Banker Who Blew Whistle Over Tax Cheats Seeks Pardon
Sleeping in a bunk bed in a dormitory-style building with 35 other inmates is far from the reward Birkenfeld says he deserves for exposing a massive tax-evasion scandal at UBS, the biggest Swiss bank. He told U.S. authorities how UBS bankers came to the U.S. to woo rich Americans, managed $20 billion of their assets, and helped them cheat the Internal Revenue Service.
Birkenfeld, 45, has asked President Barack Obama to commute a 40-month term he began in January at Schuylkill Federal Correctional Institution for his part in the conspiracy. He is seeking payment from the IRS whistleblower program and wants the U.S. Department of Justice to punish prosecutors who wouldn’t grant him immunity before his 2008 indictment and guilty plea.
“I delivered and documented this entire scandal, the largest in U.S. history,” Birkenfeld said in one of two prison interviews with Bloomberg News. “I’m the most famous whistleblower in the history of the world. It’s a question of doing the right thing, and that’s what I did.”
His disclosures preceded UBS’s decision to pay $780 million to avoid prosecution, admit it fostered tax evasion from 2000 to 2007, and turn over data on 250 secret accounts to the IRS. UBS later agreed to reveal data on another 4,450 accounts, a transfer upheld last week by the Swiss Parliament. For lifting the veil on Swiss bank secrecy, Birkenfeld said, he’s a hero, not a criminal.
Prosecutors filed criminal tax charges against 16 UBS clients in the U.S., two UBS bankers, and three others accused of enabling the hiding of offshore assets. At least 150 other people are being investigated, according to the Department of Justice. Last year, 15,000 Americans sought to avoid prosecution by telling the IRS about offshore accounts.
Downing told a U.S. judge last August that, while prosecutors wouldn’t know about the “massive tax scheme” without Birkenfeld, he deserved 30 months in prison for initially refusing to detail his own role in the fraud and for not revealing his work with Olenicoff. Birkenfeld, Downing said, also wasn’t useful as a witness. The judge gave Birkenfeld 40 months.
Olenicoff, a real-estate developer who pleaded guilty in December 2007 to filing a false tax return, got two years of probation and paid $52 million in back taxes and penalties.
He sued UBS, Birkenfeld and others for racketeering. Olenicoff, who declined to comment, claims in his lawsuit that Birkenfeld defrauded him by investing some of his $200 million in thinly traded stocks without his knowledge.
Birkenfeld said he spends his days reading, exercising and talking to other white-collar inmates at his prison camp without bars. A neurosurgeon’s son from Brookline, Massachusetts, Birkenfeld is 6-feet 4-inches, weighs 220 pounds, and has piercing blue eyes framed by a goatee and a high hairline.
A U.S. citizen, he attended the Thayer Academy in Braintree, Massachusetts, and then Norwich University, a military college in Northfield, Vermont. He then got a master’s of business administration at the American Graduate School of Business in Vevey, Switzerland.
Before spending 15 years in Swiss banking, Birkenfeld worked as a currency trader at State Street Bank & Trust Co. in Boston. His said his whistle blowing began there.
While at State Street, he said, he went to the Federal Bureau of Investigation to report what he considered illegal activity in 1994. The FBI investigated. No charges were filed.
Birkenfeld said he was offered a full-time job at the Boston office of the FBI. A former law enforcement official with knowledge of that relationship said that while Birkenfeld gave useful information to the bureau, he was not offered a job.
He then worked in private banking at Credit Suisse Group AG and Barclays Plc before joining UBS in 2001. He persuaded Olenicoff to move his assets to UBS from Barclays.
Birkenfeld was one of as many as 60 UBS bankers who criss crossed the U.S. trolling for rich clients, even though they lacked a required Securities and Exchange Commission license, he later told U.S. Senate investigators. They visited art shows, yachting regattas and golf and tennis tournaments, he said.
UBS trained bankers to avoid detection by regulators, urging them to carry encrypted laptop computers and falsely state on travel forms that they were entering the country for pleasure, not business, he said. The bank admitted it helped clients circumvent U.S. securities restrictions by referring them to outside advisers who set up sham companies in tax havens such as the British Virgin Islands, Hong Kong and Panama.
