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Brad Birkenfeld: Tax Cheat and UBS Informant Doesn't Deserve Pardon

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Pennsylvania prison inmate Bradley C. Birkenfeld, one of the most controversial and interesting characters in modern banking history, recently asked President Barack Obama for clemency.

I hope he doesn't get it.

The former UBS banker is a world-class tax cheat and opportunist. But Birkenfeld, a 45-year-old U.S. citizen, is also a tax informant and whistle-blower, partly responsible for helping the IRS crack the biggest U.S. tax evasion case in history two years ago.

And that's what makes his story so compelling. Birkenfeld is both a sinner and a saint.

For every person like me, satisfied that Birkenfeld will sit in prison for the next three-and-a-half years for his crime, there is another person just as convinced that what happened to Birkenfeld is a travesty of justice.

My dealings with Birkenfeld began last August, right after the publication of my first article for Politics Daily. The article was about the IRS and its tax-evasion case against the Swiss bank UBS. In it, I lauded Birkenfeld, a former UBS employee who turned informant and gave the U.S. government the insider information it needed to bust the famously private bank.

It was thanks to Birkenfeld, I wrote, that "U.S. tax authorities were poised to tear down the wall of Swiss banking secrecy."

He called me after the article appeared. The conversation was short, and my recollection is that he was simply hoping to find a friend in the media. He did not disclose that he faced a stiff prison sentence, although his later e-mails made it clear that he sought to make me an ally.

So how did Birkenfeld end up in prison, even while helping the United States reap a windfall of billions of dollars from tax-evading Americans with Swiss bank accounts?

This is his story:

From 2001 to 2006, Birkenfeld was a private banker for UBS, based in Geneva, servicing wealthy American clients of the bank. Among his clients was a 67-year-old California billionaire, Igor Olenicoff, who Birkenfeld helped hide $200 million in assets in phony companies off shore and advised to destroy records from his offshore accounts. Birkenfeld also did other errands for Olenicoff and his other UBS clients, including buying cars and chalets for them, and he was once caught smuggling diamonds in a toothpaste tube. (Birkenfeld told CBS's 60 Minutes that he put them there so he wouldn't lose them.)

Birkenfeld knew he was aiding and abetting clients to avoid paying taxes to the IRS. He knew the U.S. government was being cheated out of billions of dollars.

So in April 2007, Birkenfeld had his lawyers contact the Department of Justice. They said their client would provide "substantial and material assistance" to the IRS in exchange for participation "in the newly enacted Taxpayer Whistleblower Reward Statute ... and obtain immunity for his activities undertaken as an employee" of UBS. At that time, his lawyers referred to UBS as "the Vault" and Birkenfeld as "the Salesman." The lawyers further described their client as "not a big fish at the Vault," but as someone who was "ready willing and able" to provide sworn testimony to the government. Birkenfeld indicated that he expected to participate in the IRS Whistleblower Reward program as compensation for the "considerable personal risk" he was facing by exposing "the Vault's operations."

At the very same time, the IRS was going after Birkenfeld's longtime client, Igor Olenicoff. In December 2007, the IRS closed in on Olenicoff, and he pleaded guilty to filing a false income tax return. In April 2008, Olenicoff was sentenced to two years probation and 120 hours of community service, and he paid $52 million to cover six years of back taxes, interest and penalties for filing a false tax return relating to his undisclosed foreign bank accounts. (Olenicoff, who Forbes magazine ranked as the 236th richest American in 2007, is now suing Birkenfeld and 37 others for $500 million in damages, alleging that they failed to tell him about his tax obligations to the IRS.)

Birkenfeld also faced a charge of conspiring with Olenicoff to defraud the IRS. He was arrested in Boston when he returned from Switzerland in May 2008 to attend a Thayer Academy high school reunion. In June, he pleaded guilty, and on Aug. 21, 2009, U.S. District Court Judge William J. Zloch sentenced Birkenfeld to 40 months in prison. On Jan. 8 this year, Birkenfeld entered federal prison in Schuylkill, Pennsylvania., where he will likely stay until Nov. 29, 2012.

