I assume this concludes today's hearings. We appreciate your participation, and if there is any additional information that you would like to supply for the record, fine.

Mr. LYNCH. I would like to submit a copy of that-I guess the original of the letter from the SEC, the Securities and Exchange Commission.

Senator BENNETT. We have that.

There may be questions submitted to you in writing, and I assume you will respond to those and they will go in the record.

Mr. LYNCH. Yes, Senator.

(The prepared statement of Mr. Lynch, two letters from the Securities and Exchange Commission, an exchange of letters with Senator Tunney, and the answer to a letter from Senator Bennett follow:) STATEMENT OF WILLIAM S. LYNCH, CHIEF, ORGANIZED CRIME AND RACKETEERING SECTION, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

Mr. Chairman, and distinguished members of the Subcommittee, my name is William S. Lynch. I am Chief of the Organized Crime and Racketeering Section, Criminal Division, of the United States Department of Justice. I appreciate this opportunity to present to you the position of the Department of Justice regarding S. 3814 and S. 3828, the proposed amendments to Public Law 91-508.

These two bills, S. 3814 and S. 3828, are of particular concern to the Department of Justice because the enactment of legislation of this kind would effect a massive curtailment of the criminal investigative process. It is no exaggeration to say that law enforcement in the United States would be severely damaged by the passage of either of these bills.

In essence, these bills would impose certain procedures and prohibitions to severely restrict the access of law enforcement authorities to financial information contained in the records of financial institutions. Indeed, the utility of recordkeeping provisions established under Public Law 91-508 would be eliminated altogether. Those financial records which are necessary to conducting the financial affairs of customers would be obtainable only through a burdensome and dilatory system of account holder notification and consent or court orders based upon probable cause hearings. Thus, not only would the recordkeeping provisions of Public Law 91-508 be discarded, but law enforcement access to financial records, which was neither diminished nor expanded by Public Law 91-508, would be severely reduced. Let us examine the bills in more detail.

S. 3814 is designed "to safeguard certain rights guaranteed by the Constitution, including the rights of privacy." It is written in broad terms apparently so as to be applicable to all kinds of banking institutions in respect to share, deposit, or credit card accounts. The types of "financial records" that would be protected are enumerated with the apparent intention of being all-inclusive. The bill would forbid a bank to disclose a customer's financial records to any person or agency, with certain exceptions discussed below. Wrongful disclosure of the records would make the financial institution subject to civil suit for actual and punitive damages; and, if it were involved, the Federal Government would also be liable in damages. The banking officials who willfully participated in a wrongful disclosure and any Federal employee who induced or attempted to induce the violation would be guilty of a misdemeanor, punishable by as much as $5,000 fine and one-year in prison. The Federal employee convicted under this provision would also be removed from civil service and disqualified from holding Federal employment for a period of five years. In addition, any person aggrieved by a violation or threatened violation under this bill could obtain injunctive relief.

The bill contains certain provisions for disclosure for generalized purposes so that a bank could function properly under the law, give generalized statistical information, file its own tax returns, handle the accounts after the holder's death, etc. The bill would prohibit the customer from waiving any of his rights under the bill.

Except for the generalized purposes alluded to above, a bank could properly disclose the financial records of an individual account holder only on two bases: consent and court order.

A bank would be justified in making disclosures on the basis of an account holder's written consent, if the individual seeking to examine the records presented the bank with specific authorization from the customer and, after notifying the customer of this by registered mail, the bank received no contrary instructions within ten days; or, alternatively, if the bank gave the customer specific notice that a named person wanted to see certain records and the customer responded by giving written authorization, disclosures would be lawful.

A bank would also be justified to make disclosures pursuant to a Federal or State subpoena served upon an account holder if he thereafter directed the bank in writing to comply with the subpoena. If the subpoena had been personally served upon the account holder, after "the elapse of the period of compliance or fifteen days whichever is longer," the bank could make disclosures provided it had not been prohibited from doing so by a court order. If there had been only substituted service upon the account holder, the bank could properly make disclosure of the financial records only at the customer's written direction or under further court order.

A bank would be justified in making disclosures in response to the order of a court “after a probable cause hearing which on its face comports with the requirements of the fourth amendment of the United States Constitution."

The bill would prohibit Federal, State and local governments from using or retaining information contained in the financial records for any purpose other than the specific statutory purpose for which the information was originally obtained unless such information "provides the basis for or gives rise to civil or criminal action within six months of obtaining such information."

Turning now to the second bill, S. 3828 is based upon the Commerce Clause and is designed to “promote commerce" and to preserve and protect “the confidential relationships between fiduciary institutions and their customers."

