UBS: A Pattern of Ethics Scandals

By :

Annisa Kharina (29115699)

Karina Permata Sari (29115447)

Master of Business Administration Program

School of Business and Management

Institut Teknologi Bandung


.........................6 Chapter 4: Case Analysis and Solution Chapter 5: Conclusion and Recommendation Chapter 6: Lesson Learned REFERENCES Chapter 1: Case Synopsis 2 ...................................................................................................................................................................................1 Corporate Social Responsibility ................................................4 Chapter 3: Related Theories.........Chapter 1: Case Synopsis..................5 3.......................3 Chapter 2: Issue Identification....................................................................................................................3 Strategic Leadership ........................................................5 3..........................................................5 3............................................2 Corporate Governance .........

U. and to impose a 30 percent withholding tax on U. as one of the panel banks.S. formed in 1997 from the merger of Swiss Bank Corp. UBS was fined $47. Adoboli.. between 2008 and 2015 UBS’s reputation was severely damaged by a series of ethics scandals which resemble a troubling pattern: 1. clients evade taxes. the federal tax agency of the U. Switzerland has agreed to implement the FATCA. 2011.S.S.S.6 million in late 2012.S. UBS 3 .S.. investments or to exit the U. and Swiss regulators for manipulating LIBOR submissions from 2005 to 2010.S. a relatively junior trader. 3." As a result. was fined $1. Rogue Trader  On September 15. LIBOR Manipulation  LIBOR. The law requires all foreign financial institutions to report offshore accounts and activities of their U.S wealh management firm in 2000 with the combination of aggressive hiring for its investment banking business.5 billion in December 2012 by the U.S. and Union Bank of Switzerland.K. However. More alarmingly. is the interest rate at which international banks based in London would lend to each other. UBS entered into a qualified intermediary (QI) agreement with the Internal Revenue Service (lRS). U. all three of Adoboli's desk colleagues admitted that they knew more or less of his unauthorized trades. Like other foreign financial institutions under a QI agreement. government. The U.000. clients to structure their accounts by divesting U. In mid-2008. Besides the fine. UBS's Switzerland-based bankers had assisted the U.-source of income. business. become one of the top financial services companies in the world and the biggest bank in Switzerland after acquiring Paine Webber. UBS. UBS announced that a rogue trader named Kweku Adoboli at its London branch had racked up an unauthorized trading loss of $2. UBS had actively participated in helping its U. account holder status.S. To avoid QI reporting requirements. was able to take highly risky positions with vast amounts of money. or the London Interbank Offered Rate. prosecutors pressed charges on UBS for conspiring to defraud the United States by impeding the IRS.S. UBS agreed to report and withhold taxes on accounts receiving U. President Obama signed into law the Foreign Account Tax Compliance Act (FATCA) in 2010. UBS: A Pattern of Ethics Scandals UBS. clients with assets over $50. To close loopholes in the QI program and crack down on tax evasion in countries with strict bank secrecy traditions.S.3 billion over a period of three years. 2. The case was concluded with findings that systems and controls at UBS were "seriously defective. it came to light that since 2000. a 120-year-old U.S Tax Evasion  After the acquisition of Paine Webber. securities and setting up sham entities offlhore to acquire non-U.

Chapter 2: Issue Identification 1. UBS instructed its LIBOR submitters to keep submissions low to make the bank look stronger. 35-year-old Tom Hayes. pleaded guilty to U. The Justice Department views UBS as a "repeat offender. What can UBS do to avoid more ethics failures in the future and repair its damaged reputation? Chapter 3: Related Theories 3. Corporate Social Responsibility (CSR) 4 . who is to blame? The CEO? The board of directors? The individuals directly involved? Who should be held accountable? Is it sufficient just to fine the bank? 3." especially in light of a 20ll settlement related to antitrust violations in the municipal-bond investments market. The Department of Justice alleges that UBS had violated terms of the agreement and "did it again. What lessons in terms of business ethics and competitive advantage can be drawn from this MiniCase? 5." This time. Given UBS’s repeated ethics failings. During the said period. prosecutors for committing wire fraud.S. What does that tell you about UBS? 2. during the second half of 2008. In particular. UBS “Did It Again”  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. Given the information herein. motivated by making his performance look stronger 4. In contrast. prosecutors allege that UBS manipulated foreign- exchange rate. This MiniCase details several ethics scandals at UBS in recent years. a former UBS (and Citibank) trader was sentenced to 14 years in prison for fraudulently rigging the LIBOR. The autistic mathematician Hayes argues that he is the scapegoat for senior management failings. do you think that 14-year jail sentence for Tom Hayes was harsh? Did he serve as scapegoat? 4.1. In addition. UBS acted on its own or colluded with other panel banks to adjust LIBOR submissions to benefit UBS's own trading positions. prosecutors maintained that Hayes was the mastermind behind a corrupt ring of traders and brokers globally.

