When Bad Things Happen to Good Rogues
A century and a half after defective mules prompted a law on false claims, the federal government is still working kinks out of the process.
Setting a rogue to catch a rogue. That arresting phrase is the kernel of one of the United States' most important anti-fraud laws — the False Claims Act — enacted by Congress in1863.
It's sometimes known as the Lincoln Law; the president wanted to crack down on unscrupulous defense contractors in his day who were selling the blue coats bum mules, decrepit horses, misfiring rifles, dud ammo and rancid rations.
This law is still in force and allows even those unaffiliated with the government to file a claim of fraud against government contractors, under the so-called qui tam principle. They are entitled to a reward, which takes the form of a share — usually 15-25 percent — of damages recovered from the defrauders. The rewards are also meant to make up for whistle-blowers burning bridges to their former profession.
The common law concept of qui tam — an abbreviation of the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning "[he] who sues in this matter for the king as [well as] for himself" — was first deployed in 695 A.D. by King Wihtred of Kent (England) and was commonplace by the 14th century, mostly as a means to help enforce the king's law. Colonial America widely employed the concept; in Massachusetts, penalties collected for catching mackerel out of season were evenly split between the informer and townsfolk where the offense took place; in New York, a 20 shillings fine for taking oysters out of season was split between the informer and local poor.
The law clearly understands these whistle-blowers may not be entirely clean themselves. To know about the fraud well enough to expose and convict its principal authors, they may have participated in or even benefited from it — but exposing and ending the fraud is judged a greater public good than letting one of the guilty off.
"In short, sir," argued Sen. Jacob Howard, the chief proponent of the law in 1863, "I have based the [qui tam provision] upon the old-fashioned idea of holding out a temptation, and 'setting a rogue to catch a rogue,' which is the safest and most expeditious way I have ever discovered of bringing rogues to justice."
UBS, or U Been Screwed
But putting this concept into practice is not easy, as evidenced by the wildly varied handling of whistle-blower cases.
After significant amendments in 1986, the U.S. government has gotten a better handle on dealing with fraud cases brought under the False Claims Act; since that time, it has recovered $22 billion. In 2006, Congress further amended the law to plug perhaps the most serious earlier gap — that tax fraud was specifically excluded.
But the Internal Revenue Service is still on a learning curve about applying the law — tips about tax cheating more than quadrupled last year over previous years but so far no payments have been made under the higher reward rates of 15 to 30 percent.
These shortcomings have come to light in what may prove a critically important whistle-blower case — that of Bradley Birkenfeld, who revealed his former employer, UBS, the Swiss banking behemoth (accounting for roughly 20 percent of Switzerland's GDP), was running a massive tax evasion scheme.
That the government mishandled this case — primarily by prosecuting rather than rewarding him and thus scaring off future whistle-blowers — is the passionately held view of whistle-blower advocates.
"He is the most important whistle-blower in the last five years, maybe in our lifetime," argues Stephen Kohn, executive director of the National Whistleblowers Center. "He is a national treasure, and he should be treated in such a way that people from the Lichtenstein banks and the other banks say: 'I'll do it also.' But the way they are treating him now, they are going to shut [themselves] off [from] access to hundreds of billions in fraud, over time. This is an unmitigated disaster."
After more than a year of secretly meeting with various government agencies to explain in great detail how UBS' illegal scheme worked, the Justice Department decided to prosecute Birkenfeld anyway.
He ended up pleading guilty to one fraud conspiracy count, was convicted in the Ft. Lauderdale courtroom of Florida's Southern District and last August sentenced to 40 months in federal penitentiary. Justice Department tax attorneys explained that they decided to prosecute because they concluded Birkenfeld was not being completely truthful about his own role in tax evasion, which apparently included smuggling diamonds into the U.S. in a tootpaste tube, and possibly continuing to service a key client, Russian-born California real estate billionaire Igor Olenicoff.
While Birkenfeld was economical with some details about his own involvement, there is a key dispute about why this was — one of murkiest junctures of this case. His side says he was still under the threat of strict bank secrecy laws in Switzerland, where he was still living, and needed a subpoena to break that. Justice officials say he was trying to deceive them.
