The New York Times reported yesterday that as whistleblowers cash in on rewards programs set up by financial reform laws, the Obama administration, which “cracked down on corporate fraud” by promoting the programs, is reaping the real payoff. For-profit whistleblower lawyers, flush with their clients’ settlements, are shoveling money into the Obama campaign.
There are a couple of problems with this account of reality in the world of whistleblowing. Most importantly, Obama did not crack down on corporate fraud. Far from it. The Dodd-Frank reform, which set up the whistleblower rewards at the Securities and Exchange Commission (SEC), is so loaded with loopholes that whistleblowers are probably the best and only hope the public has to combat corruption and fraud in banking.
First, Dodd-Frank does not make the obvious reform: break up the Too-Big-To-Fail banks.
Clearly, this needed to happen and did not. Instead we got the Financial Stability Oversight Council (FSOC). Its Chairman is the Secretary of the Treasury (Timothy Geithner – enough said). Although the Treasury Department is happy to answer our questions about this committee and the ways in which it will protect us from future financial cataclysms, its account of itself does not inspire confidence. For example: in answer to your question, “What can the American people expect from the FSOC,” we have this response:
The FSOC can help provide a coordination role among the member agencies to help bring agencies together and to coordinate complex interagency rulemakings, where appropriate. The FSOC released an integrated roadmap following its first meeting that is based on each independent agency’s internal planning processes, which puts into the public domain timeframes statutory deadlines for key deliverables.
I don’t know what this means, do you?
Secondly, Dodd-Frank was supposed to protect us with the Volcker Rule. Here’s what Robert Reich tells us we need to know about that:
But under pressure of Wall Street’s lobbyists, the rule – as officially proposed last week – has morphed into almost 300 pages of regulatory mumbo-jumbo, riddled with exemptions and loopholes.
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UBS whistleblower Bradley Birkenfeld voluntarily came forward as a whistleblower and handed the government the biggest tax fraud scandal in history on a silver platter. As I wrote yesterday, it is fitting that the most important tax whistleblower in history, who shattered 75 years of Swiss bank secrecy, should receive the first award under the Internal Revenue Services (IRS) whistleblower reward program - $104 million.
It's great that at the U.S. has recovered billions in fines and fees as a result of Birkenfeld's information. However, the history of Birkenfeld's case still includes a sad demonstration in missed opportunities to recoup unpaid taxes and punish tax dodgers.
Birkenfeld is the only official to face jail time as a result of the scandal he revealed - not the fate a whistleblower deserves. The IRS whistleblower reward law recognizes that participants in wrongdoing are eligible under the statute for an award. The law is intended to encourage whistleblowers - even those who participated in schemes - to come forward. It should not be used to entrap whistleblowers into criminal prosecutions.
It's worth noting that Birkenfeld did not "get caught." He blew the whistle internally at UBS before going to government investigators.
[Birkenfeld] . . . learned in 2005 that the bank’s advice to clients was illegal, and after reporting it to the UBS compliance office to no avail, he decided to become a government informant.
When UBS ignored his concerns, Birkenfeld voluntarily gave the Treasury, Justice Department, IRS, SEC and Senate their entire tax evasion case against UBS. During multiple meetings in 2007, Birkenfeld met with and provided extensive documentation and intricate testimony to Daniel Reeves (a lead IRS agent in the UBS case), John McDougal (an IRS special trial attorney) and Robert Roach (counsel and chief investigator of the U.S. Senate Permanent Subcommittee on Investigations). He cooperated fully in the prosecution of Lichtenstein banker Mario Staggl and billionaire real estate developer Igor Olenicoff, who evaded U.S. taxes on $200 million in assets hidden offshore.
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After recent rumors of a turnaround for financial whistleblowers seeking rewards under the Internal Revenue Service's (IRS) whistleblower reward program, it is fitting that one of its rare financial awards goes to United Swiss Bank (UBS) whistleblower Bradley Birkenfeld. Not only is Birkenfeld the biggest tax fraud whistleblower in history (who handed the IRS key information on a silver platter), but he is especially deserving as he is the only person to go to prison among the thousands of Swiss bank account tax cheats he exposed. (Easy to understand now that we have a presidential candidate who hides money in offshore tax havens.)
