Former UBS Adviser Sanctioned for Lacking Integrity
Sarah Jane Leake | Bloomberg Law
The Financial Services Authority (FSA) has recently sanctioned Jaspreet Singh Ahuja, a former client adviser at UBS AG (UBS) in London, for failing to act with integrity. Ahuja, who has been banned indefinitely from working in the financial services sector and fined £150,000, was found to have repeatedly lied to his compliance department while helping an Indian customer to circumvent local law, in clear contravention of UBS’ guidelines.
While, on 5 August, Ahuja referred the decision to the Upper Tribunal (Tax and Chancery Chamber) for a rehearing, he subsequently withdrew his reference.
Ahuja’s Position at UBS
Ahuja, who has worked in the financial services sector since 1994, joined UBS as a stockbroker in its Indian Office in 1999. In 2003, he was transferred to the UK to work for the bank’s international wealth management business as a client adviser, eventually becoming one of the most senior advisers on the desk.
As an FSA-approved person who performed the “investment adviser” and “customer” controlled functions,1 Ahuja was expected to comply with the FSA’s Statements of Principle and Code of Practice for Approved Persons (APER). Moreover, he was required to comply with the bank’s internal legal and compliance requirements, policies, and procedures.
The Indian Investment
Between 1 January 2006 and 30 January 2008 (Relevant Period), Ahuja used a pre-existing investment structure to enable an Indian-resident customer, via an investment fund (Fund) incorporated in Mauritius, to breach Indian law. This was in clear contravention of UBS’ guidelines.
Under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations 19952 (as amended), an Indian resident, regardless of whether they are resident or non-resident in India, is prohibited from investing in Indian securities though a foreign institutional investor (FII), save in certain limited circumstances. FIIs are designed so that non-Indian investors can make investments in Indian securities.
The Fund was established as a protected cell company, with a fund manager based in France, with whom Ahuja had had previous dealings. During the summer of 2006, Ahuja arranged for the fund manager to create a new cell (Cell X) in the Fund, for investment by the UBS’ customer. Ahuja subsequently used an indirect investment route into India, where the customer invested over $250 million into Cell X. This, in turn, invested in Indian securities through the FII vehicles. While it appeared that the fund manager directed the cell’s investment, his role was merely to execute the customer’s instructions that had been passed on to him via Ahuja. In line with these instructions, the cell invested over $250 million in Indian-listed equities and derivatives.
The FSA found that Ahuja, shortly after implementing the investment structure outlined above, took a number of steps to deliberately conceal the true nature of the fund, and, in particular, the fact that the underlying beneficiary was an Indian-national. In summary, he:
- Deliberately withheld information from the bank regarding the identity of the investors in Cell X, to ensure that UBS IB did not refuse to deal with the Fund. As a result of withholding this information, Cell X was able to enter into equity swaps with IB, without UBS IB being aware of the true identity of the beneficial owner.
- Arranged for the customer to invest in Cell X indirectly (via the purchase of structured notes issued by third party banks) rather than directly (by the purchase of shares in Cell X), in order to disguise the link with the ultimate investor, an Indian-national.
- Repeatedly gave UBS’ Singapore office account opening team and legal and compliance department false and/or misleading information in connection with the Fund, ultimately to evade internal compliance controls at the bank.
- Signed instructions to transfer $68 million between customers in breach of UBS’ compliance rules, and deliberately created false internal notes relating to the transfers.
- Signed account opening documentation, in order to open an account for Cell X at UBS Zurich, which contained false and/or misleading information.
— Unauthorised Redemptions
The FSA also found that Ahuja, towards the end of 2007, assisted his line manager, Sachin Karpe, in arranging $8 million worth of unauthorised redemption payouts from the Fund. This was despite knowing that these redemptions were not properly authorised by the customer, and breached UBS’ internal compliance rules as well as general anti-money laundering principles.
These payouts were made to conceal losses in the Fund, which arose out of unauthorised trading previously conducted by Karpe. The FSA, however, does not allege that Ahuja was involved in the unauthorised trading, or that he had knowledge that the redemption payouts would be used to conceal losses caused by unauthorised trading.
