Tax Whistleblowers’ 21276-13W & 21277-13W

A husband and wife team, Whistleblowers’ 21276 and 77, played the leading roles in a high-stakes confidential “sting” operation against a sophisticated international criminal enterprise that managed over $1.2 billion in offshore “secret accounts.” Based on the whistleblowers’ undercover activities, the fraudsters were criminally convicted and paid $74 million in fines and penalties. The case set the national precedent covering tax whistleblowers whose work with the Justice Department resulted in criminal convictions. After two significant victories in Tax Court, the whistleblowers obtained $17.4 million in rewards.

Based on the whistleblowers’ undercover activities, the fraudsters were criminally convicted and paid $74 million in fines and penalties. The case set the national precedent covering tax whistleblowers whose work with the Justice Department resulted in criminal convictions. After two significant victories in Tax Court, the whistleblowers obtained $17.4 million in rewards.

Whistleblowers’ 21276 and 77 engaged in high-stakes undercover operations, successfully penetrating an international criminal enterprise. The sensitivities of the case were such that the Tax Court issued a protective order prohibiting the public disclosure of either of the whistleblowers’ names or the international financial institution that they blew the whistle on. The Tax Court also issued two of the most critical rulings ever issued in tax whistleblower cases. The first permitted the whistleblowers to qualify for a reward even though they late-filed their formal award application. The second created the national precedent allowing tax whistleblowers to obtain rewards based on the Department of Justice criminal proceedings, expanding the scope of the IRS law beyond tax remedies, and including all criminal penalties and civil forfeitures. Their case was explicitly relied upon by Congress in eventually amending the tax whistleblower law to drastically increase the scope of “collected proceeds” for which the basis for determining rewards.

A Crime Novel

The action taken by Whistleblowers’ 21276 and 77 read like a crime novel. The Tax Court explained the case: The “Targeted Business” knew it was violating U.S. laws, and thus had “instructed its partners, officers, and employees not to come to the United States.” The whistleblowers informed the Justice Department and IRS of the Targeted Business’s illegal activities, and they presented a “plan to lure” a key employee with the business to enter the United States. The whistleblowers explained that this key employee, referenced in the Tax Court decision only as “X,” could be flipped into a witness for the United States and, after that, provide all the evidence needed to convict the Targeted Business.

The whistleblowers “believed X would disregard the Targeted Business’ admonition not to come to the United States if given sufficient financial motivation.” Further, “that if X came to the United States, Federal law enforcement agents could arrest him, and to ‘save his own skin’ X would provide information that would indict the Targeted Business” They describe X as “a weak person. . . He will fold and give up and work with the U.S. government . . . he was very greedy, and he was open to kickbacks.” The whistleblowers put it bluntly: “When we throw the bone, he will bite the bone. And when we have him, he will, excuse my English, spill his guts.”

The Plan

The Tax Court explained “The Plan:” In 2010 petitioners met with U.S. Government agents (including FBI, ICE, and IRS agents), as well as British agents from the Metropolitan Police Service (Met), to formulate a plan to entice X to enter the United States. . . . X would be told that one of [the whistleblowers’ clients] had embezzled funds . . . X would be told that [the whistleblowers] held the $1.2 million in a Bahamian bank account to avoid payment of U.S. tax and that they wanted to move the money into a new bank account which would be held in the name of an “old boarding school friend” . . . X would be told that petitioners wanted him to assist them in transferring the money, and in exchange for that assistance, X would receive $40,000.”

The Sting

The whistleblowers drafted the “paperwork required to make it appear” that the ‘embezzled funds” looked real and “then contacted X and told him [the whistleblowers] were in a dire situation and that it was imperative for them to meet. X was told to meet the whistleblower [the wife]. X “trusted” the wife.

“In February 2010 [the] wife flew to England to meet X. Agreeing to meet X was difficult for petitioner wife:” She explained: “’I was scared. I was nervous. * * * It was obviously very important that I do a good job. So, I had to fly by myself. Agents didn’t fly with me.’”

