by Stephen Kohn
INTERNATIONAL TOOLKITTaking the Profits Out of Corruption
Corruption is an insidious plague that has a wide range of corrosive effects on societies. It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life and allows organized crime, terrorism, and other threats to human security to flourish.
So wrote the UN Secretary-General in the official introduction to the United Nations Convention against Corruption. Since the Convention’s approval by the UN General Assembly in 2002, it has been ratified by more than 140 countries, including the United States, South Africa, India, the United Kingdom, and Russia. The Convention not only mandates that each signatory take strong steps to combat corruption but also explicitly recognizes the importance of protecting whistleblowers as a tool in fighting corruption.
Article 32 of the Convention calls on member states to take action to prevent “retaliation” against witnesses or persons who give testimony against corrupt officials. Article 33 urges all nations to enact “domestic” legislation to “provide protection” against “unjust treatment” for any person who reports evidence of corruption to “competent authorities.” Similar conventions have been approved by other international bodies, most notably the Council of Europe. Article 9 of the Council’s Civil Law Convention on Corruption mandates that all European nations protect whistleblowers: “Each Party shall provide in its internal law for appropriate protection against any unjustified sanction for employees who have reasonable grounds to suspect corruption and who report in good faith their suspicion to responsible persons or authorities.”
But the reality facing international whistleblowers does not resemble the protections called for in these treaties. For example, in South Africa, Jimmy Mohlala documented millions of dollars in fraudulent payments during the construction of a stadium built for the 2010 South Africa–hosted World Cup. A masked gunman murdered him the day before he was scheduled to testify in court exposing the fraud. In India, Shehla Masood was shot dead after reporting corruption in government contracts. According to a Bloomberg investigation, she was just one of twelve whistleblowers murdered in India since 2010. In Russia, Sergei Magnitsky died in prison after exposing large-scale business fraud committed with the help of government officials. His death triggered worldwide outrage. The U.S. Congress took an unprecedented step and passed the Sergei Magnitsky Rule of Law Accountability Act, sanctioning Russian officials who participated in Magnitsky’s imprisonment and the corruption he died trying to expose. Most recently, a comprehensive report on the United Kingdom’s whistleblower law (often cited as a model for other nations to follow) ripped the law apart as being completely ineffectual, providing minimal compensation and failing to protect most whistleblowers.
“Very few other countries have any track record of prosecuting deliberate . . . violations, let alone a legal process that would protect witnesses from obstruction of justice . . .”
U.S. Department of Justice, in United States v. Efploia
What effective options are available to international whistleblowers who want to expose fraud or corruption?
Transnational Reward Laws on a Worldwide Stage
On September 22, 2014, the U.S. Securities and Exchange Commission (SEC), the top cop on Wall Street, issued a historic ruling in a case under the Foreign Corrupt Practices Act. The Commission awarded a non-U.S. citizen $30 million for turning in a corporation that paid bribes to foreign government officials. In making this award, the Commission sent a message to whistleblowers worldwide: The rewards program was open to anyone.
In issuing the $30 million award, the Commission stated:
In our view, there is a sufficient U.S. territorial nexus whenever a claimant’s information leads to the successful enforcement of a covered action brought in the United States. . . . When these key territorial connections exist, it makes no difference whether, for example, the claimant was a foreign national, the claimant resides overseas, the information was submitted from overseas, or the misconduct comprising the U.S. securities law violation occurred entirely overseas.
The Commission’s payment had its intended impact. By September 2016 more than nineteen hundred whistleblowers from ninety-seven countries had filed corruption claims in the United States. Figure 13 indicates the countries from which international whistleblowers have filed claims in the United States.
After making its first payment to a foreign national, the Commission continued paying rewards to other non-U.S. citizens, including paying an Australian whistleblower $3.75 million for reporting illegal payments made to Chinese officials by an Australian company. Australians took notice. One local senator told the Sydney Morning Herald: “Whistleblowers in the United States get rewarded and protected, but here they get punished and ruined.”
