UBS quizzed about torn bonus notebooks by French prosecutors

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A prosecutor in a high-profile French tax case questioned why UBS Group AG systematically destroyed handwritten notebooks detailing the movement of French clients’ funds to surrounding lower-tax countries.

Patrick de Fayet, a former general manager at UBS France SA, said that the notebooks were solely used to help settle disputes over bankers’ bonuses tied to bringing in new business to colleagues in Switzerland or Belgium. Serge Roques, a financial prosecutor, said Thursday that the destruction of the notebooks was troubling, but de Fayet said the data was saved into the bank’s accounting systems once the issue was settled, and the books torn up.

De Fayet is on trial in Paris for allegedly helping employees at the Swiss bank, who crossed the border, seek out new French clients despite not having the right paperwork. The trial, which started last week, also includes allegations that UBS assisted French customers between 2004 and 2012 by providing services such as numbered accounts or by setting up trusts to launder funds they hadn’t declared to tax authorities.

The laundering accusations can lead to fines of as much as half the amount of the funds stashed offshore for clients. Under one estimate, investigators say the Swiss bank managed 10.6 billion euros ($12.2 billion) in undeclared cash from French citizens — putting the maximum fine at 5.3 billion euros.

Annual Bonuses

De Fayet told the criminal court Thursday that annual bonuses for bankers in his unit were tied to new business they sent to counterparts abroad. Disagreements over which banker — French or Swiss — should be credited led the lender to use the so-called milk notebooks to record claims that would be settled quarterly.

Jean-Frederic de Leusse, the chief executive officer of the French unit since 2012, told judges that residents in France rarely sent money out of the country to UBS bankers abroad and so that wasn’t a major part of bonuses.

He said that the bank’s defense teams scoured the data and found about a dozen instances a year where money was sent toward UBS in Switzerland. With that information, de Leusse said the bank was able to give investigators an explanation concerning 99 percent of the 3 billion euros sent out of France during the eight years on which the investigation focuses.

He added that there were more instances — albeit involving a smaller total volume — of money being sent back to UBS France over the same period.

Interrogation in Custody

While some of those who were interrogated during the investigation initially denied the notebooks ever existed, de Fayet said he never did.

“The one person who is getting the most grief on the milk notebooks is the one who while interrogated in custody recognizes their existence,” the former UBS France banker said. “I really don’t understand why anyone had any memory lapse.” Answering a question from the prosecutor at the Parquet National Financier, de Fayet admitted that he’d never heard of any rival bank using hand-written notebooks to keep track of clients’ cross-border transactions.

Roques also asked what the French unit did to make sure customers sending money across the border complied with the tax rules.

“The only thing that we knew for sure is that we would remind clients who wanted to send money to Switzerland that French law required declaring the Swiss account,” de Fayet said.

Good Faith

The former UBS executive said his unit had no way of checking whether clients actually declared the accounts to tax officials, and instead depended on their good faith.

“I must say that it’s not every day that a client comes to me to tell me he has money that he hasn’t declared,” de Fayet told the court. “It’s rather something they keep quiet.”

On Wednesday, de Fayet told the court that UBS France offered an elite team of bankers fancy cars and big bonuses to attract wealthy local clients, often sparking tensions with the lender’s Swiss headquarters.

The trial is set to last until Nov. 15, with several other former UBS executives to take the stand.

Bloomberg News
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