WHISTLING WHILE YOU WORK: WHISTLEBLOWER STATUTES AS A NECESSARY EVIL IN

THE FIGHT AGAINST OFFSHORE TAX EVASION

INTRODUCTION

Ah, Switzerland!1 This majestic alpine nation is known for producing superb

alpine skiing, the world’s finest watches, and delicious chocolate. In addition,

Switzerland is famous for its reputation as being “peaceful [and] prosperous” with a

“stable modern market economy . . . low unemployment, a highly skilled labor force, and

a per capita GDP larger than that of the big Western European economies.”2 Due to its

low taxes on foreign investment, watertight bank secrecy laws, and stable government,

Switzerland is also one of the most welcoming sanctuaries for high-net-worth individuals

and corporations seeking to shelter income and investment gains from taxation in their

home jurisdictions.

Although Swiss banks hold $2 trillion in foreign deposits,3 they are not the only

player in the offshore tax haven game. In fact, the United States Bureau of Economic

Research believes that approximately fifteen percent of the countries in the world qualify

as tax havens.4 With so many choices available, can we really blame individuals for

1 While there are many tax havens one could use to illustrate the problems of offshore tax
evasion, Switzerland, due to its fame and presence in the news, will be used as the common
example of tax haven throughout this Note.
2 See Switzerland Tax Haven Information, available at http://www.taxhavenco.com/switzerland
(last visited 15 March 2010). In 2009, Switzerland ranked fourth amongst IMF members with a
GDP Per Capita of 66,127. See World Economic Outlook Database-October 2009, International
Monetary Fund.
3 Where the Money Goes to Hide, http://
www.theweek.com/article/index/96016/Where_money_goes_to_hide (Apr. 30, 2009, 3:36 EST).
4 See Dhammika Dharmapala & James R. Hines Jr., Which Countries Become Tax Havens?, 93 J.
PUB. ECON. at 1058-68 (2009).
trying to reduce their tax burden by seeking refuge in these so-called “places in the

sun?”5

Evading the payment of taxes has become so popular, especially in the United

States, that a 2008 Senate report suggested that roughly $100 billion in tax revenue goes

uncollected each year as a result of corporations’ and individuals’ use of shelters

provided by offshore tax havens.6 In fact, “tax flight”7 costs the United States “more in

tax revenues [each year] than corporate tax underpayments and tax shelters combined.”8

Unfortunately, this problem is not endemic to the United States, as the number of dollars

gone astray globally each year as a result of offshore tax havens is far more staggering.9

As a result of current global economic conditions, public outcry in response to

corporate malfeasance, and the need for greater funds in the federal fisc, governments

have heightened efforts, albeit unsuccessfully, to crackdown on offshore tax havens and

rein in the massive annual tax losses resulting from tax flight. These efforts run the gamut

from the Organization for Economic Co-operation and Development (“OECD”) stiff-

5 Joanne Ramos, Places in the Sun, CFO Magazine, Feb. 23, 2007, available at
http://www.cfo.com/article.cfm/8758857/2/c_8757373?f=TodayInFinance_Inside. Offshore Tax
Havens have been given this appellation because many of them are small island nations in the
Caribbean.
6 STAFF OF S. COMM. ON HOMELAND SEC. AND GOVERNMENTAL AFFAIRS, 110TH CONG.,
REPORT ON TAX HAVEN BANKS AND U.S. TAX COMPLIANCE 1 (2008) [hereinafter S. REPORT].
7 Tax flight can best be defined as the practice of hiding assets overseas (in tax havens) by
individual taxpayers in developed countries (flight jurisdictions) to avoid income taxes. Steven
Dean, Philosopher Kings and International Tax: A New Approach to Tax Havens, Tax Flights,
and International Tax Cooperation, 58 HASTINGS L.J. 911, 913 n. 10 (2006-07).
8 Id.
9 In fact, it is estimated that “the offshore world harbors $11.5 trillion in individual wealth alone,
representing $250 billion [globally] in lost annual tax revenue.” Rachel Keeler, Tax Havens and
the Financial Crises: From Offshore Havens to Financial Centers, Banking Secrecy Faces
Scrutiny, DOLLARS AND SENSE: REAL WORLD ECONOMICS, available at
http://www.dollarsandsense.org/archives/2009/0509keeler.html.

2
arming tax havens into cooperative agreements by threatening the inclusion of such

havens in a global blacklist,10 to countries entering into Tax Information Exchange

Agreements, and even to various tactics outside of the diplomatic realm.11 All of these

methods are employed with a view to obtaining information regarding wayward

taxpayers in the foreign jurisdictions.

In 2006, the United States Congress enacted Section 7623 of the Internal Revenue

Code (Code)12 with hopes of enhancing its preexisting tax whistleblower program while

simultaneously reducing lost tax revenue. Section 7623 incentivizes individuals with

inside knowledge of tax abuses to provide information to the government that will aid in

the collection of lost revenue due to tax avoidance, evasion, and fraud. The newly

amended section allows an individual who provides information that leads to tax

collection in excess of $2 million to receive an reward between fifteen and thirty percent

of the collected revenues.13 Congress enacted this provision because there are certain

cases in which the Internal Revenue Service (I.R.S.) may have difficulty identifying non-

compliant taxpayers without the services of a knowledgeable insider. One such instance

where the I.R.S. may need inside information is the identification of tax fraudsters who

are hiding behind the veil of offshore bank secrecy laws.

10 See ORG. FOR ECON. COOPERATION AND DEV., HARMFUL TAX COMPETITION: AN EMERGING
GLOBAL ISSUE (1998), available at http://www.oecd.org/dataoecd/33/0/1904176.pdf [hereinafter
OECD].
11 See Haig Simonian, The Price of a Whistleblower, FIN. TIMES, Feb. 8, 2010, available at
http://www.ft.com/cms/s/0/c71049ac-14e2-11df-8f1d-00144feab49a.html (discussing German
Chancellor Angela Merkel’s attempt to buy stolen bank records for 2.5 million Euro) [hereinafter
Price].
12 I.R.C. § 7623 (2010).
13 I.R.C. § 7623(b)(1) (2010).

3
 Part I of this Note defines the amorphous term “tax haven”14 and analyzes what

characteristics are necessary in order for a country to be a successful tax haven. Part II

will then discuss government efforts to win the war on offshore tax evasion and to close

the global tax gap. Part III will introduce the controversial whistleblower15 provision in

Code Section 7623 and provide a case study of its application. Furthermore, Part III will

recommend two changes to the provision to make it more palatable to society at large.

