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UBS: A Pattern of Ethics Scandals
©SEBASTIAN DERUNGS/AFP/Getty Images
UBS WAS FORMED in 1997 when Swiss Bank Corp. merged with Union Bank of
Switzerland. After acquiring Paine Webber, a 120-year-old U.S. wealth
management firm, in 2000, and aggressively hiring for its investment banking
business, UBS soon became one of the top financial services companies in the
world and the biggest bank in Switzerland. Between 2008 and 2015, however, its
reputation was severely tarnished by a series of ethics scandals. These scandals
cost the bank billions of dollars in fines and lost profits, not to mention a severely
diminished reputation. Even more important, they seem not to be isolated
instances, but rather to suggest a troubling pattern.
Ethics Scandal No. 1: U.S. Tax Evasion
Swiss banks have long enjoyed a competitive advantage conferred by Swiss
banking privacy laws that make it a criminal offense to share clients’ information
with any third parties. The exceptions are cases of criminal acts such as accounts
being linked to terrorists or tax fraud. Merely not declaring assets to tax
authorities (tax evasion), however, is not considered tax fraud. After the
acquisition of Paine Webber, UBS entered into a qualified intermediary (QI)
agreement with the Internal Revenue Service (IRS), the federal tax agency of the
U.S. government. Like other foreign financial institutions under a QI agreement,
UBS agreed to report and withhold taxes on accounts receiving U.S.-sourced
income. This reporting is done on an aggregate basis to protect the identity of the
non-U.S. account holders.
In mid-2008, it came to light that since 2000, UBS had actively participated in
helping its U.S. clients evade taxes. To avoid QI reporting requirements, UBS’
Switzerland-based bankers had assisted the U.S. clients to structure their
accounts by divesting U.S. securities and setting up sham entities offshore to
acquire non-U.S. account holder status. Aided by Swiss bank privacy laws, UBS
successfully helped its U.S. clients conceal billions of dollars from the IRS. In
addition, UBS aggressively marketed its “tax-saving” schemes by sending its
Swiss bankers to the United States to develop clientele, even though those
bankers never acquired proper licenses from the U.S. Securities and Exchange
Commission (SEC) to do so.
The U.S. prosecutors pressed charges on UBS for conspiring to defraud the
United States by impeding the IRS. In a separate suit, the U.S. government
requested that UBS to reveal the names of 52,000 U.S. clients who were believed
to be tax evaders. In February 2009, UBS paid $780 million in fines to settle the
charges. Although it initially resisted the pressure to turn over clients’
information, citing Swiss bank privacy laws, UBS eventually agreed to disclose
some 5,000 account details, including individual names, after intense
negotiations involving officials from both countries. Clients left UBS in droves:
Operating profit from the bank’s wealth management division declined by 60
percent, Page 525 or $4.4 billion, in 2008 alone; it declined by another 17
percent, or $504 million, in 2009.
The UBS case has far-reaching implications for the bank’s wealth management
business and the Swiss banking industry as a whole, especially its cherished
bank secrecy. To close loopholes in the QI program and crack down on tax
evasion in countries with strict bank secrecy traditions, President Obama signed
into law the Foreign Account Tax Compliance Act (FATCA) in 2010. The law
requires all foreign financial institutions to report offshore accounts and
activities of their U.S. clients with assets over $50,000, and to impose a 30
percent withholding tax on U.S. investments or to exit the U.S. business.
Switzerland has agreed to implement the FATCA. The annual compliance cost for
each Swiss bank is estimated to be $100 million.
Ethics Scandal No. 2: Rogue Trader
On September 15, 2011, UBS announced that a rogue trader named Kweku
Adoboli at its London branch had racked up an unauthorized trading loss of $2.3
billion over three years. Nine days later, UBS CEO Oswald Grübel resigned “to
assume responsibility for the recent unauthorized trading incident.”1 After more
than a year of joint investigation by the U.K. and Swiss regulators, the case
was concluded with findings that systems and controls at UBS were
“seriously defective.”2 As a result, Adoboli, a relatively junior trader, had
been able to take highly risky positions with vast amounts of money. More
alarmingly, all three of Adoboli’s desk colleagues admitted that they knew
of his unauthorized trades. Moreover, Adoboli’s two bosses had shown a
relaxed attitude toward his breaching of daily trading limits.
