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UBS: A Pattern of Ethics Scandals

UBS WAS FORMED in 1991 when the Swiss Bank Corp.
merged with the Union Bank of Switzerland. After
acquiring Paine Webber, a |2}-year-old U.S. wealth
management firm in 2000, combined with aggressive
hiring fbr 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, hclwever, UBS's 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 dimin-
ished reputation. Even more important, these eth-
ics scandals don't seem to be isolated instances, but O Sebastian DerungsiAFP/Getty lmages
appear to resemble a troubling pattern.

to acquire non-U.S. account holder status' Aided by
Ethics $candal No. t: LJ.$. Tax Evasion Swiss bank privacy laws, UBS successfully helped
Swiss banks have long enjoyed a competitive advan- its U.S. clients conceal billions of dollars from the
tage brought by the Swiss banking privacy laws that lRS. In addition, UBS aggressively marketed its "tax-
make it a criminal off'ense to share clients' infbrma- saving" schemes by sending its Swiss bankers to the
tion with any third parties. The exceptions are cases United States to develop clientele, even though those
of criminal acts such as accounts linked to terror- bankers never acquired proper licenses from the U.S.
ists or tax fraud. Merely not declaring assets to tax Securities and Exchange Commission (SEC) to do so'
authorities (tax evasion), however, is not considered The U.S. prosecutors pressed charges on UBS for
tax fl'aud. Afier the acquisition of Paine Webber, UBS conspiring to defraud the United States by imped-
entered into a qualified intermediary (QI) agreement ing the IRS. In a separate suit, the U.S. government
with the Internal Revenue Service (lRS), the f'ed- requested the UBS to reveal the names of 52,000
eral tax agency of the U.S. government. Like other U.S. clients who were believed to be tax evaders. In
fbreign financial institutions under a QI agreement, February 2009, UBS paid $780 million in fines to
UBS agreed to report and withhold taxes on accounts settle the charges. Although it initially resisted the
receiving U.S.-source of income. Reporting on non- pressure to turn over clients' infbrmation' citing the
U.S. accounts with U.S.-source of income is done on Swiss bank privacy laws, UBS eventually agreed to
an aggregate basis. This protects the identity of the disclose some 5,000 account details, including indi-
non-U.S. account holders. vidual names, after intense negotiations involving
In mid-2008, it came to light that since 2000, UBS
had actively participated in helping its U.S. clients Frank T. Rothacrrncl prcparcd this MiniCasc liont public sourccs. He gratc-
lirlly acknowleclgcs the cttntribution ol'Ling Yang on an earlier Ycrsion. This
evade taxes. To avoid QI reporting requirements, MiniCr." is developccl lirr thc pr.rlptlse o1'class discttssion. It is not intencled
UBS's Switzerland-based bankers had assisted the to bc usccl lirl any kind ol'endttrscl.ttcnt. sourcc ol'data, or depiction of cl't'i-
cient or inel'l'icient ntanagen)ent. All opinions cxprcsscd. all crrors and otlris-
U.S. clients to structure their accounts by divesting sions are entirely thc author's. Revised ancl updated: Atrgust U.201-5. O Frank
U.S. securities and setting up sham entities offlhore T. Rothacrmel.


his performance look stronger. Dur- into law the Foreign Account Tax Compliance Act ing the said period.S. whom Goldman Sachs Ethics $candal No.S.6 million in late 2012. Nine days later. or $4. UBS wanted to send a powerful message to banks around CEO Oswald Grtibel resigned "to assume responsi.000. In addition. At least 40 people. LIBOR is set daily: UBS "Did lt Again" A panel of banks submits rates to the British Bank- ers' Association based on their perceived unsecured In 2015. The law requires all foreign finan. and many others. the U. Adoboli's two bosses had shown a relaxed that Hayes was the mastermind behind a corrupt ring attitude toward breaching daily trading limits.511 i utNlcnsr zg UBS: A Pattern of Ethics Scandals officials from both countries. More alarmingly. Besides the fine. . it declined by another l7 percent. UBS announced that a rogue in prison for fraudulently rigging the LIBOR. The trader named Kweku Adoboli at its London branch jail sentence is much longer than what was expected.5 billion banking industry as a whole. Clients left UBS in "trimmed" average. President Obama signed to U. UBS acted on its own or colluded (FATCA) in 2010. any wrongdoing. In particular. lowest 25 percent of the submissions. Adoboli.. the rate is then calculated using a $1. Hayes was considered to be one of the most talented traders in the banking industry. most frequently used benchmark reference rate world- lion. Just a few years earlier. prosecutors for committing wire fraud.K. wide. or the London Interbank Offered Rate. 2011.4 bil. bank's wealth management business and the Swiss UBS. includ- agreed to implement the FATCA. in 2008 alone. business. The autistic mathematician Hayes argues U. One major conviction was handed million. doing . to benefit UBS's own trading positions."3 In contrast. in 2009. 35-year-old Tom Hayes. motivated by making was fined $47. LIBOR. the case was concluded that he is the scapegoat for senior management fail- with findings that systems and controls at UBS were ings: "I refute that my actions constituted any wrong "seriously defective. including mortgage rates. Switzerland has the bank look stronger."2 As a result. The annual compli. UBS pleaded guilty bank secrecy traditions. a former Ethics Scandal No.5 billion settlement from 2012 with UBS in the .. is the interest rate at which international banks based in Ethics Scandal No. setting prices on financial instruments worth or $504 million. which excludes the highest and droves: Operating profit from the bank's wealth man. ties of their U. 4: London would lend to each other. and during the second half of 2008. UBS of traders and brokers globally. U.S. To close loopholes in the QI program ulators for manipulating LIBOR submissions from and crack down on tax evasion in countries with strict 2005 to 2010. was able to take highly risky posi. UBS instructed its to impose a 30 percent withholding tax on U. 2: Rogue Trader UBS (and Citibank) trader was sentenced to 14 years On September 15. I wish to reiterate that my actions were con- tively junior trader."r ished and will no longerjust be settled with a fine (paid After more than a year of joint investigation by the by the bank). the world that financial crime will be severely pun- bility for the recent unauthorized trading incident. and Swiss reg- bank secrecy. The judge presiding over the case stated that the court lion over a period of three years. LIBOR submitters to keep submissions low to make ments or to exit the U. 3: tried to poach from UBS with the promise of a $3 mil- LIBOR Manipulation lion signing bonus. management was aware of my actions and at no point all three of Adoboli's desk colleagues admitted that was I told that my actions could or would constitute they knew more or less of his unauthorized trades. and Swiss regulators. clients with assets over $50. invest. as one of the panel banks. senior tions with vast amounts of money. . with other panel banks to adjust LIBOR submissions cial institutions to report offshore accounts and activi. .S. was fined $1. term The UBS case has far-reaching implications for the loans.K. prosecutors maintained Moreover. LIBOR is the agement division declined by 60 percent. had racked up an unauthorized trading loss of $2. down to date. while other traders will stand trial in the future.3 bil.S. a rela. sistent with those of others at senior levels .S. about $800 trillion. . ing several senior managers at UBS were involved in ance cost for each Swiss bank is estimated to be $100 the manipulation. especially the prided in December 2012 by the U. Department of Justice voided the borrowing cost.

