Part 1: A UBS insider blows the whistle on Swiss banking

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Published on July 27, 2010

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Part 1: A UBS insider blows the whistle on Swiss banking

NEW YORK – It’s the inner sanctum of Swiss banking – the heavily-guarded nexus between numbered Swiss bank accounts and their owner’s good names – and it’s the rare American that is allowed entry.

Bradley Birkenfeld was one of the few Americans who held the keys to the kingdom. A Boston-born, high-flying, cross-border banker at Switzerland’s premier financial institution, UBS, he had access to the kind of secret account information that American law enforcement had only dreamed of through all the decades that terrorists, dictators, arms dealers, mafia dons and wealthy tax cheats had hidden behind the fortress of secrecy that Swiss banking promised.

Subterranean bomb-proof vaults and state-of-the-art security systems are the superficial trappings of Swiss banking and its culture of secrecy, but the cornerstone of protection for its clients is the numbered account system that offers all but foolproof privacy. Or so they thought.

At UBS, clients’ names and their account information are divided irreconcilably between separate computer servers in secret locations. Even for a world-class hacker with free roam of electronic bank records, identifying the owner of a numbered account is literally “Mission: Impossible.” Nowhere do names and numbers appear side-by-side.

At vaunted UBS, the only seam of vulnerability resided in nothing more advanced than the kind of old-school card catalog you might find in a local library.

At the start of business each morning, private bankers like Birkenfeld, then a director in the wealth management division of UBS, would check in at combination vaults to pull their “racks” – wooden trays of 4×5 paper index cards that are the Achilles heel of Swiss secrecy. Printed on each confidential client card – in plain, unencrypted typeset – is the client’s name, account and safety deposit box numbers, the fees paid, and home addresses and unique passwords – secret challenge phrases known only to the banker and the client that are used to verify identity on the phone (“Rose and Eagle” on a surreptitiously photocopied card Birkenfeld showed me).

“If I was really devious … I would have just taken my gym bag, slid them in, walked out the door, hopped on a plane,” Birkenfeld laughed during our interview.

He’d have saved himself a whole lot of trouble if he had: 48 hours after our interview, the burly, energetic, balding banker with a high-pitched Boston lilt and trace goatee was due to report to federal prison in Pennsylvania, the last stop in a long, dangerous dance with U.S. prosecutors.

June 2007 found a wary Bradley Birkenfeld at the Geneva airport about to hop a plane. He didn’t have the client cards, but he had taken plenty of other incriminating UBS documents upon quitting his position as a bank director the year before: emails, training manuals, PowerPoint presentations, and phone lists that detailed the mechanics of a massive fraud.

He had already begun to transfer some of the materials to private  attorneys in Washington. Now, he was on his way to meet them in person.

As Birkenfeld moved through the terminal, he glanced at his $50,000 Audemars Piguet wristwatch – one of only 750 made, as he liked to point out – but mostly he was looking over his shoulder.

“I assumed they were watching me,” he said of his former UBS bosses, a fair assumption given that the UBS’s wealth management chiefs were themselves well versed in subterfuge. The bank had held training sessions for cross-border bankers on how to elude FBI and U.S. Customs scrutiny when traveling with sensitive bank documents; how to obscure client information on PDAs and encrypted laptops; and various other evasive trade craft not usually associated with honest banking. Birkenfeld had the pilfered PowerPoints to prove it.

Hoping now to play for the other side, Birkenfeld was operating in a state of studied paranoia. Though his actual destination was Washington, where his lawyers had arranged for him to meet with prosecutors from the criminal enforcement section of the tax division at the Department of Justice, the airline ticket he held connected through Zurich to Boston; he’d buy a separate ticket to D.C. when he arrived stateside.

Meanwhile, the DOJ lawyers were not told Birkenfeld’s name, nor the name of the bank he worked for, prior to the meeting – only that they could expect a smoking gun: “Trust me, you will like this case,” Birkenfeld’s attorney wrote in an email to the government lawyers. “Probably lots of foreign travel to Switzerland, etc.”

The information Bradley Birkenfeld eventually provided – first to the DOJ, then to investigators from the IRS, SEC, Department of Treasury and U.S. Senate – would set off cascading criminal and civil investigations into UBS. Within two years, it would bring down UBS’ entire U.S. cross-border banking division and compel intensive negotiations between the highest levels of the American and Swiss governments.

The bank would admit to intentionally subverting U.S. tax laws and defrauding the U.S. government by sending dozens of unregistered bankers, Birkenfeld among them, to the United States on thousands of illegal trips to facilitate tax evasion schemes for wealthy U.S.-based clients – a fraud hiding as much as $20 billion in secret undeclared accounts and earning UBS up to $200 million a year in ill-begotten profits.

To avoid criminal prosecution, and potential ruin, the bank would agree to pay a $780 million fine and, most controversially, agree to turn over names of thousands American account holders to the IRS, a betrayal on par with original sin in Switzerland. The move was approved by the Swiss parliament in June, clearing the way for the release of the documents and what could be thousands of pending cases.

Eventually, the Swiss government itself would bow under the weight of the evidence accumulated against UBS and, in high-level settlement discussions with the U.S. State Department, concede to new treaty terms to prevent Switzerland’s leading bank from losing its licenses to do business in the U.S.

Meanwhile, the investigations sent nearly 15,000 American tax offenders, the vast majority with undeclared UBS accounts, into the arms of a new IRS amnesty program, agreeing to pay billions in back taxes and fines to avoid prosecution themselves.

