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Case 8

Bank records also played an important role in the investigation of a New England narcotics trafficker who was recently indicted on 4 counts of income tax evasion. The indictment charged that during a 4-year period, he understated his taxable income by $56,000. When interviewed, the subject stated that his records consisted of "pieces of paper" and that these were destroyed at his place of business after his tax returns were prepared.

The Internal Revenue Service reconstructed his income by the bank deposit and expenditure method. The records of seven banks were analyzed and the Government's case will depend heavily on these bank records.

Case 9

In another major case, a Texas corporate executive and oil field equipment supplier was convicted on tax charges on the basis of bank records. He pled guilty and was sentenced to five years in prison plus a $10,000 fine. During the course of the investigation, he refused to supply any information or produce any records and the agents had to rely on bank records. The subject used 18 different trade names, four post office box addresses, nine bank accounts and 16 savings accounts.

Unreported sales were identified through the analysis of the bank deposits. Numerous checks from the business bank accounts were purportedly issued for the purchase of oil well materials when in reality they were transfers from one account to another or were for personal expenditures.

The additional taxes and penalties involved in this case amounted to $160,000.

Case 10

In another narcotics program tax investigation, the subject is a major distributor. He has been the subject of several unsuccessful investigations by law enforcement agencies.

Bank records played an important role in this investigation by helping to establish substantial real-estate investments and large expenditures for luxury items. In addition to the above, during the 5 years covered by the investigation, the subject purchased a boat, five residences, and several luxury automobiles including a Rolls Royce. The bank records played

a vital role in reconstructing these transactions and in establishing the taxpayers net worth and expenditures far in excess of the taxpayer's reported income.

The additional tax and penalties involved in the proposed criminal charges total more than $150,000.

Case 11

Recently, one of the major narcotic distributors in the Mid-Atlantic area was indicted for income tax evasion and for failure to file income tax returns. We are able to document additional taxes and penalties due to the Government in excess of one quarter of a million dollars.

The subject claimed that his books and records were either lost or stolen. The lack of records made it necessary to compute his income by the expenditures and net worth method. The investigation by the Internal Revenue Service disclosed that the subject and his wife maintained, during the 5-year period covered by the investigation, safe deposit boxes, 9 checking and 4 savings accounts.

One

The bank records used in the case included signature cards, monthly account statements, loan applications, financial statements, deposit tickets, copies of personal checks, safe deposit box visitation cards, and cashiers checks. The examination of bank records led from one bank to another and resulted in the discovery of undisclosed bank accounts. of the banks also submitted currency transactions reports which disclosed that the subject during one year exchanged $17,000 in various small bills in exchange for currency of $100.00 denomination. This latter information, when matched with safe deposit box visitations and other account transactions was especially revealing.

The availability of bank records made the tax indictment against the narcotics trafficker possible.

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This law originated in the House on December 3, 1969, when it was introduced as H.R. 15073 by Mr. Patman. The legislation grew initially out of concern over the use by criminal elements and others of secret foreign bank accounts to evade income taxes and hide the fruits of their illegal activities. However, the bill also reflected Congressional concern over the availability of records maintained by domestic financial institutions relating to those engaged in organized and "white collar" crime. As introduced, the bill required U.S. banks to copy checks and certain other instruments, maintain certain records, and permit the Secretary to have access to such records; it required U.S. financial institutions and those dealing with them to report certain U.S. currency transactions to the Treasury; it required persons importing or exporting substantial amounts of U.S. currency to furnish reports to the Treasury; and it required citizens, residents, and persons doing business in this country to report certain transactions with foreign banks.

When the Subcommittee on Financial Institutions of the House Committee on Banking and Currency held hearings on this bill we testified that we supported the objectives of preventing the use of foreign bank accounts for illegal purposes, but that we felt that the proposed bill went too far, that additional work was required to determine the best way to achieve its objectives without hampering commerce, injuring the status of the dollar, creating undue administrative burdens, and infringing upon the traditional freedoms of American life. We were particularly critical of the provisions of H. R. 15073 which would have given the Internal Revenue Service unlimited access to private bank records. We opposed any such broad "survey"

power.