Birkenfeld was released from prison in August after an usually harsh sentence. Despite the fact that Birkenfeld shattered 75 years of Swiss bank secrecy when he approached investigators about a UBS tax evasion service involving thousands of illegal offshore accounts – held by some of your favorite actors, politicians, and sports figures – and billions of U.S. dollars. Instead of targeting UBS kingpin Martin Liechti, the Justice Department turned on Birkenfeld. To add insult to injury, the prosecutor, Kevin Downing, is now in private practice at Miller & Chevalier defending the very tax cheats Birkenfeld turned in.
Until recently, to say the Internal Revenue Service (IRS) had been slow to implement the IRS whistleblower reward program would have been an understatement. The IRS' implementation (or lack thereof) was so extreme that this summer it caused longtime whistleblower supporter Charles Grassley (R-IA) to object to two Department of Treasury nominees.
The award for Birkenfeld marks a much-needed turnaround for the IRS' whistleblower office, and will hopefully encourage other financial whistleblowers to come forward.
I wrote extensively about Birkenfeld's case during his prosecution and sentencing (here, here, here, and here). After complaining internally to UBS for two years, in June 2007 Birkenfeld voluntarily met with Justice Department prosecutors and an IRS Special Agent during three full days in which he provided unprecedented and voluminous information about UBS’s cross-border and offshore business activities, the UBS offices and private bankers that were directly involved, and the details of 19,000 UBS accounts for its American customers.
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Yesterday marked the end of Bradley Birkenfeld’s prison term for conspiracy to defraud the United States. However, what he actually did was save taxpayers billions of dollars after exposing the secret corruption of UBS, the largest bank in Switzerland. UBS conducted a tax evasion scandal, allowing thousands of Americans to illegally evade taxes by using offshore bank accounts. After complaining to the UBS with no response, Birkenfeld blew the whistle to the U.S. government about the scheme. He provided extensive information about the company’s illegal operation, including the UBS agents directly involved and the details of 19,000 American-owned accounts.
In return, Birkenfeld was prosecuted, after pleading guilty to conspiracy in 2008. The DOJ claims Birkenfeld was not forthcoming about his status as a private banker for Igor Olenicoff, but Birkenfeld made his status known prior to the indictment in testimony to the Senate. In this same testimony, he revealed Olenicoff’s money laundering scheme. From GAP’s Jesselyn Radack:
After negotiations with the Justice Department broke down over its refusal to provide Birkenfeld a "friendly subpoena," which would provide the compulsory process necessary for him to reveal client names without violating Swiss bank secrecy laws, he reached out to the U.S. Senate Permanent Subcommittee on Investigations, which was investigating tax havens and more than happy to subpoena him. Accordingly, Birkenfeld testified to the Senate on October 11 and November 13 of 2007, in which he identified Igor Olenicoff by name as one of his biggest clients. At the same time, Birkenfeld also provided substantially the same information on Olenicoff to the IRS and the SEC.
In other words, prior to Olenicoff himself being charged criminally by the Justice Department, Birkenfeld had provided sworn testimony to the Senate identifying him, described his $200 million account at UBS, and detailed his own involvement as Olenicoff’s private banker at UBS.
For his truthful exposures, Birkenfeld spent two and a half years in prison, while those involved in the tax evasion scheme received little to no punishment. Martin Liechti – the UBS executive who led the illegal operation – returned to Switzerland without further punishment. As the kingpin walked with impunity, other small time crooks who assisted in the scandal were granted amnesty in return for small fines. The bank received a $780 million dollar fine, although the scandal cost the U.S. billions of dollars.
