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American securities has no doubt been reduced. Thus, the very result sought by the Foreign Investors Tax Act has been frustrated.

Now, I have set forth in the following pages outlines of many of the kinds of cases which involve the use of secret foreign bank accounts to violate American law. For instance, in the Gulf Coast Leaseholds case, which took 9 months to try, a "Lichtenstein trust” and Swiss bank was used by an American promoter to sell unregistered stock in manipulation and fraud, and this promoter made a profit of $4 million on an initial investment of $20.80.

The Hayutin case and the Allied Entertainment cases involved the use by Americans of Swiss banks for manipulation and sale of unregistered stock. There are a number of cases involving the improper use of margin, the violation of insider trailing provisions, the use of a Panamanian dummy corporation for the purchase of new issue stocks and the use of a Swiss bank to conceal it, and so on involving American brokerage firms and companies and American investors. The use of foreign accounts in connection with takeover attempts, the use of Swiss bank accounts in connection with the importation and payment for the importation of heroin, a large number of tax violations, including one case where allegedly on a small Boston bookmaker by the name of Francis Vitello had an account with over $1,200,000 in the Union Bank of Switzerland, and, of course, if title II had been in effect at that time, he would have either have had to report that transfer of funds to the Union Bank of Switzerland or have been prosecuted for the failure to report.

In conclusion, I would like to say on the basis of my experience as a U.S. attorney, I unqualifiedly support legislation designed to eliminate the abuses flowing from the use by Americans of secret foreign accounts. I am concerned, however, with reports that some of the largest domestic banks have opposed effective legislation such as the House bill and the one before this committee. I am still more concerned since, as I understand it, the main ground of criticism from the banks is that the proposed changes in the law impose unreasonable recordkeeping burdens upon them.

It is unfortunate that the domestic banks that have opposed the bill are to a large extent the very same banks that have opened foreign branches which provide secret numbered accounts to their customers, who in all too many instances are U.S. citizens intent on violating U.S. law. These banks have successfully sought the advantages of both worldsready access to U.S. capital and the protection of secrecy laws of countries that welcome our dollars but refuse our subpenas. At the same time they have failed to police themselves so that their foreign facilities are not abused by U.S. citizens, they have always resisted efforts to require the production in the United States of the records of their foreign branches on the ground that such production would undermine the ability of their foreign branches to compete with local banks.

Passage of effective legislation is vital at this time for a number of reasons. First, in recent years the U.S. Government has at last shown a willingness to commit its powers and resources to stamping out criminal conduct committed by the wealthy through the use of secret foreign accounts. Those who would perpetrate these crimes are fully aware of this commitment and are anxiously awaiting to see whether it is a permanent part of our law enforcement programs

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or a transitory whim that will shortly disappear. If a bill such as your committee's cannot be enacted, I am afraid that this commitment will no longer be taken seriously and that crimes of this sort will continue to flourish.

Second, the defeat of effective legislation will have other serious implications. Wherever we turn today we find a deep concern over crime rates, especially those violent crimes that are lumped together under the heading "Crime in the Streets" and are generally committed by the poor. Our Government has purportedly declared a war on crime, and many bills have been introduced in this Congress providing for remedies such as no-knock searches, preventive detention and other measures which impose far more than recordkeeping burdens on various classes of persons.

It would be unfortunate indeed, if the administration's war on crime were ever to be viewed as solely a war on the crimes of the poor and underprivileged, for there is no faster way of dissipating respect for law and order than creating the impression that the law is only enforced as to certain



and that others can commit crimes with impunity. We must be willing to stand by our national goal of equal justice under law. Basic commonsense and fairness tell us this.

Third, I believe that the vitality of our country rests in substantial part upon the willingness of free men freely to contribute their proportionate share to the national revenue. Our strength is to be found in the loyalty, industry, and will of the average man who works hard, raises his family, and believes in the responsibilities of his citizenship. We cannot expect the million of these honest Americans, black and white, young and old, to pay taxes without question—to dig deeply into pockets already trimmed by inflation—if their government is willing to overlook the fraud of those wealthy and powerful citizens who have discovered in foreign bank secrecy an almost totally secure means by which to evade taxes on millions of dollars of yearly income.

The time has come when the laws must be changed so that the abuses of the past will be stopped. I am confident that this committee, with its wisdom and judgment, will act to insure that result.

Thank you very much.