“This blows a big hole in bank secrecy,” IRS Commissioner Doug Shulman crowed as the settlement was announced last August. “As long as there’s been income tax, we’ve had no access to secret bank accounts in Switzerland, and because of our focused and concentrated efforts we’re now changing that whole dynamic.”

But the real game-changer, everybody in the banking world knew, was not IRS initiative: it was Bradley Birkenfeld.

“Birkenfeld must be considered among the biggest whistle-blowers of all time,” wrote the editors of Tax Notes, the arcane but influential industry journal, in a column naming Birkenfeld its “Person of the Year” for 2009. “He single-handedly made 2009 the year in which the world finally got serious about cracking down on tax evasion.”

Never in UBS’ 150-year history had an insider turned on the bank, and the betrayal has now reportedly opened the doors to justice department scrutiny of the Swiss operations of Credit Suisse and HSBC. Germany is also armed with insider information and on the offensive against tax evasion, German police officers, prosecutors and tax inspectors raided all of Credit Suisse’s offices and branches in the country in mid July.

It seems the era of secrecy in Swiss banking is ending and Birkenfeld had everything to do with that.

Birkenfeld received letters from Sen. Carl Levin and investigators at the Department of Treasury and the Securities & Exchange Commission acknowledging his contribution, but it was Kevin Downing, the DOJ attorney who spearheaded the criminal investigation against UBS, who was the most emphatic.

“I will say that without Mr. Birkenfeld walking into the door of the Department of Justice in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered by the United States Government,” Downing said in federal court last August at a sentencing after Birkenfeld pleaded guilty to one count related to his relatively minor role in the fraud. The praise was reiterated in Downing’s brief to the court: “Defendant Birkenfeld has provided substantial assistance in the investigation and prosecution of others who have committed offences,” he wrote. “This substantial assistance has been timely, significant, useful, truthful, complete, and reliable.”

Less than 15 minutes later, however, in a switch that stunned most everyone in the courtroom, Downing suddenly turned on his star informant.

“We are seeking jail time,” he told Judge William Zloch of the U.S. Southern District, something almost unheard of in a case like this (whistle-blowers are rarely prosecuted, let alone sent to jail). Continuing, he accused Birkenfeld of trying to game the Justice Department, plotting a complex fraud even while cooperating with government prosecutors.

In short order, Judge Zloch sentenced Birkenfeld to three years and four months in federal prison – far harsher than the slap on the wrist one might expect in a whistle-blower case. News footage shows a shaken Birkenfeld literally running from the courthouse. (His sentence did not begin immediately).

Many who had followed the case were outraged. “UBS whistle-blower Bradley Birkenfeld deserves statue on Wall Street, not prison sentence,” blared the headline in the New York Daily News. “Why is the UBS whistle-blower headed to prison?” asked Time magazine. The National Whistleblowers Center in Washington, which took up Birkenfeld’s case, called on President Barack Obama to pardon him.

As his Jan. 8 report date for prison drew near, however, there was no presidential pardon, and a last-ditch appearance on 60 Minutes failed to win Birkenfeld sympathy from Judge Zloch, who tossed aside a final motion to delay Birkenfeld’s imprisonment.

In an age of stomach-turning Goldman bonuses and ungodly federal bank bailouts, it’s tough to empathize with a sometimes hot-headed former high-flier in a $2,000 suit – especially one whose motives would emerge as complicated, and self serving. But Birkenfeld isn’t asking people to like him; he just wants us to see the forest for the trees.

Sitting for our full-day interview in a suite at a Boston hotel on the eve of his long drive to the Schuylkill Federal Corrections Institution near Minersville, Pennsylvania, Birkenfeld seemed sad but defiant. “I took on the biggest bank in the world and brought them down, and I took on the biggest government in the world and exposed their corruption, and I’m being rewarded with jail,” he said, squinting his deep blue eyes. Still, he added, “I would do it again.”

Telling Swiss Secrets: 222 billionaires

Part 2: Feeding the UBS obsession with North American wealth

Caption:  (Photo illustration from photograph by Gasper Tringale)

NEW YORK – Bradley Birkenfeld exuded the confidence that comes with privilege. He was Boston born and bred, a gregarious, well-educated brain surgeon’s son. In his role as a high-flying, cross-border banker with UBS, he moved easily among the world’s wealthiest men and women. And they were precisely who he was targeting as potential clients for UBS.

“Anyone residing in America – that was our market segmentation,” Birkenfeld explained in a rare, long-ranging interview with GlobalPost. “Didn’t have to be a U.S. citizen – it could be a German living in New York, it could be an Italian living in LA.”

Birkenfeld and his fellow crossborder bankers in UBS’ global wealth management division sought to sign on anyone with the obligation, if not necessarily the inclination, to pay U.S. taxes. “People understood what the advantages were,” he said, coyly enough, of the secrecy they sold.

Exclusive circles were nothing new. Birkenfeld did his early schooling at Thayer Academy, an expensive college prep school in Braintree, Massachussetts, then Norwich University in Vermont, the country’s oldest private military academy. The latter school would seem an odd choice; one of Birkenfeld’s closest college buddies described him as “the kind of guy who – I don’t want to say he’d ‘buck authority’ – but he’d stand up to ‘illegitimate authority.’ ”

Rather than following most of his classmates into the military after graduation, a traditional track at Norwich, Birkenfeld went back to Boston and worked briefly as a bond trader. Then, after a couple of years, he decamped to Switzerland and stayed. He earned an MBA at the American Graduate School of Business, a picturesque little campus nestled between Montreux and Vevey in the Swiss Riviera.