“The wife arrived in England the day before her scheduled meeting with X. She met with Federal agents who, after checking her hotel room for ‘bugs’, discussed her upcoming meeting with X. After speaking with the agents, she walked with them to the meeting place, a popular hotel lounge. Petitioner wife was informed that approximately 10 American and British agents would be in the lounge during the meeting. Petitioner wife and the agents next went to the U.S. Embassy, where she was instructed to leave the lounge if she believed something was amiss. Petitioner wife spent the remainder of the day rehearsing what she would say to X. Specifically, she needed to explain how the plan would work, state that the $1.2 million came from embezzled money and that petitioners had not paid tax on that money, tell X about the beneficial owner, and make arrangements for X to meet the beneficial owner at another meeting.”

“On the morning of the meeting, the Federal agents attached a recording device to petitioner wife and placed a backup recorder in her purse. Petitioner wife then went to the lounge and waited for X to arrive. When X arrived 10 to 15 minutes later, he and petitioner wife conversed in a foreign language. Over the course of an hour, petitioner wife was able to complete her talking points and record the incriminating conversation. After the meeting, petitioner wife flew to Philadelphia and spent several days reviewing the English translation of the transcript of her conversation with X to ensure accuracy.”

“For several weeks, no one heard from X. The Government agents began to be concerned that, as [the] husband put it, X ‘got totally cold feet.’” The husband then agreed to fly to “the Cayman Islands to meet X in order to ‘rein him back in’. [The] husband and X met, and X agreed to meet the beneficial owner.” The meeting with the beneficial owner was a key to getting X to enter the United States. The “beneficial owner” was in fact a police agent working for the government.

The Husband and Wife whistleblower team also agreed to wear wires, and they conducted extensive taping of their conversations with X. “[O]ver a period of two months, [the] husband called X in an effort to get him to make incriminating statements. Eventually, [the] husband got two recordings in which X discussed the fact that the $1.2 million came from embezzled money, that [the whistleblowers] had not paid tax on it, and that X would assist in the movement of the $1.2 million to a new bank account.”

The Arrest of X

“The next step was to draw X to the United States. Since X had been instructed by the Targeted Business to avoid entering the United States, a certain amount of enticement was necessary. [The] husband contacted X and convinced him to fly to Florida to meet the beneficial owner before traveling to the . . . the Bahamas. He told X that the beneficial owner would give him $15,000 in cash as a down payment when they met. X agreed to fly to Florida where he was arrested.

“After a week in custody, X agreed to assist the Government agents in their pursuit of the Targeted Business. X’s arrest was kept quiet so as not to alert the Targeted Business; eventually, he was released and permitted to return abroad. Upon his return, X informed one of the Targeted Business’ owners that he had been arrested in the United States and that he needed help. When the Government agents learned of X’s betrayal, they directed [the whistleblowers] to convince X to follow through on his commitment.

“[The whistleblower-husband] persuaded X to meet him. [The] husband appealed to X’s avariciousness by telling him that their meeting was necessary to resolve a number of issues with clients that affected payments to be made to X. Their meeting was tense. [The] husband bluntly laid out X’s situation. He told X that if he did not cooperate with U.S. authorities, he would be unable to travel internationally for the rest of his life, because “as soon as you jump over the water, they get you.” [The whistleblower] used himself as an example of the benefits of cooperation. He explained that the Government agents kept their word, and he warned X that “[i]f you screw them, you’re screwed”. Ultimately X agreed to cooperate with the Federal authorities.

“After X began cooperating with the Government agents, a U.S. attorney’s office opened a criminal investigation of the Targeted Business. . . . The Targeted Business was indicted, with a subsequent superseding indictment, for conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret accounts, and the income generated therefrom, from the IRS. The Targeted Business pleaded guilty, as [the whistleblowers’] predicted.”