In March 2006, an American employee of UBS, Switzerland’s largest bank, sent a confidential letter to a top executive.
“I wish to invoke my rights listed under the UBS Whistleblowing Protection for Employees” policy, he wrote.
With that, Bradley C. Birkenfeld fired the first shot in the historic and devastating assault on Swiss bank secrecy that reached a new milestone Wednesday. Under a legal settlement signed in Washington, Switzerland is expected to turn over the names of thousands of Americans who used secret accounts to dodge taxes, U.S. officials said.
Birkenfeld’s tale reads like a pulp thriller, complete with the international smuggling of diamonds stashed in a toothpaste tube.
Long-running U.S. federal probes of UBS had already driven the bank to accept a $780 million settlement, admit that it helped Americans hide money from the Internal Revenue Service and, under orders from a Swiss regulator, turn over the names of 200 to 300 American depositors, many of whom are now under criminal investigation.
Now in Switzerland, where secrecy is the bedrock of a lucrative global banking industry, there are widespread fears that business will never be the same. The IRS said on Wednesday that its probe of American offshore tax dodgers will not stop with UBS.
All of that is attributable in large part to Birkenfeld, the 44-year-old son of a Massachusetts neurosurgeon, who approached U.S. authorities in 2007 and provided an extraordinary inside account of the bank’s conduct, according to court papers filed Tuesday.
Birkenfeld, who pleaded guilty to a criminal charge last year for participating in UBS’s illicit cross-border business, is scheduled to be sentenced Friday in Florida. Although he faces a maximum of five years in prison, the Justice Department asked the court to cut that in half in a filing Tuesday.
The jail time could be tempered by the possibility of financial reward. Under IRS regulations, people who blow the whistle on tax cheaters can be eligible for rewards of up to 30 percent of any money the IRS recoups. However, an IRS notice says the agency will refuse to pay a reward if the whistleblower “is convicted of criminal conduct arising from his or her role in planning and initiating” the tax evasion.
Birkenfeld filed a claim for a whistleblower reward with the IRS in 2007, near the outset of his discussions with federal authorities, according to Dean A. Zerbe, a former tax counsel to the Senate Finance Committee who is now affiliated with the National Whistleblowers Center and who has advised Birkenfeld informally.
Zerbe, who helped lawmakers write the whistleblower law, said Birkenfeld is clearly entitled to a reward that at a minimum would total tens of millions of dollars, including portions of the $780 million UBS agreed to pay the government and of the sums the IRS recoups from UBS depositors who turn themselves in as a result of the highly publicized UBS probe.
The U.S. government would send potential whistleblowers precisely the wrong message if it sends Birkenfeld to prison, “killing the goose that laid the golden egg,” Zerbe said.
Zerbe said Birkenfeld has reason to fear for his life.
“There’s a lot of very wealthy people who are very unhappy about what he did,” Zerbe said.
Birkenfeld has been living with a family member since his guilty plea, his movements restricted and monitored with an ankle bracelet.
He attended Norwich Military Academy in Vermont and later studied business in Switzerland. He went on to join a team of UBS private bankers who stealthily marketed Swiss accounts to wealthy Americans, and then helped them disguise their ownership of the accounts through the use of offshore shell corporations. According to a court document, he once smuggled diamonds into the United States for a client by hiding them in a toothpaste tube.
He had an apartment in Geneva and a million-dollar home in Zermatt, Switzerland, and drove a BMW, according to court records.
In a sentencing memorandum, Birkenfeld’s attorneys say that in May 2005, he saw a document on a UBS internal computer network that set him on a new course. The document misrepresented the way UBS was conducting its cross-border business.
Birkenfeld raised the issue with legal and compliance officials at the bank but got no response, according to the memorandum. In October 2005, he resigned from the bank.
In early 2006, when the bank refused to pay a bonus he was owed, he invoked whistleblower status “in response to the apparent retaliation against him,” the memorandum said.
Birkenfeld wrote a March 2006 letter to a top executive saying the document on the company intranet, “which professed to outline what business practices were forbidden by UBS, ran directly contrary to the actual UBS practices which were actively encouraged by UBS senior management.”
The bank investigated and changed its practices. It also settled the dispute over the bonus. But in early 2007, while the dispute was pending, Birkenfeld reached out to the IRS and the Justice Department and met with U.S. officials, according to the sentencing memorandum. In November 2007, he contacted the Securities and Exchange Commission and a Senate investigative panel, setting more investigations in motion, according to the memo.
He tried unsuccessfully to negotiate immunity from prosecution. In a court filing Tuesday, the Justice Department said that when Birkenfeld approached the government in 2007, he refused to discuss his own participation in the scheme.
In May 2008, when he flew from Switzerland to Boston, he was arrested. He was on his way to a high school reunion — and to meetings with SEC and Senate personnel, according to the memo.
By David S. Hilzenrath
Washington Post Staff Writer
Thursday, August 20, 2009