Senator, if I may, my testimony is rather long and there are attachments that total over 30 single spaced pages. If I may summarize and offer the testimony for the record.

Senator BENNETT. The testimony with the attachments will be included in the record in total, and we will be happy to have you summarize it in any way you please.

(The complete statement appears on p. 170.)

Mr. ROSSIDES. Senator, when this administration took office, this was one of the problems in law enforcement that faced us and that we took a great deal of interest in doing something about it. At the Treasury we joined with our fellow Departments at Justice and State and with the cooperation of the Securities and Exchange Commission we formed a team that entered into serious negotiations with the Swiss Government.

In effect, the President and the administration decided to elevate the problem of bank secrecy from an ad hoc basis-trying to obtain information from time to time when a particular case would come upto a foreign policy level of negotiating a workable treaty so that we could obtain information from foreign countries on a usual and easy basis.

Actually, our program developed into a four-part program of the administration. I would call the President's reform program to do something about foreign bank secrecy.

The first, as I have mentioned, is the foreign policy approach. In this case we are not just dealing with the one country, Switzerland, which I will mention a little further on, but in effect we are reviewing all of our existing tax treaties to see that the information exchange provisions are adequate. In any new treaties we will make sure that such provisions will be adequate.

Secondly, and it is part of the philosophy-my own philosophy and, I believe, it is also the philosophy of the administration-let's look at the laws we have, see how we are administering them, and see what additional regulations we may be able to put into effect under existing law. I will discuss that. That is the administrative area, and I think one of the key things that we have done, and one that I have great hopes for is that we have made a firm decision at the Treasury that on next year's tax return there will be a requirement that those persons having an interest, direct or indirect, in a foreign bank, brokerage or similar account will have to check off on the tax return that they have that interest.

Thirdly, we have made on behalf of the administration legislative proposals. This is the first time that I am aware of that there have been any legislative proposals made by any administration in recent history. We intend to have additional proposals as they come along for the Ways and Means Committee and of course the Finance Committee. The fourth area is to work closely with the private sector in learning more about the techniques and methods of international tax evasion and international financial crimes. I believe that in this day and age when the speed of communications is such that today you can be here in the United States and in a few hours you can be in another country, the opportunities for such evasion and crimes are increased. An analogy would be what Chief Rowley of the Secret Service mentioned; in the old days when counterfeit bills would appear in a city or in a particular State, it would be localized there, today it can appear there and that

same bill the next morning can appear across the country in another State.

Most important, and what should be kept in mind, are three fundamental concerns of the Treasury Department and the administration as we prepare our proposals and as we reviewed our administrative practices. The first is that the U.S. dollar is the principal reserve and transactions of currency in the world. Foreign holdings of U.S. dollars are huge, amounting to some $43 billion in liquid form. We must do nothing which would in any way interfere with the free flow of goods and trade and capital into any unreasonable or any undue extent. Excessive measures would give concern to our allies and other nations as to the position of the U.S. dollar.

I think one of the great results of our international payments system has been the free flow of the dollar back and forth and the absence of any kind of controls. It has, therefore, been of paramount concern to us that any proposals we make will in no way restrict the regular and efficient flow of our domestic and international business or personal transactions or particularly diminish the willingness of foreigners to hold and use the U.S. dollar.

The second consideration, Senator, is that consistent with our determination to deter tax and other evasion by U.S. persons involving foreign financial transactions, we have sought to develop proposals under which the benefits to our revenue system and to our law enforcement objectives outweigh costs and inconveniences of the proposals.

Finally, the third basic thought that has been in our minds, and a very important one, is that we have kept firmly in view our traditional freedoms, such as the constitutional prohibition against unreasonable searches and seizures and the right of our citizens to privacy.

In strengthening enforcement, we must not jeopardize these principles. There has been a lot of talk, also, Senator, as to the amounts of moneys involved in international tax evasion. Frankly, there are no firm statistics. No one can say how much. We don't know. However, whether the amount is large or small and whether the number of persons involved is great or few, nevertheless, the principle involved is central to the proper administration of our self-assessment system of taxation. Tax fraud schemes must be attacked vigorously.

