IRS Awards UBS Whistleblower $104 Million After Three Years in Prison : LXBN Roundtable

By | LXBN | September 18, 2012

Somewhere in a New Hampshire halfway house lives one of the richest groundskeepers to ever pass through on the final legs of a prison sentence.  Bradley Birkenfeld, a 47 year-old former banker, was recently awarded $104 million for bringing to light a multi-billion dollar tax evasion scheme.  The scheme, perpetrated by the Swiss banking firm, UBS, helped thousands of U.S. taxpayers avoid billions in taxes over nearly a decade.

Although Mr. Birkenfeld’s cooperation with the Department of Justice (DOJ) and the IRS led to UBS paying $780 million in fines, that did not exempt him from a prison sentence in the Schuylkill County Federal Correctional Institution in Pennsylvania.  After serving over 30 months, Birkenfeld was released to a recovery house in New Hampshire and will remain under house arrest until November 29th.

Birkenfeld, a graduate of the American Graduate School of Business in Switzerland, came to UBS in 2001 after three years with Barclay’s Bank in Geneva, Switzerland.  Birkenfeld’s task, as he would later tell DOJ officials, was to convince wealthy Americans to invest their money in hidden account set up by UBS.  From 2000 to 2007 UBS actively helped clients successfully circumvent taxes by managing nearly $20 billion of their assets in these hidden accounts.

In 2007, Birkenfeld, motivated by the IRS’s whistleblower program, alerted government officials to the bank’s practices.  With UBS profiting from these tax havens to the tune of $200 million per year, and the IRS whistleblower program awarding up to 30% of the money recovered to the whistleblower, Birkenfeld was in position for a big payday.  Unfortunately, as George Garrow reports, a good deed never goes unpunished:

“Birkenfeld was an insider. While he did not establish this illegal practice at his bank, he helped clients evade taxes under these practices. Unfortunately for Birkenfeld, after he told authorities about this scheme, the Justice Department determined that he had not told all; namely, it was alleged that he hid information on how he helped a wealthy client participate in this scheme. So even though he blew the whistle on his former employer, he himself plead guilty to a felony count and did several years in prison for similar behavior.”

Birkenfeld’s “wealthy client”, Igor Olenicoff, was a former Barclay’s patron while Birkenfeld worked in their Geneva offices.  When Birkenfeld left to work at UBS, Olenicoff came along with him.  According to Ken Stier, a reporter with Time Magazine, as Birkenfeld was assisting the DOJ, he was helping Olenicoff avoid the impending fallout:

“The story of how he ended up headed for federal prison is still mired in sharply conflicting accounts. Justice officials claim that Birkenfeld was not completely forthcoming about his own dealings with particular clients, especially his biggest, the billionaire Olenicoff. Even as he was talking to the feds, they say, Birkenfeld was secretly advising the real estate mogul to move his money from UBS to Liechtenstein banks. (Olenicoff eventually settled for $53 million in tax and penalties.)”

Olenicoff’s settlement with the IRS was hardly an aberration.  As part of an amnesty program, more than 35,000 beneficiaries of UBS’s tax haven practices have come forward and voluntarily disclosed their overseas account information.  As a result, nearly $5 billion in back taxes and fines have been recouped by the IRS, while the account holders avoided potential jail time.

Although Birkenfeld found himself behind bars, his time in prison ended up being more profitable than anyone could have imagined.  From Steven Berk on The Corporate Observer:

“He served most of his sentence: he was released this past Aug. 1st.  His prosecution was controversial because of his cooperation; this award should go a long way to soften the time he spent in prison. It works out to ~$46,000 (after Mr. Birkenfeld pays taxes, and I’m sure he will make sure to pay every penny) per day spent in prison. When the IRS acts they sure are bold.”

A $104 million award is indeed a bold statement, and as Richard Renner wrote on the National Whistleblowers Center‘s blog, Whistleblower’s Protection Blog, Birkenfeld’s attorneys couldn’t have been more pleased:

“In a joint statement, Mr. Birkenfeld’s attorneys, Stephen M. Kohn and Dean A. Zerbe stated:

The IRS today sent 104 million messages to whistleblowers around the world – that there is now a safe and secure way to report tax fraud and that the IRS is now paying awards. The IRS also sent 104 million messages to banks around the world – stop enabling tax cheats or you will get caught.”

While the extent of the fines doled out by the IRS and the award given to Birkenfeld have sent a message, the efficacy of the IRS whistleblower program still faces questions.  As Berk points out in his post, the lengthy claims process and overall slugishness of the program have made it the target of US Senators and administrative stewards.  However, Berk is just as quick to remind readers how important it is to incentivize the corporate watchdogs:

We’ve said it before, and we’ll say it again: The government needs whistleblowers. Whistleblowers help ensure that companies (and people) defrauding the government are caught and punished. They help regain what is rightfully taxpayer money.  It is an issue that should transcend partisanship.  Who among us is against returning money that is in effect stolen from taxpayers?”

And Berk wasn’t the only LXBN author to defend the IRS whistleblower program.  In a seperate post, Richard Renner discussed the value and “bright future” of the program:

“It comes as no surprise that the IRS program is a valuable program. It honors truthful taxpayers, allows the IRS to catch those who evade paying their taxes and seeks to protect whistleblowers.

Senator Grassley of Iowa has been a strong advocate for the advancement of whistleblower protections for several decades. Recently, Steven Miller, Deputy Commissioner and long time supporter for the IRS whistleblower program, responded directly to concerns Senator Grassley raised. In a June 20, 2012 memorandum, Miller established a plan for the IRS to respond to whistleblowers in a more timely fashion when a case is being decided, and to create a timeline for when a case can be approved and an award can be issued to the whistleblower.”

It’s true that in the history of the whistleblower program only 3 out of 1,300 claimants have received rewards, but Birkenfeld’s story shows just how important these individuals are to our government.  All told, the IRS, a victim of some rather large budget cuts this past year, recovered nearly $6 billion as a result of the information provided by Birkenfeld. And the impact UBS has felt is hard to overstate. In 2009, as the IRS was settling matters with UBS, the financial services company cut nearly 9,000 jobs and closed banks around the United States.

A senior in college that fall, I remember walking past a UBS branch as it was closing its doors.  Parked outside was a semi-truck equipped with paper shredders.  At the time, it seemed innocuous enough. A large financial company has sensitive and valuable information not suitable for a dumpster.  Looking back at it now, I see a more sinister picture of a huge company with a large office randomly placed in a sleepy Montana college town, embroiled in a fight with the IRS, shredding documents as they came out the door.

If only a stray document had landed in front of me on the sidewalk.  Apparently the going rate for sensitive information on UBS clients is quite high.

To read more about Brad Birkenfeld, drop by our main page on the UBS whistleblower.