with and necessarily to share with banks the secrets of their private financial lives. It is the right of banks to protect their fiduciary relationships with their customers and thereby continue to serve in their traditional confidential role. The Bank Secrecy Act and its Treasury regulations strike at the traditional bank-customer relationship in two aspects: Recordkeeping and reporting. The recordkeeping requirements, we believe, bear a double burden of fault. On one hand there is ultimately the invidious spector of indiscriminate snooping in private financial matters, which must necessarily and logically follow from the universal accumulation of everyone's financial data. The amassing of what we estimate in California alone to be one-quarter billion copies of checks per month is a gigantic first step in turning on the electronic eye of 1984. In this view we have the support of a unanimous Supreme Court, speaking through Mr. Justice Powell last June in the most recent wiretap decision (U.S. v. U.S.D., E. D. Minn., 40 USLW 4761, June 19, 1972). The Supreme Court unequivocally declared: The historical judgment which the Fourth Amendment accepts, is that unreviewed executive discretion may yield too readily to pressures to obtain incriminating evidence and overlook potential invasions of privacy and protected speech (at p. 4767). Students of Constitutional law will have no difficulty in equating the collecting of taped conversations and the collecting of photocopies of checking transactions. The latter, taken together with the unrestrained power to command any reports of any and all bank customers, places a citizen's banking activity under executive surveillance without prior judicial review or approval. The additional burden of the recordkeeping requirement, while not as emotional or dramatic, is nevertheless every bit as practical from the standpoint of the banks. The fact is that our California banks are required by existing law to take a picture and store 250 million copies of financial transactions per month, an avalanche of onequarter billion per month in California alone. I would like to digress just a bit on this one point, because it has been brought out, I think by Senator Proxmire, that we are not doing anything more than we have been doing in the past. This is not the case in California. Many banks have not been taking photostatic copies of checks, and those that have, and my bank is one, find that the equipment that is available on the market today does not make it possible to have a complete review of every check that goes through the works. It happens that the microfilm, when we get it back, many times is defective, and we are not able to put together a composite picture of an individual check or an individual checking account. Let me turn to the other half of the Bank Secrecy Act-the reporting requirement. The Government lawyers have argued to a threejudge panel in San Francisco, that since the Treasury Department already has the authority to look at bank records and files, the reporting requirement of the existing statute and regulations cannot be considered an illegal search and seizure in violation of the fourth amendment to the Constitution, nor an extension of any existing authority. That argument is founded largely on the reporting already required in Internal Revenue Code sections 6031 through 6056. What the Government advocates overlook, however, are two very, very basic distinctions. The Internal Revenue Code reporting sections, in each instance, are concerned with the revenue of the taxpayer in order to properly assess taxes upon income. It is not difficult to accept the Treasury's interest in investigating the accuracy of these various reports of income. By distinction, the entire thrust of the Bank Secrecy Act is not on income but rather on expenditures. No legitimate revenue-collecting purpose can be served, and therefore the rationale of the Internal Revenue Code regulations does not apply, when the Government asks for reports which may, at the discretion of the Secretary of the Treasury, cover the minutia and detail of any individual's disbursements: From what one spends at the local liquor store or at the club to what contributions or membership fees one chooses to give to political or social organizations. It is all revealed in the checks one writes. And what the Government does not mention in its argument, and what it does not see as being clearly distinguishable, is that its traditional investigations into the financial affairs of taxpayers (and especially its examination of bank customers' accounts and records) have been until now subject to court process; that is, the subpenas and warrants issued by a court. The present statute does not provide such fundamental constitutional protection. The representatives of the Government have justified the sweeping regulations issued under the Secrecy Act by saying that the new requirements are merely extensions in one form or another of present practices of Government. Rather than being supportive of the act, the Government's assertion on its fact indicates that there may be other governmental procedures with potential constitutional infirmities. One example is the use of the so-called pocket subpena, which we heard a lot about today, which is served on banks by Government agents to obtain information pertaining to customer accounts. Another illustration of the problem is embodied in S. 1177, the Consumer Protection Agency bill currently pending before the Congress. In proposed section 207 of the