Offshore Banking: A Crack In The Swiss Vault

This story was originally published on Jan. 3, 2010. It was updated on Aug. 13, 2010.

If there's anything that the Swiss take more seriously than the precision of their watches or the quality of their chocolate, it's the secrecy of their banks. The subterranean vaults of Geneva and Zurich have served as sanctuaries for the wealth of dictators and despots, mobsters and arms dealers, corrupt officials and tax cheats of all kinds.

As we first reported earlier this year, it's a world U.S. law enforcement has rarely been able to penetrate. So the idea that UBS, one of Switzerland's largest banks, would agree to turn over information on thousands of American tax cheats would have been unthinkable just a few years ago.

You'll hear the twisted tale of how all of that changed, from a man some people have called one of the most important whistleblowers ever who has been rewarded with a federal prison term and the possibility of endless riches.

Web Extra: Swiss Secrecy
Web Extra: Undeclared Account
Web Extra: Point, Counterpoint
Web Extra: Birkenfeld's Impact
Birkenfeld Commutation Petition
IRS: Offshore Accounts
IRS on UBS Clients

Though he was born and raised in the Boston area, Bradley Birkenfeld spent most of the last decade living in Switzerland, helping wealthy Americans hide their money. He was based in Geneva, where he says there may be more money-counting machines than parking meters, in a country that once bragged it had more banks than dentists.

"It's not Swiss money in those banks. It's foreigners'," Birkenfeld told 60 Minutes correspondent Steve Kroft. "You have a culture there that has been ingrained in society about managing people's money, protected by Swiss bank secrecy."

"And who has a right to that information under Swiss law?" Kroft asked.

"Only the banker and the bank itself," Birkenfeld explained.

"How unusual is it for a Swiss banker to come forward and say, 'This is how it works?'" Kroft asked.

"It's never happened before in history. I'm the first one," Birkenfeld replied.

When Birkenfeld, a midlevel banker with an undistinguished employment history, knocked on the door of the U.S. Justice Department in the spring of 2007, he touched off an investigation that would threaten one of the world's largest banks with extinction and shake 300 years of Swiss banking secrecy to the foundations of its underground vaults.

He did it by providing inside information and documentation that his former employer, banking giant UBS, was actively involved in helping its American clients defraud the U.S. Treasury out of billions of dollars in unpaid taxes.

Asked what he thinks is the most valuable thing he gave to the U.S. government, Birkenfeld told Kroft, "The amount of clients and the amount of assets managed by UBS in the United States out of Switzerland."

"And that was how much?" Kroft asked.

"That was 19,000 clients and around 20 billion Swiss francs, which is about $19 billion," Birkenfeld replied.

"Of the percentage of American accounts that you represented, how many would you say were trying to evade taxes?" Kroft asked.

"My own clients?" Birkenfeld replied. "I would say about 90 percent."

Asked if people told him this was their intention when they opened their accounts, Birkenfeld told Kroft, "It was the unwritten rule. You didn't have to discuss it. People wouldn't fly all the way to Switzerland to open accounts just because they wanted to declare their money."

And as a private banker for UBS, Birkenfeld would help his clients invest, spend and move their money. One example he told us about involved withdrawing cash from a customer's account, buying some diamonds in Geneva and then smuggling them into the U.S. for the client inside a toothpaste tube.

Birkenfeld claimed it was legal because the diamonds he said were worth less than $10,000 and didn't have to be declared at customs.

"If it was legal why did you put them in a toothpaste tube? I'm having trouble with that," Kroft said.

"Oh, it was just a way of carrying them so I wouldn't lose them. Where would you put two diamonds?" Birkenfeld replied.

"I think I'd put them in a money belt or I think I'd put them in a case," Kroft said.

"It was a one-time event. That's not my business. I just put them in a toothpaste tube," Birkenfeld replied.

He told Kroft he wasn't trying to hide the diamonds from U.S. Customs. "Not at all," Birkenfeld said.

Buying diamonds and other valuables is just one way of hiding and transporting assets, and Birkenfeld insists that he was just providing a service to his clients, which is what Swiss banking is all about.

