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that there is practically nothing there except tourism. They are concerned about it, and they would like to build up other things, but tourism is there big operation.
It is interesting that only three banks have branches in the Virgin Islands, two banks have branches in Puerto Rico, both of which have sizable tourist interest. It is interesting that the Bahamas passed a strict bank secrecy law in 1965. Don't you think that would have something to do with it?
Mr. McGEHEE. I think there was a movement in Nassau or the Bahamian area before it started in the Virgin Islands and Puerto Rico. I think as a result of that, particularly in terms of financing enterprises in South and Central America, Nassau has become a very centrally located financial point from that standpoint.
Senator PROXMIRE. Did you want to comment, Mr. Boyd ?
Mr. Boyd. For one thing, Senator, I will be happy to mail you the balance sheet of our bank, we have a branch in Nassau, every day. Actually the reason we went into Nassau, and I am quite familiar with the situation, is in connection really with the restraint programs of the U.S. Government.
It has absolutely nothing to do with secrecy in our case, and I would believe it is true in the case of most of the other branches.
But our customers, that is, our corporate customers under the control program, foreign investment control program of the Commerce Department, have to borrow abroad to finance certain of their projects abroad. That means they have to borrow Eurodollars in general.
Now, if we are going to support our customers in their projects abroad, we have to have facilities for loaning them Eurodollars. We could have a branch in London or Nassau.
Senator PROXMIRE. That can be done in any foreign branch. Why is it Nassau?
Mr. Boyd. I am going to touch on that. There is a very good answer to that question. We didn't care about Nassau particularly, but we did feel the need to have a foreign branch in order to accommodate our customers. We looked into London. I called the Bank of England there, and they said they would be happy to have us come to London and we would have been happy too. They have certain restrictions. You have to have a manager, an assistant manager, a foreign exchange trader, an assistant foreign exchange trader, an accountant, and ground floor space. And a standard budget for a bank of our size was $500,000 a year, which means you have got to really stretch out and build up a very large volume of business in order to justify such expenditures.
Our budget is approximately $20,000 a year to operate in Nassau. You can see on that basis it wasn't hard to choose that.
Senator PROXMIRE. Why not the Virgin Islands or Puerto Rico?
Mr. Boyd. They are not outside the United States, and I would not believe they would be appropriate for Eurodollar operations outside the United States.
Mr. McGEHEE. I would like to confirm what Mr. Boyd just said. I might say in the case of my own bank, Senator, this, is exactly why we have made inquiries, because frankly a bank our size cannot afford to put up a $500,000 branch in London.
Senator PROXMIRE. In your statement you state both under S. 3678 and H.R. 15073 the Secretary has adequate authority to develop practical guidelines without requiring banks to incur prohibitive ex
penses. I agree with that conclusion. Am I correct in assuming that although you have some suggested changes you would not seriously object to passing S. 3678 or H.R. 15073 in their present forms as amended as you suggested they be amended ?
Mr. McGEHEE. If you leave out the words “present form," I might be able to go along with you. We certainly support the objectives of these two bills. As we indicated earlier, we want to support them. We do feel there are some technical amendments which are listed here which should receive your attention. We in the American Banking Association very strongly feel that the Secretary has been given very broad guidelines. We would like to see the laundry list type of thing stripped from the bill, because we think this is where it begins to get into difficulties.
We go back into the testimony before the House and even before that, you can see the many changes that have come about in trying really to write proper legislation. There are just so many things that you literally cannot enunciate all of them in legislation.
This is why we think that the Secretary of the Treasury, in which we have a great deal of confidence, and the Office of the Secretary of the Treasury should be given some latitude, and we feel that we are protected in the sense that he does have to report those regulations later on in the Federal Register. We would have an opportunity at that time to go over them and so forth.
In general, we feel that by giving the Secretary fairly broad latitude there would be a much better approach to really doing this thing rather than trying to come up with a laundry list aspect of the bill.
Senator PROXMIRE. Mr. Boyd, I got the impression as you delivered your statement that one of your concerns is that the illegitimate operators would continue to operate even if this bill were passed; they would still be able to use foreign accounts and be able to conceal their income, but they wouldn't use the banks in doing so.
Mr. Boyd). I think, frankly
Senator PROXMIRE. And you were concerned that some of these crooks would not give you the opportunity to make money on their deposits. I am sure you didn't mean that.
Mr. Boyd. Frankly, we come from a part of the country where there are very few crooks. They don't congregate in Pittsburgh. It is an industrial center. Then tend to go to other places.
Senator PROXMIRE. I am sure they are not in Milwaukee either.