Then there is controversy over how well the law was followed, in letter and in its intent. Kohn argues that whistle-blower provisions under the IRS do not, in fact, require complete info since this would make it too easy for the government to come back and prosecute a whistle-blower, even if they left out some information inadvertently.
In a statement submitted at Birkenfeld's sentencing hearing, the Justice Department submission read: "Defendant Birkenfeld has provided substantial assistance in the investigation and prosecution of others who have committed offenses. This substantial assistance has been timely, significant, useful, truthful, complete, and reliable."
There is also this revealing exchange between the judge and prosecutors. It is a matter of "great significance," said Judge William Zloch, to know whether "but for Mr. Birkenfeld" the UBS scheme would "still be ongoing."
Kevin Downing, the senior Justice Department tax trial lawyer trying the case, replied, "I have no reason to believe that we would have had any other means to have disclosed what was going on but for an insider in that scheme providing detailed information, which Mr. Birkenfeld did."
In other words, the U.S. government's case against UBS — which led to the UBS paying a $760 million fine, the bank promising to exit the tax evasion business (at least for American customers), providing the names of thousands of U.S. account holders who on the whole are likely tax cheats, the Swiss renegotiating a tax treaty with Washington — was served up by Birkenfeld.
Even this understates the true significance of the case. Tearing the lid off Swiss' bank secrecy — something U.S. investigators had effetely railed against for decades — and coercing abject cooperation from the Swiss has punctured bank secrecy's smug sense of invincibility, and that has juiced efforts — both in the U.S. and internationally — to curb tax haven abuse. More progress has been made on this issue in the last 18 months than in the previous decade, according to Sen. Carl Levin (D-Mich.), who has been on an anti-tax-haven warpath all that time.
Is This Any Way to Run a Sting?
So why prosecute Birkenfeld?
One partial explanation may lay in the government's difficulty in dealing with whistle-blowers. Personalities and the cultures of bureaucracies also matter.
"Basically, the government doesn't like whistle-blowers, and they have demonstrated time and again mountainous bad faith, as in this case, turning a perfectly good whistle-blower law into virtual entrapment," says Jesselyn Radack of the Government Accountability Project, a Washington-based nongovernmental organization. She says Justice officials gave Birkenfeld false assurances that they were not looking to prosecute while milking him for details.
She speaks from bitter personal experience, which makes her an expert, someone with an ax to grind — or perhaps both.
Radack became a whistle-blower over the government's handling of the 'American Taliban' case, involving John Walker Lindh. Soon after writing a brief that the FBI could not legally interview Lindh without his lawyer present, she was forced out of the Justice Department. The FBI ignored her advice — and another opinion that said the information could not be used in court — and when a district judge ordered up all the department's internal e-mails, the most important ones that Radack had sent were missing.
Later, while working in a private law firm, she heard Justice's official claims that they did not know Lindh's family had retained a lawyer. Hoping to remain anonymous, she sent contradictory evidence to Newsweek — which exposed her in its report. When a judge ordered an investigation of the apparent cover-up, Justice put her under criminal investigation, and she lost her private sector job. Six years after what she terms a "crucifixion," Radack is still putting her life together, but she has the satisfaction of helping other national security whistle-blowers.
In this view, government prosecutors are scorpions who can't help but sting, or prosecute, even when what they sting is helping them both survive.
While whistle-blowers sometimes are clear Hollywood heroes — think Karen Silkwood — they are often finer shades of gray. Birkenfeld, for example, was the privileged son of a Boston neurosurgeon, who spent 13 years in Switzerland, jetting around the global courting exceedingly wealthy clients. From a Geneva apartment he would tool out on weekends to a million-dollar chalet with an unobstructed view of the Matterhorn in Zermatt. Not bad for a 43-year-old, and possibly distasteful to Downing and his civil service salary colleagues.
After coming across internal policy documents at odds with actual bank practices, Birkenfeld applied for internal whistle-blower status. He says there was then a corporate cover-up, which led to his decision to take his story to Washington. (A dispute about being passed over for a sizeable bonus may have also been a factor.)
In 1997, UBS was also humbled by the revelations of a more modest employee, 29-year-old night guard Christoph Meili, who discovered the bank was destroying Nazi-era documents about orphaned assets, i.e., credit balances of deceased Jewish clients whose heirs' whereabouts were unknown and listed real estate records for Berlin property that had been forcibly taken by the Nazis, placed in Swiss accounts and then claimed to be owned by UBS.