Senator PROXMIRE. Thank you, Mr. Morgenthau. This is, I think, an outstanding statement. It puts the whole problem in its proper perspective, and I am especially happy to see your peroration, your ending, with its coming down very hard on the fact that if we really mean business on law and order, we have to prosecute crimes committed by the wealthy and powerful as well as by the poor and ignorant.

You had extensive experience as U.S. attorney. I guess you were in perhaps the best position of any U.S. attorney in the country with regard to this kind of action because you did have responsibilities, as I understand it, in New York City; is that correct?

Mr. MORGENTHAU. That is right.

Senator PROXMIRE. Of course, this is our financial center and where a great deal of our international financial transactions take place.

I would like to ask you specifically, you say “Numerous banks in Switzerland and the Bahamas are owned and controlled not only by Americans but in some cases by American hoodlums closely linked to loansharking, gambling, and other illegal business.” Can you give


us the name of an American hoodlum who owns a Swiss bank or a Bahamian bank?

Mr. MORGENTHAU. Well, since those cases were still under investigation when I left the office, I am reluctant to do it. I would be glad to give you the names of a couple of the banks. For instance, the Exchange and Investment Bank was one bank that was owned and controlled by American hoodlums, the Exchange and Investment Bank being a Swiss bank.

Of course, one of the difficulties in proving these kinds of cases is that evidence of ownership in Swiss banks is generally through bearer shares, so there is no registration of that ownership, and there are a number of tax cases looking into the ownership of the profits achieved through this ownership when I left, and since those cases were still under investigation, I do not feel free to discuss the names of those

Senator ProXMIRE. Chapter 4 of title II of the legislation requires persons who engage in or maintain relationships with foreign financial institutions to keep records and file reports. Yesterday, the Treasury suggested that those provisions be deleted on the grounds that they could be overly burdensome and they could invade a person's privacy. Do you think that these provisions are essential or could we dispense with them without substantially weakening the bill ?

Mr. MORGENTHAU. I don't think there is any question, Mr. Chairman, that those records would be extremely helpful to law enforcement agencies in the development of cases against people engaged in securities fraud and stock fraud and other violations of the law.

Senator PROXMIRE. Can you think of any examples where the reports or records required under chapter 4 would have been useful in detecting lawbreakers?

Mr. MORGENTHAU. I think in virtually every case that we prosecuted involving stock fraud in the sale of stock these records would have been extremely helpful. Of course, I guess for every case we developed, there were probably a dozen we were unable to develop. With these records available, it would have been materially easier.

Take a case like the Gulf Coast Leaseholds case, which took 9 months to try, the second longest securities fraud case tried in the Federal courts and should result in a conviction. If the kinds of records required by chapter 4 would have been available, that would have merely shortened the prosecution of that case.

Senator PROXMIRE. It might be argued that people who have secret foreign bank accounts are already violating some law, hence they wouldn't hesitate to violate the legislation before us by not reporting. What is your response to this argument?

Mr. MORGENTHAU. Well, I think that that might be true, but I think because of the way this legislation is framed that many people who would otherwise violate the law would not violate this law. But if they did, it would be much easier to prosecute them, and that would have a substantial deterrent effect on us, and I think the net effect of this would be to cut down the violations of law.

Senator PROXMIRE. Title IV prohibits U.S. brokers from accepting orders from foreign banks unless the foreign bank discloses the identity of the party for whom it is acting or certifies that it is not acting for a U.S. citizen. The Treasury also recommended that this provision be deleted. What are your thoughts on the need for this provision? This



is a provision which was not included in the House bill, and we put it in.

Mr. MORGENTHAU. Again, there is no doubt that this provision would be extremely helpful to law-enforcement agencies in the development of cases. In stock frauds, stock manipulation, insider trading, violation of margin requirements, the use of foreign banks, and in takeover situations this would be a very useful provision. That must be weighted against whatever impact it may have on international trade, but as far as its usefulness is concerned, it would be a very useful provision.

Senator PROXMIRE. Do you have any views on the effect this might have on the balance of payments by discouraging foreign investors from investing in this country if we had that kind of provision ?

Mr. MORGENTHAU. I think that would have to be carefully studied. As I mentioned in my reference to IOS, I think that the use of foreign account by Americans in violation of margin requirements and for other purposes has really had a very adverse effect on the American markets. In the long run that is going to discourage foreigners from investing in U.S. securities.

