Whistle-blowers are in a tough spot. They have to fear retaliation from their employers and legal tangles when dealing with law enforcement and regulatory agencies.
Their portrayal by the media will flip flop between the depiction of data thieves who steal information for personal gain and concerned employees who want to expose an organization’s wrongdoing.
And the information that whistle-blowers believe is important – and that they have taken great risks in obtaining – is not always met with the anticipated enthusiasm by the authorities.
Significant monetary awards for whistle-blowers who help the U.S. Internal Revenue Service recover large sums of unpaid taxes and fines for tax evasion have turned the process and the personal motivations of whistle-blowers into even more of a gray area.
Hervé Falciani, a former systems engineer at the Geneva-based private banking unit of HSBC, who obtained the personal banking details of 24,000 customers and passed them on to French authorities, was charged in Switzerland with violating Swiss secrecy laws and industrial espionage.
HSBC says Falciani simply stole the data to sell it. He maintains that he acted because he wanted to improve oversight of the bank’s activities and protect client data, and because of the illegal behavior of the bank he observed in his position as systems analyst.
“What motivated me to blow the whistle was that no effective control was possible in the bank. No system was efficient enough to ensure that terrorism financing or money laundering was under scrutiny or under control,” he told the Offshore Alert conference in May via video-link because he still faces an international arrest warrant.
Asked what percentage of the bank’s activities was illegal in his estimation, he said it is difficult to express in percentages. “But I was 100 percent certain that it was a system out of control.”
France charged HSBC with money laundering offenses, initiated tax investigations against French taxpayers who had undeclared Swiss bank accounts at HSBC and offered the data obtained by Falciani to other governments around the world. More than 30 countries have asked for French support in relation to the HSBC data, yet Falciani’s offer of help has met only a lukewarm reception.
Falciani started to cooperate with U.S. authorities five years ago, and he admits that “it was a tough collaboration.”
“I am not a U.S. citizen. I am still on an Interpol warrant.”
And when the U.S. Department of Justice asked France for legal assistance, it was refused for three years. “We had to wait for a change in the French government for this collaboration request to be accepted.”
Although the leaks of information earlier this year to the International Consortium of Investigative Journalists and the wider media generated some momentum, it is still difficult to proceed.
The magnitude of the bank and its worldwide ties have made it a political issue. While some countries are keen to pursue individual tax evaders, they may be more hesitant to go after the bank itself.
The U.K. in particular was not really interested in using the data he provided, Falciani said. “When you observe that [HSBC chief executive officer] Mr. Gulliver said the bank could relocate from the U.K. to Hong Kong, you understand what kind of political war [it is] and what kind of efforts are made. I would be really surprised if the U.K. were to go after the holding.”
He noted that for legal reasons, most countries in Europe, except Germany, would have refused the information because it was obtained illegally and could not be used as evidence in court. Even when the information is passed among countries through legal cooperation agreements, it is not admissible in court everywhere.
In the U.S., Falciani would be eligible for a monetary award from the IRS, should tax authorities recover any money from the bank, but he claims the commodity aspect of the evidence he took from HSBC was always secondary.
His main effort, with the help of lawyers in France and the U.S., is to get the U.S. investigation against HSBC to go further. “That is ongoing,” he said. Meanwhile Falciani’s legal situation remains unresolved.
UBS whistleblower Bradley Birkenfeld’s whistle-blowing experience is even more ambivalent. At one point he offered the Department of Justice insight into the practices at UBS in helping the bank’s U.S. customers evade taxes through Swiss banking services. By providing documentation on his U.S. clients, he opened the door for tackling offshore tax evasion in a major way.
Five years later, Swiss bank secrecy is practically eroded and UBS paid $780 million to settle a criminal investigation. Birkenfeld believes the Justice Department could have done more to prosecute on the basis of the information he passed on, and that officials failed to act partly for political reasons. Of the thousands of Americans who hid money in Switzerland, only a small number have been indicted or charged, and even fewer have gone to jail.
DoJ officials, in turn, felt he was not entirely honest about his own role in the bank’s activities. In 2009, Birkenfeld was convicted of aiding and abetting tax fraud and for lying to U.S. authorities about the extent of his own misconduct. He served two-and-a-half years in prison.
“Brad has become the test case showing how not do it,” says Dean Zerbe, who was Birkenfeld’s lawyer after his conviction.
Zerbe secured a $104 million award – before taxes – for his client from the proceeds recovered by the IRS, making Birkenfeld the poster boy for whistle-blower awards.
Zerbe said the treatment of whistle-blowers by U.S. authorities and the protection of their identity is extremely good. In Birkenfeld’s case, the DoJ just did not know “how to dance” with the whistle-blower, but “it has been much better with folks coming forward now.”
While the program is not a “picnic basket overall” and has its problems, whistle-blowers are generally treated responsibly, he noted.
Birkenfeld agrees that the SEC and the IRS were much more receptive. He claims he first blew the whistle within the legal and compliance departments at UBS, but he did not receive a response for several months. There is always the danger that the corporation is going to “bury it,” he said, “as they did in the UBS case with me.”
But simply to go to regulatory and law enforcement with information is not necessarily the right way. Birkenfeld advises that “it is very important to have a strategic plan in place to do that properly.”
How to blow the whistle
Zerbe believes the record IRS award to Birkenfeld had a huge impact. The payment resulted in more knowledgeable and more senior people coming forward who could provide better information to the IRS.
According to the lawyer, the IRS continues to be “hugely interested in offshore information,” and the focus of the tax authority is still on the bigger dollar amounts.
To qualify for monetary awards, whistle-blowers need to provide detailed, firsthand and current information in a way that can be quickly understood, due to the huge number of submissions. In the offshore area, the IRS needs detailed documents, names, addresses and social security numbers.
“Just to say that John Smith got an offshore account, that’s not helpful,” Zerbe said.
It is also important to come in promptly.
“Particularly in the area of offshore, a lot of people come in after the gun has gone off. That’s not going to move you along.”
While the Office of the Whistle-blower, a subunit of the IRS, does an excellent job in terms of the claims process, Zerbe said, “the office of the chief counsel that handles the litigation has historically not been a ‘hug monkey’ when it comes to the whistle-blower program.”
Whistle-blowers have to make sure to file their Form 211, the application for information awards, when they come through the door, he noted, citing a case in which his client was made to wear a wire twice and told that it was too late to apply for an award once the information had been obtained.
“Another important thing is that you are talking to IRS and Treasury officials, not just a DoJ or FBI person,” he advised.
The biggest problem that whistle-blowers face, in Zerbe’s experience, is the transparency and openness in their discussion with the authorities, and the “radio silence” that occurs after all the information has been given, which can be very frustrating. Even if action is taken, it will take years before funds have been collected and the whistle-blower can receive an award.
All these issues underline the fraught reality for those who make the decision to blow the whistle.
“Hervé is the perfect example for what it is like to be a whistle-blower,” Birkenfeld said of Falciani.
“He is running around and he is trying to duck and dodge and some people will be critical of him. There are a lot of uphill battles; you are going to be lambasted, you are going to be blackballed, you probably are never going to work again.”