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cussed and legislation proposed here which does invite extraordinary classifications and subclassifications.

Senator ProxMIRE. You are still talking about the purposes of the act, you just can't exempt them arbitrarily. I see your argument.

You say one of the problems of the bill is its unmistakable potential for invasion of privacy. Nowhere in the bill does it authorize Government agents to browse at will among the records required to be kept by banks.

As a matter of fact, the House report clearly indicates that Government access to bank reports would only be pursuant to legal process. Doesn't this legislative history substantially mitigate your fear in this respect?

Mr. DESCH. Title I does exactly what you have stated. Title II requires the filing of reports, and I fail to see the difference between an agent coming into the back office of a bank or a financial institution and spinning that microfilm wheel at will to see if there is anything further that he can investigate or if those same microfilm reports are sent down to the Treasury Department here where the same agent can do exactly the same kind of thing.

I think that is the definition of browsing we are trying to deal with.

Senator PROXMIRE. As I understand, title II is much more limited. It only covers foreign transactions.

Mr. DESCH. It does include the term “monetary instruments.” Senator PROXMIRE. Where title I covers all ? Mr. Desch. Monetary instruments could be the $2.50 check that my wife writes to the A. & P., and that is the kind of supervisory authority that we would like to get out of this bill.

Senator BENNETT. What does she get for $2.50?
Mr. DESCH. Very little, sir.

Senator PROXMIRE. What would be the additional cost if all banks were to microfilm checks?

Mr. DESCH. I don't think that the cost is horrendous if we confine it to the term "microfilm."

Senator PROXMIRE. You wouldn't object if we used the term “microfilm”; you object to photocopying?

Mr. DESCH. Which by definition implies hard copy.
Senator PROXMIRE. Senator Bennett.

Senator BENNETT. I have three or four questions, and I am going to submit them for your answer, but I have one because Senator Proxmire has opened it up.

You have discussed privacy and compare it to S. 823. I am inclined to agree with your point, but in the proposed changes of language in your bill, I don't find any specific recommendation which will handle this question of privacy. Maybe it is too much to ask, but that will be one of the questions that I will submit for your more careful consideration.

Mr. DESCH. Thank you very much.

(The questions referred to by Senator Bennett, together with Senator Proxmire's questions mentioned earlier on p. 222, follow :)

REPLIES TO QUESTIONS BY SENATOR PROXMIRE OF CARL W. DESCH Question 1. On page 3 [Desch statement) in talking about reports on currency exports, you say that the effect of Section 232 would be to require the filing of these reports in advance.How do you come to this conclusion? Sec. 231 (b) on page 18, line 5, clearly states that the reports shall be filed "at such times. as the Secretary may require." Aren't you once again prejudging what the Secretary might do?

Answer 1. Sec. 232(a) provides for the forfeiture of monetary instruments which are in the "process" of transportation where the required report was not filed or contains material omissions or misstatements. If there is to be forfeiture, it would seemingly have to take place as the monetary instruments leave this country. Instruments could not be forfeited, for example, once a courier reaches Zurich.

Question 2. In your redrafted bill, you would apply the check photo-copying requirement only to checks received from abroad. Yesterday, Asst. Attorney General Wilson and U.S. Attorney Seymour testified that copies of checks were often vital in purely domestic crimes where foreign bank accounts were not involved. Why would you arbitrarily deny this information to law enforcement agents ?

Answer 2. The banks now maintain an ever increasing number of records of domestic transactions which are available to law enforcement agencies, subject to appropriate process. We have not heard any testimony which indicates that a prosecution failed because of lack of domestic records, nor have any of the witnesses indicated how such records would have helped in the detection of the crimes described at the hearings. Moreover, no attention at all has been given in the bill to retrieval techniques without which the mass of microfilm would be useless.

Question 3. If this Committee does not agree with exempting domestic checks from the photocopy requirement, what would be your thoughts about the $500 exemption in the House bill?

Answer 3. The exemption really means very little to the member banks of this Association, but we understand it is meaningful to smaller banks and therefore we would have no objection if it were retained.

Question 4. Wouldn't the need to segregate checks under $500 be more costly than simply microfilming all checks?

Answer 4. There would probably be no cost savings if we did not have to microfilm checks under $500.

Question 5. Yesterday, Mr. Seymour indicated it was his impression that most banks microfilm checks already and that only some of the larger banks have discontinued the practice. Is that your impression also, and if so, why have the larger banks stopped microfilming?

Answer 5. Our member banks have not "stopped microfilming." As we indicated to the House Banking and Currency Committee, we microfilm checks when they leave New York City. If they are exchanged among banks locally, where there can be no plane or train accidents, we do not microfilm simply because of the tremendous volume. There are more records today and there are more microfilm rolls of tape in various recordkeeping areas than ever before.

