IRS awards UBS whistleblower $104 million for spilling secrets

NEW YORK — The Internal Revenue Service has awarded UBS whistleblower Bradley Birkenfeld $104 million — the largest reward to an individual whistleblower in IRS history — for providing damning information on his former employer, his lawyers announced today.

“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,” said Birkenfeld’s lawyers, Stephen Kohn and Dean Zerbe, in a joint statement.

“The IRS also sent 104 million messages to banks around the world — stop enabling tax cheats or you will get caught,” the statement added.

The announcement comes just over five years after Birkenfeld, once a high-flying, cross-border banker at Switzerland’s premier financial institution, began providing the US Department of Justice with evidence of a massive tax-evasion scheme involving as much as $20 billion in secret undeclared accounts and earning UBS up to $200 million a year in ill-begotten profits.

It also comes just over a month after Birkenfeld walked out of federal prison after serving roughly two and a half years for his role in the fraud.

“Swiss bank secrecy is analogous with criminal conspiracy. That’s how I see it,” Birkenfeld told GlobalPost in a series of interviews for the Special Report titled “Telling Swiss Secrets." The interviews were in 2010, when he began serving his prison sentence.

That’s the light in which Swiss bank accounts began to be seen by average Americans — and not so average ones, particularly in a political season in which Republican candidate Mitt Romney’s tax returns have raised questions among critics about the propriety of his own holdings in a Swiss bank account.

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Romney became perhaps the most prominent UBS client to close an account in recent years. There was no evidence of wrongdoing, but the revelation that he held a $3 million Swiss money market account in his wife’s name was revealed in the 500-some pages of 2010 tax returns the Romney campaign released in January.

“A prospective president with a Swiss bank account and a retirement investments in the Cayman Islands?” Vice President Joe Biden cracked about Romney in a speech this summer. “Did you ever think you’d be choosing between two people running for president, one of whom had a Swiss bank account?”

The secrecy surrounding Swiss banks is an inner sanctum to which whistleblower Birkenfeld gained extraordinary access. He was part of a small team of Switzerland-based bankers sent on illegal recruiting trips to the United States to court US-resident billionaires at exclusive UBS-sponsored events like yacht races and classic car shows. With winks and nods, and the occasional product demonstration on one of the encrypted laptops UBS bankers traveled with to avoid US Customs and FBI scrutiny, the bankers would pitch the high rollers on illegal tax avoidance schemes. 

Bradley Birkenfeld (Gasper Tringale/GlobalPost)

Beginning in the summer of 2007, the information Birkenfeld provided over a series of meetings with the DOJ, IRS, SEC, Department of Treasury and US Senate set off cascading criminal and civil investigations into UBS. To avoid criminal prosecution, the bank agreed to pay a $780 million fine and, most controversially, turned over names of thousands of American account holders to the IRS.

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“Birkenfeld provided information on taxpayer behavior that the IRS had been unable to detect,” the IRS acknowledged in its Summary Award Report on its investigation. “The comprehensive information provided by the whistleblower was exceptional in both its breadth and depth. While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS.”

The IRS and Justice Department then broadened the scope of their investigations, reportedly to HSBC and Credit Suisse and spanning from Europe to Asia and the Middle East. Nearly 15,000 American tax offenders, the vast majority with undeclared UBS accounts, agreed to pay billions in back taxes and fines to avoid prosecution themselves.

Romney's account was closed in 2010, between his two runs for president, according to Romney’s lawyer, R. Bradford Malt. Malt told the New York Times that Romney had opened the account in 2003 and that it had been properly reported to the US government. That there remains a cloud of mystery around Romney’s financial history is an understatement, however, as the candidate refuses to release additional tax records.

“If anyone could undress his tax returns, I don’t know if they’d find anything illegal but I expect that they might find something uncomfortable,” said Laurie Holtz, a forensic accountant who has investigated corporate malfeasance throughout his 50-year career. Holtz draws a direct, if fine, line between illegal behavior of bankers like Birkenfeld and the aggressive tax and legal advisers who lead the field.

“What do most accountants or tax attorneys do for their clients? They try to maximize tax benefits and tax savings for their clients and go as far as they can even if it’s not something they wouldn’t be proud of. Saying ‘I turned it over to professionals,’ as Romney has, is nonsense. What the UBS scandal shows is how far tax professionals, bankers and clients are willing to go,” Holtz added.

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The US Treasury loses up to $100 billion a year in offshore tax fraud alone, according to the IRS. Under the tax whistleblower law, an informant can collect 15 to 30 percent of any sum recovered as a result of his or her information — which amounts to potentially huge money. Also, under the new law, an informant's involvement in the fraud, formerly a disqualifier, is no longer an obstacle to a reward. In short, the IRS' new Whistleblower Office was designed to attract the Bradley Birkenfelds of the world.

But the law doesn’t guarantee immunity from prosecution. It was a risk Bradley Birkenfeld was willing to take, hoping the enormous impact of his testimony would win him favor in the eyes of the law. It didn’t quite work out. The US attorney accused him of withholding information during the course of the investigation, a charge Birkenfeld continued to denounce in emails and phone calls with this journalist during the two and a half years of his imprisonment (he served 30 months of his 40-month sentence, with time off for good behavior).

“The award reflects the enormity of what Brad has done and the significance of what he’d provided them,” said Dean Zerbe, a member of Birkenfeld’s legal team and a former investigator and tax counsel for the Senate Finance Committee. “I think they played it straight. They recognized that they had to follow the law and they were right to award him. I also think they realized the actions taken against Brad — the aggressive prosecution — had chilled potential whistleblowers from coming forward. I think this has done a lot to wash away the sins of the earlier treatment.”

So was it worth it — 30 months for $104 million? Birkenfeld remains under house arrest until November, barred from speaking to the media. But come November, when the restrictions lapse, it’s certain we’ll hear in full from the brash ex-banker and ex-con turned government-made millionaire 104 times over.

Michael Bronner, a New York-based investigative journalist, previously worked for the weekday edition of CBS News/60 Minutes. He has been a freelance contributor to Vanity Fair since 2005 and is the founder of Warscapes. A screenwriter, producer and director, he was also a co-producer on the Universal Pictures/Working Title feature film “Green Zone” about Iraq and an associate producer on the Oscar-nominated “United 93.”