UBS AG (NYSE:UBS) continues to face increased pressure from tax authorities in France with the largest Swiss bank likely to face a full-fledged criminal investigation for the role of its French unit in helping more than 350 clients evade taxes by rerouting their undeclared assets to Switzerland.  UBS has been under scrutiny from the taxman in France since last April 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. 
A criminal investigation would be bad for UBS AG (NYSE:UBS) on both the short-term and long-term fronts. The short-term implication of any tax evasion charges that are found to be true is that the Swiss bank will be forced to shell out millions to settle them like it did with the U.S. in 2009. And to make matters worse, if the French authorities are able to establish illegal business practices by UBS AG (NYSE:UBS), it will embolden the French government to push for new tax agreements similar to those entered into by the U.K. and Germany with Switzerland – something that will make the country’s asset management business a less attractive option for French investors.
We maintain a $19 price estimate for UBS, which is less than 10% above the current market price.
The Swiss banking system has thrived for decades on the back of secrecy it provides to account holders, allowing it to become the $2 trillion business it is currently. While the country’s biggest banks, UBS AG (NYSE:UBS) and Credit Suisse, have a sizable international wealth management operation, many of their high net worth offshore clients maintain accounts in Switzerland to benefit from 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 Group AG (NYSE:CS) Will Take Lumps from Swiss-British Tax Agreement and Swiss Bankers and US Gov’t Square off Over Credit Suisse).
Since early last year, French authorities have alleged that UBS maintains two different ledgers to hide the money that French citizens have stashed away in offshore accounts. And the fact that UBS admitted to similar charges by the U.S. in 2009 goes against the Swiss bank in a big way. UBS AG (NYSE:UBS) ended up paying $780 million in settlement charges to U.S. regulatory authorities in 2009. And it could very well be forced to cough up a few hundred million dollars to settle with the French in the event the allegations are proved true.
But the more far-reaching impact of an investigation going against UBS AG (NYSE:UBS) is the likely signing of a tax agreement between Switzerland and France which will drive away clients who intend to capitalize on Switzerland’s perception as a tax haven. This will reflect in slower growth in the size of assets the Swiss bank manages for its international clients, represented in the chart below.