recordkeeping of items that would be highly useful in criminal, tax or regulatory investigations or proceedings, and indicated that these were the six categories that we intended to specify in regulations.

We now see no problem in actually listing these six categories in the bill itself, in the statute, providing, of course, that the Secretary has discretion to add to or subtract from those items as experience dictates. We also propose a 6-year retention period for these records.

The question comes up regarding domestic recordkeeping. What has happened is that in this bill there are really two separate areas involved. Number one is the problem of foreign bank accounts and the problem in pursuing an investigation on inquiry. Our investigators cannot operate in foreign territory; the sovereignty of a foreign nation is involved, and only cooperation of the foreign country could lead to direct access to those records.

This bill also deals with the question of domestic recordkeeping, and in that area we have not done the study sufficient to determine what should be or should not be held by the banks.

Naturally, we felt that the normal legislative technique is you give your standard-that is, you require the kinds of records that you believe would be highly useful in criminal, tax and regulatory investigations or proceedings and vest in the Secretary of the Treasury discretion within that standard to require recordkeeping.

We got bogged down in a dispute on aims and means and so on, and the bill presently before the committee has a listing of various bank records that should be photocopied, et cetera, and the thing I want to stress is that this is largely in the domestic area.

In other words, we favor a bill with the international transactions on the one side, which lists those which we have studied and come up with. In the domestic area nobody has done even an adequate study of the kind of records that are needed.

In our judgment, we feel that the discretionary approach here should require the Secretary to continue the study that we are undergoing at the Treasury, and then issue regulations pursuant to the Administrative Procedures Act before we saddle not just the banks-and also the public because the cost involved here is not going to be borne by the bank, it is going to be borne by the public and the depositories in the bank.

Getting back to international transactions recordkeeping, there are two aspects that I want to stress. You have recordkeeping and then, first, the question of access to the records. Access to these records would be under the normal legal processes that are in being currently-the various discovery procedures and the protections that are involved with respect to access in regard to a particular taxpayer.

The other aspect is possible reporting requirements. You can have recordkeeping and access in a particular taxpayer investigation. The other possibility is to make the taxpayer's banks report all of the transactions to the Government and then the Government can then browse through those records in its own warehouse or office.

This has been under very careful study; it involves one of the key provisions of the bill, sections 241 and 242, which we oppose, because of questions on which we feel quite strongly, unconstitutional searches and seizures, and the right to privacy.

I would like to read that section, Senator, because it is important, and it does

Senator BENNETT. What page are you on in your testimony?

Mr. ROSSIDES. It would start, Senator, in the middle of page 8 of the testimony. I mention this because if you had general access to recordkeeping without aiming at a particular individual, the use of those records for the strictly law enforcement aspect would be enhanced. There is no doubt about that, but we have balanced these factors, and that is why we have come up with a firm decision to delete sections 241 and 242 of the bill. I would like to read in full the testimony in a very sensitive area.

It starts on the bottom of page 8. If the Internal Revenue Service could survey the foregoing records of the international transactions, either by examining them on the premises of the bank or other financial institutions or by requiring information returns as to some of the contents of the records, the usefulness of the records in providing initial leads to cases of possible tax evasion would be enhanced.

Such surveys, however, would extend the utilization of the records beyond their traditional role as a source of information and evidence in an examination of a particular taxpayer.

The Internal Revenue Code authorizes the Internal Revenue Service to obtain and examine records maintained by banks and others in connection with the determination of the tax liability of particular taxpayers. There is also a statutory basis for arguing that the Internal Revenue Code authorizes the use of compulsory process for a survey of the records of a financial institution located in the United States.

Nevertheless, the Internal Revenue Service has not generally asserted such survey authority, the scope of which has not been reviewed by the courts. We decided against seeking specific statutory authority extending the rights of the Internal Revenue Service to survey the record 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 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. Balancing these factors, we concluded that it would not be appropriate for us to suggest legislation extending the rights of the Internal Revenue Service to survey the records of banks and other institutions.