By 2005, Birkenfeld said, he was blowing the whistle again. He sent a memo to his superiors at UBS about a “very serious matter” regarding his compliance with UBS policies. He sent similar e-mails to top executives in the legal and compliance departments.
In October 2005, he resigned. Five months later, he wrote to Peter Kurer, then UBS’s general counsel, to say top management “actively encouraged” practices “forbidden” by the bank, according to the letter. The bank later reached a severance agreement with Birkenfeld over a disputed bonus, he said.
UBS spokeswoman Karina Byrne declined to comment.
Asked if he ever doubts himself, Birkenfeld said: “Absolutely not. I’m very sure of myself. I’m well educated and well traveled, and I think it’s important to understand that if I take on a mission, I’m going to see it to the end. I’m not going to be intimidated by the DOJ or UBS management.”
When Birkenfeld decided to tell the Justice Department and IRS about UBS, he hired a Washington law firm, Schertler & Onorato LLP. Birkenfeld sought an IRS whistleblower award that allowed informants to be paid as much as 30 percent of tax proceeds collected based on their information. The IRS won’t disclose how much additional revenue it has reaped since the UBS crackdown.
On March 28, 2007, an attorney at the firm, David Dickieson, e-mailed a tax prosecutor, Karen Kelly, to say he had a client with a “once in a career case.” Three weeks later, he and partner David Schertler wrote a memo to prosecutors.
They identified their client only as the “Salesman,” and said he worked at a large financial institution called “the Vault.” The institution offered services to “extremely wealthy” clients who didn’t declare their accounts to the IRS, they told the agency. They referred to one client as Slick the oil trader, saying he had more than $100 million in assets.
Prosecutors agreed to take Birkenfeld’s information in a session called a proffer, at which his statements couldn’t be used against him unless he lied. Birkenfeld wanted immunity. Prosecutors declined, saying they had to hear his story and corroborate it before they could agree to not charge him, Birkenfeld said.
Over three days in June 2007, Birkenfeld gave prosecutors details of how the UBS cross-border business helped rich Americans evade taxes, he said. He said he gave them the identity of Slick, a client of another banker. Birkenfeld said he couldn’t provide other names without immunity or a subpoena because of Swiss law forbidding disclosure of client information.
“They told me they wouldn’t prosecute me,” Birkenfeld said. “Kevin Downing told me that in the first meeting. They refused to give me a subpoena or immunity until they saw that I was the real deal, as they said. They kept changing the rules of the game and said ‘We won’t give you immunity.’”
Prosecutors had “an easy way to solve” Birkenfeld’s dilemma, said one of his current attorneys, Dean Zerbe.
“Why didn’t they just give him a subpoena so he would speak?,” Zerbe said.
Birkenfeld said he returned to Switzerland and continued to provide documents to prosecutors as they probed his claims. By late August 2007, Dickieson e-mailed prosecutors to say UBS suspected Birkenfeld was talking to investigators, putting him “truly at risk” because the case was “threatening some very powerful people.”
Downing and Kelly weren’t budging on immunity. They wrote to Dickieson on Sept. 6, 2007, to say Birkenfeld “terminated his proffer with the Tax Division regarding alleged criminal conduct” at UBS. They said they declined to grant immunity and could continue the proffer if Birkenfeld chose to do so.
Downing was a lead prosecutor in the indictment of 19 defendants in the largest criminal tax-shelter case in U.S. history, including 17 former partners and employees at KPMG LLP. In 2007, a U.S. judge dismissed charges against 13 defendants, saying prosecutors violated their constitutional right to counsel by pressuring KPMG not to pay their legal bills. The judge said prosecutors were following Justice Department policy at the time. Three defendants were convicted at trial.
Birkenfeld said he lost faith in the Department of Justice and decided to speak to the Senate Permanent Subcommittee on Investigations and its chairman, Senator Carl Levin, a Michigan Democrat.