Governments expect the firm to pay taxes and to manage natural resources such as air and water under a decent stewardship. Corporate Governance Corporate governance concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. the centerpiece of corporate governance. firms must obey the law and act ethically in their quest to gain and sustain competitive advantage. Managers must ensure that their firms obey all the laws and regulations.  Economic Responsibilities  The business enterprise is first and foremost an economic institution.2.  Philanthropic Responsibilities  Philanthropic responsibilities are often subsumed under the idea of corporate citizenship. and philanthropic expectations that society has of the business enterprise at a given point in time. therefore.  Ethical Responsibilities  A firm's ethical responsibilities. but who are frequently senior executives from other firms or full-time professionals. social. appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance. Inside directors are board members who are generally part of the company's senior management team. and environmental laws. Managers are called upon to do what society deems just and fair. They also establish the rules of the game. as they embody notions of right and wrong. and values of its stakeholders. norms. is composed of inside and outside directors. go beyond its legal responsibilities.  Legal Responsibilities  Laws and regulations are a society's codified ethics. Investors expect an adequate return for their risk capital. reflecting the notion of voluntarily giving back to society. Corporate social responsibility is a framework that helps firms recognize and address the economic. they embody the full scope of expectations. legal. including but not limited to labor. To accomplish all this. consumer. Consumers expect safe products and services at appropriate prices and quality. w. Suppliers expect to be paid in full and on time. Outside directors are board members who are not employees of the firm. 3. it's about asking the tough questions at the right time. they are more likely to watch out for shareholder interests. the 5 . Given their independence. The board of directors. several other corporate mechanisms are worth noting—executive compensation. Corporate governance is about checks and balances. While the board of directors is the central governance piece for a public stock company.

liaison.3. which is a conceptual framework of leadership progression with five distinct sequential levels:  The Level-1 manager is a highly capable individual who makes productive contributions through motivation. and financial statement auditors and government regulators. turning into a strategic leader.” These executives can be individuals. It is important to know the role that strategic leaders play as the interpersonal role (figurehead. we must complete the level-5 leadership pyramid. Corporate-governance mechanisms play an important part in aligning the interests of principals and agents. He or she “does the right things. UBS: The Series of Ethics Failings.  The Level-2 manager masters the skills required at Level 1. informational role (monitor. He or she “does things right. what they do. talent. the effective manager from Level 3 turns into a leader who determines what the right decisions are. at Level 5. generally CEOs. but also can be top-management teams. The Level-4 leader presents and effectively communicates a compelling vision and mission to guide the firm toward superior performance.  The Level-3 manager is a well-rounded and competent manager. Strategic leadership typically resides in “executives who have overall responsibility for an organization—their characteristics. but is also a contributing team member who works effectively with others in order to achieve synergies and team objectives. the manager reaches a leadership pinnacle. how they affect organizational outcomes. spokesperson) and decisional role (entrepreneur. leader). resource allocator. negotiator). 3. market for corporate control. a highly capable individual who is an effective team player and organizes resources effectively to achieve predetermined goals. how they do it. The key point is that they have responsibility for the performance of the entire company or for an important strategic business unit. Strategic Leadership Strategic Leadership is the behaviors and styles of executives that influence others to achieve organizational goals. disseminator.”  Finally.”  At Level 4. Chapter 4: Case Analysis and Solution 1. disturbance handler. knowledge. and particularly. An effective strategic leader is an executive who builds enduring greatness into the organizations he or she leads. 6 . and skills. But to be an effective and ethical strategic leader. Thus.