This Note will conclude by suggesting that while diplomatic efforts may help to lessen

the offshore tax havens’ grasp on the global banking and tax systems, recourse to areas

outside of diplomacy may, in fact, be a “necessary evil” in the war against offshore tax

evasion.

I. TAX HAVENS

A. WHAT IS A TAX HAVEN?

The heading of this section presents a question, the answer to which has eluded

scholars, policymakers, and bankers alike for many years. As a result, various groups and

organizations employ different definitions in their efforts to identify and combat abusive

tax havens. In fact, “no two lists of tax havens look quite the same; the number of entries

range anywhere from around twenty to almost one hundred jurisdictions.”16 In an effort

14 I refer to the term “tax haven” as amorphous because scholars, policymakers, and bankers
have differing views as to what exactly constitutes a tax haven. As a result, certain jurisdictions
may receive the moniker “tax haven” under some definitions but not others.
15 “The term ‘whistleblower’ derives from the practice of English bobbies who would blow their
whistles when they noticed the commission of a crime. That would alert both law enforcement
officers and the general public to the danger.” Douglas M. Mancino, Whistleblowers and Tax-
Exempt Organizations, MCDERMOTT WILL & EMERY, LLP, Mar. 2009, available at
http://www.mwe.com/info/pubs/taxationofexempts_0309.pdf.
16 Timothy V. Addison, Shooting Blanks: The War on Tax Havens, 16 IND. J. GLOBAL LEGAL
STUD. 703, 706 (2009) (citing J.C. SHARMAN, HAVENS IN A STORM 21 (2006)).

4
to reduce this confusion, the OECD published a list of four criteria to determine whether

a jurisdiction is worthy of the moniker “tax haven.”17 The first criterion in identifying a

tax haven is “whether a jurisdiction imposes no or only nominal taxes.”18 It is important

to note that this first criterion is the only essential element in assessing a jurisdiction’s

status as a tax haven. Although the remaining three criteria are not essential elements,

they are key factors that can help in determining the existence of a tax haven. These

remaining criteria are: (1) whether the jurisdiction has “laws or administrative practices

which prevent the effective exchange of relevant information with other governments on

taxpayers benefiting from the [jurisdiction]”;19 (2) whether there is a “lack of

transparency in the operation of the legislative, legal or administrative provisions . . . ”20;

and (3) finally, whether the jurisdiction requires the banking “activity be substantial.”21

The OECD, concerned that certain nations that were unlikely to attract tax flight, such as

a nation at civil war, might be deemed a tax haven, further required that a tax haven must

17 The report also listed several other factor, but they were not integral to the analysis of whether
a jurisdiction is a tax haven. The other factors are: (1) artificial definition of tax base; (2) failure
to adhere to international transfer pricing principles; (3) foreign source income exempt from
residence country tax; (4) negotiable tax rate or tax base; (5) existence of secrecy provisions; (6)
access to a wide network of tax treaties; (7) regimes which are promoted as tax minimization
vehicles; and (8) a regime which encourages purely tax-driven operations or arrangements. See
OECD, supra note 10, at 5. Note that several of these non-key factors may have some overlap
with the key factors mentioned above and could be there to reinforce the original factors.
18 Id. at 22.
19 Id. at 22. This factor is referring to what is commonly known as bank secrecy. The Swiss were
first to pen the concept of bank secrecy by passing the Banking Law of 1934 (“Act”). Bank
secrecy, in its most basic form, strongly resembles the notion of confidentiality that exists in an
attorney-client relationship. In laymen’s terms, bank secrecy exists when a jurisdiction employs
laws prohibiting banks and other financial institutions from providing personal and account
information about customers to authorities.
20 Id. at 23.
21 Id. at 22. It is believed that jurisdictions that do not have a requirement that the investment
activity be substantial tend to suggest that they may be attempting to attract investment or
transactions that are purely tax driven.

5
offer itself or be “perceived to offer itself as a place to be used by non-residents to escape

tax in their country of residence.”22 It is clear that the task of fitting a jurisdiction into

these enumerated criteria is extremely arduous in and of itself, as it requires several

stages of analysis. Perhaps an easier way to define a tax haven would be to take Michael

Littlewood’s approach and define a tax haven as a “jurisdiction which serves as a means

by which firms and individuals resident in other jurisdictions can escape the taxes that

they would otherwise be obliged to pay . . . .”23

B. WHY DO TAX HAVENS EXIST?

Although tax havens collectively account for only three percent of global GDP,

over half of world trade passes through them on an annual basis.24 It is precisely this

access to capital that is the major enticement for becoming a tax haven. Tax havens

“receive extensive foreign investment, and, largely as a result, have enjoyed very rapid

economic growth over the past twenty-five years.”25 Because these jurisdictions offer tax

rates that are substantially lower than most wayward investors’ home jurisdictions,

investors flock to these tax havens to achieve a guaranteed increase in after-tax returns on

investments.26 Scholars estimate that a ten-percent reduction in the overall tax rate on

investment in a particular jurisdiction increases foreign investment by six percent.27 This

is largely due to the swift mobility of capital. When an individual can realize a greater

22 Id. at 22. See also Dean, supra note 7, at 927.

23 Michael Littlewood, Tax Competition: Harmful to Whom?, 26 MICH. J. INT’L L. 411, 414
(2004-05).
24 Addison, supra note 16, at 711.
25 Id. (quoting Dhammika Dharmapala & James R. Hines, Which Countries Become Tax Havens
1 (NBER Working Paper No. 12802, 2006), available at http://www.nber.org/papers/w12802).
26 Id.
27 Dhammika Dharmapala & James R. Hines, Which Countries Become Tax Havens 3 (NBER
Working Paper No. 12802, 2006), available at http://www.nber.org/papers/w12802.

6
after-tax return in one jurisdiction with little risk of being caught, very little will stand in

his or her way.

C. SO, WHAT IS THE BIG DEAL?

While tax havens can provide great after-tax return to wayward taxpayers and

increased capital investment at the jurisdictional level, the consequences of such

transactions reverberate around the world like a tsunami after a deep ocean earthquake.