committee print dated June 20, 1972, there is authorization for the Administrator to "require any person engaged in a trade, business, or industry which affects commerce to file with him a report or answer in writing to specific questions concerning such activities and other related information." * * * Section 207 excepts from this procedure any information "which would violate any relationship privileged according to law." Needless to say at this hearing today, bank accounts would not be so privileged and thus would be subject to the general scrutiny of the Administrator unless something along the order of the two bills before you is written into law. The claim in the courtroom in San Francisco that no threat is posed by the regulatory scheme is belied by the regulations adopted to implement the act. The regulations were to be formulated within the procedural safeguards of the Administrative Procedures Act. And in fact they were. But, section 103.45 of 31 CFR subjects all of the regulations to complete and immediate change in the Secretary's "sole discretion" upon issuance of a "written order or authorization." The safeguards of the rulemaking process under the APA have been made illusory. The Congress put the rulemaking power of the Treasury under the APA, and the Treasury has extracted it-albeit its lawyers argue to the court that Treasury will not abuse the great discretionary power it has written for itself. Gentlemen, that just is not good administration, it is not good rulemaking, and it is not good for any of us who are subject to that law— and we all are. With this foregoing catalog of the defects, we would like to declare in support of the concepts embodied in S. 3814 and S. 3828. The California Bankers Association strongly supports the thrust of both bills in establishing a statutory right of privacy with respect to one's dealings with his bank. We have the following comments, however, on the specific language of the bills. In S. 3814 by Senators Tunney and Brock, we urge that the following two changes be made: On Page 4, line 2, in section 4, the phrase, "or to any other person," should be deleted. The bill as it is before you precludes a financial institution from disclosing information relating to accounts to (a) any governmental entity or (b) any other person. As previously indicated, we believe the critical problem is with general and indiscriminate gathering of information by governmental agencies. While disclosure of information by financial institutions to persons other than Government agents may be a subject which the Congress desires to study, we believe that such disclosure is not now a problem. I would like to cite the University of Florida Law Review, which is June 1969, and I quote, that the "banks' strict adherence to secrecy is the reason that there have been only 10 cases on the issue of disclosure on Anglo-American jurisprudence." This is from the year 1066. In all those years, there have been 10 cases. We can't conceive with the millions of accounts in the United States today, that there is a probem. To the contrary there may be some practical problems in dealing with the too broad nondisclosure language. For example, there is no provision in section 6 of S. 3814 excepting clearing house operations for checks and credit card invoices from the nondisclosure rule. These operations constitute an essential element of the present banking system. Neither is there any provision for permitting disclosure of account information to public administrators or private tracing services for the purpose of finding unknown relatives of persons who have died intestate. Nor would mergers, receiverships, or bankruptcies of financial institutions be possible unless information relating to classes of account holders could be revealed to private parties. In short, there are probably hundreds of situations in which everyone could agree that information disclosure to nongovernmental representatives is not prima facie objectionable. We suggest it is not feasible to attempt now to catalog all of the probable exceptions to the nondisclosure rule and that further study is desirable if such an all-encompassing prohibition is to be written into the law. Our second and final comments on S. 3814 relate to the requirement in section 4(a) and 4(b) (2) of notice by the financial institution to the account holder even though the account holder has already given his written consent to release of such information. We fail to see the necessity of this requirement. The account holder's consent should be binding, just as his signature on a check is a binding agreement constituting release of his funds to the drawee. With regard to S. 3828 we interpose similar objections. First, in section 3, for the reasons already set forth, we believe the prohibition against disclosure should be confined to disclosure to governmental entities and not to all other persons. We think that section 5 relating to court orders places an entirely unwarranted burden on banks of determining the constitutionality of court orders rather than allowing duly issued court orders to be obeyed on presentation. Moreover, the requirement in section 5(2) of servi ice of the court order on the customer in all cases may hamper purely legitimate law enforcement investigative functions where a court finds probable cause to order review of records without notice to the account holder. In closing, I thank you for your patience and courtesy in receiving this statement in support of the concept of the proposed legislation. Senator