Convicted felon gets $104-million whistle-blower reward
Help wealthy people dodge taxes. Go to prison. And cap it off by getting $104 million for ratting out your former clients to the IRS.
In one of the largest whistle-blower cases in U.S. history, the federal government is paying that amount to a globe-trotting banker who once smuggled a client’s diamonds in a toothpaste tube to avoid detection by tax authorities. The financier, Bradley Birkenfeld, later confessed his transgressions and helped the Internal Revenue Service nab thousands of Americans who had stashed money overseas to avoid paying taxes.
The payment, which was revealed Tuesday by his lawyers and confirmed by the IRS, is the latest in a string of whistle-blower cases that underscore a heightened government effort to enlist rank-and-file employees to snitch on their bosses and clients.
“This is a jaw-dropping award and it will motivate other people” to divulge wrongdoing, said Erika A. Kelton, a Washington, D.C., attorney who specializes in whistle-blower actions.
But the staggering payout to a convicted felon also pointed up the ethical gray areas inherent in whistle-blower actions. Birkenfeld pleaded guilty to conspiracy charges stemming from the case against his former employer, Swiss banking giant UBS, and spent 21/2 years in prison.
And the case itself highlighted the lengths to which the wealthy often go to sidestep taxes. Though many of the maneuvers are technically legal, they’re considered highly controversial. The tax-avoidance issue has even emerged as a focal point in the presidential race given Mitt Romney’s previous use of a Swiss bank account.
Until a government crackdown in recent years caused in part by Birkenfeld’s disclosure of widespread tax cheating, wealthy people frequently engaged in questionable activities to slash their tax bills, said Steven Rosenthal, a visiting fellow at the nonprofit Tax Policy Center in Washington.
“They just think they’re God’s gift to the planet and they would just naturally be rewarded with all these dollars,” said Rosenthal, who previously worked as a tax attorney defending clients accused of using illegal tax shelters.
“I’d think, ‘Wow, these guys got rich and they could cash out at reduced rates, but they were so opposed to paying taxes that they went through all these convoluted steps,” Rosenthal said.
Birkenfeld, a Boston native, was a charismatic banker who enjoyed a cozy living. He was an avid skier who owned a $1-million home at the foot of the Matterhorn in Zermatt, Switzerland. He kept an apartment in Geneva, drove a luxury BMW and traveled throughout the world.
As part of an aggressive effort by UBS to manage money for rich Americans, he and other bankers were dispatched to wealthy enclaves such as Newport Beach and Miami Beach, where they tried to woo clients at glitter-filled events such as art exhibits, tennis tournaments and sailing regattas.
But his relationship with UBS soured and he quit in 2005, saying he was concerned that the bank was breaking the law. Two years later, he disclosed his activities to the Justice Department, which undertook a massive investigation that led to criminal prosecutions of UBS, several sales agents and U.S. clients.
The bank agreed to pay a $780-million fine to the United States and to disclose the names of about 4,500 of its U.S. account holders.
Birkenfeld’s attorneys estimated that his tips helped the United States recover more than $5 billion in taxes and penalties.
Among those prosecuted was former Birkenfeld client Igor Olenicoff, a billionaire Newport Beach real estate developer. Prosecutors said Olenicoff moved about $200 million of his fortune to UBS in Switzerland.
Olenicoff pleaded guilty to filing a false tax return, was sentenced to probation and agreed to pay $52 million in back taxes and penalties.
Despite his cooperation, Birkenfeld was also prosecuted, and sentenced in August 2009 to more than three years in prison. Federal authorities said he was not forthcoming about his own improper conduct.
Birkenfeld’s attorney, Dean Zerbe, acknowledged his client’s mistakes but said he voluntarily came forward to expose the abuses.
“It takes a rogue to catch a rogue,” Zerbe said. “You’ve got to have people with that inside knowledge come forward. It’s not a choir practice when you’re doing tax fraud.”
Birkenfeld was prohibited from speaking to the media under the terms of his prison release, but he said in a statement that he was unfairly prosecuted.
“I single-handedly transformed centuries of illicit Swiss banking practices, but I paid a huge price for being the only person to have the courage to come forward,” he said.
Whistle-blower laws prohibit rewards to people who planned or initiated the crime, though they do not require tipsters to be entirely clean. Still, most people are not involved in the conduct they expose, experts say.
“It’s highly unusual,” Kelton said. “Bradley Birkenfeld, love him or hate him, he brought highly valuable information that the U.S. government has said they otherwise would not have received.”
Congress strengthened federal whistle-blower provisions two years ago to help sniff out the sort of financial-industry villainy that contributed to the 2008 global financial crisis and that allowed Bernard L. Madoff’s record-setting Ponzi scheme to go undetected for decades.
The IRS declined to comment on the case but defended the size of the award in a statement.
The agency “believes that the whistle-blower statute provides a valuable tool to combat tax noncompliance, and this award reflects our commitment to the law,” it said.
