management firm that helps its clients confront difficult business challenges".

It boasts impressive experience among its management. On its web site, diligencellc.com, executive chairman Richard Burt is described as a former Assistant Secretary of State and US Ambassador to Germany who "served as the chief arms control negotiator in the first Bush Administration".

CEO Nick Day is described as "a former officer of Britain's Security Service (MI5)". And Diligence's advisory board includes Judge William Webster, a former director of the CIA and the FBI", as well as Lord Charles Powell, a "former adviser on foreign affairs and defence to British Prime Ministers Margaret Thatcher and John Major".