After early stints at Credit Suisse and Barclays Geneva office, Birkenfeld joined UBS in 2001. By then, he had experience enough to know his division was steeped in skirting the law, if not in Switzerland itself, then certainly in the U.S. “Swiss bank secrecy is analogous with criminal conspiracy. That’s how I see it,” he told me.

Numbered bank accounts are illegal in the United States and most other banking jurisdictions, but it’s okay for U.S. residents to hold numbered accounts in the few countries that allow them – Switzerland is the biggest – provided they, and the banks, declare income-generating accounts to the IRS and the account holder pays tax on the income.

The reporting rules for Swiss banks are spelled out in tax treaties between the Swiss and U.S. governments. U.S. taxpayers are required to check a box on their tax returns – a simple “yes” or “no” -as to whether they hold a foreign account. Birkenfeld and his fellow cross-border bankers were essentially selling a way around all that: a way to dodge taxes through undeclared accounts often linked to sham shell companies and trusts.

The UBS bankers were frequent flyers in their high-net-worth client quest, making quarterly prospecting trips to the U.S. where the bank sponsored millionaire magnet events like the UBS Trophy yacht race in Newport, Rhode Island; Art Basel (the contemporary and modern art fair in Miami); tennis tournaments; classic car shows; concerts; and other elite gatherings conducive to meeting prospective “new money” clients.

There was a lot of wink and nod, as Birkenfeld described it: a quiet solicitation on the sidelines, a dinner later, a discreet product presentation called up on an encrypted company laptop. “These were very sophisticated marketing VIP events,” Birkenfeld said (his favorite was a $10,000-a-seat evening with Elton John at the Waldorf Astoria in April 2005). They were also illegal insofar as the cross-border bankers were involved. The Security Exchange and Investment Advisors Acts of 1934 and 1940 bar unregistered international banker-brokers from doing business with private clients on U.S. soil, whether in person or remotely via phone, mail, Fax, email, FedEx.

Documents Birkenfeld later delivered to the Justice Department show UBS to be obsessed with North American wealth. A PowerPoint presentation marked “Strictly Private and Confidential” by UBS (and later “Exhibit 14” by the Justice Department) leads off noting that “31 percent of World’s UHNWIs [ultra-high-net-worth individuals] are in North America,” followed by a graph highlighting the bankers’ target group: “Key Clients” worth greater than $30 million.

Another lip-licking slide, titled “North American Billionaires,” notes that there are 222 in the US and 14 in Canada, with a combined net worth of $706 billion.

Where best to snare them? A later slide ranks the top-25 housing locations: Montecito, CA; Aspen; Los Altos Hills, CA; Sea Island, GA; Palm Beach; and Snowmass Village, to name a few.

Birkenfeld preferred his hunting even further afield. With an expense account and ticket to ride, business was pleasure when he hit on prospective clients.

“I’d say, ‘Do you want to go to Wimbledon, have lunch and see the match? Do you want to come to Oktoberfest and drink some beer and look at hot girls? Whatever you want to do.’ I would go to the Cannes Film Festival, the Venice Film Festival, the Bangkok Film Festival.”

He cultivated contacts among event organizers so he could swing VIP treatment for himself and his clients. “I just generally spent money the way I saw fit,” he said. “I wouldn’t go out and buy somebody a Rolex, but I mean, if I spent $500 for a lunch I could justify it.”

Birkenfeld got paid, too: A starting salary of 180,000 Swiss francs (just over $170,000) plus an American-style bonus, which in his best year, he said, put him at one million Swiss francs in total compensation (about $946,000). When home from the road, Birkenfeld drove a BMW M5 and split time between a plush apartment in Geneva and a chalet in the shadow of the Matterhorn in the Swiss Alps.

Life was arguably sweeter for Birkenfeld than for his fellow cross-border bankers at UBS. Most serviced between 200 and 300 accounts, each account averaging about one million Swiss francs, Birkenfeld said, whereas he got by with a fraction of that – about 20 U.S. clients and 20 more in other countries.

He was able to carry a lighter load because he had a golden goose: a single client with accounts totaling $200 million who more than made up the slack. A billionaire Orange County, Calif., real estate mogul named Igor Olenicoff would be Birkenfeld’s biggest client, and later his nemesis.

Telling Swiss secrets: The golden goose

Part 3: Meet Bradley Birkenfeld’s biggest client, and nemesis, US billionaire Igor Olenicoff



Caption:  (Getty Images)

NEW YORK – Igor Olenicoff would seem the incarnation of the American Dream. Born to Russian parents in the mountains of Northern Iran during World War II, his journey to the U.S. began with the family’s dash for the American zone near Tehran in the aftermath of the war.

Having escaped Stalin’s forced repatriation campaign, the Olenicoffs sewed what little money they had into their coat linings and sailed for America, settling in Southern California. Father Michael, an engineer, took work as a janitor. Mother Zina worked as a housekeeper.

Igor pulled shifts at a local hardware store to put himself through school. Now 68 and head of Olen Properties, the powerhouse Orange Country real estate firm he built from a single 16 unit duplex in the early ’70s, he is a fixture on the Forbes 400 list of the wealthiest Americans – number 236 last year, with an estimated net worth of $1.5 billion. Olen Properties posts annual gross revenues of more than $250 million.