It is written in the broadest terms so as to be applicable to all kinds of banks, including savings and loan associations and credit unions; and the "financial records," which would be protected under the bill appear to be all inclusive.

If enacted, it would forbid banks to disclose to any person the "financial records" of an account holder without either his consent or judicial process. Willful disclosure in violation of the law would make the bank liable to pay damages, including punitive damages of not less than $100. Those involved in the proscribed disclosure-e.g., a bank employee and a government agent-would be guilty of a misdemeanor and subject to penalty up to $5000 fine and one year to prison. It would be a misdemeanor similarly punishable for anyone "knowingly and willfully" to attempt to induce the bank to make an improper disclosure.

A bank could properly make disclosure based upon a customer's consent; but that consent would have to meet narrow requirements; it would have to be: (1) signed and dated; (2) good for not more than one week; (3) freely given without the constraint of any contractual obligation; and (4) specific about the records as to which consent for disclosure is given.

A court order for disclosure could properly issue only upon a "showing of probable cause which would be sufficient to support the issuance of a valid search warrant to obtain the financial records if the financial records were in the home of the customer." The order would have to be served at least twenty-one days before the date of the ordered disclosure.

The bill includes various savings provisions to allow for governmental supervision of the financial institutions in a generalized way.

Returning to the first bill I discussed, under Section 12 of S. 3814, the recordkeeping and reporting provisions of Public Law 91-508 would be seriously affected. The second bill under discussion, S. 3828, in Section 6(2) allows for promulgation of regulations requiring financial institutions to maintain financial records relating "solely to international financial transactions." Domestic transsaction records which would dovetail with foreign transactions would not have to be maintained; thus, leads developed from foreign transaction records could be rendered useless. Furthermore, the disclosure procedures would inevitably alert an account holder that his financial affairs were of interest to the Government; and the delays involved in gaining either the account holder's or judicial authorization to review records might often result in a dissipation of whatever advantage the records might have afforded law enforcement authorities.

Mr. Chairman, as the Subcommittee knows, when the Senate bill (S. 3678) which evolved into Public Law 91-508 was being considered by this body, the views of the Department of Justice were presented by Will Wilson, then Assistant Attorney General of the Criminal Division, and Whitney North Seymour, Jr., United States Attorney, Southern District of New York. I will not repeat

their very informative testimony in support of the enactment of Public Law 91508. However, the gravity of these proposed amendments to Public Law 91-508 compels a brief recapitulation of their sentiments.

Particularly in the last decade, Federal law enforcement authorities have come to recognize that criminal abuses and misuses of our financial system equal, if not exceed, the growth of our financial institutions. Members of organized crime and white collar criminals engage in a wide range of sophisticated, complex, and illegal financial maneuvers, designed in part to mask the criminal origin of the moneys. The funds that are concealed and cleansed in these operations derive from crimes such as narcotics trafficking, public corruption, tax evasion, stock fraud and manipulation, other business frauds, illegal gambling, loanSharking, black market profiteering, and other rackets. The "sanitized" moneys can be returned clandestinely to finance more of the crimes from which they derived and to facilitate expanded infiltration and acquisition of legitimate busi

nesses.

Messrs. Wilson and Seymour testified that an effective fight against organized crime and white collar crime depends in large measure on the maintenance of adequate and appropriate records by financial institutions. Their statements showed that only through required reports of financial transactions can law enforcement authorities pierce the refuges of secret foreign bank accounts and inadequate domestic financial records which provide the hidden conduits or transmission of illegal profits.

Both the Senate and the House of Representatives agreed with the assessment of the problem provided by the Department of Justice and other Federal law enforcement officials. The result of that concurrence was Public Law 91-508, a step in removing the shroud of secrecy covering the financial status of Americans with covert foreign bank accounts. The findings in Section 101 of the statute clearly reflect this: "The Congress finds that adequate records maintained by insured banks have a high degree of usefulness in criminal, tax, and regulatory investigations and proceeding."

Mr. Chairman, as I described above, S. 3814 and S. 3828 are designed to nullify and void the various recordkeeping and reporting provisions which Congress supplied in Public Law 91-508. If they are enacted, law enforcement will be confronted again by the impenetrable secrecy of foreign bank accounts and will be burdened additionally by a wall of domestic bank account secrecy in that significant transactions will be impossible to resurrect in the absence of written records. That in itself is a critical harm to Federal law enforcement efforts against organized and white collar crime.