2. UBS: Stakeholders behind Ethics Failings In our opinion. the individuals directly involved (usually the BOD’s subordinate) will get the blame too since they are who conduct the wrongdoings directly. UBS should know that their business actions are unethical and violate codes of conducts even though they are completely legal according to the loophole of the law. UBS got their punishment for their unethical and illegal conducts when they caught red handed. But. Insider trading cases provide an example of egregious exploitation of information asymmetry. managers tend to have access to private information that outsiders. The conflict arises if the agents also pursue their own personal interests. as he or she is the leader and responsible of any wrongdoings within the company. The principal–agent problem is a core part of agency theory. which can be at odds with the principals' goals. the law and regulation itself should be clear and close the loopholes in order to prevent the reason of unethical wrongdoings and illegal conduct for the future. because they responsible of their subordinates’ misconducts. And also. From this we can learn aside from obey the law and ethical codes of conduct within the company. which views the firm as a nexus of legal contracts. especially investors. people who should be held accountable regarding with UBS’s corporate rap sheet are the individuals who involved in those ethics failings. Besides dealing with the relationship between shareholders and managers. In publicly traded companies. this does not mean that the Board of Directors (BODs) does not get the blame too. They should know that even though staying within the law is minimum acceptable standard. We can say that UBS had blinded by their determination of gaining sustainable competitive advantage. And as the consequences. whether involved directly or indirectly. This usually happened because of the principal-agent problem. no matter what his or her position is. These codes go above and beyond the law in detailing how the organization expects an employee to behave and to represent the company in business dealings. The one who got the most blame is usually the CEO. thus lead them to unethical and illegal conduct which destroyed their reputation. Employees who perform the actual operational labor are agents who work on behalf of the managers. Indeed. and they give the professional managers (the agents) the authority to make decisions on their behalf. the stockholders (the principals) are the legal owners of the company. The risk of opportunism on behalf of agents is exacerbated by information asymmetry: the agents are generally better informed than the principals. finding its loophole does make them violate the codes of conduct. are not privy to. Such front-line employees often enjoy an informational 7 . its concerns also cascade down the organizational hierarchy.

Kweku Adoboli. Governance mechanisms are used to reduce information asymmetry and to align incentives between principals and agent. directors and officers have aligned incentives. 3. ethical behavior and sound corporate governance practices. the judge said the maximum sentence is 10 years for a count of conspiracy. The second reason is the fact that Hayes alone was prosecuted and convicted. Tom Hayes not deserved his punishment of 14-year jail sentence. but also external corporate-governance mechanisms like the market for corporate control and financial statement auditors and government regulators. the tariff has normally been around half of what he originally received. four former Barclays traders were sentenced by a British court to between 33 months and six-and-a-half years each for conspiring to rig Libor. he was 8 . we can say that Tom Hayes is the unluckiest trader. That is why we can say that fine the bank is not sufficient enough. Good corporate governance creates a transparent set of rules and controls in which shareholders. The managerial implication of agency theory relates to the management functions of organization and control: The firm needs to design work tasks. Most companies strive to have a high level of corporate governance. The first reason is regarding with his unfair sentence. For many shareholders. UBS should put several governance mechanisms in place. it is not enough for a company to merely be profitable. which is generally recognized as too low. No matter he is the scapegoat or not. That is why it is important for UBS to apply good corporate governance. Under the Sentencing Guidelines for judges. Instead. The penalty it so heavy even there are killers who get less punishment than him. The following serve as useful benchmarks: In 2012. At the same time. a former UBS equity trader was given a seven-year sentence in London for unauthorized trading that cost the bank $2 billion while in July 2016. At Hayes’ trial. advantage over management. even though he was not a rogue trader acting in isolation like Adoboli. and employment contracts and other control mechanisms in ways that minimize opportunism on behalf of the agents. incentives. it also needs to demonstrate good corporate citizenship through environmental awareness. the activities of the agents should maximize shareholder value creation for the principals. But in reviewing the list of City traders convicted of serious fraud over the last 20 years. And not only the internal corporate-governance mechanisms like BODs and executive compensation. They may tell their supervisor that it took longer to complete a project or serve a customer than it actually did. no sentence equals that given to Hayes. Tom Hayes: Scapegoat or not? In our opinion.

middle or low end of that range. Nearly four years on from his arrest. One of his managers has even been exonerated by the Financial Conduct Authority (FCA) despite having engaged in this behavior with Hayes. But. senior bank executives claim not to have known what was going on and that the individual traders concerned were acting on their own account – without any authority from the bank. UBS: Lesson Learned in Terms of Business Ethics and Competitive Advantage In terms of business ethics. even though the actions can be completely legal. thereby making money for them by trading derivatives that fixed against the published Libor rate. the chief prosecutor. it important to know that staying within the law is a minimum acceptable standard. part of an alleged conspiracy: traders at up to 16 different banks. according to the trial judge). Meanwhile. we can learn from UBS case that before we conduct the business decision. Hayes alleged that the behavior described above was both common market practice for 20 years (although that did not provide a defense. At his trial. only Hayes was convicted. indicated to the jury that Hayes’ “managers will be next”. who between them allegedly requested Libor rates from within that day’s market trading range but which were drawn from the high. The third reason is that there is no senior figure at any bank operating in London has been charged by the SFO in relation to any rate-rigging by any of their Libor traders or in relation to ‘lowballing’. no one else from Hayes’ former employer banks has been charged. and the subject of a written instruction sheet at UBS. But to this day. 4. These were marginally in favor of the traders’ employer banks. we should consider the ethical side. In terms of competitive advantage. Mukul Chawla QC. managers can use a number of questions to improve their decision making. Moreover. we can see that Tom Hayes seems to be paying an unduly heavy price for the misdeeds of many. At his trial. From all those reasons above. all of Hayes’ alleged co-conspirators who have been charged have since been acquitted and no other co-conspirator has subsequently been charged by the Serious Fraud Office (SFO). Tom Hayes is certainly an unlucky man whether he is a scapegoat or not. or from their immediate managers. Since business decisions are not made in a vacuum but are embedded within a societal context that expects ethical behavior. When facing an ethical dilemma. UBS absolutely not 9 . a manager can ask whether the intended course of action falls within the acceptable norms of professional behavior as outlined in the organization's code of conduct. so enshrined was it in bank culture. the manager should imagine whether he or she would feel comfortable explaining and defending the decision in public. But in this alleged conspiracy involving multiple participants acting in concert with each other to fix Libor.

