UBS WAS FORMED in 1997 when the Swiss Bank Cornon-U.S. account-holder status. Ai
ID: 450625 • Letter: U
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UBS WAS FORMED in 1997 when the Swiss Bank Cornon-U.S. account-holder status. Aided by Swiss bank poration merged with the Union Bank of Switzerland. privacy laws, UBS successfully helped its U.S. clients After acquiring Paine Webber, a 120-year-old U.S. wealth management firm in 2000, and aggresively UBS aggressively marketed its ax saving" schemes hiring for its investment banking business, UBS soon by sending its Swiss bankers to the U.S. to develop became one of the top financial services companies in clientele, even though those bankers never acquired the world and the biggest bank in Switzerland. conceal billions of dollars from the IRS. In addition, proper licenses from the U.S. Securities and Exchange Between 2008 and 2012, however, UBS's standCommission (SEC) to do so. ing was harmed by a series of ethics scandals, detailed The U.S. prosecutors pressed charges on UBS for next. These scandals cost the bank billions of dollarsconspiring to defraud the United States by imped- in fines and lost profits, and severely damaged its rep- ing the IRS. In a separate suit, the U.S. requested 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 nitially resisted the pressure to turn over clients' information, citing the Swiss bank pri- vacy laws, UBS eventually agreed to disclose 4,450 accounts after intense negotiations involving officials from both countries. Clients left UBS in droves: Oper- ating profit from the bank's wealth management divi- sion declined by 60 percent or $4.4 bilion in 2008; it utation (Exhibit MC20.1) Ethics Scandal #1: U.S. Tax Evasion Swiss banks have long enjoyed a competitive advan- tage brought by the Swiss banking privacy laws ing it a criminal offense to share clients' information with any third parties. The exceptions are cases of criminal acts such as accounts linked to terrorists or tax fraud. Merely not declaring assets to tax authori ties (tax evasion), however, is not considered tax fraud. , mak declined another 17 percent ($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 for the bank secrecy in which the industry takes such pride finanialToclose loopholes in the QI program and crack down on tax evasion in countries with strict bank-secrecy traditions, President Obama signed into law the For- eign Account Tax Compliance Act (FATCA) in 2010 The law requires all foreign financial institutions to 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. Reporting on non-U.S. accounts wtheig!n U.S.-sourced income is done on an aggregate basis. This in turn protects the identity of the non-U.S account holders. report offshore accounts and activities of their US clients with assets over $50,000, and to impose a percent withholding tax on U.S. investments or 30 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 requir UBS's Switzerland-based bankers had aided U.S clients in structuring their accounts to divest U.S securities and set up sham entities offshore to acquire Frank T. Rothaermel and Carrie Yang (GT MBA, MSc.) prepared this MiniCase from public sources. It is developed for the purpose of class discus- sion. It is not intended to be used for any kind of endorsement source of da or depiction of efficie or inefficiem management. All opions expressed, and all errors and omission, are entirely the authors". Roth emnel and Yang, 2014.Explanation / Answer
1.
Mini Case 20 details three ethics scandals at UBS in recent years. What does that tell you about UBS?
About the UBS:
UBS was formed in 1997 after the collaboration of the Swiss bank corporation with the union bank of Switzerland.
By 2000, UBS became one of the top most financial companies in the world and the biggest banks in Switzerland.
The bank does not disclose any client details to the tax authorities. Disclosing such information is considered to be a criminal offence.
Still the firm has disclosed their client information to the U. S federal due to the heavy pressure from U.S. Securities and Exchange commission. As a result, there has been a reduction in the operating profit by 77% in 2004. The UBS systems were fined $47.6 million for breaching the daily trading limits.
UBS was fined by the U.S $1.5 billion in December 2012 for manipulating Libor submissions from 2005 to 2010.
2.
Given the UBS ethics failings, who is to blame? The CEO? The board of directors?
Taking into consideration the ethics failings, both the CEO and the board of directors have to be blamed.
Mr. Oswald Grubel had resigned and breached his responsibility towards the company and the customers. Mr. Adoboli has allegedly failed to write down the risk limits during the period of Mr. Oswald Grubel.
3.
What lessons in terms of business ethics and competitive advantage can be drawn from the UBS scandals, especially comparing the firm’s 2012 and 2011 net income? Looking at Exhibit MC20.1, why do you think the stock market hasn’t reacted more strongly to the ethics failings?
Reduction in profit as a result of disclosing the client's information: The bank does not disclose any client details to the tax authorities. Disclosing such information is considered to be a criminal offence.
Still the firm has disclosed their client information to the U. S federal due to the heavy pressure from U.S. Securities and Exchange commission. As a result, there has been a reduction in the operating profit by 77% in 2004.
Reduction in the profits as the firm failed to keep its promise: The firm has breached the promise that they has made to the clients. Most of customers of UBS have availed the service to conceal their bank transaction privacy from IRS. Thus, the profit has been reduced by 77% in 2004.
A fine of $47.6 million for breaching the daffy trading limits: In 2012, U.S and swizz regulators concluded that the UBS systems are seriously defective and later fined.
UBS was fined by the U.S $1.5 billion in 2012 for manipulating Libor submissions from 2005 to 2010. Due to this, the firm incurred a loss of $54.5 billion in 2011.
Due to ethical failings, the firm has lost its reputation in the market. The firm must follow the required international trading laws as it is trading globally. The firm must act as per the international standards and should not manipulate the laws as per their need. Customers voluntarily dissolved their pact with the company by closing their bank accounts.
4.
What can UBS do to (a) Avoid more ethics scandals in the future (b) Repair its damaged reputation?
USB can follow the following steps:
First and foremost, the firm should not disclose its customer's information to any third parties. Immediately, the firm should implement an effective monitoring system, such that the activities of the employees can be strictly monitored. There should be effective performance appraisal methods in order to reduce the employees from breaching the contract.
The firm must follow the required international trading laws as it is trading globally. The firm must act as per the international standards and should not manipulate the laws as per their need.
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