With help from a former UBS banker, the Feds are demystifying how the Swiss do business. Inside the tradecraft.
From the magazine issue dated Mar 23, 2009
Among the very rich, it’s known as “the nut.” That’s the amount of money they need to salt away for a “rainy day”-for when the bubble bursts or the subpoenas arrive. It’s enough money to keep paying for, say, the grandkids’ private-school tuitions or the landscape gardener on Martha’s Vineyard. (“Every Master of the Universe knows the number,” wrote “The Bonfire of the Vanities” author Tom Wolfe.) Usually, the money is invested in something safe, such as T-bills. But sometimes it’s sent, as they say, “offshore,” stashed away in what one Swiss bank described as a “posterity fund.”
Just how many rich people, and how much money? According to a recent U.S. Senate investigation, a single Swiss bank-the biggest, UBS-holds the secret bank accounts of 46,000 Americans, worth an estimated $18 billion. Lately, the Feds have tried to crack down on these rich Americans as tax evaders (generally, the depositors do not pay any taxes on the income from these accounts). The Swiss, not surprisingly, have been resisting. For more than three centuries, Swiss bank secrecy has offered safe haven to the wealthy, some of them unsavory types-Nazis, dictators such as Saddam Hussein and, allegedly, Islamic terrorists. At a time when the rich are coming under close and unsympathetic scrutiny, the details starting to come out about the way the Swiss banking game is played are eye-popping, if not infuriating. Judging from documents and testimony examined by NEWSWEEK, Swiss bankers, like spies, practice what is known in the espionage business as tradecraft-elaborate and often clever steps to evade detection. Last month UBS issued a statement saying, “UBS sincerely regrets the compliance failures in its U.S. cross-border business that have been identified by the various government investigations in Switzerland and the U.S., as well as our own internal review.” Translation: the Swiss bank was running a shadowy operation to help rich Americans get their money out of the country, and sometimes back in, without the Feds finding out.
The story is best told through the misadventures of an extremely rich American businessman named Igor Olenicoff and his dealings with an American-born Swiss banker named Bradley Birkenfeld, whose name seems to come from a Hollywood story treatment, along with some of the tales he has been telling, like smuggling diamonds in a tube of toothpaste.
Olenicoff is the 522nd-richest man in the world, according to Forbes magazine. A white-haired, courtly-looking 66-year-old, Olenicoff had a close relative who was a courtier to the last Russian tsar, Nicholas II. His family fled the communists with some help from the daughter of Leo Tolstoy, who used
her fortune to aid the tsarist diaspora. Educated at the University of Southern California, Olenicoff worked in the pop-music industry as an executive for Motown Records, then made a bundle-more than a billion dollars-in commercial real estate in Orange County, Calif. and in Florida. In the late 1990s, worried about the stability of American banks, he says, he began moving some of his money offshore, first to Barclays Bank in the Bahamas, then to UBS in Switzerland.
In an interview with NEWSWEEK, Olenicoff told how he was lured to UBS by Birkenfeld, whom he describes as smooth and well-spoken. He says Birkenfeld arranged for him to get the secret tour: the elevator ride into the vault five floors below street level in the elegant UBS bank building in Geneva (impregnable to bombs!), the thumbprint, the facial-image-recognition software. Olenicoff says he was a little skeptical of the high-tech mumbo jumbo, but he was impressed by the UBS officials. Over time, he put into UBS accounts $200 million worth of assets, some of which were held in opaque corporate entities in Liechtenstein. He got the royal treatment there: a stay in the guesthouse of Prince Hans-Adam, at the time the ruler of the tiny principality in the Alps, where he was shown portraits of some of the royal family’s most famous friends, including photos autographed by Cary Grant and Doris Day.
Olenicoff says that he was assured the setup was all perfectly legal under U.S. tax law. (This may be, though one wonders if someone as sophisticated as a billionaire with access to the best lawyers and accountants wouldn’t have raised a few questions about the tax consequences.) In any case, his suspicions were more than raised when the IRS subjected him to an aggressive audit in 2004-and indicated it had seen copies of his UBS bank statements. Olenicoff immediately questioned how the Feds knew so much about his supposedly secret holdings. He says he suspected that he had been ratted out by the man who had brought him to UBS in the first place.
Bradley Birkenfeld, in his mid-40s, is a mysterious figure. Recent photos are hard to come by. Based on a court appearance last year, Portfolio magazine colorfully described him as “a bloated, tan version of Jim Cramer, if the ‘Mad Money’ host had lost his manic energy.” The son of a successful neurosurgeon in Boston, Birkenfeld was a bit of a bad boy in high school, where he was busted for drugs, Portfolio reported. His parents packed him off to Norwich University, a military school in Vermont, presumably to learn some discipline. He appears to have migrated to a posh and not-too-demanding business school in Switzerland, then into the world of Swiss banks, where he thrived. Before long he had a BMW and a chalet in Zermatt.
