UBS Whistleblower Finds Himself in Federal Prison

http://www.cnbc.com/id/41257962

by rmah • 15 years ago

209 110 15 years ago

eftpotrm3• 15 years ago

While this seems a strange way to encourage whistleblowers to come forward, for perspective -

http://www.nytimes.com/2008/06/20/business/20tax.html

Mr. Birkenfeld pleaded guilty to helping Mr. Olenicoff evade $7.2 million in taxes on $200 million in hidden offshore assets. Mr. Birkenfeld will be sentenced in August. Mr. Olenicoff pleaded guilty last year to filing a false 2002 tax return.

http://en.wikipedia.org/wiki/Brad_Birkenfeld

"With regard to whistleblowers: those who seek to be treated as true whistleblowers need to know they must come in early and give complete and truthful disclosures.... Mr. Birkenfeld did not come in and give complete and truthful disclosures. Therefore, he is not entitled to whistleblower status."

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

Zloch, who didn’t explain his reasoning, could have given Birkenfeld a maximum five-year term. Prosecutors had noted that Birkenfeld didn’t initially reveal his role in the scheme when he first came forward as a whistleblower.

barrkel6• 15 years ago

The earlier a whistleblower comes in, he will both be (a) less implicated in whatever dirty business was going on, and (b) he will have less valuable information.

In effect, such rules help conspirators, because they can use it against one another: if you break the conspiracy, the US govt will use your lateness in coming forward, and your compliance with the conspiracy up to date, against you.

eftpotrm3• 15 years ago

To repeat the quote:

Late as he came forward, if it had been the truth, the whole truth and nothing but the truth, he would have been entitled to whistleblowing protection. It wasn't, which is why he's in prison, but was of value which is why he's doing less time than he could have been.

tedunangst2• 15 years ago

Unrelated, but the case of http://en.wikipedia.org/wiki/Mark_Whitacre is also interesting.

lionhearted7• 15 years ago

I've got a perspective here that will likely run contrary to the dominant view, but I encourage you to think about for a moment -

I'm of the belief that the ability to keep your work, voluntary exchanges, and assets private contribute to a free society in the same way that attorney/client privilege, priest/community, and spousal privilege all exist.

Now, in the United States, we don't have that and people know that and live with that. But people doing business in Switzerland are under the impression that they have a very private, safe relationship with their banker, the same way you'd have with your lawyer, psychiatrist, priest, or spouse. This man breaching that is doing a very serious thing.

This goes beyond politics. When you have a private relationship with a professional, sanctioned by the local law, that says that you have private confidence and that's betrayed... that's serious. If you don't believe in the Swiss banking system, not working there is acceptable. Protesting it is acceptable. Taking on a fiduciary duty of loyalty and confidence, and then breaching it... that's serious.

The average American might not think this way, because they don't have a private relationship with their banker. But generalize this to all duty - this man pledged duty, people were under the impression that he had a duty of confidence to them, and he breached that. This doesn't get into right/wrong, but it's something worth thinking about.

DevX101• 15 years ago

>"When you have a private relationship with a professional, sanctioned by the local law"

This isn't about local Swiss law. The clients broke U.S. law.

lionhearted7• 15 years ago

> This isn't about local Swiss law. The clients broke U.S. law.

He was a banker in Geneva. He broke Swiss law to disclose to the U.S. government.

(Now the discussion becomes if it's okay to break Swiss law to protect American law, which I don't have a position on... hence, "this doesn't get into right/wrong, but is worth thinking about")

cletus3• 15 years ago

Actually, the fact that a disgruntled tech can who exposes secret bank accounts to governments [1] gives me a lot of faith that secrecy will inevitably be broken where it actually matters.

It's this same reason that allows us to dismiss such laughable conspiracy theories as the faked Moon landings, aliens at Roswell and so on.

Let's not forget that many use these Swiss bank accounts for practices that vary from the questionable (eg evading taxes illegally) to the nefarious (eg hiding assets for the Nazis and various dictators).

