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3. The Justice Department is less than candid in saying: “... at the present time, [government] investigators have no access to the banks' records without summons, subpoena, or the consent of the bank.”' (Emphasis added) The Department is well aware that had the automatic reporting provisions of P.L. 91-508 and regulation thereunder gone into effect, many if not most domestic transactions could have been made the subject of mandatory reports required by the Secretary of the Treasury under 31 United States Code Section 1081, thus eliminating the necessity of summons, subpoenas or bank consent. The Court specifically mentioned this point at page 12, lines 12 through 21 of the opinion. As is also apparent from the opinion, it is precisely this point that was at issue in the suit brought by the California Bankers Association and others against the Government.

4. The Department infers in its discussion of our assertion of the confidentiality of a bank-customer relationship, that such confidentiality if found in law would impede law enforcement. There is absolutely no question that this is true. There is also no question that the attached opinion finds that such a state of confidentiality or "right of privacy” does exist. See opinion page 7, lines 17 through 22. It should be emphasized that neither we nor anyone else to our knowledge has ever claimed that the Bill of Rights made law enforcement easy. On the contrary, it was precisely to delimit the powers of Government with respect to individuals that the Bill of Rights was written.

We are sure that the Justice Department is aware of the support of its law enforcement functions that the California Bankers Association and its member banks have rendered over the years. That support will continue. We do not believe that the position of the California Bankers Association on this measure in Court or before Congress should be read in any way as an attack on law enforcement agencies. The Association has simply requested from Congress a rule that the Government demonstrate any need for information concerning our customers to a court of law, and not decide ex cathedra that such information would be useful and therefore is necessary. We believe our association is in the best interests of bank customers, banks and the United States Government. We are proud that the Court has agreed with us. We hope the Congress will agree with us.

5. The Justice Department states that a bank-customer relationship is one which deserves no legislatively conferred evidentiary privilege similar to privileges relating to husbands and wives, attorneys and clients, etc. We do not disagree. We do assert, however, that the Government should demonstrate its need for such information before an impartial and objective judiciary. It should not be free, on its own motion, to inspect the private affairs of citizens. In a recent United States Supreme Court decision concerning wire tapping referred to above, Justice Powell stated: “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 in protected speech.” It has been our position that this theory was contrary to the reporting procedures required in the Bank Secrecy Act. The attached Court opinion illustrates that our position was not without substance. Thank you for the opportunity to make these comments. Cordially,

FREDERICK M. PowNALL. Senator TUNNEY. One last area of questioning. Do you feel it is possible for a bank manager to evaluate objectively the total situation when he gets a pocket subpena, for example, from a Federal agency, and is told that it is absolutely urgent that the subpena be complied with, that it is in the national interest to do so?

Mr. SHEPARD. I don't think anybody can. I don't think that he is privileged to the information that that agent has. What we would like to see done, perhaps, is that when a subpena is submitted, that in the subpena itself there is something to indicate that the person is not to be notified, if it is to be a criminal investigation such as you describe or what I have heard about the drug pusher and it is necessary that this be secret; the subpena states that the person is not notified.

It is very difficult to make that judgment, and you are absolutely right. When somebody comes in from the Government, he is big brother, and he is really pushing the weight around, and in our State, we have many, many branches, it is a branch system State, and they are not talking to even a vice president, they are talking to a manager, somebody who is not familiar with it. Undoubtedly, many times he will break under the pressure, and rightfully so.

Senator Tunney. Thank you. The corollary of that would be that it is far better for the person affected to have his own lawyer test the facts before a judge.

Mr. SHEPARD. That is right.

Senator Tunney. Thank you very much, Mr. Shepard. I appreciate the attention that you have given to this problem.

Mr. SHEPARD. We are very interested in it in California.

Senator TUNNEY. I know you are. I have had the privilege of working with your association. I want to thank you for the effort which you have made. (The prepared statement of Mr. Shepard follows:)

STATEMENT OF ANDREW J. SHEPARD, CALIFORNIA BANKERS ASSOCIATION Mr. Chairman, members of the committee, I am Andrew Shepard, the chairman of the board and president of Exchange Bank of Santa Rosa, Calif. My bank is a member of the California Bankers Association, as are all of the banks of California, and I am president of the association.

As a spokesman for the California Bankers Association I have been involved in the pending Federal court proceedings in San Francisco. What we think is wrong with the present statute and regulatory scheme has been the basis of our arguments to the court and is the basis for our support of the principles embodied in the pending corrective legislation.

The banks, obviously, have many arguments similar to those raised in a separate lawsuit by the bank's customers. Most of these will be, I am certain, fully detailed for you by others who represent the individual plaintiffs in these actions. Let me, from the viewpoint of the California banks, summarily catalog the vice of the existing legislation as our attorneys have argued to the court. The teachings of this experience may be useful in considering S. 3814 and S. 3828.

