Expert View:Whistleblowing: A Get-Rich-Quick Scheme?

Published on December 28, 2009

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Expert View:Whistleblowing: A Get-Rich-Quick Scheme?

In recent days, numerous credible news media outlets have reported on what the UBS whistleblower, Bradley Birkenfeld, may make as a result of turning-in his former employer, the Zurich, Switzerland-headquartered bank, UBS AG.

Birkenfeld blew the whistle on the bank’s illegal off-shore tax schemes to the United States Department of Justice, the Securities and Exchange Commission, the Internal Revenue Service and the Senate many months before he was indicted. The impact of his disclosures has been unprecedented. UBS has entered a deferred prosecution agreement with the United States and has paid a $780 million penalty. More than 14,000 U.S. taxpayers have admitted to holding undisclosed offshore accounts.

Based on the extent of the fraud Birkenfeld exposed, there has been speculation that he might be entitled to a billion dollars or more under a relatively new IRS law that rewards whistleblowers for voluntarily providing credible information on large tax frauds (usually above a $2 million threshold). As one of Birkenfeld’s current lawyers, and as a long-time advocate for whistleblowers, I believe it is safe to predict that neither Birkenfeld nor any other whistleblower will collect a billion dollars–or anything approaching that amount–from the federal government.

What really happens to employees who blow the whistle and seek a reward? Birkenfeld, like most whistleblowers, has lost his job and career. He was forced to resign from UBS after his internal protests regarding illegal bank practices were ignored. His career as an international banker was cut off–as were his lucrative salary and benefits.

Yes, the law makes Birkenfeld entitled to a reward. But to date, he has received nothing. The government does not simply hand out checks after whistleblowers report fraud. The process is long, technical and often very disappointing, especially to the whistleblowers whose careers have been ruined.

Furthermore, in Birkenfeld’s case, the Department of Justice refused to provide him with any whistleblower protections, let alone immunity in light of his substantial and crucial contributions to the case against UBS. Instead, Birkenfeld was personally attacked by the DOJ and indicted for his role in helping one client, Igor Olenicoff, evade taxes. Far from becoming a billionaire, Birkenfeld will commence serving a 40-month sentence on Jan. 8, 2010. He lost his job. He will soon lose his freedom.

What about the new IRS whistleblower-rewards law? This law contains a reward provision similar to the now famous False Claims Act. Under both laws, employees are encouraged to disclose fraud committed by their employers. Both laws provide a reward provision that entitles these whistleblowers to a percentage of the monies recovered by the United States as a result of their disclosures. Generally speaking, that is 15% to 30%.

Theoretically, then, whistleblowers can get rich from these laws. But what is the reality? Here are the real facts:

–Between 1987 and 2009, the average False Claims Act reward paid to a whistleblower was $1.9 million dollars.

–In the 22-year history of the False Claims Act, no reward paid to a single whistleblower has, to my knowledge, approached the $100 million mark, regardless of the amount of money obtained by the government.

–Since 2006, when the tax laws were amended to provide for whistleblower rewards consistent with the False Claims Act, no whistleblower has obtained any reward from the IRS under the new legal standards.

Whistleblower cases are hard. Employees who blow the whistle suffer both professionally and personally. Blowing the whistle is not the way to make money quickly in the United States. Even the few employees who have obtained sizable rewards usually had to wait years for a recovery, and almost universally lost their jobs in the meantime, costing themselves and their families millions of dollars in lost income and benefits.

How much will Birkenfeld actually obtain as a result of his whistleblowing? Any answer is completely speculative. Given the unprecedented nature of his disclosures, and the lack of judicial or administrative precedent under the new IRS law, any attempt to place a monetary value on his whistleblowing is pure guesswork. The IRS must initially review the claim, and any amount of reward may be subject to judicial review.

This speculation actually serves to further harm Birkenfeld. He is facing 40 months in prison; that is the reality. Furthermore, no government agency has yet to confirm he is entitled to one penny based on his whistleblowing. The DOJ refused to provide him with any whistleblower protections or immunity, despite Birkenfeld’s pleas since he first communicated with that agency in early 2007.

Lost in the speculation over the theoretical size of Birkenfeld’s reward is the fact that when Birkenfeld first blew the whistle at UBS, the law that provides for the reward did not yet exist. The record demonstrates that between June and August of 2005, Birkenfeld learned that UBS had entered into agreements with the United States prohibiting many of its offshore banking practices, Birkenfeld sent multiple e-mails and interoffice memoranda to the heads of the UBS legal and compliance departments demanding answers as to how the bank could engage in apparently illegal tax evasion schemes. UBS’ legal and compliance mangers refused to answer any of his concerns. In response to this silence, and over concerns that UBS was willfully violating the law, Birkenfeld, of his own accord, quit his job. He felt he had no other choice.

In early 2006, Birkenfeld filed a formal whistleblower complaint in accordance with three internal UBS policies. The UBS whistleblower procedures were not designed to reward or compensate employees; instead they were part of a corporate compliance program designed to investigate and remedy wrongdoing. But instead of serving an independent audit function, the UBS program was controlled by the company’s Group General Counsel, Peter Kurer (who would later become the chairman of the board, and subsequently resign amid the scandal).

Birkenfeld thought he was properly reporting wrongdoing and giving the bank an opportunity to investigate and fix the problems. He was wrong. UBS’ compliance program was broken and compromised. Instead of fixing the problems, the compliance program was used to cover up the crimes. The deferred prosecution agreement between UBS and the Department of Justice acknowledged these defects, and UBS conceded that had it properly investigated Birkenfeld’s allegations, it would have uncovered the crimes he later reported to the U.S. government.

When he blew the whistle internally, Birkenfeld was not seeking a “reward” under the UBS whistleblower program–no such reward existed. He was trying to fix massive violations within the company’s procedures. Like most whistleblowers, Birkenfeld started his journey not seeking any reward, but trying to get his employer to do the right thing. Yet in most cases, a lone employee is powerless in a corporate culture that thrives on breaking the rules.

It is true that Birkenfeld formally approached the U.S. government after Congress passed the new IRS whistleblower law. But the record also shows that in 2006–before it was passed–that Birkenfeld traveled to the United States and hired attorneys for the specific purpose of exposing UBS misconduct to the U.S. government.

At his sentencing hearing, Birkenfeld’s extensive efforts to report and fix the UBS misconduct in 2005 and 2006 were simply ignored. The focus at the hearing was not on the fact that Birkenfeld, for two years before Congress enacted the reward provision, had attempted to report and fix the UBS misconduct. Instead, the Justice Department fixated on the fact that Birkenfeld had sought protection under the new IRS whistleblower rewards law.

Never mind that he lost his job and career. Never mind that he was facing 40 months in prison. The mere fact that he sought the benefits and protections of U.S. laws was turned against him. Somehow the Department of Justice argued Birkenfeld was not a real whistleblower because he sought protection under a new federal whistleblower law.

What’s next? If the United States government is actually serious about encouraging employees to blow the whistle on tax fraud, the Birkenfeld precedent is simply not the way to accomplish those goals. If rewards are simply pie in the sky, and employees who uncover massive tax fraud by large banks face unending economic retaliation, legal battles and potential prosecution when they try to report the crimes to their government, what are the future prospects for any employee in the banking industry who tries to stop massive tax fraud against the American people?

Whistleblowing is not a get-rich-quick scheme.

Stephen M. Kohn has represented whistleblowers for 25 years. He is executive director of the National Whistleblowers Center and a partner at Kohn, Kohn & Colapinto, LLP.

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