UBS in $1.4 Billion Test of French Tax-Evasion Crackdown

UBS AG (UBSN), the world’s biggest manager
of money for the rich, has become the test case for French
President Francois Hollande’s tax-evasion crackdown.

The Swiss bank is set to learn from a Paris appeals court
on Sept. 22 if it must post a 1.1 billion-euro ($1.4 billion)
bond to cover a potential criminal penalty for alleged money
laundering. Its French unit already paid a 10 million-euro fine
for lax controls that may have enabled tax dodging.

The bail corresponds to as much as half the estimated funds
UBS allegedly laundered, a rationale that was laid out in an
eight-page judicial order in July, said two people familiar with
the document who requested anonymity because it isn’t public.
French investigators are also looking into whether HSBC Holdings
Plc (HSBA)
units encouraged tax evasion. No charges have been filed in
that case.

The bail demand “is completely new and a very strong
signal” of France’s tougher approach, said Eric Vernier, a
researcher specializing in tax fraud at the Paris-based Institut
de Relations Internationales et Strategiques. “It’s like
banging a fist on the table to make an impression on everyone’s
mind.”

The payment, equivalent to about 40 percent of 2013 net
income
, was set at a level that wouldn’t put UBS at risk or
endanger the financial system, said the people.

UBS spokesman Dominique Gerster declined to comment beyond
a statement the bank made in July, when it denounced the French
action as “unprecedented and unwarranted,” and said the
process had become “highly politicized.”

HSBC spokeswoman Heidi Ashley in London declined to comment
on the French probe.

Increasing Fines

Hollande, 60, stepped up efforts to fight tax dodgers after
his former budget minister, Jerome Cahuzac, was forced to resign
when his secret Swiss account was exposed. Finance Minister
Michel Sapin toughened the stance against fiscal evasion with a
Franco-Swiss tax accord in June. In December, the parliament
passed measures to protect whistle blowers and create a national
financial prosecutor.

The government forecasts its efforts will yield almost 2
billion euros in back payments and penalties from tax dodgers
this year and additional funds in 2015.

The stakes are rising for global banks as authorities in
Europe and the U.S. impose stiffer penalties for misdeeds. BNP
Paribas SA (BNP)
, France’s largest bank, pleaded guilty in the U.S. in
June and paid $8.97 billion for violating economic sanctions
against countries including Sudan. Prosecutors in Siena, Italy,
have tried to seize 1.8 billion euros from Nomura Holdings Inc. (8604)
after accusing the Japanese firm of colluding with executives at
Banca Monte dei Paschi di Siena SpA to hide losses. The Nomura
case is being transferred to Milan, Siena prosecutors said
yesterday.

Talks Halted

Investigative judges in Paris, led by Guillaume Daieff,
demanded the security deposit from UBS after settlement talks
broke down in July when the bank balked at pleading guilty, two
people with knowledge of the events said. The French legal
system only allows settlements in conjunction with a guilty
plea, an admission UBS was concerned might hamper its business
in the U.S., the people said.

Chief Executive Officer Sergio Ermotti, 54, said in a
Bloomberg Television interview on July 29 that the bail “makes
no sense,” adding UBS had been in talks for a “double-digit
million” settlement. Gerster, the spokesman, has said the
negotiations stalled after the BNP Paribas fine on June 30.

Unless the appeals court intervenes, the money, set to
cover potential penalties and damages, must be paid by the end
of September.

Belgium, Germany

France’s tax authority is also looking into UBS’s dealings,
and could make a separate claim at a later stage, three people
with knowledge of the situation said.

Officials for the tax authority and the French finance and
budget ministries didn’t respond to e-mail requests for comment.
The Paris and national financial prosecutors’ offices declined
to comment.

UBS’s legal entanglements over whether it helped clients
dodge taxes aren’t limited to France. It paid about 300 million
euros to settle a probe in the German state of North Rhine-Westphalia this year, and faces another by authorities in
Mannheim. The bank is under investigation in Belgium on
suspicion of money laundering and organized crime.

Along with other financial institutions, UBS is also
embroiled in global probes into possible foreign-exchange
manipulation.

HSBC Probe

In July, Daieff assumed a leading role in the probe into
HSBC, said two people familiar with that matter. Investigators
in France and Belgium are looking into whether HSBC Private Bank
Suisse SA “acted appropriately” with clients who report taxes
there, the lender said in August.

HSBC had about 3,000 French customers with as much as $5
billion invested at its Swiss unit, according to a July 2013
parliamentary report. Customer data provided in 2008 by Herve
Falciani, a former HSBC software technician in Geneva, led to
the French probe.

France first brought criminal charges against UBS in
mid-2013, accusing the head office and its French unit of
illegally soliciting clients in France. Around the same time,
the French subsidiary was fined by the banking regulator and
reprimanded for control lapses that may have enabled some
clients to evade taxes.

Strengthened Compliance

The bank’s French unit was alerted to “grave suspicions”
by the fall of 2007 on its sales force’s possible involvement in
illicit marketing and the covering up of tax fraud, and waited
more than 18 months before setting up the necessary controls,
the regulator said in its June 2013 report, calling the delay
“an especially grievous failure.”

UBS, in a statement last year, disagreed with many of the
report’s conclusions and said it was pleased the regulator found
that its French unit had taken “appropriate steps to strengthen
its compliance framework since 2009.”

The bank paid $780 million to the U.S. five years ago to
avoid prosecution, admitting it helped thousands of Americans
evade taxes and agreeing to turn over account data.

To contact the reporters on this story:
Fabio Benedetti-Valentini in Paris at
fabiobv@bloomberg.net;
Helene Fouquet in Paris at
hfouquet1@bloomberg.net

To contact the editors responsible for this story:
Elisa Martinuzzi at
emartinuzzi@bloomberg.net
Frank Connelly, Heather Smith

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UBS in $1.4 Billion Test of French Tax-Evasion Crackdown
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