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

UBS AG, 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 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.

Increasing Fines

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.

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 next, a finance ministry official said. If UBS loses the appeal next week, the funds will be held in an escrow account until the outcome of the case.

Talks Halted

The stakes are rising for global banks as authorities in Europe and the U.S. impose stiffer penalties for misdeeds. BNP Paribas SA, 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. 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.

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.

Belgium, Germany

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.

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.