TUNNEY. Thank you very much. I appreciate, Mr. Shepard, your testimony. I would like to go into the problem of disclosure to nongovernmental persons. As I understand it, you believe guardians, executors and administrators are not covered in 3814? Mr. SHEPARD. That is our opinion. Senator TUNNEY. Do you think they could be deemed account holders after their court appointment? Mr. SHEPARD. I think what was said before, in the interim they are not account holders-it is a fuzzy area. At what precise point they become account holders is uncertain. I think there is one other thing along that line. Banking is not an exact science, and we have to make some decisions, and let's say we have an account that is in a single name, and the person dies and the wife calls the next day before she gets the court order or anything else, and she has some pressing bills, all kinds of things, she is very upset, and she says, "Is there any money in my husband's account?" And if I said, "No, I can't give you that information," you have lost that person as a customer, and from a human standpoint, she probably needs those funds and needs to have some idea of what she can expect out of that account in a short period of time. Senator TUNNEY. Maybe you could give us some suggested language. Mr. SHEPARD. I think we can. We would like to submit that to you in writing. Senator TUNNEY. That would be fine. Senator TUNNEY. I am somewhat concerned about the suggestion that the word "or to any other person" be deleted. I am concerned about private snooping as well as public snooping, and I wonder whether there is a way of eliminating the undue burden on banks and other financial institutions as it relates to releasing necessary information to private parties as you have suggested, and at the same time generally prohibit improper disclosures to private parties by a banking institu 83-436 0-72-18 tion, disclosures which are dependent upon the judgment of the banking official. Mr. SHEPARD. We would like to work on that area. We have one of our bankers in California working on that problem, because we anticipated that you might ask that question. We have not completed it yet. There are some very difficult ramifications on this thing. We have batted it around considerably. One of the big things from a practical standpoint again is a person many times has told me when I have refused to give out any information to a third party, the grocery store or the clothing store calls and says, "How about this guy?"-and so forth-and I say, "I am sorry, that is privileged information, and I won't give it to you.' Then I get an irate customer calling up saying, "When you didn't give any information to this person, you created a real credit problem. He doesn't think I am any good at the bank." I said, “OK, we have to go back and soothe his feathers. You give me a written statement," and he does that, and it is all right. I don't know the answer. There is more to it than really meets the eye in trying to solve this problem. We are working on it and we will submit something to you. Senator TUNNEY. That is good. I appreciate it. (The following letter was received for the record:) LANDELS, RIPLEY & DIAMOND, Senator WILLIAM PROX MIRE, Washington, D.C. DEAR SENATOR PROXMIRE: Thank you for your letter of September 11, 1972 to Andrew Shepard inviting the comments of the California Bankers Association on the Justice Department letter of September 8, 1972. We represent the California Bankers Association and are replying on their behalf. In fairness to the Justice Department and before discussing the specific points made in their September 8 letter, we should note that on September 11, 1972, a three Judge Federal Court in San Francisco issued a decision directly effecting the operation and effectiveness of portions of the Bank Secrecy Act. The California Bankers Association was a plaintiff in that suit. We enclose a copy of the Court's opinion for your information. Briefly, the Court found the domestic reporting requirements of P.L. 91-508, now 31 United States Code Sections 1081, 1082 and 1083, and the Treasury Department Regulations issued thereunder, to be unconstitutional as involving unreasonable search and seizure contrary to the Fourth Amendment. Our comments on the Justice Department letter including references to the recent Court opinion where appropriate are as follows: 1. The holding of unconstitutionality and the reasoning of the Court leading to the holding totally and completely negate the arguments of the Justice Department contained on page 1 of their letter. There the Department discussed our analogy of the collection of taped telephone conversations (wire tapping) and the collection of photocopies of checking transactions. The Department stated that this was ". . . a totally inapposite and erroneous analogy". The Court disagrees with them and, contrary to their assertion, has found bank records subject to protection of the Fourth Amendment. See opinion page 16, line 24 through page 17, line 4. In reaching this conclusion the Court relied in part on the reasoning of the United States Supreme Court in the recent telephone wire tap decision: United States v. United States District Court U.S. 40 U.S. Law Week 4761, June 19, 1972. See opinion page 8, line 23 through page 9, line 6. 2. The Justice Department states: "The account holder has no interest of the nature protected by the Fourth Amendment in [his bank] records." The Court finds otherwise. See opinion page 7, lines 17 through 22 and page 11, lines 24 through 28. |