I might add that in the last few decades there has been an increasing use of the commercial banks to gather savings and hold the deposits of individuals. In the past financial obligations were settled through the transfer of coin and paper currencies, but now with few exceptions the personal or corporate check settles accounts. With the convertibility of currencies, particularly the dollar, with the increasing interrelationship of our economies, international financial transactions often involve foreign bank accounts in at least one stage or another.

Another point that I think should be made is that the United States does not and should not seek jurisdiction over foreign financial institutions not engaged in trade or business in the United States.

I would like to discuss for a few moments our negotiations with the Swiss, if I may, Senator. We have had several conferences with the Swiss authorities, the latest one being in March of this year in which all four agencies participated. Then it was agreed there would be a Treasury team that would discuss the tax aspects separately with the Swiss. These discussions were held in Berne in May. Another meeting with the Swiss is scheduled next month at which all four agencies

will be represented. I think it is important to understand that in Swiss law there is criminal tax fraud. I believe there has been some feeling that tax evasion is not a crime in Switzerland. Well, under that phraseology or the term of art "tax evasion" it is not, but tax fraud is a crime in Switzerland in most cantons, and they do have criminal tax prosecutions in Switzerland, and the principle of bank secrecy is superseded in crimintal tax cases in Switzerland. We believe that under our tax treaty with Switzerland of 1951 we are entitled to no less information than the Swiss would be able to obtain in their own criminal tax cases.

But further, Senator, our program involving foreign policy has not been solely focused upon Switzerland. The Treasury also has been reviewing the operation of our other tax treaty exchange of information provisions. We are examining the use of financial facilities in other foreign jurisdictions which offer shields of financial secrecy to the U.S. taxpayers.

Moreover, other countries have recognized that evaders and other criminals often go beyond national boundaries and have raised the possibility of international cooperation.

I would like to turn now to our five-point program for obtaining information on foreign accounts and transactions. The first area is our decision to require on next year's 1040 and 1120 tax returns an identification by the U.S. taxpayer of whether or not he owns or has an interest in an account in a foreign bank or owns or has an interest in a foreign brokerage or similar account.

We may also recommend to the Ways and Means Committee and this information. We may also be issuing regulations under existing the Senate Finance Committee a special penalty for failure to furnish authority requiring those persons that do have such accounts keep records of their transactions with the account.

We believe that this disclosure requirement will constitute a significant deterrent to the use of foreign accounts for tax evasion and other illegal purposes while in no way affecting the legitimate use of such facilities.

We feel this is an important advance, Senator, and we have great hopes as to its deterrent value, but experience will have to prove that. Senator BENNETT. May I interrupt at that point?

Mr. ROSSIDES. Certainly.

Senator BENNETT. The fact that you are proceeding this way indicates that you are proceeding against evasion and not fraud. You used the word "evasion," and that is why I wanted to raise the question.

Mr. ROSSIDES. We would be proceeding against both. In fact, so far as enforcement of the U.S. revenue laws is concerned, "evasion" and "fraud” are virtually synonymous and interchangeable terms which connote conduct which is criminal and which also forms the basis for the imposition of the civil fraud penalty. It is Switzerland that ascribes to these two words a connotation of "lesser" and "greater" culpability and civil and criminal conduct. In other words, we would be proceeding against tax evasion in the United States for which there is a criminal penalty, whereas in Switzerland they simply say tax evasion is civil, unless it is aggravated, in which case it becomes tax fraud which is generally criminal.

In the United States we distinguish between tax avoidance and tax evasion. Tax avoidance is perfectly legal and involves a taxpayer

arranging his affairs to minimize the tax legally due. For example, a U.S. taxpayer may operate a business as a sole proprietorship or in the corporate form. His choice of the form most favorable from the tax standpoint is tax avoidance and perfectly legal.

Under U.S. concepts, tax evasion is another matter. It includes failure to pay the tax legally due and it is a crime. Some of the basic criminal provisions of the Internal Revenue Code are:

Section 7201.-Willful attempt to evade or defeat any tax imposed by the Internal Revenue Code or the payment thereof is a felony with a maximum fine of $10,000 and a maximum prison term of 5 years.

Section 7203.-Willful failure to pay tax, file a return, keep records or supply information is a misdemeanor with a maximum fine of $10,000 and a maximum prison term of 1 year.

