UBS pushes for fine reduction in money-laundering case
Just more than two years ago, UBS got a nasty shock when a Paris judge handed it a record $5.4bn penalty for helping French clients avoid taxes.
As the Swiss bank returns to the French capital on Monday
for a three-week long appeal, its team of lawyers is likely to invoke a
landmark ruling from France’s top court in an unrelated case. The ruling called
into question calculations such as those used to fine UBS, and could at the
very least mean a significant penalty cut on appeal.
UBS’s €3.7bn fine and a further €800m in damages in February
2019 — far more than analysts expected — was the largest in-court financial
penalty ever levied in Europe. It was emblematic of a French crackdown on tax
evasion that has focused on the big banks from HSBC Holdings to Credit Suisse
Group, who the government believed encouraged such behaviour by its citizens.
While UBS will try to get its conviction overturned, the
worst-case scenario appears to have become a little less scary. Six months
after UBS was slapped with the fine, France’s Cour de Cassation in September
2019 ruled that the penalty demanded from a man convicted of laundering
undeclared funds should be sharply cut. The top judges said it had been
erroneously based on the amount hidden from tax authorities rather than on dues
owed.
UBS’s hefty fine was similarly based on the undeclared
wealth in the bank’s Swiss accounts that nearly 4,000 French clients belatedly
admitted to and declared by 2015, rather than the tax they avoided. That gives
UBS room to argue for a far lower penalty based on recent case-law.
“Even if UBS’s conviction is confirmed on appeal, the bank
stands to get a significant fine reduction,” said Arnaud Tailfer, a tax lawyer
at Arkwood SCP in Paris who is not involved in the case.
UBS declined to comment ahead of the appeal. It circulated a
memo to clients and shareholders in January, now posted on its website, in
which it denied criminal wrongdoing.
New calculations
In a sign that UBS may be confident it will win at least a
reduced fine on appeal, it has set aside €450m in provisions for Monday’s case.
Since the bank’s appeal of its first-instance conviction suspends the order to
pay the penalty, UBS will only get to know what it actually has to disburse —
if found guilty again — at the end of the second trial.
UBS’s 2019 fine was based on a complex calculation to reach
a maximum potential penalty of €9.25bn by using a multiplication factor of 2½.
The multiple might be the same for any appeals penalty but the starting point
is expected to be lower.
Two years ago, the starting point had been €3.7bn — assets
held in Swiss UBS accounts that were belatedly declared. UBS may argue that the
new top court guidance indicates the basis should instead have been the tax
owed on these assets, or about €620m.
The appeal, originally set for last June before being
delayed by the coronavirus, is UBS’s first chance to attack what it said in
2019 was an “extremely superficial, inconsistent and contradictory” ruling. The
bank had been brought to that point by deciding to play hardball and go to
trial rather than settle for what may well have been less than $1bn.
Tax haven
Going back decades, wealthy French citizens have dodged
taxes at home by placing money in undeclared Swiss accounts. But a pushback
against banking secrecy that threatened to expose them encouraged many to put
their houses in order and seize on leniency programmes.
In UBS’s case, the bank was found guilty of laundering funds
by providing French customers with banking services — such as numbered accounts
or by setting up trusts — to hide assets from tax authorities. UBS has argued
the prosecution failed to introduce any specific evidence.
UBS has also been critical of the prosecution’s strategy for
picking money laundering, which fetches stinging penalties, rather than aiding
and abetting tax fraud.
UBS was further convicted of covertly dispatching Swiss
bankers across the border — using James Bond-like techniques to avoid detection
— to seek out new clients even though they lacked the paperwork to offer such
services in France.
Five of the six former UBS bankers who sat in the courtroom
during the first trial were convicted alongside the Swiss lender, as was its
French unit. The six bankers are all expected to take the stand once again at
the Paris court of appeals.
Just as UBS will rely on fresh case-law to turn the tables,
the prosecutors may attempt to bring new data that updates the 2015 figures
into play during the appeal to convince judges a strong punishment is in order.
“The tax administration was very busy right up until 2018
when it comes to processing regularisations of undeclared bank accounts,”
Tailfer said. “Still, any increase in tax owed on UBS accounts in Switzerland
will never fill the gap caused by switching the starting point — from total
undeclared assets to taxes owed on them.”
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