Rule 9 details how the FCPA works.
The Foreign Corrupt Practices Act is not the only U.S. law with transnational application. The Act to Prevent Pollution from Ships (APPS), discussed in detail in Rule 11, implements an international treaty prohibiting ships from polluting the oceans. Other U.S. whistleblower reward laws applicable to foreign nationals include the False Claims Act, the Lacey Act/Endangered Species Act, the Internal Revenue Act, the Securities Exchange Act, and the Commodity Exchange Act.
The bottom line is simple: The best bet for whistleblowers worldwide is to try to find a U.S. whistleblower law under which the misconduct they have witnessed may be covered. Next, worldwide whistleblowers must use the law’s reporting procedures (which often protect confidentiality), provide information that could result in a successful prosecution, and apply for a reward.
Foreign Corrupt Practices Act (FCPA)
The Foreign Corrupt Practices Act (FCPA) targets bribery of foreign government officials by publicly traded corporations or U.S. persons. It is the most powerful and effective transnational anticorruption law in the world. In 2010, when Congress passed the Dodd-Frank Act’s securities reward law, whistle-blowers from around the world became eligible for a reward if they provided original information about bribery or other violations of the FCPA. The FCPA whistleblower law is explained in Rule 9. Additionally, Rule 8 and Checklists 7 and 8 provide additional information on the FCPA and the securities whistle-blower law for which the FCPA provisions are a part.
Offshore Banking or Tax Fraud
Bankers from any nation in the world can now turn in their U.S. clients who hold illegal offshore bank accounts or are evading taxes. Under the Internal Revenue Service (IRS) program, whistleblowers can confidentially disclose any violation of U.S. tax laws, including violations that are perpetrated by foreign banks.
In discussing the role of whistleblowers in exposing illegal conduct in foreign banks, the Commissioner of the IRS explained how one Swiss banker’s disclosures were critical in triggering the IRS’s successful multibillion-dollar campaign to eliminate illegal offshore banking:
The IRS’s serious efforts to combat offshore tax evasion . . . [were] brought to our attention . . . by whistleblowers. . . . A turning point in our enforcement efforts came in 2009 with the agreement reached with UBS. This agreement represented a major step toward global tax transparency and helped build a foundation for our future enforcement efforts.
Under the U.S. tax whistleblower law, employees who risk their jobs to report tax frauds or underpayments are eligible for a mandatory reward. The range for the reward is 15 to 30 percent of any monies recovered by the IRS based on the whistleblower’s “original” information. The IRS treats all whistleblower submissions under strict confidentiality rules. The IRS program is explained in Rule 7.
In June 2007 the first major whistleblower to use this law stepped forward. Bradley Birkenfeld was a Swiss banker with inside information as to how the largest bank in the world, the Zurich-based UBS, had an illegal program of more than nineteen thousand Americans, all of whom held nondisclosed and secret accounts in Switzerland for which they did not pay U.S. taxes. Although Mr. Birkenfeld was
a U.S. citizen, there is nothing in the law that requires whistleblowers to be U.S. citizens. Any “individual” can provide information to the IRS, regardless of his or her country of citizenship.
Birkenfeld’s disclosures triggered the largest successful tax fraud prosecutions in world history. The results were staggering, and the power of whistle-blowers to change the world was affirmed. Here is the story.
It all started when Bradley Birkenfeld, a banker from UBS, turned over documents proving that UBS served approximately twenty thousand U.S. clients, all of whom had illegal and undeclared bank accounts designed to hide assets from government review and thus avoid paying taxes. Based on this disclosure, UBS was forced to enter into a deferred prosecution agreement with the United States. In exchange for avoiding criminal charges, UBS paid a $780 million fine and turned over information on 4,450 U.S. clients.