First of all, tax havens result in nearly $100 to $150 billion in forgone revenue to the

United States,28 and nearly $255 billion globally each year.29 Furthermore, tax havens

“lead to the wasteful expenditure of resources, both by firms in their participation in

havens, and by governments in their attempts to enforce their tax codes.30 Additionally, in

response to revenue losses imposed upon them by tax havens, tax flight jurisdictions seek

to reduce their tax rates “below levels that are efficient from the viewpoint of all

countries involved.”31 This competition creates a race to the bottom and ultimately results

in a reduction in social welfare, as countries no longer have adequate resources to provide

necessary public goods.32

II. MAJOR BATTLES IN THE WAR ON TAX HAVENS

The war on offshore tax havens will not be won by a tax flight jurisdiction

implementing laws and policies on its home turf as “the problem of offshore tax abuse

28 See Addison, supra note 16, at 704.

29 See TAX JUSTICE NETWORK, BRIEFING PAPER – THE PRICE OF OFFSHORE (March 2005),
available at http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore.pdf.
30 Joel Slemrod & John D. Wilson, Tax Competition with Parasitic Tax Havens 5 (Nat’l Bureau
of Econ. Research, Working Paper No. 12225, 2006), available at
http://www.nber.org/tmp/8335-w12225.pdf.
31 Id.
32 Id.

7
lies not with [its] tax rules but with attempts to hide from them.”33 As previously

mentioned, while certain jurisdictions may be able to craft their laws in a manner

favorable to the taxpayer by lowering taxes on investment and other forms of income, the

reduction in tax revenue from such a move will ultimately reduce overall social welfare

for the tax flight jurisdiction. Cognizant of this fact, many global organizations and tax

flight jurisdictions have undertaken various efforts to establish information sharing and

cooperation with tax havens in order to curb the tremendous loss of annual tax revenue

due to tax flight. This section proceeds by describing these efforts and offering analysis

as to why they are not perfect solutions and merely individual arrows in the ultimate

quiver needed to triumph in the war on tax havens.

A. 1998 OECD REPORT, BLACKLISTING, AND COOPERATIVE AGREEMENTS

In an attempt to push tax havens toward cooperation, the OECD published

Harmful Tax Competition: An Emerging Global Issue,34 in 1998. This report contained

two recommendations regarding the global war on tax havens. First, the report

“recommended that countries that do not have rules concerning the reporting of

international transactions and foreign operations of resident taxpayers consider adopting

such rules and that countries exchange information obtained under these rules.”35 In

addition, the report threatened jurisdictions that a later report would identify, and

effectively blacklist, countries deemed by the OECD to be “Uncooperative Tax

33 Testimony of Treasury Acting International Tax Counsel John Harrington before the S. Fin.
Comm. on Offshore Tax Evasion at 3 (May 3, 2007).
http://finance.senate.gov/hearings/testimony/2007test/050307testjh.pdf [hereinafter Testimony].
34 OECD, supra note 10.
35 Dean, supra note 7, at 927 (citing OECD, supra note 10, at 22).

8
Havens.”36 In order for a country to be deemed cooperative, the OECD required the

jurisdiction to “pledge to reduce and eventually eliminate” the policies the OECD

deemed harmful.37

In 2000, the OECD followed up this report, as promised, with the release of

Toward Global Tax Cooperation,38 which listed thirty-five (35) countries as fitting the

criteria enumerated in the 1998 report.39 This, however, was not an exhaustive list of all

of the countries deemed to meet the criteria established by the OECD. The countries that

were excluded from the initial list had “to the OECD’s satisfaction, already ‘made a

public political commitment at the highest level (an “advance commitment”) to eliminate

their harmful tax practices and comply with the principles of the 1998 report [by

2005].’”40 These commitments required the tax havens to “cease being tax havens by the

end of 2005 by developing their capacity to collect and exchange the information

36 Addison, supra note 16, at 714.

37 Id.
38 ORG. FOR ECON. CO-OPERATION AND DEV., TOWARDS GLOBAL TAX CO-OPERATION:
REPORT TO THE 2000 MINISTERIAL COUNCIL MEETING AND RECOMMENDATIONS BY THE
COMMITTEE ON FISCAL AFFAIRS: PROGRESS IN IDENTIFYING AND ELIMINATING HARMFUL TAX
PRACTICES (2000), available at http://www.oecd.org/dataoecd/9/61/2090192.pdf [hereinafter
OECD CO-OPERATION].
39 The countries listed in the 2000 report as having met the initial criteria are: Andorra, Anguilla
– Overseas Territory of the United Kingdom, Antigua and Barbuda, Aruba – Kingdom of the
Netherlands, Commonwealth of the Bahamas, Bahrain, Barbados, Belize, British Virgin Islands –
Overseas Territory of the United Kingdom, Cook Islands – New Zealand, The Commonwealth of
Dominica Gibraltar – Overseas Territory of the United Kingdom, Grenada,
Guernsey/Sark/Alderney – Dependency of the British Crown, Isle of Man – Dependency of the
British Crown, Jersey – Dependency of the British Crown, Liberia The Principality of
Liechtenstein, The Republic of the Maldives, The Republic of the Marshall Islands, The
Principality of Monaco, Montserrat – Overseas Territory of the United Kingdom, The Republic of
Nauru, Netherlands Antilles – Kingdom of the Netherlands, Niue – New Zealand, Panama,
Samoa, The Republic of the Seychelles, St Lucia, The Federation of St. Christopher & Nevis, St.
Vincent and the Grenadines, Tonga, Turks & Caicos – Overseas Territory of the United
Kingdom, US Virgin Islands – External Territory of the United States, and The Republic of
Vanuatu. Id.
40 Dean, supra note 7, at 928 (citing OECD CO-OPERATION, supra note 38, at 16).