“Life from an economic standpoint has been a fairy tale,” Olenicoff said in a lengthy interview. He splits time between “fabulous” homes in Emerald Bay, CA, Lighthouse Point, Florida and a 4,400-square-foot Las Vegas retreat, jetting to and fro in his Cessna Citation. A yacht lover, he recently replaced his 150-foot Sterling with a 120-foot Christensen. “I’ve scaled back 30 feet because I enjoy operating this one myself,” he said. “I’m my own captain.”

Beginning in early 2001, Captain Olenicoff would surrender an astonishing amount of control of quite a lot of money to a beguiling banker whose name he’d never heard until the phone rang in his Newport Beach office a few months prior: “The person on the other end says, ‘Hi, my name is Bradley Birkenfeld,’ ” he recalled.

Birkenfeld was with Barclays then, and Olenicoff had $200 million with the bank in the Bahamas, having started to move money offshore “as a safety measure” during the savings and loan crisis in the early ’90s.

It was an intriguing phone call, as Olenicoff tells it: After introducing himself, Birkenfeld said he had inside information about changes coming to Barclays Bahamas that would jeopardize Olenicoff’s accounts. Birkenfeld would be in California on other business and would be happy to explain further if Olenicoff was willing to meet.

Bradley Birkenfeld and Igor Olenicoff aboard Olenicoff’s yacht, the Rusalka, off the Belize coast. Birkenfeld is giving Olenicoff a gold Swiss cow bell as a gift. (Courtesy of Igor Olenicoff)


When Birkenfeld arrived in Newport, he told Olenicoff that Barclays was closing out its Bahamas business, information that wasn’t yet public: Olenicoff would have to move his money. Birkenfeld was moving, too, he told the billionaire – from Barclays to UBS, where Birkenfeld said he was being heavily recruited. When Birkenfeld formally joined UBS in 2001, he suggested to Olenicoff that he come along. “It dovetailed,” Birkenfeld told me (and then some, Olenicoff and his lawyers now allege).

At the time, the two hit it off. Birkenfeld impressed the older Olenicoff with his energy and intelligence. Olenicoff and his son, Andrei, soon flew to Geneva to hear more. Birkenfeld had recommended a plush hotel on the Rhône and met them in the lobby the next morning. They walked through town to a set of offices down the street from UBS headquarters, highly secure but unmarked but for a small plaque identifying it as belonging to the bank, Olenicoff recalled. A guard checked their briefcases, punched a code into the elevator pad and escorted them up. “This was sold with all the pizzazz and secrecy,” Olenicoff said. “It certainly wasn’t that way in the Bahamas.”

Birkenfeld left them with a senior UBS banker who took them for a sneak peek at the bank’s storied subterranean vault. “My son and I thought we were big shots,” Olenicoff said. He agreed to open an account, eventually for the full $200 million. It was “just a family nest egg” anyway, he said.

Birkenfeld became Olenicoff’s account executive. UBS bankers did business in person, keeping correspondence to a minimum to cover their tracks, and Birkenfeld made regular trips to the U.S. There were dinners at the Intercontinental in Miami Beach, the Montage in Laguna, the Balboa Bay Club in Newport, even a chance encounter with Hugh Hefner and his blond entourage at Mastro’s in Beverly Hills, Olenicoff recalled. On a couple of occasions, Birkenfeld joined Olenicoff and some of his friends on Olenicoff’s yacht, touring the islands off Honduras, exploring the jungle ruins in the interior, eventually jetting out from a Guatemalan military base where Olenicoff (somehow) had an arrangement to land his plane.

Birkenfeld (center front) with Olenicoff in Central America. On Birkenfeld’s right is Mario Staggl, a Lichtenstein trust manager who was indicted as his co-conspirator but remains free in Lichtenstein. (Courtesy of Igor Olenicoff)


Olenicoff said he eventually gave his UBS bankers and the brokers they worked with full control over his cash and securities accounts with an understanding that funds would be invested in the name of offshore corporate trusts rather than his own. The brokers, working with Birkenfeld and other UBS bankers, created various “structures” in Lichtenstein and Denmark along these lines. Olenicoff says they assured him (erroneously, at best) that income from the accounts wasn’t taxable until he repatriated it. “There’s this Swiss attorney there nodding his head,” he recalled. “It’s all very proper and precise -I mean, you feel you’re in the German Reichstag with all the generals there!” At the time, he said, the arrangement left him with an underlying “peace of mind.”

Peace from the tax police would have been great relief. Beginning in 1994 and continuing for years, the IRS had relentlessly audited Olen Properties, at one point insisting the company had hidden $330 million in one year alone, owing some $148 million in back taxes.

In the interview, Olenicoff said that he had never had trouble with the IRS for 25 years of Olen’s existence but that the IRS began auditing based on allegations by a former employee.  In the end, the government settled with Olen for $272,024 – “Pennies on the Dollar,” one headline read – but the IRS wasn’t done. Investigators turned their klieg lights on Olenicoff’s personal finances. “They audited and audited and audited,” he said.

The myriad civil investigations at IRS were finally settled in 2003. “I assumed everything was done and happy,” he said.

It wasn’t.

Close to 6 a.m. on a late May morning in 2005, more than 30 IRS criminal investigators swarmed Igor Olenicoff’s home, his son’s home and the offices of Olen Properties. The agents took everything: computers, correspondence, emails, bank statements and, critically, a lock-box with documents related to his foreign bank accounts.

