In the first of three reports on tax evasion in Europe EU-OCS explores France’s record fine against Swiss banking giant UBS in what the court called a case of fraud of ‘exceptional magnitude.’
A court in Paris has fined the Swiss bank UBS, the world’s largest wealth management institution, 3.7 billion euros, after it was found guilty of money laundering, tax fraud and illegal banking practices. The court has followed the recommendations of the National Public Prosecutor’s Office (PNF) which, after a six-year investigation, concluded that the bank had illegally helped thousands of French citizens to evade taxes between 2004 and 2012.
The penalties, which were the heaviest ever imposed by the French courts in a case of tax evasion, included additional damages of 800 million euros to the French state. High-level UBS executives were personally implicated as well—five out of the six executives charged were handed suspended prison terms on top of fines ranging from 50,000 euros to 300,000 euros. Attorneys for UBS immediately announced their intention to appeal the verdict.
Tax fraud of an exceptional magnitude
The investigators argued that UBS had put in place a vast system designed to court wealthy French taxpayers that resulted in fraud “of exceptional magnitude” depriving the state of more than 10 billion euros in revenue.
According to the indictment, UBS advised wealthy French clients to open accounts in Switzerland in order to avail themselves of the country’s notorious banking secrecy and pay less taxes.
“The court can only conclude that (UBS) consistently put its own financial interests over the sovereign rights of the French state,” the court’s president Christine Mee said in her ruling. “Hence, the crimes are exceptionally serious”.
The ruling coincides with new measures to end tax evasion in France and other countries. In French law, the recently-introduced procedure called «convention judiciaire d’intérêt public», or CJIP, can be used in cases of corruption, tax fraud or money-laundering and allows firms to reach regulatory settlements without the risk of a court trial or admitting any wrongdoing.
A verdict complementing a global crackdown on tax evasion
Alain Pietrancosta, a professor at the School of Law at the Sorbonne in Paris told EU-OCS that the decision will promote the new French settlement mechanism, inspired by the US Deferred Prosecution Agreement (DPA) system.
DPA’s allow firms under criminal investigation to make a financial settlement and have their charges dropped before their case is brought to court. France introduced its own American-style settlement procedure two years ago in order to help financial prosecutors take on a more global role.
“This is a strong signal sent by the French criminal justice system, not only at the national level but also at the international level. Experience has shown that the authority and respect for a judicial system depend on the fear of it, and that fear on the amount of penalties to which offenders are exposed,” Professor Pietrancosta said.
UBS is no stranger to hefty penalties. In 2009 it was ordered to shell out $780m and turn over the names of more than 4,450 people with Swiss bank accounts, after it was found to have helped thousands of American citizens hide money from the Internal Revenue Service. A similar case in 2014 in Germany resulted in a fine of 300 million euros.
Scandal unveiled by whistleblowers
The French trial opened last autumn, following several years of investigations triggered by the claims of unlawful conduct brought by two former employees. Speaking to Swiss media, former UBS France executive Nicolas Forissier—one of the two main whistleblowers to come forward—said of the ruling: “It’s not a victory because I did not carry out this action in a fight, but it’s a satisfaction, for the last ten years, the bank has humiliated me, dragged me into the mud and made me the laughingstock of my professional industry. I am proud to have done my job properly.”
Another whistleblower, Stéphanie Gibaud, who worked in the bank’s marketing department, informed officials that she was instructed by her superiors at UBS to delete evidence of secret meetings between Swiss private bankers and French clients. She penned a book about the bank’s alleged tax offenses in 2014, which led in part to Paris’s investigation into UBS.
“Milk cards”: a parallel accounting system to conceal illicit solicitation of clients
In addition to the large-scale tax fraud, the court took issue with the methods the Swiss bank had used to find its clients. French prosecutors accused UBS of organising or inviting prospective clients to prestigious events such as the French Open, luxury hunting retreats, golf tournaments, and classical music concerts, where bankers would meet their prospective customers and advise them on how they could hide their income from the French taxman.
During a trial in Paris in October, prosecutors compared the scheme to the plot of a James Bond novel. To avoid detection, officials involved in the plot followed a UBS “security governance manual” that instructed them to use encrypted computers, hand out blank business cards and change hotels frequently, prosecutors said.
UBS created a parallel accounting system, known as the “milk card”, in reference to the small notebooks that Swiss cattle ranchers used as ledgers. According to UBS, these books were used to balance out bonuses owed to French bankers who were effectively losing a client to their Swiss peers, but prosecutors had a less wholesome interpretation. According to investigators, the “milk cards” were used to record transfers of illicit money between Paris and Geneva, and serve as proof that UBS had a parallel accounting system for keeping the transfers off its books.
UBS “perfectly aware” it was breaking the law
Prosecutors said that UBS France bankers, motivated by the possibility of receiving very lucrative bonds, alerted their colleagues in Switzerland about some possible “big shots” (French citizens with assets valued between 500,000 and 10 million euros). French legislation allows commercial bank officials to put their colleagues overseas in contact with clients, but prohibits foreign companies from seeking clients inside French territory.
The National Financial Prosecutor’s office has said the bank and its directors “were perfectly aware that they were breaking French law” by unlawfully soliciting clients and helping them evade French taxes. UBS denies this. The bank emphasized in a statement that it “strongly disagrees with the ruling” and plans to appeal.
In a lengthy defence of its actions, UBS argued that it had not acted criminally, and accused French prosecutors of being politically motivated and trampling on Swiss sovereignty. “UBS vehemently disputes this ruling” which is based “on unfounded allegations by former employees of the bank who were not even heard during the trial,” the bank said in statement. The bank argued further that the decision “undermines the sovereignty of Swiss law and poses significant questions of territoriality”, as it “applies French law in Switzerland”.
It also said it was “unaware” that some French clients had failed to declare assets in Switzerland, and that prosecutors failed to produce any proof, such as client names or account numbers, to back up their fraud claims.
The verdict may be rendered, but the case is hardly over. UBS’s promised appeal could see the case drag on for years, and the bank will not have to pay anything until all appeals are heard.
That notwithstanding, analysts are cautiously optimistic that the record-breaking fine could prove a watershed in the fight against corrupt banking practices.
According to Dr Robert Gillanders, a lecturer in economics at Dublin City University, “even a small chance of being caught and punished has been shown to deter people from engaging in corrupt activities. So France’s fine could serve to make individuals and entities less likely to engage in illicit activities by tipping the scales of expected costs and benefits.”