[1] http://abcnews.go.com/Blotter/t/story?id=5378080&page=1

lionhearted7• 15 years ago

Or hiding money from the Nazis... secrecy is agnostic, but the ability to keep your affairs private lends protection to people who get unfairly persecuted. When a benevolent government knows everything about you, that's fine until they start acting non-benevolently...

barrkel6• 15 years ago

Taxation is at the heart of what makes the state possible, and it's the state, as a guarantor of justice and peace, which makes creating and keeping wealth possible. The wealthy benefit more from this arrangement, and it's fair that they are taxed more as a result. I presume you're not arguing against the existence of the state, or the need for taxation for its upkeep.

Given the need for taxation, making taxation fair requires information about economic transactions. But there's a balance to be struck here: having the state be informed about the details of every transaction, tied to each individual, would probably be too dangerous for liberty. But on the other hand, lack of oversight will lead to evasion and free-riding. So it seems that it's best to put effort in investigation in proportion to detecting potential free-riders.

Large amounts of money held in opaque arrangements abroad would seem to me to have a high probability of abuse; and with the numbers of people involved being small, the instrumental loss of liberty in having these arrangements investigated seems to me small compared to the free-riding risk.

I also object to the argument you've used; it gives me a slimy feeling reading it. You've tried to drag in this notion of privacy and respect by association with "professionals", attorneys, priests and spouses (!), to what amounts to hired thugs protecting a box of valuables. Banks spend a lot on appearances because they need to give their customers the impression that they're safe places for their customers' money, but at the end of the day, they're out to extract as much of that money as they can. Banking isn't a respectable business, particularly these days. They're a necessary part of the economic infrastructure, a bit like water supply and sewers are to cities.

pragmatic2• 15 years ago

Could a system such as a national sales tax, provide privacy _and_ revenue at the same time?

We need to collect data b/c the gov't has to know about your income, your investments, etc, etc. But how about a (hypothetical) system where you only pay taxes when you purchase goods. There wouldn't seem to be any fundamental reason to keep information on _who_ purchased what. Just the fact that the transaction occurred.

lionhearted7• 15 years ago

I thought this was a balanced and nuanced comment until you bring up "a slimy feeling" and "hired thugs", which is probably not conducive to clear and rational discussion.

That said, it's certainly possible to run an orderly taxation system with information that's publicly available - the more you require people to report their affairs to the authorities, the more chance of abuse you have. I'm personally of the belief that the sanest form of taxation is taxing assets held in a jurisdiction - then you're paying directly for what's protected. So tax property, and owned stocks and bonds perhaps. If you need someone to report all the money they have outside of your jurisdiction, everywhere, well I think that gets kind of scary.

Anyways, good discussion - armed thugs doesn't make for smart conversation, but good analysis overall.

pmjordan2• 15 years ago

There's a simple solution to the tax problem: charge a flat tax rate on gains on "secret" assets, levied by the financial institutions to which they have been entrusted. Many countries do this (I'm fairly sure Switzerland is among them) [1]. A problem only arises when the home country gets greedy and wants a piece of that tax pie. I'm sure you could come up with some system by which the destination of the money is estimated and the aggregate taxes paid to that country, but that's probably not seen as enough.

[1] Austria uses a system like this - capital gains are flat-taxed at 25% unless you choose to declare them together with other income, falling under income tax (you'd be pretty stupid to do this considering the lowest income tax rate here is 36.5%, but that's another matter). This frequently causes the OECD and the US (the only country to tax its non-resident citizens, as far as I know) exert pressure on Austria (and Switzerland) to try to get them to drop banking confidentiality; they've had some success lately, privacy has been somewhat eroded.

cynicalkane• 15 years ago

Well, you can say the same stuff about anything, really. You can say that, for example, the law is what makes the state possible, and creating and keeping wealth But this does not excuse a breach of attorney-client privilege. A lawyer who "blew the whistle" on a murderer would face severe penalties.

You can't just invoke the importance of the state here--you have to say why the situation is different for banking, but you only address this particular point with childish name-calling and complaints about injured feelings.

kiba• 15 years ago

What if there is no way for government to control the money supply, see who use it, and implement regulation?