Birkenfeld (front) drinks with Olenicoff’s party and Staggl, on his left. (Courtesy of Igor Olenicoff)


All over the documents, Olenicoff said, was the name of his UBS account executive, Bradley Birkenfeld. “Bradley had insisted that I destroy statements, but I didn’t.” There were also emails -plenty of them, according to Olenicoff – to and from the billionaire, Birkenfeld and other UBS officials and Olenicoff’s son, Andrei.

“Oh, shit,” was Birkenfeld’s reaction upon learning the IRS had taken the UBS records, according to Olenicoff. Not long afterwards, Birkenfeld flew over from Switzerland with one of his UBS superiors and met Olenicoff for lunch. “They exhibited concern for me,” said Olenicoff, who these days exhibits only contempt for his former banker.

“Bradley would like us to believe he suddenly found religion and became a whistle-blower. The fact of the matter is that he scammed me,” said the real estate mogul, who maintains that he fell for repeated assurances from Birkenfeld and other bank officials that all of UBS’s services were legal.




Olenicoff (standing), Birkenfeld (front left) and friends on Olenicoff’s yacht, the Rusalka, named after the sea nymph in the opera. (Courtesy of Igor Olenicoff)


Olenicoff refused to cooperate with prosecutors after the raid, leaving his lawyers to haggle with the government for more than two years. In December 2007, he plead guilty to one count of failing to declare his foreign bank accounts, and agreed to pay $52 million in back taxes, one of the largest individual tax cases in Southern California history. He faced up to three years in prison, but he wouldn’t serve a day.

Olenicoff’s lawyer told me there was no quid pro quo, but three months later, Olenicoff finally, voluntarily, began to cooperate with lawyers from the Department of Justice. They had burning questions about a former UBS bank manager named Bradley Birkenfeld.

Telling Swiss secrets: A triple-double cross






Part 4: UBS whistle-blower pays a high price for tipping off US investigators

Caption:  (Photo illustration from photograph by Gasper Tringale)

NEW YORK – On Oct. 5, 2005, high-flying American banker Bradley Birkenfeld abruptly resigned his plum position in the Geneva office of Switzerland’s premier financial institution, UBS. The sole reason, he said, was his discovery of an internal document that, in his mind, revealed a calculated plan on the bank’s part to disown him, or any one of his fellow cross-border bankers, should the music suddenly stop in UBS’ dubious $20 billion dance with America’s most wealthy.

The offending document was an internal brief from UBS Legal that cataloged cross-border banking activities illegal in the United States, where Birkenfeld and the other private bankers in UBS’ wealth management division routinely made regular prospecting trips for wealthy U.S.-resident clients.

The rub was that – point by point – the list of prohibitions contradicted the fundamentals of Birkenfeld’s job description: No establishing of business relationships “for securities purposes” the document read; no “solicitation of account opening” or “cold calling or prospecting;” and no contacting U.S. clients by “telephone, mail, email, advertising, the internet or personal visits.”

“I’m like, ‘Holy shit, this is a stick of dynamite!'” Birkenfeld said.

While it could hardly have come as a surprise to a sophisticated banker that aiding wealthy U.S. residents in shielding billions in offshore accounts and corporate shells skirted the law, to see the bank essentially disown that business in a formal document raised burning concerns. “It was a sandbag job,” Birkenfeld said.

Though the document was dated November 2004, six months prior to Birkenfeld’s discovery of it, none of the U.S. cross-border bankers had been told to stop what they were doing, Birkenfeld said. Quite the contrary: There were constant encouragements to book “new money” during the U.S. trips.

When Birkenfeld went to his boss and demanded an explanation, the boss brushed him off and Birkenfeld blew his stack. “I said, ‘I’ll fucking go outside with you right now. I want some answers and I want them now.'”

Birkenfeld continued to press the point in a series of terse emails addressed to Peter Kurer, the chairman of UBS, Martin Liechti, the head of UBS Wealth Management Americas International, and other UBS executives.

The bank, Birkenfeld suggested, seemed to be building an alibi for itself in the eventuality that an unlucky cross-border banker got caught.

Bradley Birkenfeld
(Gasper Tringale/GlobalPost)

Birkenfeld, in turn, may have used the document to create an alibi of his own, according to the timeline pieced together by prosecutors from the U.S. Justice Department years later.

“On or around” June 12, 2005, court records show – just five days before Birkenfeld sent his first angry memo to UBS management – Birkenfeld traveled to Liechtenstein to meet with his most important client, Orange County billionaire Igor Olenicoff, and a Liechtensteiner trust manager. The IRS had just raided Olenicoff’s home and businesses roughly two weeks prior, discovering incriminating documentation of Olenicoffs dealings with Birkenfeld and UBS. Together now in Liechtenstein, the banker, the billionaire and the trust manager agreed to move Olenicoff’s $200 million out of UBS to a Liechtenstein bank that could offer greater secrecy.

After Birkenfeld announced his resignation from UBS in October 2005, but before it became formal, he continued to pepper senior management with emails about the damning UBS legal memo, demanding that he be recognized as an internal whistle-blower. UBS chairman Peter Kurer responded on behalf of the bank, assuring Birkenfeld that UBS’ in-house general counsel would conduct “an independent investigation.” Kurer then instructed the general counsel to resolve an outstanding bonus dispute between Birkenfeld and the bank, documents show. Birkenfeld received 575,000 Swiss francs (about $535,000) in the out-of-court settlement.