"People would ask you to make purchases for them, possibly maybe a car or a chalet, possibly a nice watch. So you would also cater to the client in that regard and then deliver it to them upon their choosing," Birkenfeld explained.

"And what would be their choosing?" Kroft asked.

"It could be in their hotel room. It could be in maybe another country. Could be there in Geneva," Birkenfeld said.

"So you were sort of not just a banker but also a personal shopper?" Kroft asked.

"If you will…at a concierge level," Birkenfeld said.

Birkenfeld claims his motives in going to the Justice Department were mostly altruistic. He offered to wear a wire to gather evidence against high-level UBS executives in exchange for full immunity for his transgressions, but the negotiations broke down.

And Birkenfeld neglected to tell them about his dealings with California real estate developer Igor Olenicoff, who was his biggest client. Birkenfeld helped Olenicoff hide $200 million by introducing him to a consultant who specialized in creating shell companies and sham entities that concealed the ownership of the UBS accounts.

"I don't sign people's tax returns, so what they do with their taxes is not my business. I'm a banker," Birkenfeld argued.

"So you would steer them to somebody who would help them hide their money?" Kroft asked.

"You would recommend them to these service providers. That's correct," Birkenfeld said.

"You must have known deep down that it was illegal," Kroft remarked.

"When you came into the U.S. you felt uncomfortable. That's correct," Birkenfeld said.

But as a gesture of good will, Birkenfeld did give the Justice Department, Senate investigators, IRS agents, and the SEC lots of information about UBS and its secret activities.

"Any transaction that happened on an account was held deep in the vault and sealed until the client came to pick it up personally. Then they would either take it with them, which was generally not the case, or they would tell you to shred it, which we would do on behalf of the client," Birkenfeld said.

Birkenfeld told Kroft that clients were forbidden to have online accounts and that they didn't get statements in the mail.

"So if somebody wanted to know how much money they had in the bank and how their investments were doing, they had to go to Switzerland?" Kroft asked.

"Or maybe see their banker when they came to the U.S.," Birkenfeld explained.

It was those visits to the U.S. which Birkenfeld told the government about that ultimately got UBS in so much trouble. The bank would sponsor lavish events like yacht races in Newport and the Art Basel art festival in Miami Beach to attract wealthy Americans.

Then it flew in its bankers from Switzerland to mingle and to try and drum up new clients and conduct business with existing ones. Because the Swiss bankers weren't licensed to conduct business in the United States, it was a clear violation of American banking laws on U.S. soil, and Birkenfeld provided internal documents that proved the length that UBS would go to in order to avoid detection.

"'Call it a vacation rather than a business trip.' Rather than saying, 'Oh, yes, I'm coming to see my private clients here in the United States. And I'm coming in from Zurich, Switzerland,'" Birkenfeld said.

Asked if he brought records into the country when coming to the U.S., Birkenfeld told Kroft, "Generally, no. I did not. My colleagues brought in encrypted laptops. … So that even if they were discovered you couldn't see what was inside the computers, which were portfolios of the clients and they were product offerings for the clients."

"They were going out of their way to cover their tracks," said Thomas Perrelli, the associate attorney general of the United States

Perrelli says Birkenfeld was not the only person who provided valuable information to the investigation, but he says Birkenfeld's evidence that UBS executives encouraged illegal behavior was the bank's Achilles' heel.

"They would bring checks or sometimes they would actually carry money from one client to the next, all with the purpose of disguising and avoiding detection of large transfers of money," Perrelli told Kroft.

Perrelli added, "It was certainly surprising that there would be a unit within a major bank that would be behaving in that way."

"And there was?" Kroft asked.

"And there was. And we subsequently learned that senior officials knew about this. They knew it was wrong. They called it 'toxic waste.' But it was very profitable and they didn't stop doing it," Perrelli replied.

Based on information provided by Birkenfeld, the Justice Department and the IRS obtained a court order demanding that UBS turn over records on the 19,000 Americans believed to have secret Swiss accounts.

UBS then enlisted the help of the Swiss government to try and negotiate a settlement, finally agreeing to pay a $780 million fine, cease its offshore banking activities with Americans, and for the first time in history turn over the names of more than 4,000 U.S. citizens suspected of tax fraud.

