By Dylan Blaylock, Communications Director of the Government Accountability Project, and Beth Adelson, Communications Fellow of the Government Accountability Project. It has appeared in several media outlets throughout the country, including the Key West News (FL), TruthOut, The Mansfield News Journal (OH), Asheville Citizen-Times (NC), and the Daily Sun News (WA).
For nine years, Harry Markopolos tried to tell the Securities and Exchange Commission that Bernie Madoff was running a $50 billion Ponzi scheme. Markopolos tried to alert SEC investigators in both Boston and New York, each of which dismissed, transferred, or simply failed to understand his advanced financial analysis. He even tried getting major media outlets to investigate.
Meanwhile, Madoff continued to swindle billions from his investors until his arrest last December. Only in the aftermath did Markopolos’ reports emerge. Then people finally began to listen.
The House Financial Services Committee in particular began to listen. During a hearing in February, Markopolos denounced the “ineptitude” and “illiteracy” of the SEC. Stressing the importance of industry whistle-blowers, he stated “complaints from within industry or by investors have got to be the cheapest, most effective way to identify fraudsters.”
One would think that the federal government would be interested in taking steps to ensure that a Madoff-ish scheme never happens again, and that a prime objective to achieve this goal would be to signal that financial employees could safely blow the whistle on witnessed wrongdoing. Tragically, the Department of Justice has done the opposite.
Former international private banker Brad Birkenfeld was certainly an effective financial whistle-blower against the Swiss-based banking behemoth UBS. While working in Geneva, he discovered a document hidden deep within the company intranet that articulated UBS’ official “policy,” barring the exact practices that employees were encouraged and paid to execute. Birkenfeld demanded an explanation, and after being stonewalled by UBS officials for three months, resigned. Then he contacted virtually all UBS departments, only to be told that the matter had already been investigated.
Birkenfeld wasn’t satisfied. He traveled to the United States and registered as a whistle-blower with the IRS. Birkenfeld’s attorney contacted the DOJ in 2007, and he began to meet with officials from the DOJ, IRS, SEC, and a Senate subcommittee. Birkenfeld gave them everything: details on what UBS had done, how they did it, and how they had concealed their activities. Because of Birkenfeld, the DOJ got UBS to agree to pay $780 million to settle and avoid charges that it abetted tax evasion, and has settled another civil suit by having UBS turn over 4,500 names of offshore account-holders. These cases are being credited with ushering in a new era of transparency in offshore tax havens.
To express its gratitude, the DoJ arrested Birkenfeld.
Birkenfeld was on the way to meet with the SEC and Senate when the DOJ made its first arrest in this case and booked its own whistle-blowing partner. He was recently sentenced to more than three years for one charge. In comparison, his biggest client – who may have hidden as much as $200 million from the IRS – got a $52 million fine and probation. Birkenfeld’s boss, who ran the global tax-fraud initiative, was released back to Switzerland.
It’s true that Birkenfeld participated in illegal activity. But the government, by prosecuting its sole cooperating witness, has shown potential whistle-blowers that the better option for them is to stay silent.
In the aftermath of the Madoff disaster, the SEC tried to save face, pledging to improve its handling of whistle-blower cases. In a press release, new SEC Chair Mary L. Schapiro stated: “It’s vitally important that we move very aggressively to improve staff’s use of tips and complaints from investors and whistle-blowers.” An SEC spokesman, however, later admitted that there were no plans in the works.
Over 50 percent of Ponzi schemes and other fraud are reported by financial insiders and whistle-blowers, according to the Commodity Futures Trading Commission, a sister agency to the SEC. Insiders may not be Boy Scouts, but they are vital to ending financial fraud. The government needs to do more to protect potential whistle-blowers so that in the future, people like Birkenfeld can continue to come forward, without fear of jail time or reprisal in any form.
President Barack Obama argued in a recent speech that it was “a collective failure of responsibility” that led to the financial collapse, and that greater oversight of the financial sector is still needed. But if the government only ignores or punishes citizens for reporting financial fraud, can anything change?