But if Birkenfeld’s UBS bosses thought he would go quietly, they were wrong. Instead, he would gather a raft of damning UBS internal documents and fly to Washington, where he’d secretly arranged to meet with prosecutors from the U.S. Department of Justice.

The question is why? He could have stayed put and lived happily ever after in the shadow of the Alps. What was waiting for him in Washington?

Potentially, a pile of cash a whole lot bigger than his 575,000 Swiss franc settlement from UBS.

American law first recognized the unique power of informants to expose major fraud in 1867, when Congress gave the Treasury Secretary discretion to pay rewards to anyone with actionable information about “persons guilty of violating the internal revenue laws or conniving at the same.”

The IRS has since built some of its highest-return tax fraud cases on insider information – but until recently the Informant Rewards Program at IRS was a mess. It was decentralized and discretionary. Good tips slipped through the cracks. Good cases got lost. Whistle-blowing was a crapshoot at best.

That changed, at least on paper, in December 2006 when congress and President George W. Bush sent whistle-blower incentives sky high, creating a centralized Whistleblower Office at the IRS as part of the Tax Relief and Health Care Act.

Under the new law, an informant would collect 15 to 30 percent of any sum recovered as a result of his or her information. When you consider that the U.S. Treasury loses up to $100 billion a year in offshore tax fraud alone, 15 to 30 percent of a big fraud case can mean massive money. Also, under the new law, an informant’s involvement in the fraud, formerly a disqualifier, is no longer an obstacle to a reward. In short, the IRS’ new Whistleblower Office was designed to attract the Bradley Birkenfelds of the world.

It’s not clear DOJ’s tax division got the memo. In the spring of 2007, three months after Bush signed the new law and just prior to Birkenfeld’s first meeting with prosecutors, Birkenfeld’s attorneys in Washington sought assurances from the government that their client would be protected in exchange for his proffer. Instead, the lead DOJ tax division lawyer Kevin Downing and his colleague, Karen Kelly, set a surprisingly pejorative tone in an email exchange with Birkenfeld’s then attorney, David Dickieson.

Kelly: “You should know that based on the information you have disclosed to date, we consider your client a tipster, not a whistle-blower. Allegations won’t carry the day, by a long stretch. [There are specific laws that protect “whistle-blowers” but do not recognize any protection for ‘tipsters.’]”

Dickieson: “Karen – Call our client a ‘tipster’ or ‘whistle-blower’ or whatever you wish at present, but don’t minimize the importance of the information that our client is about to give the government. This is a ‘once in a career’ case for the lucky government attorneys willing to follow up on the hard leads that our client is prepared to provide.”

Kelly: “Just what I need, a ‘once in a career case!!'”

It was a clear warning shot to be ignored at one’s peril, say attorneys familiar with the way Downing ran his cases.

A veteran prosecutor – a New Yorker known for playing hardball – Downing looks as Irish as his name suggests: “Tall, dark and handsome,” said one former adversary, who quickly added “bully, snide, insulting and dismissive” to round out the list. Karen Kelly is cast of the same mold, said several attorneys who have faced her: tough with “a grating personality.”

Full immunity was a non-starter until Birkenfeld showed his cards, the prosecutors said.

Birkenfeld rolled the dice, leading Downing, Kelly and a special agent from IRS Criminal Investigation through his trove of UBS documents over three marathon sessions at DOJ headquarters in Washington in June 2007. The cumulative picture that emerged was one of a rogue division within one of the world’s biggest banks not only blatantly breaking U.S. law, but actively covering its tracks.

Birkenfeld wanted to help prosecutors catch them in the act. He provided a phone and email list for  the Geneva-based cross-border bankers and senior management who traveled to the U.S. in service of the alleged fraud. Mapping their travel to the United States and the clients they met with was a matter of a few wire-tap warrants, Birkenfeld suggested. He says he offered to travel to Switzerland, meet his old bosses and wear a wire to gather evidence.

His enthusiasm rubbed the DOJ lawyers the wrong way. “Downing said to me, ‘You watch too much TV, Brad – that’s Hollywood,'” Birkenfeld recalled. “I was telling the DOJ how to do its business, and they fucking hated that.”

As tension mounted, Birkenfeld’s attorneys sought immunity from future prosecution with increasing urgency, but the government suddenly moved the goalposts further down field. The insider detail Birkenfeld was providing about the wider scheme was invaluable, but Downing wanted more: The names of all of Birkenfeld’s clients. But there were some secrets Birkenfeld wasn’t prepared to disclose, and that’s where it all came crashing down.

Telling Swiss secrets: A reversal of fortune

Part 5: As a whistle-blower is jailed, UBS – perpetrator of a massive tax fraud – gets a backdoor bailout

(PDF Version)

Caption:  Bradley Birkenfeld walks to his car before surrendering to authorities at the Schuylkill County Federal Correctional Institution in Minersville, Pennsylvania, Jan. 8, 2010. (Tim Shaffer/Reuters)

NEW YORK – Bradley Birkenfeld had walked into a bear trap.

The former UBS bank director had offered himself up as a whistle-blower to prosecutors from the Justice Department’s tax division and, over the course of several sessions in Washington, provided damning evidence that Switzerland’s biggest bank had subverted U.S. tax laws and allegedly defrauded the U.S. government in a long-running conspiracy earning UBS upwards of $200 million a year.

It was by far the biggest tax case the prosecutors had ever seen. But now they were asking questions Birkenfeld wasn’t prepared to answer. The DOJ’s lead prosecutor, Kevin Downing, wanted names – Birkenfeld’s full client list – all the millionaires and billionaires the banker had helped set up secret Swiss accounts.