Birkenfeld’s job, it seems, was to fish for rich American clients. According to testimony he gave to Sen. Carl Levin’s permanent subcommittee on investigations, which has been looking into UBS, Birkenfeld was a member of a big team (“around 25 people in Geneva, 50 people in Zurich and five to 10 in Lugano … a formidable force”) of wealth prospectors. These “private bankers” would travel to the United States four to six times a year. “You might go to sporting events. You might go to car shows, wine tastings,” Birkenfeld told the subcommittee. “You might deal with real-estate agents. You might deal with attorneys … It’s really where do rich people hang out, go and talk to them … It wasn’t difficult to walk into a party with a … business card, and then someone ask[s] you, ‘What do you do?’ and you say, ‘Well, I work for a bank in Switzerland, and we manage money and open accounts.’ And people immediately would recognize, ‘Oh, this is someone who could open new business by opening accounts’.” UBS did its part to foster such potentially profitable interchanges by sponsoring fancy events such as Art Basel, an annual major art show in Miami; performances in big American cities by the UBS Verbier Festival Orchestra, an ensemble of young Swiss virtuosos; and yachting regattas at which an elite Swiss boating team called Alinghi competed.
But UBS wanted prospectors such as Birkenfeld to be careful-to act, it seems, more like spies than bankers. A September 2006 UBS document cautions its bankers to “always maintain ‘clear desk policy’ in hotel rooms; use secure infrastructure (travel notebook, PDA); be aware that cell phones are prone to eavesdropping; cross borders without client-related documents.” Other documents warn UBS bankers what to do if approached by the FBI: protect bank secrecy.
Birkenfeld told investigators UBS bankers would encourage their clients to misrepresent money transfers they received from UBS as loans, rather than taxable income; to destroy offshore banking records in U.S. files; and to use Swiss bank credit cards that supposedly could not be discovered by U.S. investigators. Birkenfeld took his client service into the realm of James Bond: he says he once transported diamonds, bought with client money abroad, into the United States in a tube of toothpaste.
Somewhere along the way-it’s not clear when or how-Birkenfeld turned state’s evidence. Documents indicate that he left UBS in 2005; the reason he reportedly gave was that he suspected his employer of illegality. On the bank’s internal computer network, he discovered an incriminating document-a set of instructions that U.S. investigators now believe was part of UBS’s tradecraft manual for bank representatives serving American clients. Birkenfeld may have already been talking to the authorities by then. In any case, he was caught in a difficult spot. Entering the United States last spring to attend his 25th high-school reunion, he was arrested by the Feds. Later he pleaded guilty to conspiring with Olenicoff to hide millions from the IRS in Switzerland and Liechtenstein. He has been cooperating with investigators in an effort to stay out of jail; he is due to be sentenced next month. Having been outed as a whistle-blower, he is in trouble in Switzerland, too: if he ever sets foot in his adopted country, he would likely face arrest and a lengthy prison term for violating the strict Swiss bank-secrecy laws. (Birkenfeld’s lawyers declined to comment.)
The Feds have subpoenaed all of UBS’s records on Americans with secret bank accounts. Threatened with criminal charges, UBS has admitted violating U.S. law, paying $780 million in a settlement and offering banking data on about 250 clients. But the bank has said that Swiss law forbids it to turn over information about the thousands of other secret accounts. Nonetheless, UBS told its American clients to close their accounts and take their money elsewhere. Conservative politicians in Switzerland have railed against what they say is a fishing expedition that violates Swiss banking laws and Swiss sovereignty. Bank secrecy is a point of cultural pride for the Swiss, and so the controversy seems unlikely to abate any time soon.
The Swiss government and Switzerland’s tiny neighbor Liechtenstein are facing heavy scrutiny. Since 2001 both countries have tried to cooperate with intelligence services tracking terrorist finance networks. As the global economy melts down and public anger rises, the old ways of bank secrecy will become increasingly hard to defend (even as the wealthy look for safe places to hide their money). Last week, the governments of both Switzerland and Liechtenstein announced that they would share more tax-related information with foreign governments, but the Swiss still declared that “Swiss bank secrecy is maintained.”
And as for Olenicoff? He had to pay $52 million in back taxes and penalties, but, according to Forbes, he is still worth $1.4 billion-a big enough nut for any Master of the Universe.
Find this article at http://www.newsweek.com/id/189248
By Evan Thomas and Mark Hosenball | NEWSWEEK