A former UBS AG banker who helped the U.S. government unleash an international crackdown on tax evasion was awarded $104 million in what is believed to be the largest-ever whistleblower payout to an individual.
Bradley Birkenfeld, 47 years old, began cooperating with U.S. authorities in 2007, while still at UBS. He provided prosecutors with detailed descriptions of the bank’s efforts to promote tax evasion and confessed to running errands for rich clients, including one instance when he sneaked diamonds into the U.S. in a toothpaste tube. Bradley Birkenfeld, a former UBS AG banker, at Schuylkill County Federal Correctional Institution in Minersville, Penn., in April 2009.
The case lifted the veil of Swiss bank secrecy that for decades had allowed wealthy people world-wide to evade taxes. UBS in 2009 agreed to turn over the names of more than 4,000 account holders who were U.S. taxpayers and pay $780 million to resolve a criminal case involving secret offshore accounts.
Since then, more than 33,000 U.S. taxpayers have confessed to holding undeclared overseas accounts and paid more than $5 billion in taxes and penalties. Mr. Birkenfeld also was implicated. He pleaded guilty in 2008 to one count of conspiracy to defraud the U.S., a felony, and was given a 40-month sentence. He currently is in New Hampshire finishing his sentence in home confinement.
Under a 2006 law, the Internal Revenue Service can pay whistleblower awards of up to 30% of the collected proceeds.
The massive award, paid out last week to a felon still serving time, shows the lengths the agency now is willing to go to collect unpaid taxes, experts said. “If Brad Birkenfeld can get an award, then many company insiders will have no problem getting one,” said Scott Knott, an attorney in Washington who specializes in tax whistleblower lawsuits.
The law doesn’t preclude paying money to convicted felons, as long as they didn’t plan or initiate the evasion.
“The IRS encourages courageous actions,” said Sen. Charles Grassley (R., Iowa), who sponsored the law. “An award of $104 million is obviously a great deal of money, but billions of dollars in taxes owed will be collected that otherwise would not have been paid as a result of the whistleblower information.”
Mr. Birkenfeld’s lawyers acknowledged their client wasn’t above reproach.
“As Brad has shown, encouraging knowledgeable insiders to stick their necks out is often the only way we can ever find out about tax cheating by the fat cats,” said his lawyer, Dean Zerbe, in a news conference.
The award was paid out last week. Mr. Zerbe said Tuesday that corrections officials wouldn’t let Mr. Birkenfeld comment. The IRS doesn’t announce whistleblower awards, but an agency spokesman confirmed the payment, adding that Mr. Birkenfeld signed a disclosure waiver.
Experts who track whistleblowers said Mr. Birkenfeld’s payment is the largest ever.
The award could also persuade other whistleblowers to come forward under a broader corporate whistleblower rule revised in 2009 and 2010. There already have been large payments made under that statute.
In 2010 the U.S. government paid $96 million to Cheryl Eckard, a former quality-assurance manager at GlaxoSmithKlineGSK.LN -0.07% PLC who helped the government win a guilty plea and a $750 million payment from the drug company to settle an investigation of manufacturing deficiencies.
The global crackdown on tax evasion isn’t yet over. Earlier this year, Switzerland’s oldest bank, Wegelin AG, ceased doing business under that name after the U.S. indicted the bank and several of its employees.
In July, German authorities raided the homes of Credit Suisse Group AG CSGN.VX +3.16% clients who were suspected of evading taxes. That case centers on about 5,000 clients who might have bought insurance policies at a unit of the Swiss bank as a way to earn tax-free interest on savings.
The inquiries have shaken up the clubby world of private banking so much that Switzerland, long a bastion for the rich, has lost some of its cachet. Alois Pirker, a research director at Boston consulting firm Aite Group, estimates that Swiss private-banking fees have fallen at least 25% in the past two years because foreign clients no longer see an advantage to stashing money there.
“The business that remains there is under extreme fee pressure, and the dust hasn’t settled yet,” Mr. Pirker said. He says wealthy Americans are moving funds to other tax havens, such as the Cayman Islands, Monaco and some Asian countries.
Mr. Birkenfeld, the son of a neurosurgeon, grew up near Boston and graduated from Norwich University, a military school in Vermont, in 1988. Later he worked for Credit Suisse and BarclaysBARC.LN +1.73% PLC in Geneva before moving to UBS in 2001 as one of about 50 private bankers at the firm in Geneva.
Prosecutors said Mr. Birkenfeld described helping clients hide wealth by purchasing art and jewels from funds in Swiss accounts. He said bankers used encrypted laptops and erased references to U.S. banking clients in communications. He was convicted on the conspiracy charge in 2008, after he started cooperating with authorities. Prosecutors said he withheld information from them concerning his relationship with a wealthy California developer who was a UBS customer.
Mr. Birkenfeld served about 30 months in the Schuylkill County Federal Correctional Institution in Pennsylvania. In August, he was released to a halfway house in New Hampshire. He will be released at the end of November and placed on probation.
Mr. Zerbe said his client has asked for a presidential pardon.
At his sentencing hearing, Justice Department official Kevin Downing said, “Without Mr. Birkenfeld walking into the door of the Justice Department in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered by the U.S. government.”
Mr. Zerbe said the $104 million award is 26% of the $400 million in tax paid by UBS to the IRS as a result of the 2009 settlement. The large-awards program pays between 15% and 30% of proceeds collected, which can be hard to determine.
Although Mr. Zerbe said Mr. Birkenfeld provided information that ultimately led to $5 billion in revenue collected by the U.S., not all of that is eligible for whistleblower awards. Mr. Zerbe said his client has other related whistleblower claims outstanding. He declined to say how much Mr. Birkenfeld’s attorneys would collect as a fee.
IRS whistleblower awards are fully taxable.
Write to Laura Saunders at laura.saunders@wsj.com and Robin Sidel at robin.sidel@wsj.com