DealBook: Sometimes, It Takes a Thief to Catch One

Bradley C. Bower/Bloomberg NewsThe I.R.S. said this week that Bradley Birkenfeld, a former UBS banker, would receive a $104 million whistle-blower award.

It’s enough to make many criminals jealous. The $104 million whistle-blower award by the Internal Revenue Service to Bradley Birkenfeld demonstrates how the government is willing to use a thief to catch a thief.

The question is whether there may be a perverse incentive for people to first help others violate the law in the hopes of later garnering a fat check. The eye-popping reward may be a lure for others to search high and low for fraud, and perhaps even help commit a crime for the sake of the potential reward. But there are protections built into federal whistle-blower programs that try to limit how much criminals can profit from the government for their misdeeds.

In Mr. Birkenfeld’s case, there is some evidence that he tried to do the right thing while he was still working at UBS in assisting wealthy American clients hide assets abroad to avoid paying taxes. After raising questions internally about the legality of the program and being rebuffed, he turned to the I.R.S. and became a whistle-blower.

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The information he provided was crucial to blowing the lid off Swiss bank secrecy, helping the I.R.S. and other countries pry information from banks about foreign clients that has largely undermined a tradition of shielding assets that goes back centuries.

The $104 million payment is almost a pittance compared with the taxes and penalties the government continues to collect from wealthy taxpayers fearful of the inevitable knock at the door if they don’t turn themselves in.

Mr. Birkenfeld pleaded guilty to conspiracy to evade taxes and received a 40-month prison term. His conviction related to assisting a client of UBS, so his $104 million award is based on tax evasion by others and is unrelated to his offense. He is residing in a community correctional facility as he finishes his sentence, and is the rare prisoner who does not need to look for a job when he is released from custody later this year.

The government makes deals with criminals all the time, therefore whistle-blower programs should not be viewed as outliers.

In criminal prosecutions, defendants frequently plead guilty to reduced charges along with a favorable sentencing recommendation in exchange for cooperating against others. There is a substantial discount given to those who agree to assist the government rather than take their case to trial.

For example, in the recent prosecution of Raj Rajaratnam for insider trading, Anil Kumar received two years’ probation for what prosecutors described as “extraordinary cooperation” while Mr. Rajaratnam is serving an 11-year prison term after his conviction.

A section of the federal bribery law makes it a crime to offer “anything of value” to a person “with intent to influence the testimony under oath or affirmation” as a witness at a trial. But the federal courts have refused to find that a plea agreement is a type of bribe — at least as long as there is not a direct payment to influence the testimony.

The whistle-blower programs that award a portion of the government’s recovery to the person who supplies information are in many ways an extension of the deals made with individual defendants. These programs do try to impose some limits on the potential reward if the whistle-blower is also involved in the wrongdoing.

The I.R.S. permits a reduction of an award if whistle-blowers “planned and initiated the actions” involved, and precludes a payment if whistle-blowers were convicted based on their role in the violation.

Other government agencies have also taken steps to remove any incentive for people to commit crimes for the sake of rewards.

The Securities and Exchange Commission’s whistle-blower rules, put in place as part of the Dodd-Frank Act, deduct from an award any amount traceable to the person’s own misconduct. The rules also allow the S.E.C. to reduce a payment based on the whistle-blower’s culpability or involvement in the violations, and prohibit an award if the person obtained the information illegally.

The oldest whistle-blower program is under the federal False Claims Act, which allows individuals to sue on behalf of the government, called a qui tam action, to recover amounts paid out based on false or fraudulent submissions.
Before Mr. Birkenfeld’s award, the largest whistle-blower payment had been $96 million for information about violations by GlaxoSmithKline that resulted in a $750 million settlement in 2010.

A provision of the False Claims Act provides that if the whistle-blower “planned and initiated the violation,” then the award could be reduced “to the extent the court considers appropriate.” The provision goes a step further by prohibiting any payment if the person “is convicted of criminal conduct arising from his or her role in the violation.” That provision is broader than the I.R.S. rule by making any conviction related to the violation grounds to block an award.

There are other risks for those who might have participated in wrongdoing and are hoping to become the next Bradley Birkenfeld.

The whistle-blower programs effectively require a person to be the first one in the door with valuable information. If the agency already knows about the violations, or the information has become public, then the person is not an original source and cannot receive a reward.

Moreover, the payment depends on the recovery of money and placement of penalties. This can take years, particularly for tax cases because the award will not be made until all appeals have been exhausted.

Becoming a whistle-blower is not something to aspire to, either. While there are provisions in the laws preventing retaliation, the decision to blow the whistle on one’s employer and co-workers is not an easy one. Once undertaken, blowing with whistle can trigger substantial personal costs, and perhaps even the risk of jail time.

While it may be easy to say in hindsight that a 40-month prison term is worth $104 million, there was strong resistance to give anything to Mr. Birkenfeld. So the pot of gold at the end of the rainbow may never appear, or can take years to be reached.

And, as the I.R.S. points out, “All awards will be subject to current federal tax reporting and withholding requirements,” so you still owe taxes on it.

This post has been revised to reflect the following correction:

Correction: September 12, 2012

Article source: http://dealbook.nytimes.com/2012/09/12/sometimes-it-takes-a-thief-to-catch-one/?partner=rss&emc=rss