9
required by flight jurisdictions to enforce their income taxes.”41 The OECD feared,

however, that the threat of inclusion in the 2001 List of Uncooperative Tax Havens was

not enough to force certain jurisdictions into compliance. As a result, the report urged

other nations to take “unilateral action against these tax haven states.”42

In the 2000 Report, the OECD provided eleven guidelines to assist independent

states in embarking on unilateral action against the tax havens. The guidelines provide as

follows:

• To disallow deductions, exemptions, credits, or other allowances

related to transactions with Uncooperative Tax Havens or to
transactions taking advantage of their harmful tax practices;
• To require comprehensive information reporting rules for
transactions involving Uncooperative Tax Havens or taking
advantage of their harmful tax practices, supported by substantial
penalties for inaccurate reporting or non-reporting of such
transactions;
• For countries that do not have controlled foreign corporation or
equivalent (CFC) rules, to consider adopting such rules, and for
countries that have such rules, to ensure that they apply in a
fashion consistent with the desirability of curbing harmful tax
practices (Recommendation 1 of the 1998 Report);
• To deny any exceptions (e.g. reasonable cause)43 that may
otherwise apply to the application of regular penalties in the case
of transactions involving entities organized in Uncooperative Tax
Havens or taking advantage of their harmful tax practices;
• To deny the availability of the foreign tax credit44 . . . with regard
to distributions that are sourced from Uncooperative Tax Havens
or to transactions taking advantage of their harmful tax practices;
• To impose withholding taxes on certain payments to residents of
Uncooperative Tax Havens;

41 Id. See also OECD CO-OPERATION, supra note 38, at 22.

42 Addison, supra note 16, at 714.
43 Certain tax regimes provide relief when the taxpayer “exercises ordinary business care and
prudence in determining their tax obligations but, [due to reasonable cause], is unable to comply
with those obligations.” See I.R.S., INTERNAL REVENUE MANUAL § 20.1.1.3.2 (2009).
44 A foreign tax credit is a credit received by an individual in their home country for taxes paid
on income in a foreign country. See Bookeepers.com, Foreign Tax Credit or Deduction,
http://www.bookkeeperlist.com/definitionsf.shtml.

10
 • To enhance audit and enforcement activities with respect to
Uncooperative Tax Havens and transactions taking advantage of
their harmful tax practices;
• To ensure that any existing and new domestic defensive measures
against harmful tax practices are also applicable to transactions
with Uncooperative Tax Havens and to transactions taking
advantage of their harmful tax practices;
• Not to enter into any comprehensive income tax conventions with
Uncooperative Tax Havens, and to consider terminating any such
existing conventions unless certain conditions are met
(Recommendation 12 of the 1998 Report);
• To deny deductions and cost recovery, to the extent otherwise
allowable, for fees and expenses incurred in establishing or
acquiring entities incorporated in Uncooperative Tax Havens; and
• To impose “transactional” charges or levies on certain transactions
involving Uncooperative Tax Havens.45

When the OECD published the List of Uncooperative Tax Havens in 2002, all but

seven of the original thirty-five tax havens had been removed from the list.46 However,

the measures taken by the OECD during the 1998-2005 time period have been deemed

unsuccessful, as the amount of tax revenue lost due to offshore tax evasion continues to

rise on an annual basis. Professor Steve Dean, writing in 2007, argued that several issues

contributed to the ultimate ineffectiveness of the OECD cooperative agreement initiative.

First, the cooperative agreements are entirely unilateral.47 The mere fact that “cooperation

commitments are intended to induce tax havens to help prevent tax flight, but rely

principally on transnational collateral consequences to motivate tax havens,” is what

made them so ineffective.48 A pair of nations will typically cooperate when “such

45 OECD CO-OPERATION, supra note 38, at 25.

46 See Dean, supra note 7, at 928.
47 See id. at 961 (comparing cooperative agreements to tax flight treaties and arguing that the
lack of a reciprocal promise—aside from the jurisdiction’s removal from the black list—has made
these agreements ineffective).
48 Id.

11
cooperation will improve the collective welfare of each nation.”49 It is the “promise/threat

of transnational collateral consequences in the form of changes in foreign aid policies [as

well as strict adherence to the eleven recommendations mentioned above] [that] made

[tax havens] show . . . cooperation by entering into the OECD’s cooperation

commitments but have not developed the information infrastructure the OECD sought.”50

Essentially, tax havens are sending a message to the OECD that they will not be bullied

into complying with the demands of a foreign entity without some form of reciprocal,

societal benefit. More importantly, they are fervently demonstrating that their sovereignty

should not be violated merely because they have differing viewpoints on tax

administration.51

B. INFORMATION SHARING

The free flow of information between a tax flight jurisdiction and a tax haven is,

quite possibly, the most crucial weapon in effectively combating the abuse of offshore tax

havens and the concomitant loss of revenue to the federal fisc. Information sharing

usually takes one of three forms: (1) exchange on request; (2) automatic exchange; and

(3) spontaneous exchange.52 Information is exchanged on request when a competent

authority of one country asks for particular information regarding specific taxpayers from

the competent authority of another country.”53 The automatic exchange of information

generally occurs when a source country reveals details of income arising in the source

49 Id. at 919.
50 Id.
51 Addison, supra note 16, at 711.
52 Testimony, supra note 33, at 3.
53 Id.

12
country as a result of dividends or royalties and is generally obtained on a routine basis

by the sending country. This information is readily available for transmission to the

requesting party.54 Finally, the spontaneous exchange of information occurs when the

country in possession of the information sends it to a treaty party without the party

requesting the information.55

i. BILATERAL TAX TREATIES

Broadly defined, a bilateral tax treaty is an “agreement that serve[s] to harmonize

the tax systems of two countries . . . .”56 These treaties are generally created between two

countries with the goals of reducing double taxation, eliminating tax evasion by

information sharing, and encouraging cross-border trade efficiency.57 Without a tax treaty

in place, an individual or corporation would be subject to potential taxation on “income

[earned] from cross-border transactions or investment[s] . . .” in both the foreign and the

earner’s home jurisdiction.58 A bilateral tax treaty “eliminates this double taxation by

allocating taxing jurisdiction over the income between the two countries.”59 The bilateral

tax treaty works by “eliminating the source jurisdiction’s tax” and typically favors

countries with high rates of capital exportation.60 As a result, these treaties “permit pairs

of nations to improve the flow of capital across their borders, permitting investors to

54 Id.
55 Id.
56 International Business Machines, Bilateral Income Tax Treaty Essentials,
http://www.ibm.com/ibm/governmentalprograms/bilateral-income-tax-treaty-essentials.pdf. For a
wonderful discussion on Bilateral Double Tax Treaties, see Dean, supra note 7, at 938-53.
57 See Michael J. McIntyre, Professor of Law, Wayne State University Law School, Model Tax
Treaties: A Comparison of the UN and OECD Models, available at
http://faculty.law.wayne.edu/tad/Documents/Teaching_Materials/model_treaties.pdf.
58 Id.
59 Id.
60 Dean, supra note 7, at 949 n. 132.

