Correction: An earlier version of this article incorrectly reported Miami solo practitioner Robert Panoff predicted U.S. District Judge William Zloch would reduce UBS whistleblower Bradley Birkenfeld’s sentence before he goes to prison. Panoff said the government has indicated it would ask for a reduced sentence.
Without expatriate whistleblower Bradley Birkenfeld, offshore tax havens for Americans might still be a great way to hide money from the IRS. For his help in uncovering an international network of hidden money, the former UBS banker received a 40-month federal prison sentence.
Three Washington, D.C.-based government watchdog groups say the sentence imposed by U.S. District Judge William Zloch in Fort Lauderdale, Fla., will discourage other bankers from coming forward to the Internal Revenue Service under a three-year-old whistle-blower law.
They question whether any other bankers would be willing to come forward.
The National Whistleblowers Center, the Government Accountability Project and the Project on Government Oversight wrote Attorney General Eric Holder on Oct. 22, calling Birkenfeld’s sentence “one of the worst setbacks in international law enforcement history.”
“The government would not have had a case against UBS without Brad Birkenfeld,” said Jesselyn Radack, homeland security director for the Government Accountability Project. “It’s a real chilling message to whistleblowers because the Justice Department was so heavy-handed.”
She said two bankers recently contacted her group for advice on whether to come forward, fearing they would be prosecuted if they do.
Jake Wiens, an investigator for the Project on Government Oversight, said it’s more than just wealthy Americans who were hurt by Birkenfeld’s disclosure. Making inroads against foreign tax havens was a blow against organized crime.
“When you are talking human trafficking, those engaged in the drug trade, bribery — very bad people — opening the doors and letting the sun shine in has an extremely important impact across the globe,” he said. “There is a lot of human tragedy behind these accounts, and getting them open is a lot more important than getting more money in the treasury.”
Birkenfeld went to the Internal Revenue Service two years ago, looking to cash in on the new whistleblower law that would allow him to get up to 30 percent of collections based on his information. But Birkenfeld, an American living in Switzerland, said he could not disclose his own clients while employed by UBS without violating Swiss banking secrecy law and facing prosecution there.
Caught between a rock and a hard place, Birkenfeld eventually was crushed when the Justice Department learned he helped one of UBS’ biggest scofflaws, sometime South Florida resident and real estate tycoon Igor Olenicoff, squirrel away $200 million and evade $7 million in taxes. The billionaire pleaded guilty and received two years probation.
Birkenfeld, Olenicoff’s banker, is largely credited with creating a new era in tax compliance by turning on UBS.
CLIENTS IN COURT
The Swiss bank agreed in February to pay a $780 million penalty for trolling for wealthy Americans who wanted to hide assets. About 7,500 U.S. taxpayers came forward under a six-month amnesty program that expired last month to report their secret foreign accounts. Others have been prosecuted based on information from Birkenfeld.
Birkenfeld has not yet made a request for a share of the money collected by the U.S. in UBS cases, but one is anticipated.
Two sentences last week brought into focus sentencing discrepancies in UBS cases.
Boca Raton, Fla., accountant Steven Michael Rubinstein was placed on probation Wednesday for three years, including one under house arrest, for hiding $6 million in assets overseas.
Jeffrey Chernick, a New York toy distributor, was sentenced to three months in prison Friday by U.S. District Judge James I. Cohn in Fort Lauderdale for hiding $8 million in Swiss bank accounts.
Rubinstein, the first UBS client to be sentenced, got some praise for coming forward from U.S. District Court Judge Marcia Cooke, who said his plea sent a message to other tax scofflaws.
“Thousands if not millions of taxpayers now know what the legal landscape is,” the Miami judge said. “We will not tolerate offshore tax evasion.”
No such words were imparted to Birkenfeld when Zloch handed down his sentence in August. Prosecutors recommended a 2½-year sentence, but Zloch rejected it. Defense attorneys will ask the judge in January to reduce the sentence before he surrenders to begin his prison term.
“The government has publicly indicated they intend to file a subsequent motion with respect to Mr. Birkenfeld. I think whistleblowers should be comforted by this fact,” said Rubinstein’s attorney, Miami solo practitioner Robert Panoff.
Birkenfeld’s supporters are not optimistic. His sentencing was delayed three times so prosecutors could mine him for information, and sources say prosecutors are now “underwhelmed” by the information that is left.
The Justice Department isn’t happy that advocacy groups and his attorneys have said Birkenfeld’s sentence has undermined the IRS’ whistle-blowing program, those close to the case say.
“You are looking at the fellow who gave the government the keys to the kingdom,” said Dean Zerbe, a Houston attorney representing Birkenfeld on the reward request. “The folks who really benefited from this are coming out OK from the amnesty.”
Zerbe, a name partner with Zerbe Fingeret Frank & Jadav, said he has no idea how much Birkenfeld can expect from the IRS. He conceivably could be sitting in prison collecting checks worth millions of dollars.
Assistant U.S. Attorney Kevin Downing of Washington D.C., a prosecutor in Birkenfeld’s case, insisted to Zloch that Birkenfeld needed to be punished for not being completely forthright about his clients and taking responsibility for his own crimes.
If Birkenfeld had disclosed Olenicoff, Downing said prosecutors would have recommended no jail time.
Birkenfeld was indicted for helping Olenicoff in May 2008 and arrested at the Boston airport en route to a high school reunion. He might have been better off keeping his mouth shut and not going for the reward.
UBS executive Martin Leichti refused to say anything when he was detained by federal investigators at the Fort Lauderdale airport before Birkenfeld’s arrest and was sent home to Switzerland, never to be heard from again.
The watchdog groups’ letter to Attorney General Holder defends Birkenfeld, saying he was not an informant trying to mitigate his sentence but came to the U.S. government voluntarily and had no cooperating witness agreement.
“Since Mr. Birkenfeld was providing information to the (Department of Justice) without an immunity agreement, he was under no obligation to reveal everything that he knew,” the letter states.
Birkenfeld’s supporters also wonder whether the government really thinks whistle blowers will come in with completely clean hands. Somebody in government, Zloch or the Justice Department, needs to realize the viability of the tax whistleblower program is at stake, they said. Birkenfeld was the test case, and the government failed.
“It was the first time a tax whistleblower of his importance voluntarily stepped forward,” said Stephen Kohn, executive director of the National Whistleblowers Center.
“The case has not been handled correctly and must be reevaluated in light of overriding public policy of encouraging other international bankers to become whistleblowers.”