exit the US business altogether . Switzerland has agreed to implement the FATCA . The annual com pliance cost for each Swiss bank is estimated to be 100 million Ethics Sandal #2 : Rogue Trader On Septemt 2011 , UBS announced that a rogue trader named Kweku Adoboli at its London branch had racked up an unauthorized trading loss of $2.3 billion over a period of three years . Nine days later , UBS's CEO Oswald Grbel resigned to assume responsibil ity for the recent unauthorized trading incident . After more than a year of joint investigation by the UK and Swiss regulators , the case was concluded with findings that systems and controls at UBS were seriously defective As a result , Mr. Adoboli , a relatively junior trader , was able to take highly risky positions with vast amounts of money . More alarm ingly all three of Mr. Adoboli's desk colleagues admitted that they knew more or less of his unau thorized trades . Moreover , Mr. Adoboli's two bosses had shown a relaxed attitude toward breaching daily trading limits. UBS was fined $47.6 million in late 2012. Ethics Scandal # 3: Libor Manipulation Libor, or the London Interbank Offered Rate, is the interest rate at which international banks based in London lend to each other. Libor is set daily: A panel of banks submits rates to the British Bankers ' Asso ciation based on their perceived unsecured borrowing cost the rate is then calculated using a "trimmed " aver age, which excludes the highest and lowest 25 percent of the submissions . Libor is the most frequently used benchmark reference rate worldwide , setting prices on financial instruments worth about $ 800 trillion . UBS , as one of the panel banks , was fined $ 1.5 bil lion in December 2012 by the U.S. , the UK , and Swiss regulators for manipulating Libor submissions from 2005 to 2010. During that period , UBS traders acted on their own or colluded with interdealer brokers and trad ers at other panel banks to adjust Libor submissions to benefit UBS's own trading positions . In addition , during the second half of 2008, UBS instructed its Libor sub mitters to keep submissions low to make the bank look stronger. At least 40 people, including several senior managers at UBS, were involved in the Libor manipula tion. In addition to the fine, UBS Japan pleaded guilty to U.S. prosecutors for committing wire fraud. UBS ended the year 2012 with a loss of almost $3 billion, compared with a profit of $4.5 billion for 2011. Please answer these questions the rest of the reading is at the top1. MiniCase 20 details three ethics scandals at UBS in recent years. What does that tell you about UBS? 2. Given the UBS ethics failings, who is to blame? The CEO? The board of directors? 3. What lessons in terms of business ethics and com petitive advantage can be drawn from the UBS scandals, especially comparing the firm's 2012 and 2011 net income? Looking at Exhibit MC20.1, why do you think the stock market hasn't reacted more strongly to the ethics failings?4. What can UBS do to (a) avoid more ethics scandals in the future and (b) repair its damaged reputation ?

UBS's Billion-Dollar Ethics Scandals UBS WAS FORMED in 1997 when the Swiss Bank Cor- non-U.S. account-holder status. Aided by Swiss bank poration merged with the Union Bank of Switzerland. privacy laws, UBS successfully helped its U.S. clients After acquiring Paine Webber, a 120-year-old U.S. conceal billions of dollars from the IRS. In addition, wealth management firm in 2000, and aggressively UBS aggressively marketed its "tax saving" schemes hiring for its investment banking business, UBS soon by sending its Swiss bankers to the U.S. to develop became one of the top financial services companies in clientele, even though those bankers never acquired the world and the biggest bank in Switzerland. proper licenses from the J.S. Securities and Exchange Between 2008 and 2012, however, UBS's stand- Commission (SEC) to do so. ing was harmed by a series of ethics scandals, detailed The U.S. prosecutors pressed charges on UBS for next. These scandals cost the bank billions of dollars conspiring to defraud the United States by imped- in fines and lost profits, and severely damaged its rep- ing the IRS. In a separate suit, the U.S. requested utation (Exhibit MC20.1). UBS to reveal the names of 52,000 U.S. clients who were believed to be tax evaders. In February 2009, Ethics Scandal # 1: UBS paid $780 million in fines to settle the charges. Although it initially resisted the pressure to turn U.S. Tax Evasion over clients' information, citing the Swiss bank pri- Swiss banks have long enjoyed a competitive advan- vacy laws, UBS eventually agreed to disclose 4,450 tage brought by the Swiss banking privacy laws, mak- accounts after intense negotiations involving officials ing it a criminal offense to share clients' information from both countries. Clients left UBS in droves: Oper- with any third parties. The exceptions are cases of ating profit from the bank's wealth management divi- criminal acts such as accounts linked to terrorists or sion declined by 60 percent or $4.4 billion in 2008; it tax fraud. Merely not declaring assets to tax authori- declined another 17 percent ($504 million) in 2009. ties (tax evasion), however, is not considered tax fraud. The UBS case has far-reaching implications for After the acquisition of Paine Webber, UBS entered the bank's wealth management business and the into a Qualified Intermediary (QI) agreement with the Swiss banking industry as a whole, especially for the Internal Revenue Service (IRS), the federal tax agency bank secrecy in which the industry takes such pride. of the U.S. government. Like other foreign financial To close loopholes in the QI program and crack down institutions under a QI agreement, UBS agreed to on tax evasion in countries with strict bank-secrecy report and withhold taxes on accounts receiving U.S.- traditions, President Obama signed into law the For- sourced income. Reporting on non-U.S. accounts with eignaccount Tax Compliance Act (FATCA) in 2010. U.S.-sourced income is done on an aggregate basis. The law requires all foreign financial institutions to This in turn protects the identity of the non-U.S. report offshore accounts and activities of their U.S. account holders. clients with assets over $50,000, and to impose a In mid-2008, it came to light that since 2000, UBS 30 percent withholding tax on U.S. investments or had actively participated in helping its U.S. clients evade taxes. To avoid QI reporting requirements, Frank T. Rothaermel and Carrie Yang (GT MBA, MSc.) prepared this UBS's Switzerland-based bankers had aided U.S. MiniCase from public sources. It is developed for the purpose of class discus- sion. It is not intended to be used for any kind of endorsement, source of data, clients in structuring their accounts to divest U.S. or depiction of efficient or inefficient management. All opinions expressed, securities and set up sham entities offshore to acquire and all errors and omissions, are entirely the authors'. Rothaermel and Yang, 2014