This sanction triggered the largest individual reward given to a whistle-blower. The IRS awarded Mr. Birkenfeld $104 million under the whistleblower reward law. That award had worldwide ramifications, as taxpayers with illegal offshore accounts realized that their own bankers could become multimillionaires by turning them in to U.S. authorities. The “trust” needed to make an international secret banking program work was undermined. Any participant in that illegal program could become a whistleblower—regardless of the participant’s own country’s domestic laws (or lack thereof) and despite the fact that he or she may have personally participated in the secret banking system.
Mr. Birkenfeld’s whistleblowing not only forced UBS to pay a large fine but also forced UBS to agree to turn over the names of the U.S. citizens who held illegal bank accounts in Switzerland. This concession radically undermined the concept of Swiss banking secrecy. Switzerland had boasted for decades that its domestic laws protected the identity of U.S. account holders, but because of Mr. Birkenfeld’s disclosures, secrecy could no longer be guaranteed. As explained in the publication swissinro.ch, “The U.S. had long suspected Swiss banks of harboring U.S. tax cheats. But Swiss banking secrecy made this impossible to prove. That changed when former UBS employee Bradley Birkenfeld came to the Department of Justice with strong documentary evidence in 2007.”
What happened next was simply amazing.
The $104 million reward, in combination with the mandatory disclosure of account-holder names and significant sanctions imposed on the banks, caused U.S. tax cheats with assets hidden around the world to panic and rush to take advantage of a tax amnesty program established by the IRS. The amnesty program was simple: Turn yourself in; pay fines, penalties, and back taxes; and in exchange you could escape criminal prosecution and keep your identity secret. If you did not turn yourself in, the IRS promised to aggressively prosecute everyone who did not turn themselves in—and seek far higher fines and penalties.
More than 100,000 Americans have taken advantage of the amnesty program. As the Government Accountability Office (GAO) explained, Switzerland’s agreement to name names “created uncertainty among UBS account holders as to whether their names were on the list.” To escape prosecution, tens of thousands of millionaires and billionaires turned themselves in. As of October 2016, the United States had collected more than $13.7 billion in fines and penalties from these tax cheats and the offshore banks that hide their wealth, with thousands of cases still awaiting processing.
The IRS and DOJ also used whistleblowers’ information to indict other Swiss banks. After the UBS case was resolved, fifteen other Swiss banks were indicted for tax fraud. The prosecutions are ongoing, but as of 2016 Credit Suisse had pleaded guilty to criminal conspiracy and paid $2.811 billion in fines and penalties, Bank Leumin group had paid $270 million in fines, and the Julius Baer Group Ltd. had paid $547 million in fines and penalties. Moreover, a whistleblower turned in the oldest bank in Switzerland, Wegelin & Co., which pleaded guilty to tax fraud, paid $74 million in fines, and was forced into bankruptcy. Wegelin’s bankruptcy sent additional shockwaves throughout the Swiss banking system, and, for the most part, all known U.S. illegal accounts were closed.
After indicting the fifteen banks, the DOJ cut deals with eighty smaller Swiss banks, which agreed to pay a total of $1.36 billion in penalties. In addition, these banks were forced to “make a complete disclosure of their cross-border activities; provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest.” They also agreed to close all illegally held U.S. accounts and “provide detailed information as to other banks” that hold illegal U.S. accounts.
By 2015 the United States had successfully criminally prosecuted 45 American-UBS account holders, resulting in $224 million in recoveries. By 2016 the DOJ announced that more than one hundred U.S. account holders had been found guilty in federal court. By the end of 2016, well over $13.7 billion had been collected from the Swiss banks and their U.S. account holders.
When issuing its reward to the whistleblower, UBS Swiss banker Bradley Birkenfeld, the IRS stated that he had “provided information on taxpayer behavior that the IRS had been unable to detect.” His “comprehensive information . . . was exceptional in both its breadth and depth” and “formed the basis for unprecedented actions against UBS, with collateral impact on other enforcement actions.” This was not an overstatement. Even DOJ conceded that the initial UBS case was “the centerpiece of the Division’s current efforts” that “resulted in an historic agreement” that “dealt the fabled Swiss bank secrecy a devastating blow.”
