The Betrayal of the American Dream (18 page)

Connex says that investors don’t even have to be immigrants to the United States to take advantage of U.S. tax laws. They just have to spend less than six months a year to qualify for all the tax-sheltered goodies. In language that would make any Caribbean tax promoter proud, Connex boasts that it “can also establish U.S. Limited Liability Companies (LLCs) which are very effective when you need to establish full service bank and brokerage accounts and a business presence in the USA while avoiding unnecessary tax liabilities.”

So the United States, at the behest of its financial institutions, has morphed into a tax haven country. It goes unsaid, but obviously is understood by sophisticated foreign investors, that U.S. banks enjoy a unique relationship with the U.S. government and will get pretty much whatever they want. (Remember the trillion-dollar bailout of the banks and Wall Street, the very institutions that economically trashed tens of millions of working Americans, who were largely abandoned by the government?)

Does America’s new status as a tax haven for foreigners mean that U.S. authorities have less interest in going after tax cheats who illegally park money offshore? The story of Bradley Birkenfeld would seem to suggest that.

Birkenfeld was born into the privileged life of a Boston-area neurosurgeon and his wife. In 1988 he graduated from Norwich University in the Green Mountains of Vermont, the first private military college in the United States. With a freshly minted economics degree, he returned to Boston and went to work in a series of low-level banking jobs, before heading off to Switzerland to secure an MBA at the American Graduate School of Business on the shores of Lake Geneva. After collecting his MBA, Birkenfeld began his real career in the wealth management field, where he could exploit his networking skills. In 2001 he moved from Barclays Bank to the venerable UBS, taking with him a prized client, Igor Olenicoff, a certified member of the Forbes directory of global billionaires. A Russian, Olenicoff had emigrated from the Soviet Union to the United States many years earlier, made a lot of money in California and Florida real estate, and divided his time between homes in those two states. Birkenfeld tended to Olenicoff’s various financial needs, including, at one point, transferring money from UBS accounts to the New Haven Trust Company Ltd., a small private bank in Liechtenstein. The reason? Birkenfeld assured his Russian client that Liechtenstein had better secrecy laws than Switzerland.

In 2006 Birkenfeld resigned from UBS, but continued to provide offshore banking services to U.S. clients through a Swiss corporation with offices in Miami. He also continued to work with Mario Staggl, who owned and operated New Haven Trust in Liechtenstein. Over the years, according to U.S. court documents, Staggl “devised, marketed and implemented tax evasion schemes” through the use of “Liechtenstein nominee entities, Liechtenstein banks, and Danish shell companies.” On behalf of their tax-averse clients, Staggl and Birkenfeld routed money through phony companies and assorted tax haven countries to conceal income: standard fare in foreign tax havens.

But in 2007 Birkenfeld became concerned about what he was doing and approached the IRS seeking whistleblower status. If the IRS agreed, Birkenfeld would receive, in exchange for inside information on international tax fraud and the roles played by UBS and Swiss bankers generally, a percentage of the tax revenue ultimately recovered. For the IRS, this was a golden opportunity to do what had never been done before: unveil the inner workings of the legendary secret Swiss banking system, which featured untraceable cell phones, fake trusts, encrypted computers for bankers to use when they traveled around the United States signing up new clients, and the tactic of personally carrying checks back to Switzerland so as not to trigger a suspicious activity report by the Treasury Department.

It was all very cloak and dagger. On one occasion Birkenfeld had used a client’s money to buy diamonds, stuffed them in a toothpaste tube, and brought the contraband into the United States, with Homeland Security and the IRS none the wiser. Bankers would meet clients at prestigious public events like the NASDAQ tennis tournament and Art Basel Miami Beach, where more than 250 leading galleries from around the world showcase the works of 2,000 artists of the twentieth and twenty-first centuries. In 2004 alone, 32 Swiss bankers came to the United States and met with clients about 3,800 times. No matter the event, all of those meetings had the same unifying feature: rich Americans with money to conceal from the IRS.