Senator PROXMIRE. Also, of course, it is not necessary to disclose the identity of foreigners, only Americans.

Mr. MORGENTHAU. That is right. It is only designed to force the disclosure of Americans who are using foreign bank accounts to conceal some violation, in most cases some violation of American law.

Senator PROXMIRE. As you know, unrestrained margin trading led to the stock market debacle of 1929. Judging from your testimony, it is becoming quite easy to exceed the margin requirements through secret foreign bank accounts. Do you think this might be a factor contributing to the present stock market slide?

Mr. MORGENTHAU. I feel very strongly that the use of illegal margin, borrowing without putting up proper margin through foreign banks, has had a major impact on the market and the sudden break in the market, because where you have people putting up only 20 to 30 percent instead of the required 80 percent, 70 percent, as the case may be, when the market breaks there is no doubt that this has a major impact.

Back in, I think it was the summer of 1966, when we were looking at a particular account because of the activity in it and the purchase of stock in a single company, this account which turned out later to be owned by a Greek shipowner, he invested $14 million in the security of a single stock traded on the American Stock Exchange, and he ran that stock up from 25 or 26 to the middle fifties and when the break in the market occurred in 1966 he was forced to liquidate. He did that on a 25-percent margin. The stock went down to 20. An awful lot of innocent American investors got hurt by that activity. I might add that that shipowner had become an American citizen after the war, and when he started to engage in these kinds of activities, he became denationalized, became a resident of the Bahamas, continued to live in New York but as a citizen of the Bahamas.

Senator PROXMIRE. Title III extends the margin requirements to the borrower as well as the lender. It has been suggested that they be extended to the borrower only if he borrows overseas. Would you favor this modification, or should we apply the margin requirements to the borrower regardless of whether he borrows from a domestic or a foreign lender



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Mr. MORGENTHAU. I think the provision in the present bill is a good one. I think it should be applied to the borrower no matter where he borrows, because if he is going to break the law, I don't think it makes any difference to us whether he has done it by borrowing from an American bank or borrowing from a foreign bank.

I think we want to get at these situations and I strongly support the present provisions of the bill.

Senator PROXMIRE. We had some questions vesterday on the Bahamian secret accounts and the fact that so many banks had chosen to develop branches there. Why do you think so many U.S. banks have established branches in the Bahamas?

Mr. MORGENTHAU. I think, No. 1, to take Eurodollar accounts, and, No. 2, because of the secrecy provisions. Under Bahamian law

Senator PROXMIRE. Is there any way you can document that? I was very suspicious of this, the fact that they picked the Bahamas rather than some of the other British possessions which are equally convenient and attractive, but the Bahamas does have a secrecy nrovision, some of the others don't, and yet these bankers whom I talked to are very sincere men, very honest men, and they say that secrecy was not the purpose, that the Eurodollars was the purpose.

The last two witnesses we had vesterday were especially emphatic on that. They came up after the hearing and reiterated it and I am sure they felt this. I wonder if there is any way we could document that this is a fact.

. Mr. MORGENTHAU. It is hard to sav what was in the minds of the banks when they opened those branches, but I can tell you unqualifiedly that the Bahamian branches of American banks have been used for tax evasion, they have been used to handle cash from gambling casinos; so, whatever was in the minds of the banks when they opened those branches, they are being used by Americans to evade American law in very substantial degree, not only the tax law but also the securities laws.

We had an investigation when I left of the use of bank accounts in the Bahamas to try to acquire control of American companies without informing the SEC.

Senator PROXMTRE. As I understand it, there are 29 banks that have branches in the Bahamas that have deposits of $3 billion. As you know, IOS has recently experienced a financial setback which has caused its mutual funds to liquidate American securities, and you mention that with great emphasis in vour statement. Do you see anv relationship between these financial difficulties and the unregulated nature of IOS which permits it to operate outside our customary disclosure laws?

Mr. MORGENTHAU. Yes. I think there is a definite connection. I mean there have been strong allegations and reports in the press, particularly in the foreign press, that insiders in IOS have borrowed large amounts of money from banks owned by IOS. One report is that the loans go as high as $47 million.

Now, when IOS had an underwriting last October, and in the underwriting, incidentally, two of the lead underwriters were American brokerage firms, there was no disclosure of transactions in loans to insiders. If IOS had been regulated by the SEC, of course, these disclosures would have been required.

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