I must emphasize, however, that an even greater encumbrance of effective law enforcement will accompany the enactment of either of these bills. Both S. 3814 and S. 3828 limit law enforcement access to financial records by imposing requirements of either consent of the account holder or judicial process based upon a showing of probable cause. The concomitant of these bases for disclosure is notice to the account holder that law enforcement authorities are interested in examining his financial dealings.

Without hypothesizing all the possible situations that could occur, I wish to present some examples of criminal investigation in which immediate, discreet access to financial records is critical.

An individual has been kidnapped and a ransome paid for his return, but the victim has not yet been found. An informant tells the Federal Bureau of Investigation that the ransom money has been deposited in the account of a safedeposit box of a particular individual or, perhaps, that an account or safedeposit box identified only by number contains the ransom. The only reasonable action by the Federal Bureau of Investigation is to immediately ask the bank for a review of its records of recent transactions in that account or for access to the safe-deposit box records in attempt to determine if, indeed, the ransom was passed through it. Obviously, this could lead to tracing the location of the kidnappers and their victim.

Consider, however, the effect of having to notify the account holder of the desire to search his bank records or of having to establish probable cause to search the records and then wait 21 days before the search could be effected. It is patent that if the kidnapper could be contacted for purposes of notification, he would flee immediately. It is also quite obvious that any delay in obtaining access to bank records would increase the likelihood of escape by the kidnappers. In addition, examination of the records may show that the lead was false and

the informer wrong. The bank customer will not have to be bothered by agents or appearance before a grand jury.

Consider, also, the case in January of this year wherein bombs were alleged to have been placed in bank safe-deposit boxes around the country.

On January 5 and 6, 1972, identical letters were mailed at Chicago, Illinois, to news media representatives in several cities alleging bombs were placed in several specified safe-deposit boxes in Chicago, Illinois; New York, New York: and San Francisco, California. Bombs were located in the boxes specified and immediate investigation of bank records determined each box was rented in a particular name.

Because of the enormous magnitude of potential disaster to life and property that could have occurred if other bombs had been planted in unspecified safedeposit boxes by this same individual, it was vital to have immediate access to numerous bank records. The name the FBI was aware of needed to be checked expeditiously against bank records to determine if this individual could have planted other bombs under his true name or known aliases.

The fact that the banks made their records immediately available was beneficial and extremely important to the bank as well as to the FBI.

There could be a repetition of this incident in the future and it is of utmost importance that bank records be immediately available for review by appropriate law enforcement agencies.

The availability of unaccounted for funds to a suspect in an espionage investigation may be a significant lead in the investigation. A representative example of this is the case involving a former U.S. Army officer who was arrested by the FBI in July, 1966, and successfully prosecuted for cooperating with foreign in--telligence from 1959 to 1963 during which period he received over $14,000 from his foreign power. He had served in the intelligence branch of the U.S. Army from 1948 until his retirement. From 1955-57 the subject was assigned to the Foreign Liason Office of U.S. Army in the Pentagon and was known to be in contact with Military Attaches of a foreign power. Preliminary inquiry regarding his background showed him to be in frequent financial difficulty, yet during interviews with neighbors he was described as affluent and maintaining a higher standard of living than his status could reasonably support. A penetrating evaluation of his financial status was initiated for years 1955-63 and bank account records subsequent to 1959 were examined which revealed he had financial problems during the period 1957 to early 1959. These problems apparently eased in late 1959 through 1960 and 1961. After 1862 his financial situation deteriorated to such a degree his liabilities far exceeded his assets. This investigation clearly showed he had deposited more money during 1959 to 1962 than could be explained by earnings or loan proceeds.

As a result of these indications the subject was interviewed. He at first denied any misconduct, but during questioning respect to the apparent excess of funds in his possession beyond his income, he admitted that he had sold information to the foreign power.

The key to his admission was FBI analysis of his finances showing unexplained income and it was this point which broke this case.

This case is representative of many similar investigations where a covert examination of financial records and bank accounts is an essential aspect of inquiry to determine whether or not an individual is engaged in espionage against this country.

In the enforcement effort against narcotics trafficking, the Bureau of Narcotics and Dangerous Drugs is using bank records to develop cases involving several conspiracies of international scope. The ready access to records pertaining to deposit and transfer of large sums of money has uncovered a well organized system designed to defraud the United States of taxable moneys and to further narcotic smuggling activities. A disclosure of these bank record inquires could result in failure of the investigations.