We also were critical of the provisions in the bill which made mandatory the photocopying of all checks. A Treasury task force was studying the international banking transactions area and had developed certain proposals for legislative action similar to those in the House bill. In the domestic area, however, we observed that the bill as drafted provided the Secretary with little or no flexibility with respect to the implementation of its requirements.

As a result of our efforts, the provision giving Treasury broad access to bank records was deleted from the bill. However,

the Committee disagreed with us that the domestic recordkeeping area required further study. The bill reported out by the Committee contained the following Congressional findings and statement of purpose:

"Sec. 21. (a) (1) The Congress finds that
adequate records maintained by insured banks have
a high degree of usefulness in criminal, tax, and
regulatory investigations and proceedings. The
Congress further finds that photocopies made by
banks of checks, as well as records kept by banks
of the identity of persons maintaining or authorized
to act with respect to accounts therein, have been
of particular value in this respect.

"(2) It is the purpose of this section to require
the maintenance of appropriate types of records by
insured banks where such records may have a high
degree of usefulness in criminal, tax, or regulatory
investigations or proceedings.

The House Report justified these positions as follows:

"In recent years a few sizable banks have abolished or limited the practice of photocopying checks, drafts and similar instruments drawn on them and presented to them for payment. This failure to maintain photocopies of checks has frustrated law enforcement personnel in securing evidence necessary to criminal, tax and regulatory investigations and proceedings. Many cases have either been dropped or their conclusion has been long delayed because of the difficulty or impossibility of obtaining photocopies or records of essential checks drafts or similar instruments." (p. 11)

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"The importance of photocopies of checks to effective law enforcement, especially where whitecollar crimes are concerned, simply cannot be overestimated. The recipient of a direct or indirect bribe, for example, will make no record of his receipt of the money, and the person who wrote the check will take pains to see that it is totally destroyed after cancellation. In many instances, payments by check which are not necessarily illegal in and of themselves may constitute the only way that the prosecution can establish the existence of a relationship or pattern of conduct which may be essential to making its case.

Finally, the maintenance of check photocopy records by banks raises no constitutional issues and poses no threat to individual liberty. As has been pointed out,

banks have wide experience with maintaining these
records, and the banking industry has a creditable
record of maintaining their confidentiality. There
is nothing in this bill which would make such records
any more accessible to law enforcement officers, much
less anyone else, than they now are. (p. 16)

The House Report also commented:

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"Read in conjunction with the findings set forth
in section 21 (a) and the requirement in section 21(b)
that the Secretary 'shall prescribe regulations to carry
out the purposes of this section,' the statement of
purpose leaves the Secretary little choice but to
request upon the effective date of the legislation,
that banks photocopy all checks except for those
exempt under subsection (i), discussed below." (p. 16)
Subsection (i) provided that "this section shall
not apply to domestic financial transactions involving
less than $500."

Senate Action

Thereafter, Senator Proxmire introduced S. 3678. Title I of that bill contained the same findings, purpose clause, and photocopying requirements as H.R. 15073, with the exception of the exclusion for checks under $500. When this bill was being considered by this Subcommittee we made the following comments concerning governmental access to bank records:

"We decided against seeking specific statutory authority extending the rights of the Internal Revenue Service to survey the records of international transactions in banks and other financial institutions. In deciding this, we considered the constitutional prohibition against unreasonable searches and seizures and the need to avoid unnecessary incursions against the right of privacy. While it is clear that obtaining records by established discovery procedures from the banks and other institutions in connection with the examination of a particular taxpayer would not violate these rights, provision for a survey of such records raises a much more serious question. We are also concerned that surveys or information returns could have an adverse effect on legitimate foreign investment in the United States. It has been the tradition overseas to place great emphasis on the privacy of financial transactions and a breach of this tradition could adversely affect the flow of foreign funds to the United States."

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