Section 7206 (1).—Willfully making and subscribing under penalties of perjury a return which is not believed to be true and correct as to every material matter, is subject to a maximum fine of $5,000 and a maximum prison term of 3 years.

There is, of course, a good deal of overlap among these three sections, but it is clear that in the United States it is a crime to willfully fail to report income which is clearly taxable or to willfully claim as deductions amounts that are clearly not deductible.

The Swiss divide our crimes-our tax evasion-into two categories, ordinary evasion which is not a crime and tax fraud which is generally a crime. The mere omission of taxable income is not criminal tax fraud in Switzerland--it generally would be a crime in the United States but the presentation of false documents to a tax official to substantiate that there was no omission of income would be criminal tax fraud in most Swiss cantons if the official accepted the documents as accurate.

Senator BENNETT. Failure to check the box-is that evasion or fraud?

Mr. ROSSIDES. The present penalty for failure to declare or in effect check the box has been unfortunately very little used. I will ask Mr. Cole to answer the specifics on what the current penalty is and whether or not it amounts to a misdemeanor.

Mr. COLE. Senator, there is a criminal penalty for failure to file a complete return, but that is not ordinarily imposed in the case where information which is not directly related to the tax liability is omitted from the return. That is why we are considering the possibility of a special penalty for failure to supply this particular information. The criminal penalty under existing law to which I refer is set forth in section 7203 of the Internal Revenue Code, which provides: SEC. 7203. WILLFUL FAILURE TO FILE RETURN, SUPPLY INFORMATION, OR PAY TAX

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return . . . [other than a declaration of estimated tax by individuals], keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution.

Senator BENNETT. And you are considering making this tantamount to a fraud or subject to the same kind of penalty as failure to file a complete return?

Mr. COLE. As far as a criminal penalty for failure to file a complete return, the existing law would appear to provide all that is required. Section 7203 which I quoted above already provides that if a person required to supply any information by the Internal Revenue Code or regulations made under the authority thereof willfully fails to supply such information, he is guilty of a misdemeanor, subject to a maximum prison term of 1 year. That provision would cover the case where a taxpayer failed to answer the question as to whether he had a foreign account. If, instead of failing to answer the question, the taxpayer supplied false information, then section 7206 (1) could be applicable. Section 7206 (1) provides that any person who willfully makes a return which he does not believe to be true and correct as to every material matter shall be fined not more than $5,000 or imprisoned not more than 3 years, or both.

Our main thought, however, with respect to legislation would be to provide for a civil penalty for failure to respond or correctly respond to the question on foreign accounts. Civil penalties can be imposed administratively and there are cases where it might be appropriate to impose a civil penalty where imposition of a criminal penalty would seem unduly harsh or could raise evidentiary or constitutional problems. There are a number of examples under existing law of civil penalties with respect to specific statutory requirements. For example, section 6652 provides a $10 penalty for each failure to file a statement as to the payment of interest or dividends, with a maximum annual penalty of $25,000, unless it is shown that such failure is due to reasonable cause and not to willful neglect.

Senator BENNETT. I understand. I am sorry to have interrupted you. Mr. ROSSIDES. Not at all, Senator, I think it is helpful having you interrupt, sir.

The second area is on the question of recordkeeping of international transactions. This was a subject which was discussed at length in the House hearings, and in my original testimony in December we pointed out that we simply did not know enough. We had the Treasury task force which was investigating this area, and I asked for a few months to complete our work, which we did in March. The administration's position after extensive study and detailed work with the banking and brokerage houses that are involved in international transactions was that we proposed a substantial recordkeeping requirement for the banks in six categories.

1. Records of foreign remittances transferring funds abroad. 2. Records of foreign remittances transferring funds to the United States.

3. Records of large checks negotiated abroad drawn on banks located in the United States and records of large foreign credit card purchase by U.S. citizens and residents.

4. Records of foreign checks transmitted abroad for collection. 5. Records of foreign drafts.

6. Records of letters of credit and documentary collections. Attachment A discusses in detail each of these six categories. Originally, when we had the discussions in the House, we felt that the normal way would be to give the Secretary discretion to require