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Earlier this month, Senator Chuck Grassley (R-Iowa) – a longtime supporter of whistleblower rights – objected to two Treasury Department nominees due to his concerns about the implementation (or lack thereof) of the IRS whistleblower reward program in the Dodd-Frank financial reform law. Grassley said in a floor statement:
My support for the final confirmation of these nominees will depend on both Treasury and Internal Revenue Service responses to questions I have posed regarding their implementation of the tax whistleblower program. I rewrote the statute in 2006 to encourage whistleblowing on big-dollar tax cheats. However, nearly six years since those changes were enacted, Treasury has yet to issue much needed regulations and IRS has paid less than a half dozen awards under the new program.
The much-needed whistleblower-reward program has instead been used against whistleblowers instead of in favor of them. Meanwhile, UBS whistleblower Bradley Birkenfeld is set to be released from prison next week after an usually harsh sentence. Despite the fact that Birkenfeld shattered decades of Swiss bank secrecy when he approached investigators about a UBS tax evasion scandal involving thousands of illegal offshore accounts and billions of U.S. dollars. Instead of targeting UBS "kingpin" Martin Liechti, the Justice Department turned on Birkenfeld.
I wrote extensively about Birkenfeld's case at the time of his sentencing. (here, here, here, and here). After complaining internally to UBS for two years, in June 2007 Birkenfeld voluntarily met with Justice Department prosecutors and an IRS Special Agent during three full days in which he provided unprecedented and voluminous information about UBS’s cross-border and offshore business activities, the UBS offices and private bankers that were directly involved, and the details of 19,000 UBS accounts for its American customers.
Birkenfeld had the potential to change an entire industry designed to evade U.S. taxes. Instead, the U.S. has been soft on UBS: letting bank kingpin Martin Liechti go free; under-fining the bank only $780 million for a multi-billion dollar fraud; settling for only 4,500 customer names of the 52,000 our government originally sought; and setting up an amateurish amnesty program that allowed the worst offenders to avoid criminal liability by paying fines. But worse, the Justice Department’s treatment of Birkenfeld is chilling would-be financial whistleblowers from coming forward, and will continue to do so for decades, to the detriment of the U.S. economy and all taxpayers—something that should be inconceivable during a global financial crisis.
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A coalition partner of GAP's International program – Citizens for Tax Justice (CTJ) – co-released a study earlier today that profiled 280 of our country's most profitable companies, and found that 78 paid no federal income tax in at least one of the last three years.
GAP and CTJ are both members of the FACT (Financial Accountability and Corporate Transparency) Coalition because of common ground in international anti-corruption work. Many corporations and wealthy American citizens escape taxes by parking assets abroad, often illegally. Once privately-owned assets have been moved to "secrecy" jurisdictions (e.g. the Cayman Islands, British Virgin Islands) they are very hard to trace and tax.
One notable whistleblower who exposed such financial malfeasance is Bradley Birkenfeld, who revealed schemes involving financial services behemoth UBS (out of Switzerland) and approximately 52,000 wealthy corporate and individual US taxpayers.
This new report was co-released by the Institute on Taxation and Economic Policy. The study is online here.
Bea Edwards is Executive Director at the Government Accountability Project, the nation's leading whistleblower protection and advocacy organization.
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This post also appears on GAP Homeland Security Director Jesselyn Radack's Daily Kos blog.
The government used to fire, blacklist and bankrupt whistleblowers. But now the government has upped its ante: it is prosecuting them.
Three weeks ago, former NSA whistleblower Thomas Drake was indicted for "leaking."
In today's Washington Post, there's a great article on financial whistleblower Bradley Birkenfeld. He complied with a whistleblower incentive law and ended up in jail.
This is a toxic trend that must stop.
Bradley Birkenfeld is a former banker with UBS, Switzerland's largest bank, who shattered 75 years of Swiss bank secrecy by blowing the whistle on American tax dodgers who hid money in Swiss bank accounts.
Birkenfeld's story is more than a cautionary tale. It is a glaring stop sign for any potential financial whistleblower. The new IRS Whistleblower Reward Program enticed him to come forward with a law that turned into virtual entrapment.
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