Turns Out Crime Can Pay

9/21/2012

Back when you were a little kid, Mom and Dad warned you that crime doesn't pay, but it turns out that it can – at least for one felon-turned-whistleblower. News broke last week that the IRS would be paying former banker Bradley Birkenfeld a $104 million award for his insider information on the shady dealings of Swiss bank UBS. So who is Birkenfeld, and what kind of dirt did he dish up to get $104 million?  

In 2001, Birkenfeld began working at Switzerland's biggest bank, UBS. His job was to solicit American depositors, 90% of whom he said were trying to evade taxes. His main duties included schmoozing clients at UBS-sponsored events. But he also helped clients create shell companies to hide ownership of their accounts, shredded documents recording transactions in their accounts, and once even smuggled a pair of diamonds through U.S. Customs in a tube of toothpaste.  

By 2005, Birkenfeld experienced an attack of conscience. He approached his superiors at the bank to complain about "unfair and deceptive" business practices. When those complaints went nowhere, he took his story to the U.S. government. He originally sought immunity for his own role in any crimes, but wound up pleading guilty to a single count of conspiracy to defraud the United States. He spent 2.5 years in prison before moving to a halfway house, and he's scheduled to be released for good on November 29.  

When he is released, he will be re-entering society with a parting gift most felons don't enjoy. Under the IRS Whistleblower Program, which rewards qualified whistleblowers based on funds recovered by the IRS, Birkenfeld will be receiving the largest whistleblower award in the history of the program. While it’s not quite the 30% the whistleblower law allows (estimates suggest the IRS will be recovering more than $5 billion in taxes after the fallout), the award works out to $4,600 for every hour he spent behind bars. After taxes and his lawyers’ share, Birkenfeld will walk away with quite the nest egg.   

In explaining their decision, the IRS pointed out the magnitude of Birkenfeld’s information and its impact in the financial and banking community. UBS paid $780 million in fines and ratted out their 4,700 biggest American clients, and that was just the tip of the iceberg. Nearly 35,000 Americans have taken advantage of special IRS amnesty programs, resulting in payment of the $5 billion in back taxes mentioned above.  

Birkenfeld wasn't the first guy to tell the IRS that rich Americans were using Swiss banks to cheat on their taxes. But he was the first to document it so devastatingly, and he was the first to offer evidence that the bank itself encouraged illegal behavior. The IRS said, "While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS.”  

Naturally, after the award was announced, a gold-rush of whistleblowers sprung forth. Time will tell whether the Birkenfeld award will have an even larger influence on banking, investing, and tax planning practices and result in even more drastic changes in the financial community.