UPDATE 2-Mellon settles IRS documents case for $16.5 mln

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BOSTON, June 28 (Reuters) - Mellon Financial Corp. MEL.N will pay $16.5 million to settle U.S. government claims related to the destruction of 77,000 tax returns and checks its bank unit was supposed to be processing for the Treasury Department, the Justice Department said on Thursday.

The government had charged that Mellon falsely reported to the Internal Revenue Service it had completed processing the tax returns and checks received during the peak April 2001 tax period when it had actually destroyed them.

Mellon said the settlement releases it from any civil or administrative monetary claims under the False Claims Act.

Seven former Mellon employees have pleaded guilty to charges in connection with the case, prosecutors said.

"The government must be able to rely on the integrity of its agents, especially those who handle tax receipts," Peter D. Keisler, Assistant Attorney General of the Civil Division, said in a statement.

Last year Mellon avoided criminal prosecution by accepting responsibility for its former employees' misconduct and agreeing with the U.S. Attorney for Western Pennsylvania to be subject to independent third-party monitoring for three years.

In November 2002, Mellon paid $18.1 million in an administrative settlement with the U.S. Treasury Department to reimburse the government for the value of the interest lost on the destroyed checks and other costs.

Mellon spokesman Ron Sommer declined to elaborate on the latest settlement.