It was an account UBS finally didn’t open, but the disclosures and admissions require a lot of explanation.
An account some executives of UBS could not open has landed a £1.25-million fine for Sachin Karpe, former staffer of the multinational financial services group, UBS, at the hands of the UK’s market watchdog, the Financial Services Authority (FSA). Karpe’s appeal, a bid to bring down the fine, has in turn put the limelight on a ‘mega client’ the executives tried to open the account for.
FSA, contesting Karpe’s appeal at a London tribunal, said the Mauritius-based structure was intended for Anil Ambani, head of the Reliance group of companies named after him. “The source of funds is Anil Ambani,” the FSA lawyer was quoted by Financial Times as saying.
A detailed email seeking comments from the Reliance Group did not elicit any response. On Wednesday, a Group spokesperson had said the case was five years old and had been settled at the Securities and Exchange Board of India through a consent mechanism in January. The group was neither a party nor represented in the FSA case, the spokesperson had said.
Karpe was head of the Asia–II desk of UBS’ wealth management. The London branch’s international wealth management business model afforded desk heads a high degree of autonomy and authority, according to an FSA final notice against UBS issued in 2009. Each desk head (DH) supervised client advisers (CAs) operating on that specific desk. DHs’ responsibilities included preparing investment documentation, contributing to technical discussions and liaising with legal, compliance and ‘back office’ functions. Where appropriate, DHs were also expected to meet clients with CAs, FSA said.
Karpe’s lawyers, however, said he was rather a “peripheral figure (a mere desk head) who was acting on the direction of his superiors” and that he “did not attempt to open any account in connection with the Pluri scheme,” which was a pre-existing structure.
The revelations
FSA’s main charge against Karpe is of involvement in unauthorised foreign exchange and precious metals trade. According to an FSA notice in August 2009, UBS was forced to pay $42.4 million in compensation to 39 clients in that matter. A Financial Times report said in addition, he is charged with trying top open an illegal Marutius-based structure for a Rs French couple’. According to FSA, there was no French couple and Karpe was doing it for the Ambani family.
According to Financial Times reports on the tribunal proceedings, Karpe’s lawyers, pleading for a reduction of the fine, have produced evidence that showed top UBS officials were involved in the attempts to establish the Mauritius-based structure, ‘Pluri E cell’. According to these reports, the structure was eventually shot down from within. This ‘Pluri E cell’, presumed to be short-form for ‘Pluri Emerging Companies PCC Cell E Emerging Markets Growth Fund’, figure in a Sebi order.
In January 2011, Sebi, in a consent order passed in the matter of misuse of external commercial borrowing (ECB) funds said, “The investigation revealed that Reliance Infrastructure Ltd (RIL) and Reliance Natural Resources Ltd (RNRL) were prima facie responsible for misrepresenting the nature of investments in yield management certificates/deposit, and profit and losses thereof in their annual reports for the year ending March 2007, March 2008 and March 2009, and misusing the frame work of the Sebi (Foreign Institutional Investors) Regulations, 1995.”
Sebi said it had received information on amounts raised towards ECB and Foreign Currency Convertible Bonds (FCCB) by Anil Dhirubhai Ambani Group Companies, used by them to invest in the stock market. It did not give details of these transactions in the consent order.
However, in December 2009, Namo Narain Meena, the Union minister of state for finance, told the Rajya Sabha that RBI had observed end-use violations regarding two ECB transactions of $360 mn and $150 mn by Reliance Infrastructure.
Similarly, RNRL had issued FCCBs worth $300 mn for pursuing projects under the automatic route and the enforcement directorate was investigating these cases, the minister had told the House in response to a specific query.
This money was initially parked in UBS’ wealth management arm, whose Asia desk was managed by Karpe. Sebi said it had also received information about the investment vehicle abroad which was used as a means for the investment. It conducted an investigation relating to the dealing, either directly or indirectly, in the shares of Reliance Communications Ltd (RCom). This had revealed that two foreign institutional investors, Barclays Bank Plc and Societe Generale, had failed to adhere to various reporting requirements under the Participatory Note (PN) rules.
Barclays, SG
Between January 2006 and January 2008 Barclays had issued Offshore Derivative Instruments (ODI) to UBS AG, with RCom as the underlying entity. When Sebi sought further information, Barclays said upon review the counter-party of the transactions was not UBS AG as earlier reported by it but was Hythe Securities Ltd, an entirely new entity. According to Sebi, Hythe did not form part of any of the submissions previously made by Barclays to it.
ODIs issued by Barclays to Hythe (originally stated to be issued to UBS AG) were onward issued to another entity Pluri Emerging Companies PCC Cell E Emerging Markets Growth Fund.
Barclays stated the error in the reporting had occurred due to manual compilation of the ODI reports in December 2006 and error in data entry levels, and that after improvements in its systems for ODI reporting in 2008 and 2009, the errors continued to be carried forward in the new system, according to a Sebi report.
Similarly, Societe Generale had also issued certain ODIs/PNs to Hythe, with RCom as the underlying entity. While providing details of all the ODIs/PNs entered into with Hythe, Societe Generale acknowledged there had been errors in its reporting to Sebi of transactions with Hythe.
Subsequently, it was observed that those ODIs/PNs had been onward-issued, and Hythe was not the end-beneficiary. Societe Generale failed to adhere to the Know Your Client norms, as it had little or no relevant knowledge of the ultimate beneficiary of the ODIs issued by it.
Till now, the ultimate beneficiaries of the P-notes issued to Hythe and onwards to Pluri was a mystery.
According to the reports, Karpe’s lawyers have filed an email dated March 20, 2007 as evidence. It reads: “I would support the decision to go ahead, based on the following: The client is a mega client for wealth management and a key relationship account for the investment bank...Our mega client is among the top three industrialist (sic) in India, with enormous influence in the country, and able to interact with regulators and authorities as required.”
The email was sent by Kurt Kumschick, then marketing head for wealth management in the India-Pacific region. Kumschick allegedly told two junior colleagues that whether the bank should create the Mauritius-based investment vehicle for Ambani would be a “business decision”, if the bank could not confirm its legality under Indian law. Kumschick died this week, media reports said quoting UBS officials.