In one narcotics case in New York, the defendant was charged in a conspiracy involving the importation into the United States of over 190 kilos of pure heroin. In the course of this case, which, incidentally, resulted in conviction, it was learned from informants that the defendant had one million dollars secreted in the New York area. Negative information developed from a search of bank records assisted the Government in developing probable cause for a search of the defendants' residence where $1,078,100 was discovered buried in the back yard. I submit to the Subcommittee that, as these examples indicate, giving notice to an account holder that law enforcement officials desire to review his bank

records will often sabotage the ongoing criminal investigation. Since financial records are commonly an initial means of developing a criminal case, exposure of the Government's interest in bank records will allow a suspect to alter his operations, to falsify or destroy evidence, or even to flee the jurisdiction before an indictable case can be developed. This notice will serve as a red flag to the criminal that the authorities are on his trail.

When this notice is compounded by the requirement of the account holder's consent to the revelation of bank records involving his financial dealings, the obstruction of the criminal investigative process becomes more pronounced and the possibility of acquiring incriminating evidence becomes quite speculative. Certainly, the individual whose financial affairs must remain secret from the eyes of law enforcement officials will not remain idle when given notice of the investigation and the means for protracted legal challenges to the Government's acquisition of potentially incriminating records.

I have discussed the practical encumbrances contained in S. 3814 and S. 3828 to illustrate the postition of investigative impotence into which law enforcement would be forced by passage of either of these bills, and I believe it is eminently apparent that their enactment would create a domestic American version of the secret foreign bank accounts which have so frustrated law enforcement efforts against organized crime and white collar crime. Thus, not only would Public Law 91-508 be rendered void, but the evil it was designed to attack would be cultivated in our own domestic financial world.

Mr. Chairman, the judicial process referred to in these bills would seem to be a subpoena process; yet the requirements to be met are those necessary for the obtaining of search warrants. In the case of S. 3828, the standards to be followed exceed the due process requirements for acquiring search warrants; and, thus, surpass the requirements for searches and seizures under the Fourth Amendment. If this probable cause barrier is erected for bank records, why would not the live testimony of a bank teller be privileged, and then why should not the Congress create further barriers and privileges for other businesses? An operator of an illegal still needs to buy unusual quantities of sugar; a counterfeiter needs to buy high quality paper; a bookmaker may need to buy flash paper. In all such cases, there will be people willing to make the sales, and they would enjoy telling investigators that they cannot cooperate because the privacy of their customers are involved. The Bill of Rights, to be sure, has marked off certain areas into which, not even for solving the most heinous of crimes, can government intrude without probable cause. But that is not so of third party's business records. It might be remarked in this connection that the Congress has enacted legislations, not just to require banks to keep certain records, but to require close recordkeeping, e.g., by purveyors of stimulant and depressant drugs, by sellers of firearms and ammunition, and by importers, manufacturers, and distributors of explosives. Drawn to their logical conclusions, the two bills I have been discussing would go far indeed toward putting law enforcement out of business. The Supreme Court and all the circuits which have considered this issue have established that the customer of a financial institution has no proprietory interest in the records kept by the institution and that there are no constitutional inhibitions which prohibit reasonable inspections of financial records by the Government. Such records are the property of the financial institutions maintaining them, and account holders have no interest in or to them. Donaldson v. United States, 400 U.S. 517, 522 (1971); Harris v. United States, 413 F.2d 316 (9th Cir., 1969); United States v. Bank of Commerce, 405 F.2d 931 (3rd Cir., 1969); United States v. Gross, 416 F.2d 1205 (8th Cir., 1969), cert denied 397 U.S. 1013 (1970); Gailbraith v. United States, 387 F.2d 617 (10th Cir., 1968); Dosek v. United States, 405 F.2d 405 (8th Cir., 1968); Application of Cole, 342 F.2d 5 (2d) Cir., 1965), cert. denied 381 U.S. 950 (1965); and DeMasters v. Arend, 313 F.2d 79 (9th Cir., 1963). Furthermore, it is well settled that the Federal Government acting in an areas properly subject to Federal legislative jurisdiction can require a person or a financial institution to keep records. Public Law 91-508 is based power was neither expanded nor diminished by Public Law 91-508. Consequently, right to access to financial records. It is patent that the Government's access power was neither expanded nor diminished by Public Law 91-508. Consequently, these drastic restrictions contained in S. 3814 and S. 3828 cannot derive support from allegations that the Government is granted new unconstitutional and abusive powers of intrusion into personal affairs by Public Law 91-508.

Financial records maintained by banks with respect to their account holders are typically reviewed as an essential preliminary step in criminal investigations. If probable cause existed to search financial records maintained by a bank,