Revealing his clients’ identities was against the law, Birkenfeld told the U.S. prosecutor – against Swiss law, specifically the Swiss Banking Law of 1934 codifying bankers’ “professional rule of secrecy.” As a banker registered and resident in Switzerland, Birkenfeld risked jail in Switzerland if he betrayed his clients trust, he told Downing.

Downing accused Birkenfeld of playing games. Later, as the case exploded onto a far bigger playing field, Swiss President Hans-Rudolf Merz and Foreign Minister Micheline Calmy-Rey would invoke the same Swiss secrecy laws in negotiations with U.S. Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton, with just as little success.

Downing saw in Birkenfeld nothing more than an overly clever informant trying to blow the whistle to his own tune. And that is when the music stops with the Justice Department.

Birkenfeld and his lawyers say they offered a simple solution: If the DOJ gave Birkenfeld the cover of a subpoena, he could show the Swiss government he had been compelled to give up the names.

“It never made any sense why they didn’t do that,” said Dean Zerbe, a member of Birkenfeld’s legal team and a former investigator and tax counsel for the Senate Finance Committee, which gave countless witnesses the cover of friendly subpoenas as a matter of course during Zerbe’s 25 years in Congress. (The Justice Department refused several interview requests for this story.)

Instead, beginning in late 2007, Downing began secretly investigating his own whistle-blower. The trail would lead him to Orange County, and the offices of a billionaire real estate mogul who was more than willing to fill in the blanks. Igor Olenicoff, formerly Birkenfeld’s golden goose, would become Downing’s.

On March 12, 2008, Downing and his team of government investigators flew to California for a secret meeting. Olenicoff had barely welcomed them into his office when Downing threatened him: “Don’t bullshit us,” said the prosecutor to the billionaire, by the latter’s account. “I’ll come down hard on you if you try.”

Olenicoff agreed, and then gave Downing an earful about Bradley Birkenfeld.

When Birkenfeld boarded a flight for the U.S. two months later, he had no idea that Olenicoff had turned evidence against him. (He would learn of the California meeting for the first time from me during a follow-up prison interview with him this February).

And he did not know that Downing had filed a sealed indictment against him based on Olenicoff’s information. He boarded his usual Geneva-Zurich-Boston flight still hoping to salvage his whistle-blower relationship with the U.S. government, planning to travel on to Washington after attending his 25-year high-school reunion.

There were two Department of Homeland Security officials waiting on the jetway in Boston when he arrived, checking passengers’ passports as they disembarked. The photo in Birkenfeld’s shows him smiling and relaxed. As a female DHS official looked up from the picture to the man, Birkenfeld’s heart sank. “She said, ‘Oh, there is something wrong with your passport,’ and I just said, ‘Oh, whatever, fuck, it’s over.'”

The arrest wasn’t a total surprise, Birkenfeld told me. The week before, UBS Wealth Management Americas International chief Martin Liechti, formerly one of Birkenfeld’s superiors and purportedly complicit in the fraud (as Birkenfeld had documented in detail for the DOJ), had been handcuffed and marched out of the transit terminal in Miami while changing planes en route to South America, detained as a material witness in a then-unspecified DOJ investigation.

“I could have just stayed in Switzerland,” Birkenfeld reflected in our interview. “The DOJ was just playing such hardball, but what am I going to do? I was coming forward as a whistle-blower. I wasn’t trying to hide.”

Birkenfeld spent the night in a local jail near the airport and was arraigned in federal court in Boston the next morning on one count of criminal conspiracy to defraud the U.S. government.

Birkenfeld would eventually plead guilty. In addition to helping Olenicoff evade $7,261,387 in taxes, Birkenfeld admitted to advising clients on all sorts of tactics to conceal their undeclared accounts, accepting “bundles” of checks from U.S. clients for deposit into Swiss, Liechtenstein and Danish banks and, on one occasion, buying diamonds for an American client and transporting them to the U.S. in a toothpaste tube.

The judge sentenced him to 40 months, the longest prison sentence by far for anyone associated with this case. UBS agreed to pay $780 million to avoid prosecution, admitting it fostered tax evasion from 2000 to 2007 and consenting to turn over the names of some 4,500 U.S.-based clients, a transfer which was approved in June by the Swiss parliament. Olenicoff plead guilty to filing a false tax return and received two years of probation and paid $52 million in back taxes and penalties. (He is currently suing Birkenfeld and dozens of other UBS executives in a sweeping civil action.)

By all accounts, it is extremely rare for the Justice Department to indict a valuable informant, and immunity has been granted to witnesses implicated in far more serious crimes than Birkenfeld’s (hit men, mobsters and members of the Manson Family, to name a few). Given the massive scope of the UBS fraud, why the government would arrest a whistle blower who came forward voluntarily remains a puzzle, for many observers of the case, even after Downing explained his reasoning in court.

Bradley Birkenfeld had tried to play the DOJ, Downing explained in court. Having discovered that Birkenfeld had helped move Olenicoff’s $200 million from UBS to a less conspicuous Liechtenstein bank before resigning from UBS, Downing accused Birkenfeld of a bold scheme to continue the lucrative relationship with Olenicoff even as he courted the Justice Department as a whistle-blower seeking a huge IRS reward.

If true, Birkenfeld would be the most audacious would-be whistle-blower ever to present himself in Washington, or the stupidest.

