UBS Running Out Of Options As Highest French Appeal Court Upholds €1.1 Billion Bond
UBS (NYSE:UBS) failed to get any relief from France’s highest appeals court in the ongoing tax evasion investigation, with the apex court upholding the €1.1 billion ($1.4 billion) bond imposed by French prosecutors on the bank in July. [1] The largest Swiss bank had appealed against the “exaggerated” bond amount with the Cour de Cassation after a lower court squashed an earlier appeal in September and directed the bank to pay the record bond amount by the end of that month. [2] Notably, UBS has already posted the bond, which is seen as an initial payment towards penalties stemming from the long-drawn investigation. The bank is exploring the option of filing an appeal with the European Court of Human Rights in this matter.
UBS’s failure to get a waiver points to a rather tough stand taken by French authorities against the bank on charges of helping French citizens evade taxes – especially since the bank hoped to settle the issue for roughly €100 million ($122 million). This could potentially result in a multi-billion dollar settlement bill for UBS next year. To put things in perspective, UBS settled similar tax evasion charges with the U.S. in 2009 for $780 million and one with Germany in 2014 for roughly €300 million ($365 million). [3]
A multi-billion dollar tax settlement with French authorities presents a downside to our $20 price estimate for UBS, which is about 15% above the current market price.
See our complete analysis of UBS here
The Swiss banking system has thrived for decades on the back of the secrecy it provides to account holders, allowing it to become the $2 trillion business it is currently. While the country’s biggest banks, UBS and Credit Suisse, have sizable international wealth management operations, many of their high net worth offshore clients maintain accounts in Switzerland to benefit from the privacy that comes with such an account. And while the Swiss government’s unyielding support of privacy in its banking system has been the target of scorn from governments across the globe for decades, extreme pressure from the likes of the U.S., the U.K., Germany and France since the 2008 recession has forced the Swiss government to relent and agree to various tax agreements with some of these countries (see UBS and Credit Suisse Will Take Lumps from Swiss-British Tax Agreement and Swiss Bankers and US Gov’t Square off Over Credit Suisse).
UBS has been under scrutiny in France since April 2012, when French authorities searched its offices in Strasbourg, Lyon and Bordeaux in relation to money laundering and tax evasion assistance charges leveled against the bank. [4] French authorities have alleged that UBS maintains two different ledgers to hide the money that at least 350 French citizens have stashed away in offshore accounts managed by the bank, and consequently directed the bank to post a €1.1 billion ($1.4 billion) bond in the ongoing criminal investigation. The bank was forced to pay the amount when its initial appeal was rejected by a lower court, even as the Swiss government handed over information of about 300 UBS clients to French investigators in October. [5]
The fact that the court dismissed UBS’s appeal recently appears to be an indication of what lies ahead for the bank. The French authorities seem to be gunning for a large settlement amount from UBS – making the deal a template for going after other banks in the near future. While UBS got away with a fine of $780 million to settle similar charges with U.S. regulatory authorities in 2009, the situation has changed considerably since then with Credit Suisse shelling out a record $2.6 billion and also pleading guilty to settle tax evasion charges with the U.S. earlier this year.
A multi-billion dollar settlement will hit operating margins for UBS’s wealth management operations for the period in which it is reached. You can see how lower margins affect UBS’s share value by making changes to the chart below.
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- UBS Loses Appeal in French Tax Evasion Probe, The Wall Street Journal, Dec 17 2014 [↩]
- UBS’s $1.41 Billion Bail Upheld in French Tax Case, The Wall Street Journal, Sept 22 2014 [↩]
- UBS Said to Pay $1.4 Billion Bail in France Tax Probe, Bloomberg, Sept 30 2014 [↩]
- European tax probes are headache for Swiss banks, SwissInfo, Jul 11 2012 [↩]
- Swiss authorities give France documents on 300 UBS customers: SonntagsZeitung, Reuters, Oct 5 2014 [↩]