"I think they knew we had a very strong case," Perrelli said.

UBS realized that the Justice Department was holding all the cards. UBS had a major presence and 30,000 employees in the U.S., and it could not survive as a global banking power without access to the U.S. market.

"If you had such a strong case, why didn't you get the names and numbers of every American account holder in Switzerland?" Kroft asked associate attorney general Perrelli.

"We got the accounts that really are the core of the fraud, the largest accounts, the accounts that are most clearly, likely to be associated with fraud," he replied.

After the scandal broke, nervous clients withdrew $160 billion from UBS' wealth management operation. And 14,700 Americans notified the IRS that they had offshore bank accounts, taking advantage of a program that allows them to pay back taxes and penalties and escape prosecution, which should provide a windfall for the U.S. Treasury.

Asked how much tax revenue he thinks the government will have gained from this, Perrelli told Kroft, "I've heard, certainly, the commissioner of the IRS say in the billions of dollars."

With the government claiming victory and UBS breathing a sigh of relief, the only person with grounds to be really unhappy is Bradley Birkenfeld, who the last time we saw him, was wearing an electronic ankle bracelet. The federal government had restricted his movements to the commonwealth of Massachusetts.

"I gave them the biggest tax fraud case in the world. I exposed 19,000 international criminals. And I'm going to jail for that?" Birkenfeld asked.

As it turns out, while the U.S. government was using Birkenfeld's information to go after UBS, the Justice Department was closing in on his biggest client, Igor Olenicoff, for tax evasion.

Olenicoff cooperated with the investigation, and paid $52 million in fines and back taxes and got off with no jail time. But because Birkenfeld hadn't prosecutors told about his relationship with Olenicoff, Birkenfeld was arrested and charged with conspiracy to commit tax fraud. He pled guilty and was sentenced to 40 months in prison. And he was not happy about it.

He told Kroft he shouldn't be going to jail.

"Even though you violated the law and you were an enabler? I mean you were the person who was implementing these policies," Kroft pointed out.

"And I'm the only one going to prison. Out of 19,000 accounts and no Swiss bankers?" Birkenfeld replied.

"If he had come forward and told us everything that he knew, a complete and accurate picture in the summer of 2007, we think it's likely he wouldn't have been prosecuted," Thomas Perrelli told Kroft.

"Mr. Birkenfeld says the federal government admits that the prosecution would not have been successful without his participation in this. And yet, he is the only one that is going to jail. Is that fair?" Kroft asked.

"It is not uncommon for someone to engage in criminal activity and to provide us information, but to also go to jail," Perrelli replied.

"The day he walks into prison is the day you will lose a generation of tax whistleblowers," attorney Stephen Kohn told Kroft.

Asked why, Kohn said, "Because no one will blow the whistle."

Kohn is one of Birkenfeld's civil attorneys and the head of the National Whistleblowers Center. He believes there may be one final twist in the case that could give his client the last laugh.

That's because Birkenfeld may well be entitled to collect tens of millions of dollars under a federal law that rewards whistle blowers with up to 30 percent of the money that is recovered as a result of the information they provide, even if they end up going to jail.

"Mr. Birkenfeld has saved the taxpayers billions of dollars, brought thousands of people to justice. They should blow up his check," Kohn said. "The attorney general should shake his hand and look into the camera. And he should say, 'I want [to send] a message to every international banker that works to money launder against America. You come here to America. You'll be protected and you'll be rewarded. Get 20. Get 30 Birkenfelds. Let's fix this problem. Let's lower everybody's taxes.'"

The IRS will ultimately decide whether Birkenfeld qualifies for the reward. If he does, they may have to mail the check to federal prison, where Birkenfeld is now serving time. But it couldn't be worse than returning to Switzerland, where he is regarded by some as a criminal and a traitor.

Asked if he thinks he'll ever return to Switzerland, Birkenfeld told Kroft, "I don't believe I will."

So far, ten UBS clients have been convicted of filing false tax reports. Most were fined and sentenced to probation or home arrest. None have received more prison time than Birkenfeld, who has petitioned President Obama, asking for clemency.

Produced by Andy Court and Keith Sharman