UBS Whistleblower Finds Himself in Federal Prison

It is one of the strangest and most important financial whistleblower cases of all time.

Bradley Birkenfeld
Bradley Birkenfeld

Bradley Birkenfeld once lived the high life as secret Swiss banker at UBS in Geneva. Then he delivered some of the world’s best-kept secrets to the US government, expecting a great reward. And now he sits in federal prison in Pennsylvania.

How’d that happen? It began in 2007, when the American-born Birkenfeld approached the Department of Justice with surprising evidence that UBS was helping alleged American tax cheats hide assets in Switzerland's famous secret banking system.

He told the US government that 19,000 American clients had about $19 billion dollars of assets at UBS.

"I'm going out of my way,” he said in a prison interview. “Risking my career. Risking my reputation. Risking my life. And trying to unfold the largest fraud in US history."

Bounty Hunters - See Complete Coverage
Bounty Hunters - See Complete Coverage

Birkenfeld once played a key role in the storied and very secretive Swiss banking system. He said that the undeclared accounts inside the Swiss banksare so sensitive that the bankers don’t keep the names of the clients in the same file as the details of the funds held in the accounts.

The only place the names and the accounts are linked, he said, is in on paper files held inside a vault at the bank. Secrecy is maintained by a host of security measures, including encrypted laptops and secret code words.

Birkenfeld showed me one of the paper files detailing a client account. To make any changes to it, this client had to use a secret code phrase: “Rose and Eagle.”

“It’s very cryptic, for obvious reasons,” he said. “In the computer system, you have the portfolio, which shows you nothing about a name.”

“This,” he said, pointing to the piece of paper with the client’s name and account information, “is in a safe. So, it’s almost like 'Mission Impossible'.”

"I believe there's a high-level cover up from the UBS executives." -Former UBS Banker, Bradley Birkendeld

He says he’s convinced that wealthy Americans are hidingas much as a trillion dollars in wealth outside the US tax system, and that’s putting a huge burden on the rest of the nation’s taxpayers. “The average American is carrying the weight for all these millionaires and billionaires,” he said.

“That’s the fact. That’s the truth. And until someone does something about it, it’s never gonna be cleaned up.”

After Birkenfeld's disclosures, the IRS offered an amnesty program for Americans with secret Swiss bank accounts. Over 15,000 people disclosed their hidden accounts in exchange for lighter penalties from the government.

But the government says Birkenfeld held crucial information from them, and charged him with conspiracy to commit tax fraud, which is why he's behind bars today and serving a 40-month sentence. He says the earliest he expects to be released is the spring of 2012.

Birkenfeld says that only a massive cover-up can explain why he is in prison after delivering such valuable information to authorities. And, he charges that the federal government is trying to protect the wealthy and powerful Americans who have millions of dollars hidden from the tax system in secret Swiss accounts like the ones he used to manage.

“I believe there's a high-level cover up from the UBS executives, who have penetrated the US government to squash this whole story,” he told me in an interview at the prison. “I mean, does America see what's going on here? It's big business in bed with big politics.”

He also complains that President Barack Obama is too personally close with UBS Americas CEO Robert Wolf, playing golf with the financier at a time when Birkenfeld is pleading with the president for clemency. The White House declined to respond to his remark.

A UBS spokesperson responded to Birkenfeld's comments, saying in a statement to CNBC, "UBS completely resolved its US cross-border issue with the US government in November 2010 and we are pleased to have put this issue behind us."

Birkenfeld's attorneys argue that he's entitled to a percentage of all the tax revenue recouped as a result of his whistleblowing. In theory, that could amount to hundreds of millions of dollars —and the money could be paid out by the federal government while he’s still in federal prison. But the IRS has yet to decide on how much, if anything, he'll get.

For now, Birkenfeld says he spends his time mopping floors at the prison for 12-cents an hour.

In his head, though, he's planning for what he'll do when he gets out, including opening a charitable foundation with the millions he's convinced he'll win from the federal government.

Whistleblower advocates say the government must pay Birkenfeld if they ever want to see new whistleblowers step up and report frauds.

And Birkenfeld told me that he doesn’t think the Swiss banks will ever hire another American financier.

“No,” he said, laughing. “I don’t think so.”

Watch Eamon Javers' special series, "Bounty Hunters," all week on CNBC. On Tuesday, February 8 and Wednesday, February 9, he will report on "Squawk Box", "Squawk On The Street", and "Power Lunch. On Thursday, February 10 and Friday, February 11, he will report on "Squawk Box" and "Squawk On The Street."