Destruction of such documents violated Swiss law, but when Meili, with the help of a Jewish organization, went to the local press with the document, Zurich authorities went after him for violating bank secrecy.
He and his family were granted political asylum in the United States (the first instance ever of Swiss nationals in the U.S.); their lawsuit led to a settlement of $1.25 billion in August 1998 and helped persuade Swiss banks to offer reparations for victims of Nazi looting.
The Meili affair "did more than anything to turn the Swiss banks into international pariahs by linking their dubious behavior during and after the war to the discovery of a seemingly unapologetic attempt to cover it up now by destroying documents," according Stuart Eizenstat's Imperfect Justice.
Other banks, too, could have benefited had they played nicer with their whistle-blowers.
At the Lichtenstein Global Trust Bank, owned by the Lichtenstein royal family, Heinrich Kieber reportedly raised concerns with his managers about the bank's dealing with various dictators and circumventing U.S. laws. That might sound naïve – the bank, at the time, essentially specialized in tax evasion.
"The answer was always the same: None of your business. Just stick to your designated job," recalled Keiber, a lowly records management officer with a prior criminal record for buying Spanish property with a bogus check (and for which he paid restitution), according to press accounts. So he furiously downloaded a vast trove of company documents he then peddled to various countries (his first sale was to the German foreign intelligence agency, which recouped some money by selling information to the British, etc.). The revelations triggered investigations in more than a dozen countries; Keiber now lives under an assumed name in an undisclosed country and LGT is out of the tax evasion business.
Botched handling of whistle-blowing is an enduring company weakness, according to research by Janet Near of the Kelley School of Business at Indiana University in Bloomington. Senior management attitudes toward whistle-blowing are critical, she notes because the higher they are in the organization the less likely that are to know what's not working in the firm's bowels.
But it's not an easy call for companies. While whistle-blowing offers clear societal benefits, private companies tend to see complicated cost trade-offs that sometimes incline them to delay or suppress the information, which only makes their fate worse when wrongdoing explodes into a crisis later on.
Making a Federal Case
The U.S. government's response is complicated because it is capable of several reactions simultaneously. While it is the IRS that decides about Birkenfeld's whistle-blower status — and thus whether he will get any of the money the U.S. government recovers from the UBS fine and subsequent settlements with tax cheats — this does not enjoin the Justice Department from prosecuting.
So Birkenfeld may go to prison but also get some very substantial checks, both courtesy of the same government.
Beyond the question of how Birkenfeld fares, his case raises important policy issues, particularly what impact the U.S.'s handling could have on future whistle-blowers. In a globalized financial system with proliferating exotic products, schemes tend to be extremely complex and perhaps only can be fully exposed by knowledgeable insiders.
That certainly was a key lesson learned by the Senate Finance Committee when it tried to fathom the myriad shenanigans of Enron with its hundreds of shell companies in the offshore tax havens.
"When we did the Enron investigation," explained Dean Zerbe, who served as the committee's tax attorney, "we were no brighter than Justice or IRS people involved, but we were much more open to talking with whistle-blowers who explained everything to us about what Enron was doing – that was hugely helpful – and that put it in our minds that, 'My God we have to do more to get these whistle-blowers to come in and explain.' They can just sherpa you through everything. Not only does it save you untold manhours, it's just night and day."
That's why he is also disturbed by the implications of the government's handling of the Birkenfeld case. "I don't blame the local [Justice] guys for focusing on the narrow legal issues here, but what's stunning to me is that no one on senior level in Washington has looked at the big picture at what we are doing in terms of policy. This is a disaster for the government efforts at dealing with offshore tax havens."
Now a private tax attorney, both he and Kohn recently joined Birkenfeld's effort to win a reward, possibly in the tens of millions of dollars, from the IRS.
Those concerns led three Washington watchdog organizations — National Whistleblowers Center, the Government Accountability Project and the Project on Government Oversight — to write an open letter to U.S. Attorney General Eric Holder to review Birkenfeld's case and urging him to "take action to prevent one of the worst setbacks in international law enforcement history."
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