UK FSA Fines & Bans Client Adviser at Private Wealth Bank, Contributed by Ben Trust and Joanna Pearson, Nabarro LLP
On 14 December 2011, the Financial Services Authority (FSA) imposed a prohibition and fine of £150,000 on Mr Jaspreet Singh Ahuja, a former client adviser to private wealth banking customers at UBS AG, for failing to act with integrity in breach of Principle 1 of its Statements of Principles and Code of Conduct for Approved Persons (APER) and for lack of fitness and propriety. Ahuja is now prohibited from performing any function in relation to any regulated activity in the financial services industry.
Ahuja was a senior client adviser on one of the international business desks, the Asia II desk, within UBS’ international wealth management business in London, which provides wealth management services to private banking customers. As an approved person holding the “investment adviser and “customer” controlled functions, Ahuja was expected to comply with APER and was also required to act in accordance with UBS’ legal and compliance requirements.
Between 1 January 2006 and 30 January 2008, Ahuja used a pre-existing investment structure to enable a customer who was resident in India to invest in Indian securities through an investment fund incorporated in Mauritius (Fund). This was in breach of Indian law, and in contravention of UBS’ guidelines relating to the requirement that investments are made in accordance with relevant local law.
Under Indian law,1 an Indian investor2 (whether resident or non-resident in India) is not permitted to invest in Indian securities through a vehicle known as a foreign institutional investor (FII), except in particular circumstances (which were not relevant here). Vehicles such as these are designed so that non-Indian investors may make investments in Indian securities. Ahuja initially arranged for the Fund to be set up in February 2006 for another of the Asia II desk’s customers, using a fund manager based in France with whom he had prior dealings. The Fund was established as a protected cell company (a single legal entity comprising a series of self-contained cells). Around August 2006, Ahuja arranged for the fund manager to create a new cell in the Fund for investment by the customer, which was a large group of Indian companies, headed up by a wealthy Indian individual. The customer wanted to invest in an Indian company within its own group.
In order to achieve this, Ahuja used an indirect investment route for the customer into India, whereby three Indian companies in the customer’s group invested over $250 million into the new cell, which, in turn, invested in Indian securities including through FIIs. Ahuja arranged the structure so that it would appear that it was the fund manager who was directing the cell’s investments, when in fact the fund manager was merely executing the customer’s instructions that had been passed to the fund manager via Ahuja. This was done by Ahuja to disguise the fact that the three Indian companies were, via the cell, purchasing Indian securities through FIIs, in direct contravention of Indian law.
Ahuja subsequently took steps to conceal the true nature of the customer’s investment by the deliberate and repeated provision of false and/or misleading information to UBS’ legal and compliance department and other parts of UBS. These included signing payment instructions routing payments through third parties without their knowledge, creating internal memoranda setting out false reasons for transfers, drafting e-mails for the fund manager, and preparing the fund manager’s staff before telephone calls in order to conceal from UBS Investment Bank (UBS IB) that they were dealing with a customer of UBS’ international wealth management business. Ahuja was aware that had USB IB been aware of the actual customer they were dealing with, there was a risk that they would refuse to deal with the Fund. Ahuja appears to have been aware of the fact that Indian investors are prevented from investing in Indian securities via FIIs, as he repeatedly told a UBS compliance function that the beneficial owners of the account were French nationals.
Ahuja also assisted in unauthorised redemption payments out of the Fund in the knowledge that, amongst other things, the redemptions were not properly authorised by the customer and breached UBS’ internal compliance rules. The redemption payments were used to conceal losses from unauthorised trading conducted by another of Ahuja’s former colleagues.
Ahuja made both written and oral representations in relation to substantive fairness, procedural fairness and the appropriate sanction.
He argued that the proceedings against him should be discontinued as they were substantively unfair in that he alone was being pursued for his involvement in breaching Indian law, when there were many others within UBS who were equally culpable. He submitted that by pursuing him alone, the FSA was acting in a manifestly partial and unequal way. Ahuja also argued that the FSA’s investigation had been based on the original investigation of UBS (and, subsequently, KPMG), which, he submitted, was biased. The FSA’s decision to “acquit” others at UBS was also criticised by Ahuja.
Notwithstanding his submissions regarding the fairness of the proceedings and the inappropriateness of the allegation that he lacked integrity, Ahuja also addressed the appropriate sanction in the case, submitting that the misconduct alleged against him was not “particularly serious” as it “merely involved lying to UBS compliance”. He also suggested that, as he alone was facing regulatory action for misconduct that was widespread in UBS, it would be inappropriate to prohibit him. Ahuja further submitted that, in any event, his misconduct was not sufficiently serious to merit a prohibition.
The FSA found that there was no substantive unfairness arising from the fact that Ahuja now faced regulatory action while others did not. The FSA also rejected Ahuja’s submissions in relation to procedural unfairness, stating that it was satisfied with the evidential basis for the decision and did not consider that the proceedings were rendered unfair because of the reliance that was being placed upon the original investigations conducted by UBS and KPMG.
Although the FSA accepted that Ahuja would have been influenced by those with whom he worked, it was felt that this could not excuse misconduct which clearly demonstrated a lack of honesty and integrity. In addition to finding that Ahuja’s use of a pre-existing investment structure to assist a customer to breach Indian law demonstrated a lack of honesty and integrity, the FSA found that this was compounded by Ahuja’s attempts to conceal the true nature of the customer’s investment, his repeated provision of false and/or misleading information to a UBS compliance function and his conduct in arranging unauthorised redemption payments.
The FSA viewed Ahuja’s misconduct as particularly serious for a number of reasons, mainly that: he abused his position of responsibility, as a senior client adviser with over 10 years experience, and the trust placed in him; he showed a disregard for legal and regulatory requirements; his misconduct in relation to the deliberate concealment of the true nature of the customer’s investment constituted a consistent, deliberate course of misconduct spanning over 24 months; his misconduct resulted in a loss to one of his customers; and his misconduct was deliberate.
The FSA’s decision further reinforces its stance that behaviour such as this will not be tolerated and that anyone working within the financial services industry found to be in breach of its rules or principles will face significant penalties, irrespective of whether other employees, or the employer itself, played a part.
The decision serves as a warning/reminder to approved persons in particular that, even if they are encouraged by their employer to take steps to maximise profits for clients, such steps should be taken within the confines of the FSA rules, and in accordance, with relevant local laws. The FSA co-operates extensively with foreign regulators. Indeed, it is often the case that the FSA will share the information it receives during an investigation with the relevant local regulator, which opens up the possibility that approved persons could be subject to investigation in other jurisdictions.
Given that the FSA fined UBS £8 million for systems and controls failings in relation to this case in November 2009,3 and UBS has since repaid affected customers more than $42 million by way of redress, UK financial institutions need to ensure that adequate systems and controls procedures are in place and reviewed regularly, particularly within wealth management functions.
Ben Trust is a partner in the commercial dispute resolution team at Nabarro LLP. Ben acts for a number of quoted and unquoted companies, public bodies and other institutions. He has a broad practice and experience in both commercial litigation and arbitration, including financial services litigation, commercial fraud, professional negligence, and technology disputes. Much of his experience includes cross-border or international issues. Telephone: +44 (0) 20 7524 6234; E-mail: firstname.lastname@example.org.
Joanna Pearson is an associate in the commercial dispute resolution team at Nabarro LLP. Joanna has experience in commercial litigation, financial services litigation and non-contentious financial services advisory work. Joanna’s experience includes cross-border/international issues. Telephone: +44 (0) 20 7524 6767; E-mail: email@example.com.
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