That fall, the Senate committee gave Birkenfeld the subpoena he sought, and he gave investigators his story and client details, including those on Olenicoff. He also spoke to investigators from the IRS and the SEC.
“Everybody but the DOJ was friendly to me,” Birkenfeld said. “I just felt they were being so stubborn and then they were trying to make me out to be the bad guy when I was trying to help them. I didn’t break off the proffer. They failed to live up to their end of the bargain.”
Downing said Birkenfeld’s lawyers insisted he wouldn’t continue talking to prosecutors without immunity.
“He decided to not take advantage of the opportunity that was offered and tell us about his own involvement in the UBS tax fraud scheme,” said Downing, 44, a senior trial attorney who led the UBS prosecution. “He particularly failed to tell the Department of Justice about his involvement in offshore banking for Igor Olenicoff.”
Immunity, he said, starts with the proffer agreement.
“You only get immunized for the crimes you tell us about,” Downing said. “But you have to tell us about them. Had he told us the truth about his involvement, in all likelihood he would have been given immunity.”
The standoff continued into early 2008, when prosecutors secured an indictment of Birkenfeld from a federal grand jury in Fort Lauderdale, Florida. He was arrested in April 2008 at Boston’s Logan International Airport as he flew from Geneva for a high school reunion and meetings with Senate investigators and the SEC.
Birkenfeld helped prosecutors before pleading guilty two months later. At his plea, Birkenfeld said UBS made $200 million a year handling $20 billion in assets. He said he toted customer checks to deposit in European banks, and bought diamonds for a client, bringing them to the U.S. in a toothpaste tube. In an interview, Birkenfeld said the client wasn’t able to travel.
“I wasn’t smuggling them,” he said. “I was just bringing them.”
In the summer of 2008, prosecutors held the head of the cross-border banking business, Martin Leichti, on a material witness warrant and debriefed him over four months. By February 2009, UBS lawyers were in court admitting the bank’s wrongdoing to avoid prosecution.
At Birkenfeld’s sentencing, Downing said Olenicoff would have been in jail had Birkenfeld told the truth about him. Downing also said he told Birkenfeld’s lawyers that he would seek a court order compelling him to disclose client information, which would give him protection from prosecution in Switzerland.
Birkenfeld said Downing lied on several fronts at that hearing before U.S. District Judge William Zloch. Downing said: “I’m a federal prosecutor speaking to a district court judge. The truth is what we deal in.”
Birkenfeld said Schertler & Onorato, the first of three law firms he hired, engaged in legal malpractice.
“Clearly, they made representations to me that were false that I was going to get immunity, and they had great contacts in the DOJ,” Birkenfeld said. “That was the whole reason why I retained them from the outset.”
The firm declined to comment. Birkenfeld wouldn’t discuss whether he may sue the firm.
Andrew Ames, a spokesman for the Justice Department pardon attorney, said Birkenfeld’s application is under review and he couldn’t comment further. IRS spokesman Dean Patterson said he couldn’t discuss the case of Birkenfeld or any other individual.
U.S. law allows the IRS to reward whistleblowers after a confidential administrative review of their application. It may deny or reduce awards if a whistleblower “planned and initiated” tax cheating.
Birkenfeld’s case is being watched closely by other whistleblowers and their lawyers, said Washington attorney Erika Kelton of Phillips & Cohen LLP.
“He is obviously a very important whistleblower and a controversial figure, so people are very interested to see what the IRS does in this case,” Kelton said.
Birkenfeld said that if he gets the IRS whistleblower award, he hopes to set up a nonprofit foundation and do charitable work in India and the Philippines, two countries where he has traveled extensively. He said that when he leaves prison, he intends to live in Europe or Asia. Birkenfeld said he “walked away” from a $1 million house in Zermatt, Switzerland, after his arrest.
“I don’t trust my government,” he said. “That’s why I lived in Switzerland for 15 years. How could I possibly trust our government after what I’ve been through? I have no desire to live in a country that treats its people this way.”
The case is U.S. v. Birkenfeld, 08-cr-60099, U.S. District Court, Southern District of Florida (Fort Lauderdale).