— Financial Penalty
Under section 66(1) of the Financial Services and Markets Act 2000, the FSA may, where it considers that an approved person is guilty of misconduct, impose a financial penalty on that person of such an amount as it considers appropriate. An approved person is considered to be guilty of misconduct if, while he was an approved person, he failed to comply with one of the FSA’s Statement of Principles for Approved Persons (Principles).3
Persons approved by the FSA are subject to its Principles. They only breach these, however, where they are personally culpable, In other words, their conduct must have been deliberate or their standard of conduct must have fallen below that which would have been reasonable in all the circumstances. Principle 1 is particularly relevant in this case. It provides that an approved person must “act with integrity in carrying out his controlled function.” Behaviour that falls below the requisite standard includes deliberately misleading by act or omission the approved person’s firm4 (including by providing false or inaccurate information/documentation5), and deliberately failing to inform the firm of the fact that their understanding of a material issue is incorrect, despite being aware of the firm’s misunderstanding6 (including by deliberately preparing inaccurate records7).
— Prohibition Order
Under section 56 FSMA, the FSA may, where it considers that an approved person is not sufficiently fit and proper to perform a function in relation to a regulated activity, make an order prohibiting that individual from performing any function.
The FSA’s Fit and Proper Test for Approved Persons (FIT) sets out the main criteria for assessing a candidate’s fitness and propriety to perform a controlled function. The FSA uses these criteria when assessing an approved person’s continuing fitness and propriety. Therefore, due regard must be had to these provisions when considering whether it is appropriate to impose a prohibition order. When assessing an individual’s honestly and integrity, the FSA will consider whether that person:8
- Has contravened any of the requirements of the regulatory system;9
- Has been dismissed or asked to resign, and resigned, from employment;10 and
- Has, in previous dealings with regulatory bodies, been candid and truthful and demonstrated a willingness to comply with the regulatory requirements to which he was subject.11
Breach & Sanction
The FSA concluded that Ahuja has “contravened requirements and standards of the regulatory system,” and “is dishonest and lacking in integrity.” He has therefore breached Principle 1, and is “not a fit and proper person to perform any function in relation to any regulated activity.”
The FSA’s policy on imposing financial penalties is set out in its Decision and Penalties manual (DEPP) at DEPP 6. Provisions of the FSA’s Enforcement Guide are also relevant. When assessing the appropriateness of imposing a financial penalty and/or making a prohibition order, the FSA must consider all the relevant circumstances of a case. Weighing up the aggravating and mitigating factors in this case, the FSA considered a financial penalty, combined with a prohibition order, to be the most appropriate sanction.
The FSA considered Ahuja’s misconduct to be particularly serious because he: abused his position of responsibility and the trust placed in him by UBS; deliberately set out to evade Indian law, thereby showing a complete disregard for legal and regulatory requirements; and, enjoyed substantial salary payments and bonuses throughout the Relevant Period as an indirect result of his misconduct.
Despite Ahuja’s representations, the FSA remains unsatisfied that Ahuja would suffer serious financial hardship were a financial penalty of £150,000 to be imposed upon him. It has therefore imposed a penalty in this amount, to be paid in full by 28 December.
UBS suspended Ahuja from employment in February 2008, and accepted his resignation shortly thereafter.
Although Ahuja may not work in the financial services sector for the indefinite future, UBS has also been sanctioned. Just over two years ago, the FSA fined the bank £8 million for systems and controls failings in part in relation to this case.12 As a result, UBS has now redressed affected customers to the tune of over $42 million.
While Ahuja argued that it was unfair that he alone was facing regulatory action “for misconduct that was widespread at UBS,” and that his misconduct “was not sufficiently serious to merit a prohibition,” the FSA vehemently rejected these grounds of defence. In its view, “there was no substantive unfairness” to be found. Commenting on the sanction, Tracey McDermott, acting director of enforcement and financial crime, stressed that “[t]his sort of behaviour has no place in the financial services industry. This [sanction] . . . should serve as a reminder that such behaviour is woefully short of that expected of approved persons and will not be tolerated.”13
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