Rainmakers and milk books: UBS in France

Last week, a French court ordered UBS, the Swiss banking giant, to pay a fine of $ 4.2 billion for facilitating filthy rich French people hide their money from French authorities and evade taxes. This is an extremely significant development as the bank has been, in the recent past, fined in the United States and Germany as well. It has, however, not very uncommon for banks to be fined for illegal activity in developed jurisdictions. UBS is the largest bank in Switzerland and has a chequered history of becoming a monolith after two competing banks – Union Bank of Switzerland and Swiss Bank Corporation – decided to merge in 1998 and create the entity UBS.

Taking advantage of the codified banking law of 1934 in Switzerland which encourage and support almost absolute secrecy and confidentiality, UBS had been proactively targeting high net worth individuals almost all over the world. The bank is, truly speaking, not at all interested in clients providing low volumes of business and has been focusing only on the top segment of the society. Given the number of choices provided by the competitors, the rich and elite have to be wooed in a different manner, which obviously is very different from soliciting business from the middle class clients.

The UBS had been quite successful in getting business from several European countries and France has also been a country providing good business, though less than in quantum than Germany. The French law does not allow foreign bankers to solicit clients on its soil and that made rainmakers – individuals who bring business using their networking, informal contacts and cosy relationships – from the Swiss office of UBS to troop in France on the sly and arrange meetings with the high end individuals on the social and income hierarchy at exotic locations. Never ever these meetings were arranged formally with complete information disclosed.

The business cards of the rainmakers never had the logo or name of the bank, and, a strong code of conduct was in place for them as well as for any prospective investors with an emphasis on secrecy and not leaving any trail of their movement.

All the transactions and notes about the meetings were recorded in small milk books – the books used by milk farmers in Switzerland for keeping an account of the production and supply of milk, and other details – without any usage of proper ledgers and of course, no digital records were made.

It has been difficult for the French authorities to collect evidence, however, key former employees of the UBS themselves have come forward to provide evidence, at least in the form of oral testimony, which, though is weaker than documentary evidence, yet has substantial strength and value in the eyes of law.

UBS has denied all the allegations and has stated that it will file an appeal against the decision. This is tad surprising as in the recent past the bank had rejected a settlement offer of the French authorities of about $ 1 billion and had chosen the path to fight the legal battle in a court of law, which it lost, and, now is gearing itself up for the long appellate legal journey. UBS, Credit Suisse – the second largest bank in Switzerland – and several other banks in Switzerland have been providing the facility of undeclared bank accounts taking full advantage of the neutrality of the country for a very long time, that is not aligning to any of the blocs of countries, and also by maintaining complete secrecy without succumbing fully – at times they partially disclose a few unimportant details to play to the galleries – to the external pressures of the government of foreign countries demanding disclosure of bank account details of their nationals. This is such a great service for individuals sitting on a pile of illegally accumulated money that very often the efforts made by any governments are thwarted by the same individuals who are usually in positions of power in the respective countries. The action by French authorities is commendable and we can expect something similar by the Indian authorities; an action which has been promised several times to the people of India and is long overdue. These type of rainmakers and milk books have no place in modern-day banking and must be relegated to a forbidden corner.

The author is a professor at IIM-A, akagarwal@iima.ac.in