That mean the ability to tax fall down like a house of cards and we have to look for alternative ways of running society.

watchandwait• 15 years ago

The state is hardly the "guarantor of justice and peace." Governments use deadly force and have created the greatest horrors of humanity. In the 20th century alone the state created the Holocaust, deliberately starved tens of millions to death from the Ukraine to China, and obliterated entire cities with nuclear and firebomb weapons. Indeed, around the world today, as many people are oppressed by state power as liberated by it.

nivertech• 15 years ago

The government can exist without taxation. Government provide services (security, healthcare, city planning, etc.) The problem is that Government is a monopolist. I have no problem to pay for the services, given I really need them and I have right to choose from which vendor to buy these services.

Right now peoples only choice is to emigrate to another country.

The other ugly face of tax system is that many, otherwise productive hours and resources, wasted for such a non-productive activity as accounting.

tlb2• 15 years ago

Some states are not pure guarantors of justice and peace. Some are downright kleptocracies. Many deposits in Swiss bank accounts are from people who need to secure their wealth from corrupt local officials.

The US is not a kleptocracy, but Olenicoff (the American who Birkenfeld smuggled diamonds for) has ample experience with them. A bio reads: Having escaped Stalin’s forced repatriation campaign [from Iran], the Olenicoffs sewed what little money they had into their coat linings and sailed for America. In that situation, a banker who helped them might be called a hero.

pragmatic2• 15 years ago

This might have something to do with America's schizophrenic view of banking. The founding fathers were very suspicious of banking. Throughout American history tension existed between most of America (up until recently heavily ag and industrial) and the "New York Money Interests".

The "New York Money Interests" were represented as early as pre-revolution America( see Alexander Hamilton). The anti-banking interests (epitomized by Thomas Jefferson) were mostly those indebted to the banks (like Jefferson).

So I theorized that much of the lack of privacy has to do with populist concern over wealthy colluding with "big money interests" (banks).

However, I'm just explaining why I think the law is like it is.

I whole-heartedly support more personal privacy especially in financial matters.

_delirium• 15 years ago

That's a position I could see someone taking, but in this case, he's being imprisoned on exactly the opposite legal theory: the court ruled that he had a legal duty to break his secrecy sooner and more comprehensively than he did.

He revealed tax fraud that was taking place, which he was partly involved in. The government alleged that he: 1) should have stepped forward sooner, and since he didn't, was guilty of willingly continuing to participate in tax fraud; and 2) had not revealed all the information in his possession, so was guilty of still partially covering up the fraud. Therefore, he was convicted of conspiracy to commit tax fraud.

Of course, that's the official story, and it's possible it's not the real reason he was prosecuted.

brown9-22• 15 years ago

Taking on a fiduciary duty of loyalty and confidence, and then breaching it... that's serious.

Even when that fiduciary responsibility entails doing things that break the law in the jurisdiction in which you operate (the US) and in which your clients live (the US)?

I honestly am having a very hard time understanding your point here. You seem to be arguing that "duty" should trump legality. It does not.

yummyfajitas8• 15 years ago

Huh? I thought these were Swiss banks. As far as I know, he didn't break Swiss law.

Many organizations have a fiduciary duty which may break the law in some countries. For example, Tarsnap's fiduciary duty to protect secrecy almost certainly breaks the law in China, North Korea or Iran. Do you believe their duty to protect their client's data should not trump the laws of China?

kenjackson4• 15 years ago

Privacy with your banker is fine. Just pay your taxes.

Just like your medical records are private, but if you are HIV+ you must disclose that to unprotected sexual partners.

rbanffy3• 15 years ago

> Taking on a fiduciary duty of loyalty and confidence, and then breaching it... that's serious.

Lets imagine it's not about tax fraud, but, say, murder. You are a psychiatrist and your patient proves you he has murdered someone and states he intends to murder someone else.