S.2013.. adding another 3. while the S&P Tom Hayes $3 million bonus to quit UBS.S.20t2. September 18. August3." Financial Times." The Guardian. Sources: This MiniCase is based on: UBS annual reports. various years. UBS's stock price has settlement." The Wall Street Journal.20ll. other offender.S. In particular. "The U. UBS l4-year jail sentence for Tom Hayes was harsh? is pleading guilty to allegations that UBS traders Did he serve as a scapegoat? (including Tom Hayes) had manipulated LIBOR." Bloomberg Businessweek' May 28' 2015." United States Senate. Drscussl0N QuEsTl0Ns ch. other banks.2012' "Final notice to UBS AG. What does that tell you iry. August 28." Financial firres. 2. I "Memo to UBS staff from interim CEO. July 24. representing the broader stock market." Asso- ciated Press. 500.2O09. The Justice Department views UBS as a "repeat 3 "LIBOR rate-probe spotlight shines on higher-ups at Citigroup." especially in light of a 20ll settlement banks." The Wall Street Journal. luded in moving foreign-exchange rates for their 2 "UBS fined fl9lmover rogue trader. August 20." Financial Services Author- at UBS in recent years. (2011).G.2Ol2.B." This time. This MiniCase details several ethics scandals November 26. November 26.2O12. 26. September 24. November own benefit and to the detriment of their clients.2013.2Ol2.7m over rogue trader. "UBS to give 4. "Demise of Swiss banking secrecy heralds new era." Swissinfo. Cantley. move forward on tax compliance.2012: "UBS fined f30m over rogue trader. "The LIBOR scandal: The rotten heart of finance. June 2l. "Former trader Tom Hayes sentenced to 14 years for LIBOR tigging"' The Wall Street Journal.. July l7' 2008. "UBS ex-official gets l8 months in muni bond-rigging case. What can UBS do to avoid more ethics failures in the future and repair its damaged reputation? UBS had violated terms of the agreement and "did it again. and "Tax haven banks the bank? and U. February 18. 2015. December 19. "LIBOR rate-probe spotlight shines on higher-ups at Citigroup. l. The Wall Steet Journal." The Economist. is up May 19. "Goldman Sachs offered lost almost 70 percent of its value. "UBS enters into Deferred Prosecution Agreement." American Criminal Law Review." Brigham Young University Interna- tional lttw & Management Review 7 (Spring) available at SSRN: http://ssrn. 2009. The Department of Justice alleges that 5. The individuals directly involved? Who should 20l I . do you think that the $200 million in fines.2011." Financial Times." Reuters." 40 percent. September 15. "UBS fined f29. B. Case: The U. chairman." The United States Department of Justice Release." The Wall Street Journal. 1. Given UBS's repeated ethics failings. "Ending an era of Swiss banking secrecy: to blame? The CEO? The board of directors? The facts behind FATCA. who is com/abstract= 1554827: "Rogue trader causes $2 billion loss at UBS. Endnotes UBS and other banks are accused of having col. related to antitrust violations in the municipal-bond investments market. What lessons in terms of business ethics and UBS had avoided prosecution in 2012 by agreeing competitive advantage can be drawn from this to cooperate with authorities and promising not to MiniCase? engage in rate rigging and other illegal activities in the future.2015: "Justice Department to tear up past UBS Since its high in 2007. August 28'2013.S' about UBS? Attack on Swiss Banking Sovereignty.450 names be held accountable? Is it sufficient just to fine to U. Perhaps more damaging. Given the information herein. "Swiss and U. tax compliance. . May 14." The Wall SIreet Journal. July 7. 2Ol3. prosecutors allege that UBS manipulated foreign-exchange rates.S. IIINICASE 2S UBS: A Pattern of Ethlcs Scandals i 515 wake of the LIBOR rigging scandal.