Birkenfeld also provided inside information to the Securities and Exchange Commission and the Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs.

In large part because of Birkenfeld’s information about his former employer, UBS agreed to pay $780 million to the U.S. Treasury to settle claims that it had helped cheat the United States out of tax revenue. Igor Olenicoff, the California and Florida real estate developer, paid $52 million in back taxes, fines, and penalties. He added another layer of intrigue to the tax evasion scheme by saying that one of the sham companies was actually an entity that Russia’s president at the time, Boris Yeltsin, had set up to make foreign investments.

As for Birkenfeld, the very same Justice Department that said in court documents that he had provided “substantial assistance” that was “timely, significant, useful, truthful, complete, and reliable” sent him to the slammer. Indicted for conspiring to help people hide money from the tax collector, Birkenfeld pleaded guilty and was sent to prison for forty months. Why the Justice Department chose to jail an informant who helped the United States recoup billions of dollars in concealed taxes and helped disclose the existence of more than 20,000 secret American offshore accounts holding nearly $20 billion is uncertain. What is clear is that the Justice Department sent an unmistakable message to future whistleblowers: turn in a list of tax cheats and it’s quite likely that you—not the tax law violators—will go to prison.

To date, few have. In fact, most of the cheats were given amnesty if they agreed to pay up. But the vast majority of Americans who held the secret UBS accounts have never been identified. UBS itself and several of its executives all just paid fines. As for Mario Staggl, he simply disappeared into the mists of foreign tax havens, never to be seen by U.S. authorities, who declared him a fugitive. Birkenfeld’s boss, who presided over the global tax fraud scam, fared even better. Martin Liechti pleaded the Fifth Amendment when he was called to testify before Congress. After being detained for a few months, he was allowed to return to Switzerland. He was never charged with a crime.

The Justice Department’s handling of Birkenfeld stirred indignation among tax professionals, the news media, and the whistleblower community. It’s generally understood that whistleblowers in any field often enter the courthouse with less than clean hands. But it’s also generally understood that the good they can accomplish far outweighs their personal transgressions.
Tax Notes,
a highly respected weekly publication on federal taxation, proclaimed Birkenfeld its “2009 Tax Person of the Year” for successfully disclosing “what goes on in the wealth protection units of the world’s major banks.” The
Atlantic
called the prosecution one of “the five 
worst
law-related moves by the Obama White House and Justice Department.” And
Time
asserted that “almost no one in the U.S. government would deny that Birkenfeld was absolutely essential to its landmark tax-evasion case against Swiss banking giant UBS.”

The sentence was handed down on August 21, 2009, in the U.S. District Court in Fort Lauderdale, Florida. Six days later, President Obama, on vacation with his family at Martha’s Vineyard, set off to play several hours of golf with friends. Among his golfing partners was Robert Wolf, the head of UBS’s American operations, an early financial supporter of Obama and one of his major bundlers of campaign contributions. Wolf continues to fill that role, in addition to stopping by the White House for occasional dinners and other gatherings.

CHAPTER 6

THE END OF RETIREMENT

O
f all the statistics that show how the rules are changing for middle-class Americans, here is one of the most alarming: since 1985, corporations have killed 84,350 pension plans—each of which promised secure retirement benefits to dozens or hundreds or even thousands of men and women.

Corporations offer many explanations and excuses for why they are cutting down a vital safety net for Americans, but it all comes down to money. The money saved by not funding employee pensions now goes for executive salaries, dividends, or some pet project of a company’s CEO. Congress went along and even compounded the betrayal by pretending that the change was in employees’ best interest.

