UBS: Growth Run Amok

We’re exercising our Friday liberty to post a story that’s not about the Foreign Corrupt Practices Act — at least not yet. It’s about a world-class financial institution — a market leader with 80,000 employees in 50 countries, the heavyweight champ of global wealth management — that allowed its sales force to run wild and in the process trample numerous U.S. laws.

We often say that what matters most for compliance is not the policy manual. It’s management’s commitment to obey the law. This story shows what happens when that commitment is pushed aside and replaced by a mad scramble for growth at any cost.

In the U.S. Senate this week, in hearings of the Permanent Subcommittee on Investigations, witnesses told how Swiss bank UBS AG hid around $18 billion for 19,000 Americans that went unreported to the IRS. Although foreign offices and employees of UBS weren’t licensed to solicit or service U.S.-based clients, that group was targeted by the bank’s huge and elaborate marketing efforts.

To keep their U.S. thrust a secret, UBS’s Swiss bankers encrypted emails, used pay phones, and gave a code name to each client. The bankers then taught their clients not to write down account numbers or locations and never to use their own names in phone calls to the bank.

A witness from UBS described its Swiss-based U.S. sales team this way: “As I remember, there [were] around 25 people in Geneva, 50 people in Zurich, and five to ten in Lugano. This is a formidable force.”

The Senate released a 115-page investigative report the day before the hearings started. It said 20 Swiss bankers made more than 300 trips to the U.S. since 2003 to solicit Americans at UBS- sponsored yachting regattas, art shows, and golf tournaments. The report cites an e-mail from a senior UBS private banker to colleagues saying, “The markets are growing fast, and our competition is catching up. The answer to guarantee our future is GROWTH.”

Most top executives at UBS lost their jobs because of the scandal and the bank’s poor performance in the market downturn. Among those who are gone are the former chairman, the chief executive officer, the head of the investment bank and its chief financial officer. Bradley C. Birkenfeld, an American and former top UBS banker, is waiting to be sentenced after pleading guilty in the U.S. last month to fraud. He helped an American client conceal $200 million in assets from the IRS. He said he once smuggled diamonds for a client in a toothpaste container.

UBS is cooperating with the IRS and the Justice Department. In the Senate hearings, the bank said it has stopped offering offshore-banking services to U.S. clients through non-U.S. branches.

“We have decided to exit entirely the business in question,” said Mark Branson, chief financial officer of UBS’s global wealth-management unit. “UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches. Such services will only be provided to residents of this country through companies licensed in the United States.”

CFO Branson said UBS “genuinely regrets any compliance failures that may have occurred. We will take responsibility for them. We will not seek to minimize them. On behalf of UBS, I am apologizing, and committing to you that we will take the actions necessary to make sure this does not happen again.”

Meanwhile, the Senate subcommittee released what it calls a list of “Tax Haven Bank Secrecy Tricks” aimed at helping U.S. clients hide assets overseas and avoid paying taxes:

• Code Names for Clients

• Pay Phones, not Business Phones

• Foreign Area Codes

• Undeclared Accounts

• Encrypted Computers

• Transfer Companies to Cover Tracks

• Foreign Shell Companies

• Fake Charitable Trusts

• Straw Man Settlors

• Captive Trustees

• Anonymous Wire Transfers

• Disguised Business Trips

• Counter-Surveillance Training

• Foreign Credit Cards

• Hold Mail

• Shred Files

The DOJ’s investigation will surely result in many personal tragedies for men and women from UBS and other banks — as well as the Americans who cheated the IRS. Reputations will be ruined and careers wrecked, and some will spend time in prison.

The Senate report also mentioned a memo from LGT, a private bank run by the royal family of Liechtenstein, that describes the use of secret offshore accounts for bribery in the U.S. and elsewhere. So we may hear about related Foreign Corrupt Practices Act investigations as the DOJ learns more.

Stay tuned.

Read reports from Bloomberg, ABC News, the International Herald Tribune and the New York Times.

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