One reason the Department of Justice did not grant Birkenfeld immunity in the Olenicoff case for his help in their case against UBS was because Birkenfeld did not immediately disclose his relationship with Olenicoff to them; because of that omission, he was prosecuted. Moreover, the whistle-blower program was operated by the IRS, not the Justice Department.

After they lost their bid for immunity, Birkenfeld's lawyers went to the Senate's investigative body. In a sworn deposition taken in October 2007, Birkenfeld told staff members of the Senate Permanent Subcommittee on Investigations in great detail exactly how UBS bankers routinely and deliberately violated U.S. law. As Birkenfeld revealed, UBS told its bankers to travel with encrypted laptop computers to protect the information on them in case they were detained at the U.S. border, to carry checks from their clients back to Switzerland for deposit rather than using the wire transfer system that might have triggered a suspicious activity report by the U.S. Treasury Department, to never stay in the same hotel twice and to print nothing on UBS letterhead.

Birkenfeld reported that during his time at UBS, thousands of U.S. clients opened accounts with UBS in Switzerland, but as he told the Senate investigative committee: "I didn't see anyone declare any of those [Swiss] accounts in my entire career."
During explosive Senate hearings in July 2008, the committee discovered that not only had UBS maintained billions of dollars in undeclared accounts in Switzerland for U.S. clients but also it had helped its U.S. clients get around the reporting requirements it had agreed to follow as part of a 2001 "Qualified Intermediary" agreement with the IRS. (For details on the UBS case, see the Senate report on "Tax Haven Banks and U.S. Tax Compliance.").

Birkenfeld's evidence greatly helped both the Justice Department and the IRS. Just over six months later, UBS admitted that some of its employees had defrauded the United States. In February 2009, UBS agreed to pay $780 million in taxes, penalties and fines and to turn over the names of 255 suspected American tax cheats as part of a deferred prosecution agreement with the Justice Department. On Aug. 19, the bank reached an agreement on the civil case with the IRS and agreed to provide U.S. authorities 4,450 names of U.S. clients with undeclared accounts. The IRS estimates that these accounts may have held as much as $18 billion at one time. Concurrent with these legal developments, the IRS offered a temporary amnesty program to encourage those with hidden accounts off shore to tell the IRS about them and avoid criminal prosecution. Nearly 15,000 Americans came forward to declare their accounts.

Birkenfeld certainly has supporters who believe the United States made a grievous error in putting him in jail, arguing that it was only because of his information that the U.S. government was able to prosecute UBS. Putting him in jail would put a chilling effect on future informants, they claim.

It is true that taking on UBS was no easy task. Before Birkenfeld, no other Swiss banker had ever come forward to report evidence of massive tax evasion by a Swiss bank. Never. Not once over centuries of Swiss banking secrecy. Why? Perhaps it's because Swiss bankers can go to jail for a long time for breaching the country's banking secrecy laws.

The prosecuting attorney in the UBS case, Kevin Downing, said at the time of Birkenfeld's sentencing that: "... without Mr. Birkenfeld walking into the door of the Department of Justice in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered by the U.S. government." (For more on the UBS case, see the Reuters report on how the U.S. authorities cracked open the secret Swiss bank vault.)

After being sentenced to prison, Birkenfeld received an outpouring of sympathy in the media The Business Insider, for example, condemned the "heavy handed" authorities and called for his immediate pardon. The Atlantic called the decision to punish Birkenfeld one of the Obama administration's five worst law-related moves. Time magazine wondered why the UBS whistle-blower was going to prison. In his January interview with 60 Minutes, Birkenfeld, himself, wondered why he was going to jail after "giving them the biggest tax fraud case in the world." In an e-mail to me last fall, Birkenfeld said "as you can see I got screwed by the DOJ as the only whistle-blower in the largest tax fraud case in U.S. history. Without my efforts this business would still be ongoing. So much for justice. Brad"

One of Birkenfeld's attorneys, Stephen M. Kohn, the executive director and co-founder of the National Whistleblowers Center, said the government made a big mistake in sending Birkenfeld to jail. "We've known since enactment of the False Claims Act in 1863 that it takes a rogue to catch a rogue," he told me, adding that "every whistle-blower is involved at some point" in the activities they are disclosing.