13
make more efficient decisions and increase the GDPs of both treaty partners.”61

In addition to eliminating double taxation and encouraging cross-border trade

efficiency, these treaties usually carry with them a provision providing for the free-flow

of information between the parties to the agreement.62 Unfortunately, as Professor Dean

argues, these information exchange provisions tend to take a back seat to the double

taxation provisions and ultimately have little effect in the exchange of information

between the parties to the treaty.63 Furthermore, bilateral double tax treaties are “more

likely to exist between pairs of countries with strong commercial ties and large amounts

of cross-border investment.”64 Dean argues that the flow of information does not always

mimic commercial ties, and as a result, gaps in the global network of double tax treaties

“inhibit the flow of useful extraterritorial tax information.”65 Due to the shortcomings

surrounding bilateral tax treaties’ ability to share meaningful extraterritorial taxpayer

information, many nations have adopted a “concept of stand-alone administrative

assistance agreements”66 also known as Taxpayer Information Exchange Agreements

(“TIEAs”).

ii. TAXPAYER INFORMATION EXCHANGE AGREEMENTS

With the limited success of the OECD’s co-operative agreements and bilateral tax

treaties in fighting offshore tax evasion, many tax flight jurisdictions have entered into

TIEAs with tax havens. A TIEA is a tax treaty between two countries for the purpose of

61 Id. at 939.
62 See Steven A. Dean, The Incomplete Global Market for Tax Information, 49 B.C. L. REV. 605
(2008).
63 See id. at 645.
64 Id. at 649.
65 Id.
66 Id.

14
sharing information regarding taxpayers who are illegally utilizing one jurisdiction’s tax

laws to evade the payment of taxes in the other jurisdiction. According to Treasury

Acting International Tax Counsel John Harrington, a TIEA must have three

characteristics that set it apart from other information-sharing treaties. First, the treaty

must provide for the exchange of information on both civil and criminal tax matters.67 In

addition, the treaty must provide for the “exchange of information even if such

information relates to a person who is not a resident or national of the tax flight

jurisdiction or the TIEA partners.”68 Finally, the TIEA must provide for the “disclosure

of information regardless of local ‘confidentiality’ laws that may prohibit such disclosure,

including laws relating to bank secrecy . . . .”69

Executing TIEAs that meet Harrington’s three characteristics has been a greater

challenge than originally anticipated. The difficulty arises because many of the tax

havens willing to enter into a TIEA with a tax flight jurisdiction will only guarantee the

release of “the requested information so long as the [requesting jurisdiction] is able to

present evidence linking the suspected individual’s bank accounts to either tax evasion or

criminal activity, primarily money laundering.”70 In Switzerland, for instance, “where

banking secrecy is a fundamental pillar of the . . . financial centre,”71 the requesting

country must provide a prima facie case that the individual in question has committed a

crime or fraud. In addition, the Swiss, along with many other tax havens, will not tolerate

67 Testimony, supra note 33, at 4.

68 Id.
69 Id.
70 Addison, supra note 16, at 717.
71 Author Unknown, Swiss to Relax Banking Laws, SWISSINFO.CH, Mar. 13, 2009, available at
http://www.swissinfo.ch/eng/Specials/Swiss_banking_secrecy_under_fire/News/Swiss_to_relax_
banking_laws.html?cid=7274384.

15
so-called “fishing expeditions.”72

What type of behavior, then, is necessary in order for a tax haven to willingly

relinquish information about individuals banking within its jurisdiction? Most

jurisdictions are only willing to exchange information that would assist in the prosecution

of a criminal matter. These jurisdictions are not at all eager to break their longstanding

traditions of bank secrecy to assist in the pursuit of a civil tax matter. Problematically,

what one jurisdiction deems criminal, the other may handle civilly. As a result, and in

order to fully grasp what is required to be shown by a requesting jurisdiction, it is

important to briefly define the various methods of tax chicanery utilized by taxpayers the

world around.

First, information about an individual using “legal means [whether at home or

internationally] to modify [his] financial situation in order to lower the amount of income

tax owed”73 is never considered a behavior that would qualify for exchange treatment.

While many people hold such behavior, especially in down economic times, in the lowest

of regard, it is neither illegal nor unpatriotic. Consider the following language from Judge

Learned Hand in the 1934 decision Gregory v. Helvering:

Anyone may arrange his affairs so that his taxes shall be as low as
possible; he is not bound to choose that pattern which best pays the
treasury. There is not even a patriotic duty to increase one's taxes. Over
and over again the Courts have said that there is nothing sinister in so
arranging affairs as to keep taxes as low as possible. Everyone does it, rich
and poor alike and all do right, for nobody owes any public duty to pay

72 BANKING SECRECY, REPORT BY THE FEDERAL DEPARTMENT OF FINANCE 3 (last updated Feb.
25, 2010), available at
http://www.efd.admin.ch/dokumentation/zahlen/00579/00607/00621/index.html?lang=en.
73 Tax Avoidance, Investopedia, http://www.investopedia.com/terms/t/tax_avoidance.asp.

16
 more than the law demands.74

Thus, the critical focus is tax evasion and fraud. In the United States, tax evasion

is an illegal practice whereby a person “willfully attempts in any manner to evade or

defeat any tax imposed by [the Code].”75 The failure to report income earned in the

United States is considered an act of tax evasion. While United States residents are

allowed to earn income in any jurisdiction they so choose, whether through work or

investments, they must report this income on their federal income tax returns.76

Deliberate underreporting of income is criminal tax evasion in the United States,

however, in a jurisdiction like Switzerland, such behavior is dealt with civilly.77

Fraud, on the other hand, is a criminal matter in nearly all jurisdictions. Fraud is

defined by the Swiss as “conduct that causes or is intended to cause an illegal and

substantial reduction in the amount of tax paid.”78 Actions that constitute fraud include

the use or “intention to use a forged or falsified document . . . or, in general, a false piece

of documentary evidence, and when the taxpayer intends to use a scheme of lies

(‘Lugengebaude’) to deceive the tax authority.”79

These legal distinctions make it extremely difficult for tax flight jurisdictions,

74 Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934),

75 I.R.C § 7201 (2010). This provision provides for a fine of “not more than $100,000 ($500,000
in the case of a corporation), or [imprisonment] of not more than 5 years, or both, together with
the costs of prosecution” for a person caught evading their US tax liability. Id.
76 See I.R.S. Instructions for Form 2555 (2009) (“If you are a U.S. citizen or a U.S. resident alien
living in a foreign country, you are subject to the same U.S. income tax laws that apply to citizens
and resident aliens living in the United States.”).
77 See Swiss Bank Secrecy and Tax Evasion, Micheloud & Cie,
http://switzerlandisyours.com/e/banking/secrecy/tax.html (intimating that the Swiss place greater
importance on personal privacy than they do on taxation such that, the failure to report or the
underestimation of income or assets are not considered a crime).
78 S. REPORT, supra note 6, at 21.
79 Id.