Next we considered the approach taken in section 241 and 242 of S. 3678 and H.R. 15073 which could be used to accomplish the same [result by requiring banks and other financial institutions to file information returns setting forth the information contained in the international records.

For the same reasons that we have concluded that we cannot support new legislative authority for the survey of records not tied up to a particular taxpayer investigation, we believe it inappropriate to support legislation requiring reports of information obtained from

the records of international transactions. Since sections 241 and 242 of the bills authorize such reports, we cannot support their inclusion unless they are substantially amended. This is a very delicate area which requires full consideration of the constitutional prohibition against unreasonable searches and seizures, the need to avoid unnecessary incursions against the right of privacy, the international reaction, and the needs of the Internal Revenue Service for information. We intend to do additional work in this area with the thought that if a sound proposal can be developed, it will be presented to the Congress.

The third area, Senator, in our five-point program for obtaining information is the area of reports of exports and imports of currency. Certainly one of the methods of operation and concern, particularly in organized crime, is to just take cash out of the country.

So, we are trying to develop a system here of reporting when it comes to $5,000 or more. This is a tough one to administer and would require substantial manpower in Customs, and even then we don't know how effective it will be. But it certainly will be more effective than at present.

The fourth area concerns rebuttal presumptions that U.S. citizens and residents engaging in certain foreign transactions are dealing with their own untaxed income. In that area, Senator, we will be making proposals to the Ways and Means Committee and the Senate Finance Committee on these rebuttal presumptions.

Very simply, a particular case would be the following, where a taxpayer would take an interest deduction on a foreign loan, we would ask for information and he wouldn't give us the information on that loan. The records are in some foreign bank.

Our assumption would be that the taxpayer is dealing with his own untaxed income. We can make certain inferences now, but we feel a statutory presumption would add to our ability to deal with. that.

Point five deals with administrative measures. We are thinking here of an intensified enforcement program. We focused on this and the Revenue Service has now focused on this more clearly as well as other Treasury services. For instance, before where an agent may have come across some information in this area, knowing the problems and difficulties of obtaining information from the foreign banks, he might not have pursued a particular audit. Well, now new guides are being presented, new guidelines in the Revenue Service.

There may also be development of a group in the national office of the Internal Revenue Service that may become experts in the area of foreign banks and foreign financial transactions and that can be called upon by the agent in the field. So there is going to be a much more intensive effort administratively, and the number of man-years applied to this, we hope, will increase substantially. That completes the fifth part of the five-part program to obtain additional information and make use of that information.

Now, to turn to page 13 of the prepared testimony where I discuss the administration's proposal for obtaining domestic information, as I mentioned before, basically this bill involves two areas.

One, the international recordkeeping and information gathering, and two, domestic. In the international I pointed out that we came up with several areas, six areas to be specific, that we now recommend be

46-824-70-11

actually included in the bill for recordkeeping. In the domestic area, however, as I mentioned, we just don't know enough yet. And we want to have the normal discretionary language for the Secretary of the Treasury to develop the kinds of transactions that would be needed. This includes the recordkeeping and the second domestic provision is the reports, Treasury currency reports. We have had Treasury currency reports presently under the emergency regulations, and we feel and we concur in the general approach on Treasury currency reports, but we feel quite strongly that there has to be a standard. The House committee accepted the standard on recordkeeping limiting it to items that are highly useful in criminal, tax, and regulatory investigations and proceedings, but we feel that it was unfortunate that they did not accept that same standard for the reporting requirements on Treasury currency reports, and we would urge that such an amendment be included. To summarize, on the legislative aspects, Mr. Chairman, the Treasury proposals would require a bill that would include: (1) Requiring U.S. banks and other financial institutions to maintain. records of specified international transactions; (2) requiring persons importing or exporting from the United States large amounts of currency or its equivalent to file reports; (3) and this gets into the domestic area, authorizing the Secretary of the Treasury to impose recordkeeping requirements on banks and other financial institutions with respect to domestic transactions; (4) requiring again in the domestic area-requiring Treasury currency reports, to the extent it is found. that such records and reports in (1), (2), (3), and (4) are likely to have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings.

