Ubs service clientele

Case: UBS: A Pattern of Ethics Scandals 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.