(Jeffrey Neiman, an attorney in Ft. Lauderdale in his own firm, is a former federal prosecutor. He led the landmark tax evasion case against UBS and is an expert on US tax enforcement. This article is adapted from a paper he presented at the ACFCS International Financial Crime Conference & Exhibition in New York on September 13-15.)
It’s not often that someone serving a federal prison sentence can earn $4,600 per hour by sitting in a cell. That is what Bradley Birkenfeld, a former financial advisor at UBS, Switzerland’s largest financial institution, earned during the time he served in US federal prison for his role in the massive tax evasion conspiracy led by UBS.
Birkenfeld went from tax evasion mastermind to tax evasion whistleblower. Convicted of tax fraud after he pled guilty and sentenced to 2-1/2 years in prison in 2009, Birkenfeld last week received a record $104 million reward from the US Internal Revenue Service for cooperating in revealing the elaborate schemes UBS used to harbor US tax evaders in secret accounts in Switzerland.
The Birkenfeld reward is a fraction of what the IRS has recovered for the US Treasury in taxes and penalties as a result of the information he disclosed.
In 2009, UBS also paid a $780 million penalty as part of a Deferred Prosecution Agreement for masterminding the US tax evasion conspiracy. With the help of the Swiss government, which picked up the cudgels for its bank citizen, UBS disclosed the account information of about 4,500 US persons who held the secret accounts.
UBS harbored 52,000 US tax evaders, but only revealed 4,500
The US government agreed to limit the number of accounts it would receive from UBS, even though a total of about 52,000 US persons had secreted bank accounts and other assets at the huge Swiss bank.
In the wake of the UBS case, the IRS established the Offshore Voluntary Disclosure Initiative, which allows US taxpayers with hidden overseas accounts to provide details on the accounts in exchange for a fixed penalty. To date, the program has produced more than $5 billion in back taxes and penalties for the US government. The IRS has said that more than 30,000 US taxpayers have confessed to holding offshore accounts.
A vital element in the success of these governmental efforts are whistleblowers, such as Birkenfeld. As the IRS and Justice Department continue to apply pressure on overseas banks in Switzerland and elsewhere that harbor US tax evaders, informants that work at these institutions have emerged as key players.
The IRS has revamped its whistleblower program to encourage whistleblowers and informants with offers of big rewards for their cooperation and productive information.
IRS creates Whistleblower Office, boosts informant rewards
For many years, the IRS had an informal program of encouraging informants and paying rewards. The system was cumbersome and unproductive. In 2006, Congress enacted a law that created a Whistleblower Office at the IRS. The mission of the Office is to solicit information from informants and supervise the process of paying rewards.
The Office is authorized to pay significant rewards for information leading to a determination that another party has an unpaid tax liability. The law provides for two types of awards. For cases where the amounts involved exceed $2 million, the IRS may pay 15% to 30% of the amount it collects. In other cases, rewards may equal 15% of these amounts. Informants who feel their reward is insufficient may appeal to the US Tax Court to seek an increase.
Whistleblower claims are reviewed by specialists in the Whistleblower Office and, if deemed worthy of investigation, are sent to field agents for further inquiry. All information provided by whistleblowers is screened by the IRS Criminal Investigation Division, which has new offices in Beijing, Sydney and Panama, as well as other offices and attaches worldwide.
It is no coincidence that in the IRS building in Washington, DC, the Whistleblower Office is neighbor to the office of the Chief of the Criminal Investigation Division.
Cottage legal industry crops up around whistleblowers
All this has spawned a legal industry in the United States around informants. Lawyers now enter into contingent fee agreements with clients to share in the rewards. A US lawyer disclosed in April 2011 that his client had received $4.5 million, the first reward paid by the Whistleblower Office, for exposing underreporting and underpayment of tax at a US financial services company.
Informants or whistleblowers have provided the IRS with information about the US tax evasion activities of several foreign banks, much of which has been reported widely in the press. This has led to ongoing investigations of several non-United States financial institutions, including other Swiss banks, such as Wegelin Bank. IRS audits and investigations of hundreds of US persons are also a byproduct of the work of the whistleblowers.
In some cases, the whistleblower who provides secret information to the authorities has broken the laws of is home country. This does not impede the use of the whistleblower’s information by US agencies, unless it can be shown that a US agency affirmatively participated in the unlawful conduct.
Insider cooperation is key to unraveling complex schemes
In nearly every complex financial crime investigation, US prosecutors rely on cooperating witnesses to help make the case. Where a person is caught up in an unlawful scheme, often the only way he can obtain lenient treatment from prosecutors, and under the US sentencing guidelines, is by cooperating against those around and above him in the institution or corporation.
In foreign bank cases, the standard playbook for US prosecutors is to pursue lower-level employees and obtain their cooperation in exchange for no, or reduced, criminal charges and leniency in sentencing. This seems to have been the case in the 2011 indictment of various foreign bankers, including some at Credit Suisse, in Switzerland, and the criminal charges against Wegelin Bank in 2012.
There are reports that other similar cases are in motion now, particularly in New York. It is likely that other cases are moving forward.
Any arrest or indictment of a bank employee will invariably prompt the lawyer to inform the employee of the benefits of cooperating against higher-ups. It is a tried-and-true method of getting the big fish.