Diamonds in toothpaste and hissy fits - an everyday tale of whistle blowing

In this piece I'm assembling the facts as I see them, about the origins of the row between the Swiss Bank UBS and the US income tax people at IRS.

It falls neatly into a story of both wealth and power.  In this case the wealth of the invidual,  set against the power of Government bodies and commercial organisations.  Plus here we have an added element in the mix, the power of one very disgruntled whistle blower.

In 2001, Igor Olenicoff, a multi-millionaire real estate mogul living in California, flew to Switzerland to meet Bradley Birkenfeld. (Birkenfeld is on the left of the photo - from the Daily Telegraph).

This was to prove a very unlucky meeting for Mr Olenicoff, and for many others, and it proved to be the starting pistol that begun the present IRS blitz on off shore companies and so-called tax havens. And nearly brought down one of the great banks of the world, UBS, the Swiss bank specialising in wealth management.

Birkenfeld, now 44, had lived in Switzerland for 13 years, working as a financial adviser to the rich. Since 2001 he has been a director with UBS, living the charmed life of a highly paid expert in tax affairs. He had a million-dollar house under the Matterhorn in Zermatt and an apartment in Geneva and drove a 50,000 dollar BMW.

Birkenfeld looked after important clients for UBS's private bank, catering for US citizens with offshore accounts. Earlier, Birkenfeld had worked for Barclays Bank in Geneva and Mr Olenicoff had been one of his clients. When he left Barclays to become a director at UBS, Birkenfeld took Mr Olenicoff with him. Mr Olenicoff was his biggest client.

Using offshore accounts is not illegal for United States taxpayers, but hiding income in so-called undeclared accounts is. Switzerland does not consider tax evasion a crime, and using undeclared accounts is legal there.

Mr Olenicoff had approached Birkenfeld in good faith, believing, as any of us would, that he was dealing with a decent and trustworthy professional man, representing one of the great banks of the world. He naturally assumed that everything he said would be in confidence as he was talking to a man whose profession was advising on offshore banking. No doubt, Mr Olenicoff was paying a lot of money for the privilege of Birkenfeld's discretion and advice. It seems to me he was betrayed, in the most treacherous manner, by an individual who was himself doing exactly what he was condemning his client for doing.  The hypocrisy of Birkenfeld's behaviour is staggering - not to speak of his stupidity in thinking he could get away with it.

Birkenfeld took Mr Olenicoff's money, gave him advice, helped him move possibly hundreds of millions of dollars from the Bahamas to Switzerland, smuggled several hundred thousands worth of diamonds into the States, hidden in a tube of toothpaste -

- and then sold both his long term client and his ex-employers (who had kept him in luxury for years) straight down the river and into the hands of the IRS, the American tax authorities. The IRS, who didn't see this one coming, took a little time before they realised that their whistleblower, the apparent hero who was claiming virtuously to be so shocked when he found out what UBS was doing that it was his moral duty to tell on them, was hiding the fact that he himself had been doing exactly the same thing.

That's why, unusually for a whistleblower, he's just go 40 months in a state penitentiary, instead of the praise he might have got.

And the whole tacky story seems to have had its roots in little more than a hissy fit by Birkenfeld when he got a less than favourable annual report from UBS, and a smaller bonus than he was expecting. He flounced out of UBS and into the hands of the taxmen, taking his unsuspecting client with him.

Shakespeare talks of how 'one may smile, and smile, and be a villain.'
Well, for 40 months at least, I suspect Birkenfeld won't be doing much smiling.

And by the way, the client who trusted him got a suspended sentence, paid back some $50 million, and was fined $3,500. Maybe, like me, the court had considerable sympathy for Igor Olenicoff.

The Taxmen, The Bank and The Rat

Getting together this piece about the IRS/UBS row over tax -  triggered by the treachery of one Bradley Birkenfeld, left, a man who makes Judas Iscariot look like a Saint -  it seemed to me that in essence the whole thing comes down to two words: Freedom or Tyranny.

Those are dramatic words,  but this latest attack on the personal money of the

individual is a pretty dramatic affair.

In the violent slugfest between the IRS, the tax collecting arm of the United States Government, and the Swiss Bank UBS, specialising in wealth and asset management,  we seem to be seeing a clear attempt by one side, aided and abbetted by the OECD,  to do away with the long accepted distinction between tax avoidance and tax evasion - to the detriment of every one of us, rich or not.

Bear with me, because this is the boring bit where we have to define our terms.

In any civilised country,  two elements of the tax system have always been recognised - Tax Avoidance and Tax Evasion.

Tax Avoidance is legal. Tax Evasion is not.

To put it simply, Tax Avoidance is me exercising my god given right to hang on to my hard earned money and not hand over unreasonably large chunks of it to a bunch of greedy politicians.

Tax avoidance is the legal exploitation of the tax system, to try and reduce the amount of tax that is payable by means that are within the law, while at the same time - and this is the relevant bit to the present row - making full disclosure of income to the tax authorities.

Examples of tax avoidance are, for instance, using tax deductions, changing ones business structure through incorporation, or establishing an offshore company in a tax haven.

Tax Evasion, however, involves deliberate efforts by individuals, or firms etc, to evade the legitimate payment of taxes by illegal means.
This usually means taxpayers deliberately misrepresenting or concealing the true state of their affairs, and includes dishonest tax reporting, such as underdeclaring income, profits or gains - or overstating deductions.

So, Evasion is naughty. Avoidance is good,  because in a free country money belongs to the people who produce and earn it.

Of course, anybody in their right mind knows a certain level of tax is necessary - a portion of the wealth produced by the population must be given up to pay for the public good - for a decent health service, decent education, a trustworthy system of justice, national defence et al.

But why should we give the government an unlimited claim on our money to use as they see fit? And for what? Corporate bail outs, pet projects, foreign aid - the list goes on and on.

That's why this particular battle makes me nervous.  Not because I'm rich. I'm not - though one day, in a good old capitalist society, I might be.  And then I will want talented people around who will come to my aid and protect me from the grasping hands of my government.

Is there something a touch malevolent about the IRS relentless pursuit of UBS and it's clients?   A sort of old fashioned socialist desire to punish  people for having money? 

Yes, I do know that in this difficult financial landscape, all Governments are scratching round to find every and any source from which they can raise revenue.

And I am not saying the wealthy are perfect - but tell me who is? 

Mr Timothy F Geitner is the Secretary of the Treasury, the American equivalent of the UK's  Chancellor of the Exchequer.  I guess that makes him the boss of the IRS boys.

Do the words 'without sin' and 'casting the first stone' ring a bell, anyone?

more to come -including who are the OECD, and what's in it for them?