In the most direct evidence yet tying UBS Chairman Peter Kurer to oversight failures at the Swiss bank, Investment News learned today that the U.S. Justice Department recently criticized as inadequate an internal investigation that he supervised. The 2006 investigation focused on whistleblower allegations that bank managers were encouraging breaches of UBS’s own written policies in helping American clients evade federal taxes, prosecutors said in an exhibit accompanying UBS’s settlement of a criminal investigation. This “limited” 2006 probe “did not examine or follow up on available evidence of private banker communications with U.S. clients,” according to the Justice Department’s Statement of Facts attached to the settlement.
“As a result, it found only ‘isolated’ instances of non-compliance,” the six-page document said. “A thorough investigation would have uncovered violations of U.S. law.”
The Justice Department criticism was part of a section titled “inadequate compliance systems.” Mr. Kurer, 59, was UBS’s top lawyer at the time.
“Of the evidence made public, this is the most compelling information yet to suggest that he is at risk of a criminal indictment,” said Jacob Frenkel, a former federal prosecutor with Shulman, Rogers in Rockville, Md. “But there are too many factors that play into an indictment to know if there will be one.”
Columbia University law professor Daniel Richman, a former federal prosecutor, said the documents “bring home the essential role that Mr. Kurer played in the failures at UBS. Whether he acted negligently or worse in the government’s eyes is still something that has not yet been made clear.”
UBS’s $780 million settlement, which headed off a likely indictment, limits the bank’s exposure to prosecution but not that of its employees. The Internal Revenue Service has filed a separate civil suit seeking to force the company to disclose the identities of U.S. taxpayers involved in the case.
The Justice Department leveled accusations at UBS and unnamed executives who “occupied positions at the highest levels of management” and were termed “unindicted co-conspirators.”
The Justice Department’s Statement of Facts did not mention Mr. Kurer by name.
But a May 2006 letter from him to the whistleblower, former UBS private banker Bradley Birkenfeld, shows that Kurer oversaw the internal probe.
“The general counsel for the corporate center, Bernhard Schmid, has delivered to me his final report on his independent investigation into the whistle-blowing matter which was raised by you,” Mr. Kurer said in the letter. “I am in the process of reviewing the results and formulating a number of recommendations to management.”
The investigation was conducted with internal auditors and included interviews with 12 people, “a thorough analysis” of new client relationships, and analyses of emails as well as portfolio and security transactions, the letter said.
“We’ve acknowledged that as an organization we made mistakes and that our control systems were inadequate,” UBS spokeswoman Karina Byrne said today. “We’ve pledged to strengthen our compliance systems.”
But Mr. Kurer’s letter “was just one step in dealing with the complaints raised by Mr. Birkenfeld,” she said. “We investigated the whole business.”
A Justice Department spokeswoman declined comment.
Other allegations by prosecutors have involved senior UBS executives.
In another exhibit to last month’s settlement, Justice alleged unnamed UBS executives failed to “implement effective restrictions” after being notified about “unregistered and unlicensed contacts with the United States.”
“The business was too profitable for UBS,” the criminal allegations said. The Justice Department did not make clear the circumstances in which the executives were allegedly told of the illegal activity.
Mr. Kurer also sat on a high-level 2002 corporate committee accused by prosecutors last month of “knowingly” withholding information relating to its obligations to report on American taxpayers’ secret accounts.
The U.S. Justice Department alleged that the 10-member UBS Group Executive Board that ran the bank’s daily business operations contributed to a conspiracy to defraud the United States of tax revenue.
Mr. Kurer joined UBS in 2001 as general counsel and was appointed to the banker-heavy Group Executive Board in July 2002. He became chairman of the UBS board of directors last April.
Mr. Birkenfeld’s March 2006 letter said he notified UBS compliance and legal officers of “unfair and deceptive business practices” at the bank, but they ignored his complaints for three months.
He then went over their heads to their superior, General Counsel Kurer, in an attempt to get them addressed.
Copies of Mr. Kurer’s letter were sent to senior UBS audit executives and Marcel Rohner, head of the bank’s global wealth management business who became UBS chief executive until his resignation last week.
George Clarke, a Washington criminal tax lawyer who represents clients with offshore accounts, said it is important to know what Mr. Kurer did after receiving the investigative report.
“Without knowing what he did, it is very difficult to say he acted improperly,” said Mr. Clarke, a partner with Miller & Chevalier. “It seems clear that DoJ is not particularly happy.”
March 3, 2009