Question 6. How many members of the clearing house still microfilm checks!

Answer 6. All 10 members microfilm transit items, both front and back, and always have. Some Clearing House banks do not microfilm checks cleared locally.

Question 9. On page 11, [Desch statement] you say the language of Title III could permit the Federal Reserve Board to regulate borrowings by foreign citizens from foreign banksI find this a highly fanciful interpretation of the language. How did you come to this conclusion?

Answer 7. I do not believe that our interpretation of Title III is at all fanciful. The reason I said that Title III could permi tthe Federal Reserve Board to regulate borrowings by foreign citizens from foreign banks is that the language on page 22 beginning at line 4 and running into line 12 contains no geographic restrictions. Because the purpose of Title III is to regulate borrowings from foreign banks by United States citizens, the lack of any restriction of the impact of this lanuage solely to U.S. citizens and residents would make it subject to the interpretation that it could also apply to non-resident aliens.

Question 8. You go on to say that you are recommending language to overcome this alleged difficulty which I frankly doubt exists. However, your actual language goes far beyond this stated intent. Your recommended revision would exempt U.S. borrowers from violating the margin regulations if they borrow from a domestic creditor, presumably because domestic creditors are already bound by the margin regulations. However, yesterday, the SEC said it would be easier to enforce the margin regulations if they applied to both the borrower and the lender. For example, borrowers may deceive the lender by falsely certifying the purpose of the loan. Why would you limit the ability of the SEO to move against the borrower as well as the lender?

Answer 8. We did not include in our recommendations for changes to Title III language which would subject domestic borrowers from domestic banks to penalties for violation of the legislation requirements because we believed that it was an issue separate from the announced purposes of S. 3678. If the regulatory agencies believe it is desirabie to fighten up the laws which they administer, they are quite capable of coming forth with proposed legislation. Thus far, they have not done so on this point.

As you know, under present law borrowers are not subject to penalties for violation of Regulation U. It would be to the interest of banks to subject borrowers to such penalties. Banks now run a risk that a customer may make a false certification and later attempt to repudiate the transaction on the ground that Regulation U was violated. If the statute were to be amended as suggested by your question, banks would be protected from such entrapment.

Question 9. On page 11 [Desch statement] you say that Title IV "will in all probability significantly reduce the volume of U.8. securities held by foreigners.” How do you arrive at such a conclusion? If the securities are really owned by a foreigner, why would he object to Title IV ? His identity would not have to be disclosed. The bank which placed the order would merely certify that the transaction was not on behalf of a U.S. resident.

Answer 9. It would be virtually impossible in most cases for a foreign financial agency to provide the certification required by Sec. 31 (a) because there are many situations where beneficial interest in securities transactions would not be known. If in doubt, responsible foreign financial agencies may refrain from engaging in the transactions. Moreover, the redtape involved in filling out the necessary forms, and the delay in getting the certification to the United States, would probably reduce the volume of U.S. securities held by foreigners. It should, also, be noted that, as drafted, the bill may be deemed to require a certification for each transaction. If so, in view of the volume of trades ordered from abroad and the frequent use of cables, it can be seen that the paper requirements and delay awaiting receipt of certifications would inhibit foreign investment in U.S. securities. Moreover, as “foreign financial agency” is defined, it would include any broker who does business abroad. This could be construed to apply to a New York broker with branch offices abroad and, thus, to apply to transactions between a resident of New York and the New York office of such broker.

Question 10. There is some $40 billion in U.S. securities owned by foreigners. How much of this stock is really ouned by U.S. citizens through a secret foreign bank account?

Answer 10. I do not know how much of the $40 billion in U.S. securities owned abroad is really owned by U.S. citizens. However, I would doubt that it is a very significant part of the total.

Question 11. It may well be that full disclosure might induce U.S. citizens to sell their stock owned through secret foreign bank accounts. In this sense, "forcign" ounership might be substantially reduced as you suggest. But is this really 80 bad? Disclosure will force these funds into the open where they can be subjected to taxation.

Answer 11. We would not be concerned if the only result of Title IV was to force U.S. citizens to sell their stock owned through foreign bank accounts. However, as indicated in my testimony, we believe the effect will be to discourage investment by foreigners in U.S. securities, the importance of which should not be underestimated. Even in the case of U.S. citizens, it seems likely to us that those who now conceal ownership of U.S. securities will merely find some more sophisticated way to conceal such ownership thus frustrating the basic intent of Title IV. Title IV just treats the symptom rather than the disease.

REPLIES TO QUESTIONS OF SENATOR BENNETT Question 1. On page 3 (Desch statement) you discuss privacy and mention S. 823. I agree with your point but didn't find any language to accomplish that purpose in your marked-up bill. Do you have such a recommendation?

