How UBS Miscalculated and Wound Up With a $5 Billion Fine in France

In January 2017, UBS Group AG General Counsel Markus Diethelm bragged to a journalist that the Swiss bank’s tax case may mark France’s entry into the big league of financial crimes enforcement.

“We could be the first company to work out a settlement” in the country, he told the reporter of French daily Le Figaro in an interview at the bank’s central Paris offices on Boulevard Haussmann, alluding to a new U.S.-style procedure of paying fines while not admitting guilt.

Several months earlier, UBS had dispatched one of its top attorneys to convince French lawmakers of the need to create a settlement option for money laundering cases like the one faced by the bank. Lobbying by the Swiss bank and others that year yielded the desired outcome -- a French law was passed at the end of 2016 that made such settlements possible.

When time came for settlement talks, UBS offered up 180 million euros ($204 million), less than a fifth of the 1.1 billion-euro bond it had been made to post by the French. As French enforcers dismissed the UBS offer, which it had improved slightly, as unacceptable, the bank’s legal team decided to play hardball, pushing the case to trial in the hope of wringing out a smaller penalty. That effort failed spectacularly.

Failed Strategy

On Wednesday, Switzerland’s biggest bank was ordered to pay more than $5 billion in the tax-evasion case -- matching what was sought by prosecutors. That’s the biggest ever fine for a Swiss bank, and more than 15 times what HSBC Holdings Plc paid to settle a similar matter in France in 2017. The bank has said it will appeal the ruling.

“It’s too early to draw any definitive conclusions given the appeals have just begun, but they took a risk in thinking they had a solid case and it’s clear now the strategy didn’t pay off,” said Stephane Bonifassi, a Paris criminal lawyer not involved in the case.

The UBS case is a tale of miscalculations, with the bank failing to take into account the backdrop against which the French prosecutors and judges were operating, dozens of conversations with people involved in the probe showed. Most asked not to be identified because details of the case remain confidential.

UBS was up against both a global trend toward tougher fines for financial crimes and also the Gilets Jaunes protests over wealth disparity that have gripped France over the last few months.

‘Two to Tango’

“There’s an element of context at play,” the bank’s main attorney, Denis Chemla, said at a press conference in Paris on Thursday. “The fact that we’re a Swiss bank doesn’t help. The reason our negotiations didn’t succeed is not because of the arrogance of the bank or its lawyers. It’s because we failed to agree on an amount. It takes two to tango.”

The lawyer is now focusing on the second round. Chemla expects the appellate court to issue its ruling in about two years. In the meantime, the appeal suspends the bank’s order to pay the penalty.

Until recently, the French had been notoriously slow in punishing financial crimes, and court fines in the country had been small -- never more than a few million euros, which may have lulled UBS into thinking it would get off lightly.

But France was finding out that other countries weren’t shy about fining its companies. The real eye-opener was BNP Paribas SA’s $8.9 billion fine five years ago in the U.S. in a sanctions violation case. Another French company, Alstom SA, paid $772 million in penalties the following year to resolve a bribery case.

Settlement Talks

In that context, France was in favor of modernizing its financial crimes enforcement mechanisms, and UBS’s push for a wide-ranging settlement procedures drew active backers. The settlements law passed at the end of 2016, with a last-minute amendment that catered to UBS’s needs.

With settlement talks beginning, UBS’s Diethelm came to Paris to meet with top enforcer Eliane Houlette at the offices of the Parquet National Financier on Boulevard des Italiens. He soon learned that the enforcers wouldn’t go below 1.1 billion euros -- the amount of the bond UBS had been forced to post in the course of the French investigation -- and were pushing for even more.

‘No Trace’

The general counsel put his foot down. UBS Chief Executive Officer Sergio Ermotti had made the bank’s views clear in a 2014 Bloomberg TV interview, shortly after the bond order was issued.

“A bail of 1.1 billion euros makes no sense,” Ermotti said. “It makes no sense also if you related to our settlement with Germany, which is a much bigger business.” UBS paid about 300 million euros to resolve the German case.

The continuing deadlock left French investigators -- who would have preferred a settlement -- with no other choice but to send the case to trial. On March 20, 2017, just two months after Diethelm’s Figaro interview was published, the Swiss lender was indicted alongside six former bankers and its French unit.

UBS may have been too hasty in thinking that it could secure a quick victory through the French courts, said Ludovic Malgrain, a lawyer at White & Case, not involved in the case.

“UBS opted for the legal way by going to trial rather than trying to manage the financial risks by negotiating a deal and it did not work out,” he said.

The trial began in mid-October the following year. UBS insisted there was no proof of systemic wrongdoing as alleged by the prosecution.

“A system leaves traces” Chemla said in court. “It leaves thousands and thousands of emails, it also often leaves wiretaps when people speak too much. Here there’s nothing, nothing at all.”