This article first appeared at The McAlvany Intelligence Advisor on Monday, December 30th, 2013:
Writing from his jail cell, former UBS banker and present whistleblower Brad Birkenfeld took pains to justify himself and his actions:
With the expansion of criminal conduct in the world (including, but not limited to: intelligence agencies, corrupt dictators, drug cartels, arms dealers, corporate malfeasance, individual tax dodgers, etc.) Switzerland was the ideal offshore jurisdiction to deposit, shield and invest illegal assets, due primarily to strict bank secrecy laws, an ingrained culture of deniability, and the lack of any accountability or transparency….
The Swiss government, private banks, and businesses have all benefitted directly from this massive illegal enterprise.
He claimed to be a good Boy Scout by trying to persuade the bank to cleanse itself. Numerous times he brought his case to UBS’s legal counsel, but got no response. So he quit the bank and blew the whistle:
In 2007, I voluntarily approached the U.S. Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the IRS, and the Senate Permanent Subcommittee on Investigations with everything I knew about the Swiss banking industry.
I became the very first Swiss private banker in history to reveal to the outside world the inside secrets behind these illegal practices….
In the summer of 2007, I voluntarily provided virtually every essential and material fact contained in the now famous “John Doe” summons to the UBS.
I revealed tax evasion on a massive and unprecedented scale….
For his trouble Birkenfeld received a $100 million whistleblower award from the IRS, the largest in history. And three years in jail for failing to be as forthcoming about one of his UBS clients, Igor Olenicoff, who later pleaded guilty to tax evasion and paid fines, penalties, and interest in excess of $50 million.
The DOJ saw its opportunity, took maximum advantage of Birkenfeld’s revelations, and decimated the bank. Its stock hit a high of $65 in April 2007, and now trades at under $20, a decline of 70 percent. Its entire senior management team was terminated, the bank underwent painful scrutiny in public testimonies in front of Senate investigating committees, paid fines, penalties, and interest of nearly a billion dollars, and saw its asset base diminish by $200 billion. As the DOJ gleefully noted:
The division’s current offshore program began in 2008, with the investigation of UBS AG, Switzerland’s largest bank. As a result of that investigation, in February 2009, UBS entered into a deferred prosecution agreement (DPA) and admitted guilt on charges of conspiring to defraud the United States by impeding the IRS, exited the business of providing banking services to U.S. customers with undeclared accounts, and paid $780 million in fines, penalties, interest, and restitution.
As part of the DPA and a 2009 agreement negotiated among the US, UBS, and the Swiss government to settle a civil summons enforcement proceeding brought by the Tax Division, the IRS has received account information about thousands of the most significant tax cheats among the U.S. taxpayers who maintain secret Swiss bank accounts….
[These efforts] have resulted in an unprecedented number of taxpayers – over 38,000 since 2009 – voluntarily disclosing to the IRS their previously hidden foreign accounts and agreeing to pay billions of dollars in back taxes, interest, and penalties to the U.S. Treasury.
As a result, these enforcement efforts not only remedy past wrongdoing, but also bring into the system tax revenue from taxpayers who become compliant going forward.
It’s hard to feel sorry for those banks who are now complaining about the demands being forced upon them to disgorge information about secret accountholders, many of whom have long since closed their accounts and moved their assets elsewhere. They are caught between Scylla and Charybdis: they must comply or face similar sanctions from the DOJ.
More sympathy can be generated for those 38,000 who have now “voluntarily” coughed up nearly $5 billion in back taxes, penalties, and interest. But the real costs are political: the overriding and abrogation of Swiss national sovereignty, the negation of their bank secrecy laws dating back to 1934, and the destruction of Fourth and Fifth Amendment rights of American citizens.
This is not to condone tax evasion, if tax evasion there be. What’s been done in Switzerland, however, is setting precedents for further IRS incursions into national sovereignty and banking systems around the world. As Jeff Snyder, a Manhattan attorney familiar with the case, wrote:
The IRS’s highly visible targeting of the “establishment” Swiss banking system will likely garner much greater future compliance with these reporting obligations, so that the IRS and [the] US government will likely obtain detailed information about many more foreign accounts from people who have either intentionally hidden these accounts or who just want to “play it safe” [with their money].
The Department of Justice admits that this is just the beginning:
These investigations are expanding into other countries. In April 2013, a federal district court authorized the IRS to issue a “John Doe” summons seeking information about U.S taxpayers who may hold undeclared offshore accounts at CIBC FirstCaribbean International Bank (FCIB), a Barbados-based bank with branches across the Caribbean.
Birkenfeld was released from prison in August 2012 and was put on probation for another nine months. He now lives in New Hampshire and says that he’s “satisfied” with the outcome of his efforts.
The DOJ is also satisfied, knowing that the first olive out of the bottle is the hardest, and that afterwards the others are likely come out a little easier. Expect other banks and governments to roll over for the IRS and the DOJ as they ramp up their attacks on wealth and the people who own it.
The DOJ: The details of the Deal
The DOJ: John Doe summons to UBS