Mr. Boyd. That is right. That is a good example. So, I am not as familiar with this, frankly, as an expert would be. But I have talked to some of my friends in New York who are knowledgeable in this field, and apparently this type of operator is more likely to be found in New York than in Milwaukee or Pittsburgh, and they say that for the life of them they cannot see that the crooks are using the banks. They think that the banks are much less used.
One other point I would like to make is we don't make any money out of sending a hundred thousand dollars to Switzerland anyway. This is a nonprofitable transaction.
Senator PROXMIRE. If they aren't using it now, I can't see how this would in any way adversely affect the banks.
Mr. Boyd. Affect the banks? Well, if we are required to keep these domestic records, it would be an expense and would accumulate a lot of records, and in addition I believe that it would discourage foreigners from keeping money in the United States who are in search of privacy.
My sources estimate that there is as much money in the United States placed by foreigners here in search of privacy as there is—in fact more than there is by U.S. citizens placing money in Switzerland in search of privacy.
Senator PROXMIRE. Of course, the purpose of the bill isn't to identify the foreigners. We want to get at the criminal activity and tax evasion in this country.
How did you arrive at the estimate that it would cost a $1.5 billion bank $300,000 to comply with S. 3678 ?
Mr. Boyd. I am glad you questioned me on that. In my haste to get through this thing in time, I did not comment on that specific estimate. I deleted that from my verbal statement, and I would like to modify that. I have checked those figures overnight, and I feel that that figure for the development of the records alone should be more nearly $150,000.
The figures that were developed included some numbers that I don't think properly belong there. However, you still would have the expense of the maintenance and this matter of retrieval. I am not really an expert on this, but I think it is a problem.
Senator PROXMIRE. Let's take the $150,000 then. The profit of a $1.5 billion bank is likely to run about $15 million a year, thus an expense of $150,000 is only 1 percent of total profits. Mormons such as Senator Bennett give 10 percent of their income to the church. Is it unreasonable that banks would give 1 percent of their profits for fighting crime?
Mr. Boyd. If we were really fighting crime we would be happy to contribute very large amounts, but I revert back to the statement I made earlier in my testimony in which I say that I am concerned lest the Congress feel that in passing a bill with these provisions that they have accomplished a great deal in materially assisting the authorities. I am not persuaded on that point. You see, what I mean.
Mr. MCGEHEE. I would like to support Mr. Boyd on this.
Senator PROXMIRE. I am reminded by John Evans of our staff that Senator Bennett's contribution and John Evans contribution to the church is entirely voluntary.
Mr. Boyd. Ours would be voluntary, if we really felt we were doing the job.
Mr. McGEHEE. I would like to support what Mr. Boyd says. The problem is not in the microfilming of the checks. The banks can do that, and it would cost x number of dollars to do it. The real problem is retrieval. My bank rates 86th in terms of size of banks in the United States. Our total assets are about $780 million. We handle about 7 million items a month. I know this is small potatoes compared to our friends in Pittsburgh and New York. This means that we are handling between 65 and 72 million items a year. So, we take a picture of all of those items, all well and good. But then the question comes about, someone wants to chart checking into it and the retrieval—that is where the expense comes in.
Senator PROXMIRE. The retrieval presumably would come when the law enforcement agencies thought they were hot on somebody's trail and they thought they had something.
Mr. McGEHEE. We would be willing to cooperate with them if they came in through the legal process.
Senator PROXMIRE. And the expense would be justified in that case.
In connection with a previous question, you pointed out that I did give bad examples of Puerto Rico and the Virgin Islands, but Jamaica, Trinidad, Barbados, for instance, are all outside the United States. Jamaica has two banks, not 28 like the Bahamas does, Trinidad has two. Barbados has one.
So, apparently the secrecy provision in the Bahamian law didn't hurt the Bahamas in building up their banking industry.
Mr. Boyd. Sometimes you really have to take things on faith. I know the people that have established banks there, and I promise you if you went through the files of their proposals to their management, you would not-I cannot believe that in two cases out of the 29—in fact I would be willing to bet you even money that there would be no reference to the secrecy provisions of Nassau. That just isn't something that is attractive to us. We wanted a base for Eurodollars for our bank, and I am sure that is what the others were looking for. We just don't do that kind of business, frankly.
Senator PROXMIRE. I certainly accept your sincerity. Mr. Boyd. If you would like, I would be happy to query my friends who have branches there and see if this was a factor in their decisions. I cannot believe it was. We just don't do that kind of business.
This is another thing that bothers me, if I may just interject another thought, there are certain areas where crime functions, and to some extent this extensive microfilming might well be helpful in Manhattan, but one of the things that bothers me is if this bill passes I visualize banks all over the country accumulating extensive microfilming records that would never be referred to. I
about that. (The prepared statement of Mr. Boyd together with attachments follows:)
STATEMENT OF WILLIAM BOYD, JR. ON BEHALF OF THE BANKERS ASSOCIATION FOR
Good morning gentlemen. My name is William Boyd, Jr. and I am Senior Vice President and Manager of International Banking of the Pittsburgh National Bank, of Pittsburgh, Pennsyvania. Today I am speaking for the Bankers Association for Foreign Trade of which I am President.