17
such as the United States, to procure the information necessary to prosecute tax crimes

and regain the revenue lost due to the offshore transaction. In addition, these differences

can render the TIEAs between tax flight and tax haven jurisdictions essentially moot.

Finally, these differences have the potential to create what Tim Addison has referred to as

a Catch-22.80 Addison asserts that “[t]ax havens only cooperate with investigations when

presented with evidence of [criminal] wrongdoing. Without a tax haven’s cooperation,

however, such evidence is usually unavailable and nearly impossible to obtain.”81 Even in

a case of fraud or active deception, the requesting party will need to demonstrate that

there is a valid case against a particular individual.82 The result is that these TIEAs will

continue to have a small effect on the overall reduction in offshore tax haven abuse.

iii. NON-DIPLOMATIC EFFORTS

“Ultimately, until tax havens permit the automatic disclosure of the tax

information of those individuals earning income in their jurisdiction, the only truly

effective and viable option to deter tax evasion and reduce the tax gap must occur on the

domestic front.”83 As a result of failed diplomatic efforts, many tax flight jurisdictions

80 See Addison, supra note 16, at 718 (citing JOSEPH HELLER, CATCH-22 (Simon and Schuster
1999) (1959)).
81 Id.
82 In response to great outside pressure, the Swiss amended an agreement with the United States
in 2009 to provide the United States with banking information for thousands of bank customers
accused of tax evasion. The amendment, however, required that the United States provide the
names of the banks customers in order for the information to be overturned. Anything less will be
deemed by a fishing expedition by the Swiss. This amendment was turned on its face, however,
by a February 2010 court decision prohibiting the release of the client information unless the
United States could prove that the customers were engaged in active fraud. See Joseph Heaven,
UBS Clients Win Ruling Over U.S. Tax Data Transfers, BUS. WEEK, Feb. 26, 2010, available at
http://www.businessweek.com/news/2010-02-26/two-more-ubs-clients-win-ruling-blocking-data-
transfers-to-u-s-.html.
83 Addison, supra note 16, at 722-23.

18
have resorted to unilateral tactics that are outside the bounds of diplomacy, and perhaps

even the law. In February 2010, German Chancellor Angela Merkel authorized the

payment of €2.5 million for stolen information relating to “1,000 to 1,500 Germans with

bank accounts in Switzerland.”84 This is not the first occurrence of such behavior by the

German tax authorities. In 2008, the German Secret Service purchased data regarding

thousands of individuals who banked with Liechtenstein’s largest bank.85 Germany

subsequently used the information to initiate the prosecution of its own citizens and also

provided the information to other jurisdictions so that they could pursue a similar course

of action.86 Germany and other countries consider the problem to be so severe that they

have allegedly infiltrated banking organizations by placing service individuals in business

roles to gather the necessary information, and by sending undercover operatives to tax

planning and informational seminars to “network.”87

While such efforts may be marginally effective in procuring the information

necessary to initiate criminal actions against a wayward taxpayer, they are certainly not

good for diplomatic relations and the furthering of international cooperation. Yet, in

recent years, the United States has acted in similar fashion, albeit under American tax

law, by handsomely rewarding inside whistleblowers for the provision of information

leading to the collection of lost tax revenue. The next Part will discuss the whistleblower

provision and provide an example of its firepower in the war to end offshore tax haven

abuse.

84 Price, supra note 11.

85 Id.
86 Id.
87 Id.

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III. WHISTLEBLOWER PROVISIONS

A. WHISTLEBLOWER PROVISIONS AND SECTION 7623

The notion that “private enforcement of public law is particularly appropriate

when regulators, due to asymmetric information and active concealment on the part of

regulated entities, are unable to enforce and prosecute the law effectively,”88 has certainly

withstood the test of time. In fact, for over 100 years, the United States has had a tax

informant statute permitting the federal government to pay individuals who supply

information for the “detecting and bringing to trial and punishment persons guilty of

violating the internal revenue laws . . . .”89 The initial whistleblower provision was

codified in the Revenue Act of 1934, which provided for “expenses for the detection and

punishment of frauds, related to the internal revenue laws.”90 Congress recodified the

statute as Code Section 7623 in 1954, and it remained largely unchanged until 2006.91

In 2006, Congress amended Section 7623 and “created a centralized

Whistleblower Office [to] process tips received from individuals who ‘spot tax problems

in their workplace, while conducting day-to-day personal business, or anywhere else they

may be encountered.’”92 In addition to the creation of the Whistleblower Office, amended

Section 7623 is a statute which “pays [hefty] bounties to private citizens for detecting

underpayments of tax and assisting [in] the successful prosecution of tax cheats.”93

Section 7623(b) of the Code provides, in pertinent part:

88 Dennis J. Ventry, Jr., Whistleblowers and Qui Tam for Tax, 61 TAX LAW. 357, 371 (2007-08).
89 Id. at 360.
90 Id. at 361.
91 Id.
92 Id.
93 Id. at 372.

