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UBS $104 Million Whistle-blower Award Raises Ethical Issues

Motivation and Role in the Wrongdoing are Key to the Ethics of Whistle-blowing

Whistle-blowing creates ethical issues because the motivation and intention of blowing the whistle is the key to whether it is a courageous act or one undertaken for self-enrichment purposes. The case of Bradley Birkenfeld is a case in point. I’ve read several articles about the former UBS employee’s whistle-blower’s award and in none did I see a purpose for blowing the whistle. Compare that to the case of Cheryl Eckard, a quality-assurance manager at Glaxo, who had blown the whistle on the safety of products made in its Puerto Rico plant. As I have previously blogged, Eckard had a real concern about public health and safety and was willing to risk her job to live up to her ideals.

I have several concerns from an ethical perspective with respect to the UBS case. Motive is one and another is the process followed to gather and report the wrongdoing.

Birkenfeld was a former UBS banker who provided information on the firm's vast business of helping wealthy Americans hide their assets from the Internal Revenue Service. He has received a $104 million whistleblower reward, which his lawyers said was the largest in U.S. history.

Birkenfeld, 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. He wasn’t exactly an innocent ‘dupe’ in the fraud.

My guess is Birkenfeld started to cooperate in return for leniency for his role in the fraud. Not a very ethical position; more of a pursuit of self-interests approach to whistle-blowing. I am concerned that whistle-blowers implicated in the wrongdoing get away with a slap on the wrist while, at the same time, become millionaires for their whistle-blowing efforts.

There have been positive effects of Birkenfeld’s whistle-blowing. 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.

It’s a good thing that controls are finally being put in place and enforced by the Swiss with respect to secrecy accounts. 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.

Unfortunately, other destinations are ratcheting up their efforts to draw money from the wealthy and mega-wealthy under the guise of secrecy. Pirker says wealthy Americans are moving funds to other tax havens, such as the Cayman Islands, Monaco and some Asian countries.

Birkenfeld 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.

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."

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.

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. This is my concern as well and recent whistle-blowing legislation that was part of the Dodd-Frank Financial Reform Act may exacerbate the problem.

The law doesn't preclude paying money to convicted felons, as long as they didn't plan or initiate the evasion. I’m not sure how the planning criteria can be known short of a ‘smoking gun,’ such as an e-mail to that effect. Do we really believe someone like Birkenfeld would admit to planning the act? He certainly was complicit in carrying it out.

"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." This is an ends justifies the means approach to ethical reasoning and shows the lack of ethical sensitivity by Grassley. I’m also concerned about spying on one’s employer to whom employees owe a confidentiality obligation.

According to the Wall Street Journal, the IRS has collected more than $1 billion in taxes through whistleblower cases since the new program was launched targeting major offenders. Don’t get me wrong. I am not against whistle-blowing. I merely raise ethical issues as I might in a classroom discussion.

Oh, by the way, in case you are wondering, IRS whistleblower awards are fully taxable.

Blog posted by Steven Mintz, aka Ethics Sage, on September 17, 2012