BAFT is the assocation of approximately 130 United States banks that have international banking departments. You will find attached the names of our member banks listed by state and city.
Today we are not attempting a complete review of S. 3678. Much of it does not directly affect international bankers. We simply wish to make certain observations that we believe will be helpful to members of the Committee.
Our organization is on record by unanimous vote as supporting that portion of the purpose of this bill which states that it is to aid duly constituted authorities in lawful investigations. The United States international bankers are very much concerned with the growth of crime in this country and wish to do everything feasible to assist in combating it.
On the other hand, we are not pesuaded that the records of domestic transactions that would be maintained in accordance with the provisions of S. 3678 would be sufficient assistance to the duly constituted authorities to justify the very large accumulation of material that woud result. At this point I would like to say that we have no objection to retaining records of certain categories of international transactions. These could certainly be helpful.
In addition, we are concerned lest the Congress feel that, in passing a bill with provisions similar to those of S. 3678 and H.R. 15073 which would create a huge mass of records, it would in fact be substantially assisting the authorities and that its mission was accomplished.
We wish to point out that it is our conviction that if such a bill were passed, those who want to move substantial sums out of the country without detection would simply avoid the banking system even more than presently, and would secretly use cash or readily negotiable bearer instruments or would resort to other less convenient but fully effective devices that would not be reported.
We now turn our attention to certain particular aspects of this proposal that
In the first place, there is the matter of the relationship between the United States bank and its depositors. We believe that if the banks are required to keep records similar to those provided for in S. 3678 there must be a provision that the information is to be released only with respect to specific named individuals and pursuant to subpoena orother lawful process. Government officials must not be entitled to browse at will.
Secondly, in support of United States trade and investment throughout the world, the United States banks have developed extensive facilities. One important service is their head office trading in foreign exchange and Eurodollars. It would appear to us that regulations developed in accordance with S. 3678 might well interfere to such an extent with this high-volume, rapid trading, as to make it impracticable to conduct such operations effectively in the United States. This would further impair the position of this country as a leading international financial nation and restrictions on trading would make the dollar less useful as an international currency.
Thirdly, it is an important part of United States national policy that the global acceptability of United States dollars should be maintained. Very large amounts are already in the hands of foreigners and it is recognized as a matter of great importance that strong effort should be made to protect the dollar so that those foreigners will wish to retain their holdings.
Among the advantages of dollars in the eyes of foreigners is that they are readily accepted throughout the free world and are readily transferable without official knowledge or interference both within the United States and in many other countries. Knowledgeable observers are aware that in the past governments that have required detailed reports of certain financial transactions have later placed controls thereon. One need only examine our own recent past to find an example. In 1963 United States banks were required to file more detailed reports than previously on foreign loans and deposits. Then in 1965 the Federal Reserve initiated the Voluntary Foreign Credit Restraint program which controls foreign lending by banks.
Are not foreign holders of dollars likely to feel that the reports provided for in S. 3678 may lead to controls and that they would be well advised to transfer their money out of the United States to a more free environment while they can?
In addition some foreign holders of dollars in United States banks will not be happy with the knowledge that United States Government officials can readily obtain information on their transactions. As we know, many non-Swiss maintain accounts in Switzerland to avoid the disadvantages of having them in their own countries. For the same reasons many foreigners have been maintaining accounts in the United States because they feel that even though we do not have the so-called numbered accounts we do have a tradition of privacy. Will not many of these feel that their privacy would be better preserved by some Euro pean country, with consequent outflow of substantial proportions?
As part of its effort to strengthen the dollar, the United States Government is endeavoring to improve our international balance of payments. In the past an important positive factor affecting the flow of funds into the United States has been the investment by foreigners in United States securities. Any regulation that makes it more difficult or less attractive for foreigners to buy United States securities in the United States tends to have a negative effect on our balance of payments and the amount is not small.
In Section 401 of Title IV there is the provision that those engaged in effecting transactions in securities must submit detailed information about the client of any foreign financial agency at the time of the transaction if any United States citizen or United States resident is a beneficiary. It is our feeling that this provision makes investing in United States securities less attractive.
Despite the fact that the cost of crime in the United States is very great indeed, and the banks are among those most seriously affected, any measure designed to assist duly constituted authorities in lawful investigations should, in our opinion, be examined from the standpoint of its cost, in addition to other criteria. A considered estimate of the cost of the records required by S. 3678 for one bank with deposits of about one and one-half billion dollars is