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 Rewards to whistleblowers. If the Secretary proceeds with
any administrative or judicial action described in
subsection (a) based on information brought to the
Secretary's attention by an individual, such individual shall,
subject to paragraph (2), receive as an reward at least 15
percent but not more than 30 percent of the collected
proceeds (including penalties, interest, additions to tax, and
additional amounts) resulting from the action (including
any related actions) or from any settlement in response to
such action. The determination of the amount of such
reward by the Whistleblower Office shall depend upon the
extent to which the individual substantially contributed to
such action.94

In order to claim a reward under Section 7623(b), a whistleblower must turn in a

claim against an individual with an annual income of $200,000 and the claim must be for

taxes in excess of $2,000,000.95 While the heightened whistleblower reward under

Section 7623(b) prevents many people from claiming relief due to the dollar amounts

involved, Section 7623(a) allows for a reward when the dollar thresholds of Section

7623(b) are not met.96

The newly revamped whistleblower program proved successful as early as May of

2007. The Whistleblower Office’s first director, Steven Whitlock, was quoted in the Wall

Street Journal stating that “knowledgeable insiders” were turning over “big, fat piles of

paper.”97 Some of these “piles of paper” involved the recovery of hundreds of millions of

dollars.98 The incidence of such “whistleblowing” did not wane in the months following

94 I.R.C. § 7623(b) (2010).

95 Id.
96 See I.R.C. § 7623(a)(2010); see also I.R.S. Pub. No. 733 (Nov. 2004) (indicating that the
reward under Section 7623(a) can equal up to 15% of the amount recovered or $10,000,000,
whichever is less).
97 Tom Herman, Whistleblower Law Scores Early Success, Higher Rewards Attract Informants
Submitting Tips, WALL ST. J., May 16, 2007, at D3 (quoting Director Whitlock).
98 Ventry, supra note 88, at 361.

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the program’s inception, as evidenced by two accounts in 2007 of underpayments in the

$1-2 billion dollar range.99

While these early accounts occurred at the domestic level, the high level of

reward provided by the provision has the potential to entice insiders at the international

level to reveal information relating to the banking practices of organizations located in

offshore tax haven jurisdictions. To demonstrate the effect of this statute in relation to tax

havens, this Note will provide a detailed account of one of the most famous banking

scandals in history, as well as a classic representation of the whistleblower provision’s

power in obtaining information from informants regarding American citizens’

fraudulently excluded income.

B. THE UBS SCANDAL AND BRAD BIRKENFELD

From 2000-2007, UBS AG, one of the largest financial institutions in the world,

“made a concerted effort to open accounts in Switzerland for wealthy U.S. clients,

employing practices that could facilitate, and have resulted in, tax evasion by U.S.

clients.”100 During this time, Bradley Birkenfeld worked for UBS in its Geneva private

banking operations.101 As a private banker for UBS, Mr. Birkenfeld assisted U.S.

taxpayer Igor Olenicoff in hiding $200 million in assets in both Switzerland and

99 Id. at 361-62. See also J.P Finet, Tax Whistleblower Action Claims $1 Billion Underpayment
by Fortune 500 Company, DAILY TAX REP. (BNA), Oct. 12, 2007, at G-5; J.P. Finet,
Whistleblower Action Claims Major Firm Underpaid Its U.S. Taxes by $2 Billion, 238 DAILY
TAX REP. (BNA), Dec. 12, 2007, at G-9.
100 S. REPORT, supra note 6, at 8 (suggesting that UBS’s activities included “maintaining for an
estimated 19,000 U.S. clients ‘undeclared’ accounts in Switzerland with billions of dollars in
assets that have not been disclosed to U.S. tax authorities; assisting U.S. clients in structuring
their accounts to avoid QI reporting requirements; and allowing its Swiss bankers to market
securities and banking services on U.S. soil without an appropriate license in apparent violation
of U.S. law and UBS policy”).
101 Id.

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Liechtenstein, as well as in evading $7.2 million in U.S. taxes.102 U.S. authorities arrested

Mr. Birkenfeld in 2008 and he pled guilty to the charges against him. The United States

subsequently gave Mr. Birkenfeld a prison sentence of 40 months for his efforts relating

to Mr. Olenicoff.103 However, a hefty prison sentence may not be the only reward Mr.

Birkenfeld receives from the federal government.

In June 2007, prior to his incarceration, Mr. Birkenfeld, “motivated in large part .

. . by the new reward law,”104 provided the United States with information relating to

UBS’s activities in sheltering billions of dollars of income for American clients.105 The

disclosure of such information, relating to potentially 52,000 offshore clients, has allowed

the I.R.S. and the Department of Justice to force the hand of the Swiss in turning over

account details of roughly 4,450 UBS clients.106 It is expected that these clients will “pay

billions of dollars in back taxes, penalties, and interest,”107 into the federal fisc.

Furthermore, as a result of the disclosure, the I.R.S. created an amnesty program that has,

thus far, accounted for nearly 14,700 offshore tax evaders,108 “yielding extra billions in

tax for the Treasury.”109 Finally, Mr. Birkenfeld’s disclosure was acknowledged by the

Department of Justice as the “crucial factor leading to the criminal investigation of

102 Id.
103 Lynnley Browning, Ex-UBS Banker Seeks Billions for Blowing Whistle, N.Y. TIMES, Nov.
27, 2009, available at
http://www.nytimes.com/2009/11/27/business/27whistle.html?_r=1&pagewanted=print
[hereinafter Billions].
104 Janet Novack & William P. Barrett, Tax Informants Are on the Loose, FORBES, Dec. 14,
2009, available at http://www.forbes.com/forbes/2009/1214/investment-guide-10-ubs-irs-
spondello-tax-informants-on-loose.html [hereinafter Informants].
105 S. REPORT, supra note 6, at 9.
106 Billions, supra note 103.
107 Id.
108 Id.
109 Id.

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UBS,”110 which led to UBS admitting to the wrongdoing and agreeing to pay a $780

million fine to the United States.111

Because of his efforts, and much to the chagrin of U.S. regulators, Mr. Birkenfeld

is seeking a reward under Code Section 7623 from the “fine that UBS paid . . . collections

from the data turned over under [the] agreement with UBS, and . . . collections from

individuals who came forward under the IRS voluntary disclosure initiative . . . .”112 It is

estimated that under the whistleblower program, Mr. Birkenfeld stands to receive a

reward in the billions of dollars.113

Is it too much for Mr. Birkenfeld to ask that the I.R.S. honor Section 7623 in this

case? After all, the information he disclosed could result in the return of hundreds of

billions of dollars to the Treasury. The Department of Justice seems to think so. In fact,

they have gone so far as to label him a mere tipster and not a whistleblower.114

It would be most unfortunate if the Department of Justice and I.R.S. deny Mr.