International bankers and the numerous support employees who establish the illegal structures used to hide money in secret foreign banks accounts (such as those identified in the “Panama Papers”) hold the key to policing all illegal U.S. offshore accounts. These bankers, lawyers, accountants, and trustees are potentially eligible for large rewards under the U.S. program.
Employees who work for international banks, and who want to file a confidential whistleblower reward claim, must follow the rules governing IRS tax whistleblowers. These steps are spelled out in Rule 7.
Wildlife Trafficking, Protection of Endangered Species, and Illegal Logging
The U.S. Congress enacted whistleblower reward laws in key laws prohibiting wildlife trafficking and protecting endangered species. Whistleblowers can obtain rewards under the Lacey Act, the Endangered Species Act, and the Fish and Wildlife Improvement Act when they disclose violations of laws protecting plants, fish, and animals under the major international treaty banning trade in endangered species (the CITES Convention). These laws cover illegal logging, which destroys the habitat for many critically threatened species.
These reward laws have international application and permit any “person” to qualify for a reward. Under the Lacey Act, a “person” includes a corporation. Consequently, international organizations committed to fighting illegal trafficking can also qualify for a reward, provided they submit original information that documents violations of the antitrafficking laws and/or information that results in a successful prosecution of criminal traffickers.
Rule 12 explains how these wildlife trafficking laws work.
False Claims Act
The oldest whistleblower reward law, the False Claims Act (FCA), also has extraterritorial application. As explained in Rule 6, the FCA is America’s premier whistleblower reward law. It broadly covers frauds against the United States taxpayer/government. Many schemes that are hatched by foreign companies are covered under the Act, and whistleblowers that are non-U.S. citizens are fully qualified to file claims under the law and collect rewards. Because the False Claims Act is such a powerful law (allowing treble damages and recovery of attorney fees and including a private right of action and mandatory rewards for qualified whistleblowers), employees who work outside the United States should be fully aware of the types of misconduct covered under this law. Following are some examples of the misconduct for which foreign companies have been held liable:
• Failure to pay customs or “anti-dumping” duties and v
iolation of tariff obligations: Toyo, Inc. (Japan); CMAI (China)
• Improper relocation of employees in the United States (B-1 visa violations): India-based Infosys Technologies
• Sale or importation of defective products for use in government contracts: Lincoln Fabrics (Canada); Barrday (Canada); Itochu (Japan)
• Kickbacks or illegal marketing of drugs paid for by Medicaid, Medicare, or the Veterans Administration: Valeant Pharmaceuticals (Canada); Serono (Switzerland); Organon International (Netherlands); B. Braun Melsungen AG (Germany),
• Fraud in obtaining gas or oil leases or underpayment of royalties owed on such leases: Louis Dreyfus Group (France), Royal Dutch Shell (Netherlands)
• Fraud in providing food and water to U.S. troops in Afghanistan: Supreme Foodservice FZE (United Arab Emirates)
• Phony claims submitted to the U.S. government for payment: BNP Paribas (France)
• Violation of terms in fixed price contract: Hesco Bastion Limited (U.K.)
• Using misleading testing certificates in selling products to the U.S. Army: Alcatl Lucent (France)
• Improper billing of defense contracts: Securitas Gmblt Werkschutz (Germany)
• Selling adulterated drugs: Ranbaxy Laboratories (India)
Employees working for foreign companies are often unaware of whistleblower rewards available under U.S. law. Employees who work for companies that import products to the United States, sell goods or services to the American government (including state governments), or obtain U.S. government contracts are all potentially eligible for whistleblower rewards.
The procedures for filing claims under the False Claims Act are explained in Rule 6.