What is more important? Your duty towards your patient or your duty towards society?

lionhearted7• 15 years ago

Three points -

1. He didn't report a specific crime, he dumped a bunch of data, some potentially criminal and some not.

2. The clients hadn't broken Swiss law, which is where he was employed and where he took his duty oaths.

3. Actually, your lawyer can't be compelled to testify against you even if you tell him you did commit murder. Swiss society believes that a man's relationship with his banker should be sacred. This guy agreed to that relationship in Switzerland. Then broke it.

I'm not even saying it's wrong. Just that it's worth thinking about, because it's not clear cut at all.

xbryanx• 15 years ago

Your privacy ends where the IRS' authority to tax you begins. Thank goodness.

brudgers• 15 years ago

>"I'm of the belief that the ability to keep your work, voluntary exchanges, and assets private contribute to a free society in the same way that attorney/client privilege, priest/community, and spousal privilege all exist."

The 19,000 US citizens were violating US tax law. Are you confident omerta for bankers is really a good idea?

http://en.wikipedia.org/wiki/Omertà

jfager2• 15 years ago

Do you actually know what the man's "pledged duty" was, that it was recognized by the applicable laws about privilege, and that he broke it?

All of the other privileged relationships you mentioned have limits:

- The attorney-client privilege does not apply to communication in pursuit of committing a new crime.

- Psychiatrists are under ethical and legal obligations to break confidence when a patient reveals an intent to harm themselves or others.

- The actual level of confidence communications with priests carry is variable between states.

president• 15 years ago

Do you think protesting would have ever gotten him anywhere? Probably not. The man was trying to do the right thing and change the world, sometimes it is necessary to go above and beyond. You're chastising him for that.

ZachPruckowski• 15 years ago

I agree that that's a legitimate issue, but professional confidentiality has to be suspended when you're talking about ongoing and/or future crimes. You can't use "I'm a lawyer" or "I'm a banker" as a shield to involve yourself in fraud or to help cover it up without repercussions.

mbreese• 15 years ago

Privilege with your attorney/doctor isn't absolute. For example, if your doctor has reason to believe that you may harm yourself or another, they have a duty to report that to the authorities for the protection of you and others. I'm not a lawyer, but I doubt that your lawyer would be allowed to help you actively break the law.

In this case, these individuals were using their Swiss bankers to help them break US law. This is a very different thing than having confidence in the privacy of your transactions. I'd argue that his breach wasn't to his clients, but to his employer. His employer was asking him to help others break US law, so he turned them in. I see nothing wrong with that.

jbooth• 15 years ago

If you tell your lawyer or doctor that you're planning on committing a crime, they have to report it. Attorney-client privilege ends once you're breaking the law in the present tense with the attorney's knowledge.

Similarly, here we have people who were allegedly breaking the law. Not telling the authorities would have made this guy complicit in the crime.

cletus3• 15 years ago

It's important to remember tha whistleblower statutes protect you from retaliation by the company when you expose illegal behavior.

They do not protect you from prosecution for any illegal activity you've done.

That being said, often the DA or US Attorney (as appropriate) will offer lighter sentences and/or immunity to secure a prosecution.

iwwr4• 15 years ago

It's somewhat fanciful to think the government, upon receiving this windfall of 'reappropriations' will turn around and put them toward paying the national debt (or at least reducing the deficits). More tax income doesn't reduce the individual 'working man' tax burden, spending just increases to cover the windfalls.

BTW, this is very revealing:

"I'm going out of my way,” he said in a prison interview. “Risking my career. Risking my reputation. Risking my life. And trying to unfold the largest fraud in US history."

versus

Birkenfeld's attorneys argue that he's entitled to a percentage of all the tax revenue recouped as a result of his whistleblowing.

kenjackson4• 15 years ago

Why is that a "versus"?

iwwr4• 15 years ago

He's not entirely a disinterested party, concerned for the public good etc...

jhamburger• 15 years ago

At the same time, wasteful thoigh it might be government spending presumably doesn't just go down a black hole. The working man receives a service or at least the fringe benefit of that money being circulated back into the economy.