Answer 1. There is no way to eliminate invasion of privacy completely. In our marked-up bill privacy would be protected principally by the amendments suggested to Sec. 202 (clarification of the purposes of the Title), Sec. 203 (1) (restriction of definition of monetary instruments), Sec. 501 (requirement that the Secretary's regulations apply to classes of persons and not to particular persons) and Sec. 502 (requirement that the Secretary issue regulations only after a hearing held under the Administrative Procedures Act with opportunity for participation by those persons affected). Although we did not specifically suggest it, we agree with Assistant Secretary Rossides that Sec. 202 could be further amended by inclusion of language similar to that included in Sec. 121 (b) of Title I : “It is the purpose of this chapter to require the maintenance of appropriate types of records and the making of appropriate reports by such businesses where such records or reports may have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.”'

Question 2. On page 4, (Desch statement) you define monetary instruments. What types of instruments are you excluding, and why?

Answer 2. We exclude in our definition of monetary instruments personal checks, corporate checks, bills, notes, bonds and the like because we do not believe they are a substitute for currency. Chapters 2 and 3 of Title II originally dealt exclusively with currency and we believe for the reasons stated in the answers to the preceding question that reports under those Chapters should be limited by statute to cash or cash equivalent. There has been no call for, or demonstrated need to know, the movement of all negotiable instruments which are the normal, legitimate means of commerce and which pass by the mail or otherwise throughout the world.

Question 3. The point you make on page 10 [Desch statement] using the AT&T example, is well taken. How can such transactions be excluded without opening up possible loopholes ?

Answer 3. The Secretary should be encouraged to exempt by class checks or drafts which issue in the normal, usual business transactions. The AT&T situation is but one example. After all, the original purpose of this legislation was to get at the unusual transactions, outside the normal business practices, by which certain persons are able to conceal their fraudulent dealings. We don't believe it is necessary to mandate the copying of domestic checks and we continue to urge that the legislation require only recording of international transactions.

Senator BENNETT. That is all, Mr. Chairman.
Senator PROXMIRE. Thank you, gentlemen, very much.
You have been most helpful and we appreciate it.

I would appreciate it very much if our last two witnesses could come forward together, Mr. Coleman McGehee, president, First and Merchants National Bank, Richmond, Va., representing the American Bankers Association, and Mr. William Boyd, Jr., senior vice president of the Pittsburgh National Bank, representing the Bankers' Association for Foreign Trade.

Again I want to apologize to you gentlemen for this very late hour, but I think you understand the circumstances.

Mr. McGehee, would you go right ahead.

If you do abbreviate your testimony, the entire statement will be printed in full in the record.



Mr. McGEHEE. I am C. Coleman McGehee, president, First and Merchants National Bank, Richmond, Va., and a member of the Bank Management Committee of The American Bankers Association. I am appearing for the Association, on behalf of its member banks, to express its views on S. 3678 and H.R. 15073.

These bills have as their main objectives the promulgation of requirements designed to aid duly constituted authorities in lawful investigations and to prevent the premature destruction of certain types of evidence having a high degree of usefulness in the establishment of civil and criminal liabilities.

S. 3678 is nearly identical with H.R. 15073 passed by the House of Representatives on May 25, 1970.

S. 3678 contains an additional title which does not appear in H.R. 15073 relating to the reporting of securities transactions involving foreign financial agencies.

In order to avoid any misunderstanding, let me repeat the statement made by the representative of The American Bankers Association to the House Banking and Currency Committee on H.R. 15073, namely, that The American Bankers Association and its members desire to cooperate to the maximum extent possible with law enforcement agencies.

This Association and commercial banks generally are deeply interested in the apprehension of criminals and limitation of their activities both in this country and abroad. Banks are more directly concerned than most citizens because many of them have suffered heavy losses from criminal activities with resultant increases in costs to the entire banking industry. We too are concerned wth the public interest aspect of the blll and desire to do everything in our power to protect that interest.

S. 3678, and H.R. 15073 as it passed the House, do not raise the same concern to banking institutions as did the initial provisions of H.R. 15073. We believe that under these bills the Secretary of the Treasury has authority to develop practical guidelines or regulations that can be followed by commercial banks without incurring prohibitive expense and without violating the right of privacy of their customers. We base this position on the language in section 101 (Section 21(d) of the FDIC Act) that banks will make photocopies of checks to the extent the regulations of the Secretary so require” and the broad exemption provisions in section 206 of the bill.

Banks have an obligation to their customers to maintain the privacy of their personal financial affairs except in response to subpena or other regular legal process.

Information made available to law enforcement agencies from bank records should be confined to the records of those persons who are subject to active investigation and only in response to subpena or comparable legal process. This would protect the rights of the individual and the responsibility of the financial institutions and would be consistent with long recognized principles of law.

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