UBS was fined $47.6 million in late 2012. Adoboli was sentenced to seven
years in prison, of which he served about half before being released in
2015. By summer 2017, he was still fighting his deportation order from
Britain, where he had arrived at age 12 from his native Ghana to attend
Ethics Scandal No. 3: LIBOR Manipulation
LIBOR, or the London Interbank Offered Rate, is the interest rate at which
international banks based in London lend to each other. LIBOR is set daily:
A panel of banks submits rates to the British Bankers’ Association based on
their perceived unsecured borrowing cost; the rate is then calculated using
a “trimmed” average, which excludes the highest and lowest 25 percent of
the submissions. LIBOR is the most frequently used benchmark reference
rate worldwide, setting prices on financial instruments worth about $800
trillion, including mortgage rates, term loans, and many others.
UBS, as one of the panel banks, was fined $1.5 billion in December 2012 by
U.S., UK, and Swiss regulators for manipulating LIBOR submissions from
2005 to 2010. Besides accepting the fine, UBS pleaded guilty to U.S.
prosecutors for committing wire fraud. During the stated period, UBS acted
on its own or colluded with other panel banks to adjust LIBOR submissions
to benefit UBS’s own trading positions. In addition, during the second half
of 2008, UBS instructed its LIBOR submitters to keep submissions low to
make the bank look stronger. At least 40 people, including several senior
managers at UBS, were involved in the manipulation. One major conviction
was handed down.
In particular, 35-year-old Tom Hayes, a former UBS (and Citibank) trader,
was sentenced to 14 years in prison for rigging the LIBOR. The jail sentence
was much longer than what was expected. The judge presiding over the
case stated that the court wanted to send a powerful message to banks
around the world that financial crime will be severely punished and will no
longer be settled with just a fine (paid by the bank). Hayes argues that he is
the scapegoat for senior management failings: “I refute that my actions
constituted any wrong doing… I wish to reiterate that my actions were
consistent with those of others at senior levels… senior management was
aware of my actions and at no point was I told that my actions could or
would constitute any wrongdoing.”3
In contrast, prosecutors maintained that Hayes was the mastermind
behind a corrupt ring of traders and brokers globally, motivated by a
desire to make his performance look stronger. Just a few years earlier,
Hayes had been considered one of the most talented traders in the banking
industry, whom Goldman Sachs tried to poach from UBS with the promise
of a $3 million signing bonus.
Following an appeal, in 2015, Hayes’ sentence was reduced to 11 years. In
his letters from prison, Tom Hayes states that he is being held basically in
solitary confinement away from other inmates. Authorities indicate that
this is done for his protection.
Ethics Scandal No. 4: UBS “Did It Again”
In 2015, in the wake of the LIBOR rigging scandal, the U.S. Department of
Justice voided the $1.5 billion settlement from 2012 with UBS, adding
another $200 million in fines. Perhaps more damaging, UBS pleaded guilty
to allegations that its UBS traders (including Hayes) manipulated LIBOR.
UBS had avoided prosecution in 2012 by agreeing to cooperate with
authorities and promising not to engage in rate rigging and other illegal
activities in the future. The Department of Justice now alleges that UBS
violated the terms of the agreement and “did it again.” This time,
prosecutors say that UBS manipulated foreign-exchange rates. In
particular, UBS and other banks are accused of having colluded in moving
foreign-exchange rates for their own benefit and to the detriment of their
clients. The Justice Department views UBS as a “repeat offender,” especially
in light of a 2011 settlement related to antitrust violations in the
municipal-bond investments market.
1. This MiniCase details several ethics scandals that occurred at UBS in
recent years. What does that tell you about UBS?
2. Given repeated ethics failures at UBS, who is to blame? The CEO? The
board of directors? The supervising managers? The individuals directly
involved? Who should be held accountable? Is it sufficient just to fine
3. Given the information provided in this MiniCase, do you think that the
11-year jail sentence for Tom Hayes was too harsh? Did he serve as a
scapegoat? Note: The average jail sentence served for a person
convicted of murder is 17 years in England and Wales.
4. What can UBS do to avoid ethics failures in the future and to repair its
5. Does the number of broke the rules by financial institutions has increased or.
decreased after judgement?
6. Why do big financial institutions offend like this, what should
they do to avoid it in the future?
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