Kohn believes that his client should not only be released from jail but also that he should receive a whistle-blower award from the IRS. "There is no legal impediment to his receiving the award," Kohn said. "The only obstacle is political." Moreover, giving Birkenfeld a large reward would "be a game changer. Just think of what that would do to tax compliance," he said. According to Kohn, Birkenfeld has filed the paperwork to claim a whistle-blower reward.

If Birkenfeld is rewarded, he will have won the lottery. By law, the IRS must pay whistle-blowers at least 15 percent and up to 30 percent of the amount collected due to information submitted by the whistle-blower (for cases involving at least $2 million). Although his lawyer declined to estimate the size of the potential reward, he agreed that it could be significant. To give you an idea of how large the reward could be, consider the following example. Assuming that the nearly 15,000 U.S. citizens who declared their accounts through the amnesty program had hidden $15 billion in their offshore accounts and would have had a 28 percent tax withheld from these accounts, the IRS might collect an additional $4.2 billion in taxes. Birkenfeld could receive $63 million if the IRS pays the mandatory minimum 15 percent of the amounts collected, or $126 million if it pays the maximum amount.

Just reward? Not by my lights.

For starters, Birkenfeld has admitted that his motive for ratting on UBS was money. Just months before he went to the authorities with the incriminating information, Congress had changed the law and made it very lucrative for whistle-blowers to come forward.

And while Birkenfeld was all too ready to inform on UBS and claim his reward, he was none too ready to inform on himself. At Birkenfeld's sentencing on Aug. 21, Justice Department attorney Downing said, "When he came in to the United States government, he came in to be a whistle-blower. He wanted to earn money by disclosing the wrongdoing of others. He refused to disclose his own wrongdoing." That refusal was fatal to the U.S. officials, for it prevented them from making their case against Olenicoff. Downing made this point clear when he told the court that "Mr. Olenicoff would be in jail" if Birkenfeld had told them what he knew about Olenicoff in June 2007 when Birkenfeld approached the U.S. authorities. Instead, Olenicoff is free and, ironically, Birkenfeld is in jail.

In this respect, Birkenfeld's actions differ sharply from those of the convicted tax cheat, John Mathewson, whose case was prosecuted a decade ago. Mathewson, a former president of a Cayman Islands bank who helped thousands of his clients avoid U.S. taxes, turned over all of the computer records for more than 1,000 customers, nearly all of whom were U.S. citizens, of his bank as soon as he was arrested. By contrast, Birkenfeld waited to tell the U.S. authorities of his involvement in helping Olenicoff evade his tax liability until well after the investigation was under way. Thus, although both men faced a possible five-year prison sentence, Mathewson was placed on probation, Birkenfeld was placed in jail.

Some would argue that Birkenfeld's 40 months behind bars is a fair trade-off for getting a multimillion-dollar reward -- which is still not at all certain.

Unless the president gives him a pardon, which I believe there is no chance he will do, Birkenfeld will have to sit in his cell until 2012 to find out.

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I have no problem with Birkenfeld being punished but there is a long list of people who should be punished before him and with greater severity. Justice is relative, it is only justice if it is uniformly applied to all people. Applying it severely to whistle blowers and leniently to the wealthy smacks of corruption. You miss this very important point in your article, Birkenfeld is the only one to have done jail time so far as a result of the investigation.

October 20 2010 at 1:27 PM Report abuse rate up rate down Reply

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