What this means is that fewer and fewer Americans will have enough money to take care of themselves in their later years. As with taxes and trade, Congress has been pivotal in granting favors to the most powerful corporations. Lawmakers have written pension rules that encourage businesses to underfund their retirement plans or switch to plans less favorable to employees. These rules deny workers the right to sue to enforce retirement promises. Lawmakers have also written bankruptcy regulations to allow corporations to scrap the health insurance coverage they promised to employees who retired early—including workers who were forced into early retirement. Congress has enacted legislation that adds to the cost of retirement. One by one, policies that once afforded at least the possibility of a secure retirement to many seniors have been undermined or destroyed, while at the same time Congress has allowed corporations to repudiate lifetime-benefit agreements.

Pensions were once an integral part of the American dream, a pledge by corporations to their employees: for your decades of work, you can count on retirement benefits. In return for lower earnings in the present, you were promised compensation in the future when you retired. Not everyone had a pension, but from the 1950s to the 1980s, the number of workers who did rose steadily—until 1985. Since then, more and more companies have walked away from pensions, reneging on their promise to their employees and leaving millions at risk.

Before today’s workers reach retirement age, decisions by Congress favoring moneyed interests will drive millions of older Americans—most of them women—into poverty, push millions more to the brink, and turn the golden years into a time of need for everyone but the affluent.

For all of this you can thank the rule makers of Wall Street and Washington who have colluded to rewrite the rules on retirement in ways that will harm millions of middle-class Americans for decades. Here is what they have done:

• In addition to the 84,350 pension plans killed by corporations since 1985, companies have frozen thousands of other plans, meaning that new employees are barred from participating or benefit levels are frozen, or both. Freezing a pension plan is often the first step toward eliminating it.

• The congressionally touted replacements for pensions—401 (k) plans—have insufficient holdings to provide a serious retirement benefit. This even though millions will be depending on them.

• As companies have killed or curtailed pensions for employees, executive pensions have soared, largely because they are based on executives’ compensation—which has ballooned in recent decades.

• At some companies the only employees who have pensions are the corporation’s executives.

• The 401 (k) plans promoted by corporations and Congress that have replaced pensions as the main retirement plan for many employees are uninsured, and they are less secure and cost more to administer than traditional pensions, but they have provided a windfall of fees for Wall Street.

• Workers’ pensions are insured by the federal Pension Benefit Guaranty Corporation (PBGC), but the agency faces mounting deficits, raising the question of whether it will be able to fully honor all pensions that may be defaulted by private companies in the future.

The result of these changes is that America has devolved into a land of two separate and decidedly unequal retirement systems—one for the have-mores and another for the have-lesses, whose numbers are exploding. Those who have less aren’t just the poor, whose later years have always been a struggle; now they include large numbers of the middle class—men and women, individuals and families, who once eagerly awaited retirement, but now fear what those years will bring. People like Kathy Coleman of Ave Maria, Florida.

Like millions of others who once looked forward to that time, retirement isn’t on Kathy’s radar. She didn’t expect this. Kathy grew up in St. Clair Shores, Michigan, the daughter of a tool and die engineer. She graduated from Wayne State University in Detroit with majors in art and interior design. She married, had two sons, and started a career in interior design. After her sons were grown and she was single again, she moved to Florida and went to work as the cultural and social events director at the exclusive Polo Club of Boca Raton. She arranged concerts, coordinated speakers and excursions for members, prepared the annual budget and monthly reports, and helped create the club’s annual calendar of events.

In 2005, intrigued by a new town that Domino’s pizza founder Tom Monaghan was building near Naples on the west coast of Florida, she relocated, taking a job as conference director for Legatus, an organization of wealthy Catholic businessmen that Monaghan had founded. She wrote marketing copy and articles for the Legatus website and helped coordinate the group’s conferences, including an annual pilgrimage to Rome for an audience with the pope. She bought a new home in the community of Ave Maria, near the university of the same name, which Monaghan had also founded. On a quiet street, the house had three bedrooms and a pool and made an attractive place for her sons and their families to visit. It would also be a good place to retire.