A second bill that we are working on would amend the Internal Revenue Code to provide a specific penalty for failure to comply with the foreign account disclosure requirement and to provide statutory presumptions that U.S. taxpayers engaging in certain foreign transactions and not furnishing complete information with respect thereto are dealing with their own untaxed income.

I do want to mention that H.R. 16444, which is not before the committee but which was prepared by the Treasury and introduced by Representative Widnall on March 12, 1970, would provide the legislative framework, other than the Internal Revenue Code amendments, for the enforcement system which we recommend.

We would recommend, as I mentioned before, amending H.R. 16444 or the current bills before the committee to specify the required records of international transactions in a separate action. In addition, I am sure that Treasury and congressional staffs could make a number of technical improvements. I might mention in this regard, Senators, I think everybody is agreed on the objectives in this particular area. The question is how do we best get there.

I am convinced that we can come up with a bill that is effective in increasing our ability to handle this problem from a legislative point of view and yet one which will not interfere with the normal flow of commerce and goods and capital, which is so extremely important particularly at this sensitive time.

I would like to present the administration's position on extending margin requirements to borrowers and restricting dealings with foreign financial agencies. I would like to read this section, if I may, since it gets into another sensitive area.

"Section 301 of the bills would give the Federal Reserve Board clear authority to apply margin requirements not only to lenders but also to borrowers. This is an entirely new concept in the regulation of credit as margin rules have been only applied in the past to lenders. "The Administration supports the extension of the margin requirements to borrowers provided it is made clear that this is not intended to regulate the availability of credit abroad to foreigners. Therefore, Section 301 should be amended to provide that only borrowers who are American citizens or residents and foreign persons controlled by or acting for them are subject to these requirements. In addition, it should be made clear that the requirements are applicable only with respect to the purchase of United States securities, or of foreign securities where the transaction is executed in the United States.

"It is not our intention to engender direct jurisdictional conflicts with foreign countries which have sovereign authority to regulate the availability of their own domestic credit. Any problems that may be raised by foreign participation in our securities markets should be approached through international cooperation."

"The second area concerns restricting dealing with foreign financial agencies." A new section appears in S. 3678 which does not appear in H.R. 15073 which aims at identifying users of foreign financial facilities. The new provisions, title IV, of S. 3678, would accomplish this objective by providing that no person may effect any transaction in a domestic security within the United States if such transaction was initiated by a foreign financial agency, unless such person either obtains from the foreign financial agency the identity of all persons having any beneficial interest in the transaction or has in good faith accepted a certification from the foreign financial agency that no citizen or resident of the United States had any beneficial interest in the transaction. In addition, it provides that any U.S. citizen or resident who purchases or sells domestic securities through a foreign financial agency must both authorize that foreign financial agency to disclose the citizen's or resident's identity to the U.S. broker or dealer executing the transaction and file periodic reports with the Securities and Exchange Commission disclosing details of purchases and sales as may be required by the SEC.

"We must be careful to avoid provisions that are too stringent and which may have the effect of impeding the channels of trade and this defect exists in title IV.

"Moreover, I believe that foreign financial agencies might find it extremely difficult to comply with this provision. Even with the best of will, a foreign financial agency might be unaware of the real parties in interest in a transaction. Consequently, fear of the consequences of failure to comply with this section, particularly if criminal or other penalties were to attach to a false identification or certification, could have serious effects on the willingness of foreigners to invest in the United States. Thus, this provision is likely to produce little in the way of reliable information and could have limiting effects on investment in the United States.

"At the same time, title IV would put a heavy administrative burden on those foreign securities dealers and banks seeking to make portfolio investments in the United States. Yet the information obtained under title IV would in part duplicate information obtainable under other provisions of the bill which will achieve many of the same