Either way, any use is more beneficial to ordinary americans than having the rich horde billions of taxable dollars in offshore accounts.

tlb2• 15 years ago

Hoarding money isn't actually bad for ordinary Americans. It removes money from circulation, which the Fed can make up for as necessary to regulate inflation.

steve19• 15 years ago

Birkenfeld, a US citizen, was helping US citizens commit tax fraud. He now expects the IRS to pay him a percentage of the money he helped steal from the US goverment/citizens?

He is crazy.

DFreed• 15 years ago

Interesting article and interview from CBS 60 Minutes

http://www.cbsnews.com/stories/2010/08/05/business/main67456...

trustfundbaby• 15 years ago

I find it interesting that he never actually denies the allegations of tax fraud

ajays2• 15 years ago

A lot of people seem to be saying that "he broke the law" and "he was a part of the scheme" , so he deserves a prison term.

But this is ridiculous.

Think about it: all of his activities are a subset of the activities that UBS is accused of. He is being accused of helping 1 person hide his assets; but UBS helped 19000! So how can he be sent to prison, but no one from UBS? Shouldn't there be other UBS executives being charged?

AndrusAsumets• 15 years ago

Some countries have adopted exceptionally sane methods for fighting antitrusts where the first company that comes forward with proof that law was broken will be pardoned from the law. Although the company itself was in the ring of bad guys and broke law, it still will not be facing any penalties.

I can not really see why this practice couldn't be applied to elsewhere.

hippich• 15 years ago

deal with cash, digital one - http://bitcoin.org: - no central issuing center - all transactions are open, but no information about ownership by particular person is shown - almost no fees for money transfers - and transfer itself takes as little as 10 minutes (if you trust another person - instantly) - limited supply of bitcoins - meaning you will not loose value over time and inflation.

jfager2• 15 years ago

I thought this story was fascinating, so I did a little bit of background digging, since this article is pretty thin.

There are a bunch of relevant legal documents and news stories up at http://www.pogo.org/pogo-files/alerts/whistleblower-issues/w... Note that this is very much a pro-whistleblower site, and so is slanted towards the idea that Birkenfeld shouldn't be in prison. I'm not so sure, though.

According to Birkenfeld's own request for clemency, the sequence of events that led to him going to the IRS was: after ~4 years of working with wealthy clients at UBS, in June 2005, he found an internal legal document prohibiting many of the actual practices of the bank. He wrote an internal memo to his superiors about the discrepancy, and then resigned in October 2005. When UBS didn't pay him a bonus he thought he was entitled to, in early 2006, he invoked whistleblower protection claiming that UBS was retaliating against him, in an effort to recover that bonus.

He didn't approach the IRS and DOJ, though, until early 2007, and didn't actually talk until June 2007. And while he described UBS's practices, he didn't go into specific details about clients except for one, Igor Olenicoff, for whom he had, among other things, smuggled diamonds in a toothpaste tube. It's his activity dealing with Olenicoff that he's in prison for, and he pleaded guilty to those charges.

Tellingly, though, Olenicoff was already under IRS investigation in - drumroll - 2006 (http://www.forbes.com/forbes/2006/1009/042.html), and he eventually pleaded guilty to tax evasion in December 2007 and paid $52M in back taxes and fines (http://www.irs.gov/newsroom/article/0,,id=212163,00.html).

To me, Birkenfeld's actions look a lot more like CYA than principled whistleblowing.

cakeface• 15 years ago

This kind of analysis is why I read HN. Thanks for doing the legwork jfager!

Cadsby• 15 years ago

A lot of well written exchanges in this thread. Too bad much of it is an apologetic for the wealthy evading their civic obligations, yet again.

Meanwhile the average working American is lectured daily on the values of "personal responsibility."

ck2• 15 years ago

Government asks you to spy on your neighbors all the time.

But report on big money doing something wrong and you are screwed.

Oh and the IRS just waived sanctions for offshore accounts recently too.

UBS Whistleblower Finds Himself in Federal Prison

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