The rub is that at the same time Downing and his team say they were secretly investigating Birkenfeld’s hidden agenda – in late 2007, after Birkenfeld refused to give up his client’s names without a subpoena – Birkenfeld was sitting at a conference table in the bowels of the Russell Senate Office Building with Senate investigators talking about Igor Olenicoff by name and under oath.

The meetings took place in October and November 2007, on Birkenfeld’s initiative, seven months before his arrest and before he had any inkling he was under investigation: When the DOJ refused to give Birkenfeld a subpoena that June, he’d simply crossed the capital looking for someone who would. He’d found the Senate Subcommittee on Investigations more than willing.

Birkenfeld’s Senate testimony about UBS headlined two days of riveting hearings held the following summer, and his trove of documents figure heavily in the subcommittee’s 1,200-page report.

The Senate also subpoenaed live testimony from the UBS wealth management chief, Martin Liechti, Birkenfeld’s superior, who had been held as a material witness since his arrest in the Miami airport months before. Liechti arrived at the hearings with a suntan; with no house in the U.S. in which to remain under house arrest, the Justice Department had agreed to confine him to the Four Seasons. On the advice of his attorneys, Liechti pled the 5th at the Senate hearings. The Justice Department then allowed him to return to Switzerland a free man. By all appearances, Liechti had been granted immunity – an inequity that keeps Birkenfeld up in his cell at night.

“They had never been able to crack this nut and I did it. I educated them,” he railed when I visited him in prison recently, dissing Downing and his DOJ team. Birkenfeld then suggested something more subtle: “I fucked so many politically powerful and wealthy people with this maneuver,” he said. “I was a whistle-blower, and they fucking hate that.”

Of all those who admitted complicity in what became the biggest tax fraud case in the country’s history – from UBS and its executives to Igor Olenicoff and nearly 15,000 other U.S.-based tax offenders, most former UBS clients, who avoided prosecution through an IRS-sponsored amnesty program initiated after the UBS revelations – the view from Birkenfeld’s jail cell is understandably jaundiced.

Relying heavily on Birkenfeld’s evidence, the DOJ threatened to bring criminal charges against UBS unless it turned over the names of thousands of U.S.-based clients holding undeclared accounts. Prosecutors had the bank over a barrel. UBS earns between 30 and 40 percent of its total annual revenue through its regular U.S. operations; if UBS lost its U.S. banking and brokerage licenses, the bank would collapse, and likely the Swiss economy along with it.

But the Swiss had a strong position for the same reasons. UBS employs more than 23,000 people in the U.S., with some 4,000 in Connecticut alone. The bank’s brokerage division serves more than two million U.S households, with more than twice as many UBS financial advisors based in the U.S. (some 7,300) than the bank has in the rest of the world combined. In the middle of the economic crisis, there was no way the Obama administration was going to kill UBS: The bank was too big to fail.

Despite its long-running criminal conspiracy to defraud the U.S. government, UBS, one of the banks hardest hit in the subprime mortgage crisis, received $5 billion in a backdoor bailout through AIG, which honored some of its policies.

Salvaging UBS’ reputation was another story. The bank shuttered Birkenfeld’s division and shed its entire staff – between 40 and 60 private bankers and senior management. The bank also appointed a new chairman and CEO, Oswald J. Grübel, who set out to reassure skittish clients.

“Mr. Grübel has said repeatedly and emphatically that compliance failures like this will not happen again,” UBS spokeswoman Karina Bryne told GlobalPost. “We have definitely lost clients due to reputational issues,” she admitted, “but those outflows have slowed and we are working very diligently toward positive net new money.”

Last August, just three days after Birkenfeld was sentenced and five days after the U.S. and Swiss governments agreed to a settlement, President Barack Obama played 18 holes at Martha’s Vineyard’s Farm Neck Golf Club with the UBS Group Americas chairman and CEO, Robert Wolf, one of the top donors to his campaign and a member of the president’s economic recovery advisory board. UBS officials insist the bank’s U.S. offices had no knowledge of the Swiss-based fraud, despite Birkenfeld’s sworn testimony that UBS Americas coordinated the lavish marketing events in the U.S. for Swiss private bankers and their U.S. clients.

Obama’s sweeping financial regulatory overhaul, signed into law in July, contains a strong nod to whistle-blowers, granting the SEC authority to pay rewards up to 30 percent of monetary sanctions, like the IRS bill, no matter whether the whistleblower is involved in the misconduct. The SEC has already paid a $1 million reward – good news for whistle-blowers, if not for Bradley Birkenfeld. His June appeal to Obama to commute his sentence of 40 months has so far gone unanswered.

Birkenfeld, who went from managing hundreds of millions of dollars in investments, now mops floors in prison. But as he does, he just can’t – and won’t – let go of the idea that someday he’ll get back what he believes he’s owed. His lawyers have filed a claim with the IRS Whistleblowers Office seeking his share of the recovered monies from the case – “at least several billion dollars,” they say.

If that seems unseemly, Bradley Birkenfeld couldn’t care less.

“I am going for a reward, and rightly so,” Birkenfeld said. “I’m invoking my rights under federal law, you have a problem with that?”

Global Post
August 5, 2010
By Michael Bronner

Michael Bronner, a New York-based investigative journalist, previously worked for the weekday edition of CBS News/60 Minutes. He has been a freelance contributor to Vanity Fair since 2005. A screenwriter, producer and director, he was also a co-producer on the Universal Pictures/Working Title feature film “Green Zone” about Iraq and an associate producer on the Oscar-nominated “United 93.”

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