First, the banks historically enjoy a fiduciary relationship with their depositors. This is what bank business is founded on-a sense of trust in the private handling of one's financial affairs. It is not legally identical to the confidential communication which the law recognizes in the relationship between lawyer and client, priest and confessant, doctor and patient, etc. However, it is a traditional relationship that is nurtured by the knowledge that a bank will not make unpermitted disclosures of the details of a depositor's account. And in this sense the existence of a private relationship permits depositors to deal 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 wire tap decision (U'.S. v. U.S.D.C., ED. 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 incrimi

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nating 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 250,000,000 copies of financial transactions per month, an avalanche of one-quarter billion per month in California alone.

Let me turn to the other half of the Bank Secrecy Act—the reporting requirement. The government lawyers have argued to a three-judge anel in San Francisco, that since the Treasury Department already has the authority to affairs of taxpayers (and especially its examination of bank customers' accounts and records) have been until now subject to court process, that is, the subpoenas 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 face indicates that there may be other governmental procedures with potential constituional infirmaties. One example is the use of the so-called "pocket subpoena” 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 5, 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. To the contrary there may be some practical problems in dealing with the too broad non-disclosure 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 non-disclosure 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, re ceiverships, 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 non-governmental representatives is not prima facie objectionable. We suggest it is not feasible to attempt now to catalog all of the probable exceptions to the non-disclosure 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 unwar. ranted 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 service 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, gentlemen, I thank you for your patience and courtesy in receiving this statement in support of the concept of the proposed legislation.

Senator TUNNEY. It is my understanding that Mr. Thomas Clusserath is here, who is the assistant vice president of the California Savings & Loan League, and will be making a statement in behalf of the Savings & Loan League.



My name is Thomas Clusserath. I am here today to represent the savings and loans in the State of California and throughout the United States who have membership in the California Savings & Loan League and in the United States Savings & Loan League.

Throughout the United States, our two organizations represent approximately 4,800 savings and loans. I am appearing before you today to express our concern with certain recordkeeping requirements adopted by the Department of the Treasury under the Financial Recordkeeping and Currency and Foreign Transaction Reporting Act of 1970.

I would like to depart a little from the text of the statement, because I assume it will be read by the members of the committee, to point out to you, Senator, that the savings and loan industry supported the 1970 act, and has raised no major objections to the Treasury regulations. But we want to bring to the attention of this committee certain problems that have developed because of the way the Treasury has interpreted those regulations.



On June 30, 1972, the Treasury Department set forth in a memorandum release of the date, which was published in the Federal Register, certain instructions relating to identification numbers." The instructions require any individual or group cpening an account in an S. & L. or other financial institution after June 30 to provide his or its social security number or employer identification number, at the time the account is opened.

I want to stress that this must be done at the time the account is opened.

According to the instructions, if the number was unavailable, an account could be opened without securing a number immediately only when the customer authorized the financial institution to secure a number for him from an appropriate Government agency. Authorization forms to be used by the institution were those normally used by individuals in seeking a social security or taxpayer identification number.

It has been interpreted that the above requirements as set forth in the instructions, prohibit the acceptance of an account after June 30 by a financial institution unless the saver furnished a social security number at the time the account is opened or signs an authorization to the Social Security Administration to furnish such a number to the financial institution.

These instructions have raised many problems for savings and loan associations. We believe that the approach provided for in the instructions is not authorized by Congress, and, if enforced, will discourage thrift and opening of savings accounts in many cases. Most savers will have no objections to giving a social security or taxpayer identification number, but in many cases may be unwilling or unable to do so immediately. Others may refuse as a matter of principle to disclose such numbers.

In addition, financial institutions, in following these instructions, will be put to extra costs which will be involved when a customer has to sign the authorization, and the association will have to follow through with securing the social security or taxpayer identification number for the new account.

Prior to June 30, and I feel this is very important for the understanding of what these regulations or interpretations are doing, all associations have made serious attempts over the previous few years to obtain social security or taxpayer identification numbers when accounts are opened.

In case of joint accounts, which represent 50 percent of all accounts established, there have been handicaps due to the fact that only one person opens the account, usually the wife. She has been hesitant to give his or her number.

To meet this problem in the past, associations gave her a signature card for the signature of her husband and requested that a social security number be furnished when the signature card was returned.

In the followup process, the association was enabled eventually to obtain the required number.

Under the new instructions, it appears that the association will not be able to open these joint accounts until the customer returns with the number, especially if she is hesitant to sign the social security or IRS authorization forms.

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