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As greet_sed and I have both pointed out, does any one or more of these paramters have whitespaces
in them without quotes or NULL values?

Possible ones are:-
USERNAME="$1"
LOCAL_DIRECTORY="$3"...

For our new member

This explains what a here-doc is:

Here Documents (http://www.tldp.org/LDP/abs/html/here-docs.html)

My understanding is the sftp works fine when in interactive mode and...

Posting "Does not work" without explanation does not help you or anyone. If a command does not work for you, please show the exact circumstances you used it, and the exact error or malfunction you...