HSBC and UBS may be liable for as much as $3.2 billion of losses linked to alleged fraudster Bernard Madoff in a dispute over the duties of financial custodians at funds in Luxembourg and Ireland, according to Bloomberg.

At stake is the image of the European fund industry, French finance minister Christine Lagarde wrote in a 12 January letter to the European Commission and Luxembourg prime minister Jean-Claude Juncker. European funds’ assets grew by 59 per cent to €6.8 trillion ($9 trillion) over the past six years, partly because rules protecting investors made them attractive.

Custodians oversee funds and they manage cash inflows and payments to investors. Those looking to recoup money would have to prove the banks failed to fulfil their duties, according to nine lawyers surveyed by Bloomberg. HSBC has said it is not liable and UBS declined to comment on the issue, the news agency said.

Dozens of institutions, such as hedge fund firm Man Group, Spanish bank Santander and Switzerland’s Credit Suisse, have been hit by the Madoff fraud, the biggest of its kind in financial history.

HSBC did not immediately comment when contacted by WealthBriefing. UBS declined to comment. 

HSBC and UBS’s custodian roles for the Luxembourg funds are limited because they were set up by investors specifically looking to place money with Madoff, said Paul Mousel, co-head of the financial services practice at law firm Arendt & Medernach in Luxembourg, according to Bloomberg. Mr Mousel represents both banks.

“The arrangements that were put in place from the beginning are arrangements that gave to the custodian a very, very, very small role to play, especially regarding the safekeeping of the securities, which allegedly would have been purchased by the investors’ moneys,” Mr Mousel said.

In a separate report by the Financial Times, the paper noted that UBS has said repeatedly that it set up two onshore funds – the Luxembourg Investment Fund’s US Equity Plus subfund and the Luxalpha Sicav – at the request of wealthy families. There is also a clause on the subscription on the contracts of these funds which said they would be "safekept" by a US broker. 

Independent French financial services company Oddo & Cie is suing Swiss bank UBS  to recover €30 million (about $40 million) invested in a fund associated with Mr Madoff.

Oddo spokesman Arnaud Ploix said his firm sold its clients' shares in the Luxembourg-based LuxAlpha fund on 4 November 2008 but never got the money from UBS, which at the time was the fund's custodian.

And a Swiss law firm has also said it is considering suing the bank over its management of the same $1.4 billion fund. Marc Hassberger of Geneva-based Chabrier & Associes said three of his clients put millions of dollars into LuxAlpha.