Corporate governance is often associated with public companies. but also long-term competitiveness within the industry. 5. requiring them to disclose and avoid potential conflicts. The company might forbid loans to officers and family members or the hiring of family members. Corporate governance consists of rules that direct the roles and actions of key people rather than processes. Managers are called upon to do what society deems just and fair. apply the corporate social responsibility (CSR). but small businesses can also benefit from this practice. CSR has four components: economic. UBS: Prevention of Ethics Failure in the Future and Repair its Damaged Reputation What UBS should do regarding with prevention of ethics failure in the future is implementing good corporate governance. the company might draft a conflict of interest statement that top executives must sign. corporate governance rules focus on creating better management and fewer ethical or legal problems. it helps the firms to gain a characteristic of corporate citizenship. which is the big mistake as they continue to fall and far from reaching competitive advantage. Learning from their mistake. In particular. as it reflecting the notion of voluntarily giving back to society. with philanthropic responsibility. Next. At its heart. External audits or requiring checks over a certain amount to be approved and signed by two people help reduce errors and fraud. norms. With economic responsibilities. Moreover. Unlike simple policies and procedures. such as a dress code or expense reimbursement procedure. For example. legal. CSR provides managers with a conceptual model that more completely describes a society's expectations and thus can guide strategic decision making more effectively. UBS should implement Corporate Social Responsibility (CSR). we should know that applying the CSR help firms to gain sustain competitive advantage. it helps the firms to define minimum acceptable standards in their business decision making in terms of law and regulations as a society’s codified ethics. CSR is about an organization taking responsibility for the impacts of its decisions and activities on all aspects of society. The last. and values of its stakeholders. the community and the environment. Corporate governance limits the potential for bad behavior of employees by instituting rules to reduce potential fraud and conflict of interest. 10 . such as awarding contracts to family members or contracts in which an executive has an ownership interest. and philanthropic responsibilities. With legal responsibilities. it helps the company to gain and sustain competitive advantage as the business enterprise is first and foremost an economic institution. Doing so ensures not only effective strategy implementation. ethical. to repair its damaged reputation. With ethical responsibilities. it helps the firms to embody the full scope of expectations.

informational. and decisional that strategic leaders have. this way of operating should be embedded in the business. Thus. it’s about contributing to the health and welfare of society. it would make them effective for the firm performance. and competitive disadvantage. With the role of interpersonal. Chapter 5: Conclusion and Recommendation  Conclusion In conclusion. robust corporate CSR framework and organizational mindset can genuinely help organizations deliver public value outcomes by focusing on how their services can make a difference in the community. More importantly. CSR could help in having positive impact in the community. which leads UBS to their downfall. build alliances and foster strong working relationships with both existing and new clients. But. its role in the manipulation of the LIBOR interest rate index and its failure to prevent one of its traders from running up more than $2 billion in losses and in 2015 it had to plead guilty to a criminal charge in the U.  Recommendation We recommend that UBS should pursue strategic leadership for their future managers. the company will reach the sustain competitive advantage. Put simply. UBS has been embroiled in a series of recent scandals involving its role in helping wealthy Americans evade taxes. CSR could also help in supporting public value outcomes. CSR is more than just donating money or printing double-sided to save trees. A strong CSR framework is essential to building and maintaining trust between the company and clients.S. damaged reputation. by Keeping social responsibility front of mind encourages businesses to act ethically and to consider the social and environmental impacts of their business. public value is about the value that an organization contributes to society. It can strengthen ties. which could lead to the competitive advantage. A sound. which is a natural progression of five different levels of 11 . CSR could also help in enhancing relationships with clients. It is important to implement good corporate governance and CSR in order to keep the company in control to ensure that it pursues its strategic goals successfully and legally. In doing so. Those scandals are the consequences of the failure in applying good corporate governance and CSR. operating transparently and ethically. rather than an afterthought. organizations can avoid or mitigate detrimental impacts of their business on the community. those strategic leaders must be both effective and ethical by applying level-5 leadership pyramid.

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