Birkenfeld what is rightfully his under the Code. First of all, while the Code provides for

a reduction in or a complete denial of the reward if the individual either planned and

initiated the actions which led to the underpayment of taxes or was convicted of criminal

conduct arising from the planning and initiation of the scheme to defraud the I.R.S.,115

110 Id.
111 Id.
112 David D. Stewart, Attorney in UBS Scandal Sees Reward Claim as Test of U.S.
Whistleblower Policy, TAX NOTES TODAY, Dec. 7. 2009 [hereinafter Attorney].
113 Id.
114 Billions, supra note 103. Such labeling is due to the fact that “while he described the bank’s
dealings, he provided few details on actual clients . . . .” Id.
115 See I.R.C. § 7623(b)(3).

24
Mr. Birkenfeld is not seeking a reward for his actions relating to Mr. Olenicoff.116

Instead, he is seeking a reward for the billions of dollars returned to the U.S. as a result of

his dissemination of information relating to UBS’s unscrupulous banking practices. In

addition, denying Mr. Birkenfeld a reward in this situation would effectively eliminate

render the whistleblower provision’s potential to aid in the battle against offshore tax

evasion, as certain individuals would have little incentive to risk their careers,

relationships, and, in some cases, their safety, in order to assist the federal government in

its war on offshore tax haven abuse.

While the whistleblower provision has great potential to assist in the battle against

offshore tax havens, it is not without its warts. The following section proposes two

changes to the rule that would make it more palatable to society, as well as more enticing

to individual whistleblowers looking to come forward with helpful information.

C. CHANGES RECOMMENDED TO 7623

As evidenced by the above case study, the 2006 amendments to Section 7623

were definitely a step in the right direction toward ending the abuse of offshore tax

havens by American citizens. In fact, the combination of the new whistleblower program

and Mr. Birkenfeld’s disclosure forever changed the “entire game . . . on international tax

evasion.”117 By providing a huge financial incentive to informants, Congress has

116 See Attorney, supra note 112 (suggesting that Mr. Birkenfeld is seeking “potential
compensation from the fine that UBS paid under its deferred prosecution agreement, collections
from the data turned over under that agreement and the subsequent John Doe summons
settlement, and collections from individuals who came forward under the IRS voluntary
disclosure initiative that brought in 14,700 individuals”); see also Billions, supra note 103
(suggesting that Mr. Birkenfeld should not have his reward reduced because he is not seeking
money for actions surrounding his own clients).
117 See Informants, supra note 104.

25
increased the likelihood that individuals will put it all on the line and come forth with

information that only they have access to. As with every good statute, however, there is

room for improvement in the whistleblower program.

First of all, if Congress really wants to ensure that individual informants will

come forward with information, they need to amend Section 7623 to include an amnesty

provision.118 Most inside informants, like Birkenfeld, do not have entirely clean hands. In

fact, Dean Zerbe, who is special counsel to the National Whistleblowers Center,

suggested that when they were drafting the law they knew that they would not have “Boy

Scouts coming forward, particularly in the tax area, because of the need to have people

that are on the inside that are going to be able to tell you what is going on.”119 Zerbe

claims that there are “people in Switzerland who want to blow the whistle on other banks

but are scared because of what they saw with Birkenfeld.”120 If the United States does not

provide amnesty in some form, whether complete amnesty or a reduction in the

whistleblower’s sentence, then it is likely that the whistleblower program will be as

ineffective as other past efforts to squash offshore tax evasion.

Secondly, in exchange for the addition of an amnesty provision in Section 7623,

Congress should lower the amount of the reward received by the whistleblowers. The

prospect of doling out billions of dollars to bad actors who essentially tattle on others

118 See National Whistleblowers Center Letter Urges Review of Birkenfeld Case, TAX NOTES
TODAY, October 23, 2009 (arguing that a failure to review Mr. Birkenfeld’s sentence could have
a chilling effect on other potential whistleblowers). This argument can be construed as an implicit
argument for an amnesty provision in Section 7623 for whistleblowers with less-than-clean
hands.
119 Stewart, supra note 112.
120 Informants, supra note 104.

26
leaves a rather bad taste in many taxpayers’ mouths.121 As such, lowering the potential

payout to somewhere in the range of 10-20% of the amount recovered including interest,

penalties, additions to tax, and additional amounts, might make the provision seem more

fair. Not only would the U.S. taxpayers save money by shortening, if not completely

eliminating, lengthy prison sentences, they would also save money by not funding overly

generous whistleblower rewards.

Although my proposal to decrease the reward might seem like a disincentive to

the would-be whistleblower, the fact of the matter is many individuals are currently not

coming forward because of the fear that they will be incarcerated for their past actions.122

While the monetary reward is being reduced under my proposal, individual

whistleblowers will not only be handsomely rewarded, they will gain peace of mind

knowing that their past behavior will not lead to a lengthy period of incarceration. If

Congress at least entertains these two recommendations in its next attempt to amend

Section 7623, the United States will likely see an increase in tax revenue—revenue

previously sheltered in offshore tax havens.

IV. CONCLUSION

121 For an example see Ventry, supra note 88, at 358. Senator Harry Reid referred to the
whistleblower program as “Reward for Rats” and informed Congress that the [I.R.S.] was
effectively “paying snitches to act against associates, employers, relatives and others—whether
motivated by greed or revenge—in order to collect taxes. Id. In addition, Reid insisted that the
program was “unseemly, distasteful, and just wrong,” as well as “a powerful incentive to anyone
interested in becoming rich at the expense of a neighbor, former business associate, former wife,
[sic] former husband.” Id. After an exhaustive search of the legislative history surrounding the
decision to set the range between 15 and 30 percent, I am unable to find a justification or
rationale for setting the range as such.
122 See supra note 99 and accompanying text.

27
 Individuals and corporations alike abuse offshore tax havens, to the tune of $100

billion per year. In response to public outrage and the need for greater resources in the

federal fisc., many nations and international organizations have embarked on efforts to

stop such abuse in its tracks. Unfortunately, strong traditions of bank secrecy have

limited the amount of information that tax havens will release to foreign jurisdictions, and

have rendered most of the efforts only marginally effective. As a result, unless tax haven

jurisdictions suddenly decide to change how they deal with private banking information,

private action may become one of the sharpest, straightest arrows in the quiver used to

fight offshore tax haven abuse. This Note’s proposed revamping of Section 7623 will

likely result in greater participation in the I.R.S.’s whistleblower program, a warming of

public sentiment toward whistleblowers, and, with any luck, further progress in the battle

to stop offshore tax haven abuse.

28