When former UBS private banker Bradley Birkenfeld asked Stephen Kohn for help in applying to the Internal Revenue Service's whistle-blower award program in September 2009, he could hardly have been in a deeper legal hole. A month before, Birkenfeld had been sentenced to 40 months in prison—10 months more than prosecutors had recommended—after he pled guilty to conspiring to help a client, Igor Olenicoff, evade U.S. taxes.
Birkenfeld was no one's idea of an angel. (In their statement of fact, prosecutors said that he once smuggled a client's diamonds out of the country in a toothpaste tube.) They asserted that after years of helping rich Americans hide their assets at UBS's private banking unit, Birkenfeld blew the whistle only after he learned that his client was being investigated for tax fraud, and that he himself would be implicated.
But the timing of the highly publicized prosecution—Birkenfeld had just provided information that the IRS and the U.S. Department of Justice both credit with prompting the recovery of $5 billion in unpaid taxes from thousands of offshore accounts, and a $780 million fine against UBS—was a disaster for the IRS's fledgling whistle-blower program. No whistle-blower in a rewards case, let alone one who the New York Daily News said should be "hailed as a modern-day hero," had ever been successfully prosecuted. Birkenfeld's conviction undoubtedly had a chilling effect: IRS whistle-blower submissions, which had been on the rise since the law came into effect in December 2006, plunged by a third from 2009 to 2011. By early this year, "there was almost a panic" about the viability of the program, says Kohn, name partner at Washington, D.C.'s Kohn, Kohn & Colapinto.
To put the IRS program back on the map would take a bold move. And ultimately, the institution did what was necessary: On September 11 the agency awarded Birkenfeld $104 million, one of the largest individual whistle-blower payouts in history.
The award was three years in the making. Far from the public eye, the IRS whistle-blower office had to grapple with the novel legal issues raised by the case, and confront institutional resistance. Could Birkenfeld, as a convicted felon who had participated in the misconduct, be eligible under the law? And if so, how would the award be calculated?
The motivations behind Birkenfeld's decision to blow the whistle remain murky. Prosecutors asserted during his sentencing hearing that in June 2005, five days before Birkenfeld first contacted his superiors about his concerns, he had learned that IRS agents had raided Olenicoff's home and seized documents incriminating Birkenfeld. Birkenfeld, in contrast, claimed that he was prompted by an internal UBS memo listing cross-border banking activities that were illegal in the United States—including practices that had been promoted by his superiors.
Birkenfeld resigned from UBS in October 2005, but not before initiating a campaign to alert UBS's compliance department and in-house counsel to his concerns. When nothing much came of the internal campaign, Birkenfeld said in his plea memorandum, he decided to take his information to government authorities.
According to court documents, during a trip to the U.S. in April 2006, Birkenfeld met with David Schertler, of Washington, D.C., litigation boutique Schertler & Onorato. (The firm declined to comment, citing an ongoing fee dispute with Birkenfeld.) Schertler, a former prosecutor, advised him to seek immunity from criminal prosecution. The IRS's whistle-blower statute, which affords certain protections, would not be enacted for another eight months; and even then, the new law did not prevent the office from referring a whistle-blower involved in a crime to the Justice Department. Still, in practice, Kohn says, whistle-blowers who have not initiated or directed illegal activities are rarely, if ever, prosecuted.
Schertler told prosecutors what his client had to offer, and requested immunity, but was unsuccessful. Despite the risks, in June 2007 Birkenfeld met with Kevin Downing, head of Justice's offshore tax fraud crackdown, and a U.S. Department of the Treasury special agent. At the meeting, he handed over reams of internal UBS communications. And at the direction of the new IRS whistle-blower office, his lawyers also gave his whistle-blower claim form to the IRS agent.
What became of that original submission remains unclear. But the IRS whistle-blower office had only just opened its doors. It was so new, Birkenfeld's attorneys later noted in court documents, that even those in the office were unsure about how the claims process would work.
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