Also, if this legislation which has now been proposed by you, Senator, were enacted, I think some of these loans would have to be disclosed because these would be borrowings by Americans from foreign banks, and I think the fact that these disclosures would be required or rather the records would have to be kept of these transactions might very well discourage this kind of activity.

Senator PROXMIRE. Some more questions I would like to ask you on IOS, but my time has expired.

Senator Bennett?

Senator BENNETT. Thank you, Mr. Chairman.

Mr. Morgenthau, I have the feeling that the flavor of your testimony is a condemnation of every American bank that has opened a branch in a foreign country that has a secrecy provision in its laws. Do you want to make that as a general statement?

Mr. MORGENTHAU. I respectfully disagree with the Senator. I think that American banks have every right to open branches in foreign countries, that everybody is interested in the development of international trade. I do criticize the few large banks that have opened branches abroad which have accepted American customers and then have refused to make the records of those customers available to the United States where there has been a violation of American law.

Senator BENNETT. In your statement-and the chairman has already referred to it--you refer to the 29 banks that have opened branches in the Bahamas, and then you say, "This goes far beyond the apparent needs of the tourist trade and the local economy." Isn't that kind of a blanket indictment of all 29 banks?

Mr. MORGENTHAU. No, sir. What I am trying to do is to show the extent of the problem. We have had a great change in banking in this country and abroad in the last 10 or 15 years. Our big banks have become multinational in scope and they are doing business all over the world.

Senator BENNETT. Isn't that good?

Mr. MORGENTHAU. That is fine, that is very good, and I think this legislation is designed not to interfere with that, because after all if you wanted to really stop this kind of activity, you could authorize no more branches abroad, and that would stop not only criminal activity through banks but it would stop the banks from doing business.

This legislation is designed to encourage that kind of foreign trade but at the same time to discourage Americans who are going to take advantage of these foreign branches to violate American law.

Senator BENNETT. Contrary to what might be your impression, the banks have not come here and objected to the legislation. There has been some objection both on the part of the banks and the Treasury about some of the provisions of title II, particularly, as I have listened to the testimony, because title II requires complete recordkeeping and reports by domestic banks of domestic transactions and by individuals on certain transactions.

Mr. MORGENTHAU. Senator, I do favor the provisions of title II.

Senator BENNETT. You said earlier that you thought the cost of "a little recordkeeping" was not to be weighed against the possible advantage of being able to get into the records, or at least that is my impression of the comment that you made earlier.

Mr. MORGENTHAU. I think it is a burden of doing business; yes, sir.

Senator BENNETT. If you are not making a blanket indictment, can you furnish to the committee in the open hearing or privately the names of those American banks that you feel have in fact gone abroad into these havens primarily for the purpose of involving themselves in illegal activity?

Mr. MORGENTHAU. Senator, I don't suggest that any American bank has gone abroad primarily for the purpose of engaging in illegal activity. I am just trying to set forth the facts and what has happened is American banks that have established branches abroad competing very heavily with deposits of foreign banks and the branches of other American banks.

In doing so, I think they have turned the other way in a number of cases where Americans have used those banks for illegal purposes. That being the case, I think we have got to maintain records in the United States which will be available to law enforcement agencies so that these foreign branches of American banks cannot be used to violate American law with impunity.

Senator BENNETT. As I read your statement or listened to it, I got the impression that you have the feeling that in a country like Switzerland, which by law requires secrecy, if an American bank goes over there with a branch, it should violate that law and answer questions of American law enforcement officers in spite of the local law of Switzerland. Am I correct in that impression?

Mr. MORGENTHAU. No, I am not saying that. I am saying that American banks and their branches should obey American law. As I said, I find it shocking that an American bank can open a branch abroad, have the advantage of the American dollar behind it, the American resources behind it, but let its branch be used for violation of American law.

Senator BENNETT. Can American law reach into Switzerland and require a bank owned in Switzerland by Americans to violate Swiss law?

Mr. MORGENTHAU. I don't know the answer to that, but I think we are trying to avoid that confrontation.

Senator BENNETT. I think you have got the confrontation right now. Mr. MORGENTHAU. I think we are trying to avoid that confrontation by requiring the American bank that sends the money over to Switzerland or transfers the money over to keep such records in this country so that that transaction can be reached without going to Switzerland and asking for those records.

felt-let's

Senator BENNETT. By your testimony, as I understand it, I got the impression that you felt let's say, an American bank, an Americanowned Swiss bank accepts a deposit from Germany, do you think we have any right to information about that deposit in this country because the bank happens to be owned in the United States?

Mr. MORGENTHAU. I don't know the answer to that, but I don't think we have reached that problem with this legislation. What I said is, I find it shocking that an American bank can be used by American citizens to violate the law of that country and refuse to make that information available.

This legislation would require records in this country of transfers abroad. It would require the banks to keep records, it would require American citizens if they took cash abroad to keep those records.

Therefore, you wouldn't have to go to the foreign branch. You would go to the Chase Manhattan Bank or whoever it is in New York and find those records here and avoid the kind of confrontation you are talking about.

Senator BENNETT. Is it your feeling that when an American-owned bank, either in Switzerland or the Bahamas, performs a financial transaction for an American citizen in the normal course of business, that it becomes an accomplice if that transaction is a violation of American law?

Mr. MORGENTHAU. Not necessarily. If they don't know about it, they don't become an accomplice. If they know it is a violation of American law, they do become an accomplice, the same rules of evidence that apply if a foreign branch of an American bank conspires with American citizens to violate the tax laws, sure they are an accomplice. If they don't know about it, they are not.

Senator BENNETT. I think most of the members of this committee are going to support most of the legislation, but I was surprised at the atmosphere, as I said at the beginning, of your testimony which carried the impression that American bankers are going abroad to tax havens largely for the purpose of becoming involved in illegal activities, and I assume that you are anxious to see that that impression doesn't remain in my mind.

Mr. MORGENTHAU. What I am saying is not that they go abroad to engage in illegal activities, but they have lent their facilities to the use of Americans who are violating the law and that we have got to figure out a way, Congress has to figure out a way, so that those transactions can be reached, and I think this legislation does that.

Senator BENNETT. My time is up, Mr. Chairman.
Senator PROXMIRE. Senator Percy.

Senator PERCY. Mr. Chairman, I am delighted that Senator Bennett has given Mr. Morgenthau the opportunity to clarify that. I do think that we do have a situation where American banks would welcome an obligation on their part to plug some of these loopholes which they ordinarily wouldn't countenance. But as long as they do not have a specific requirement to cooperate and to help in this regard, they probably feel they shouldn't reach their arm out as they are not a law-enforcing agency.

I was particularly struck by your testimony on the transactions involving the noncommissioned officers mess from Vietnam. I serve on the Senate Permanent Investigating Committee. We spent about 4 months on those cases, and some of them are still pending. Could you tell us how the present legislation would help us prevent such practices? You report that kickbacks were made to employees of noncommissioned officers clubs in Vietnam by American companies through Swiss banks. If this law had been in effect, could we have prevented the scandal that we have in service clubs, not only in Vietnam but in Europe as well?

Mr. MORGENTHAU. To the extent that we investigated those transactions, we came across them in connection with investigations of other Swiss bank transactions. We found that almost all of these checks cleared through American banks, so that if the American banks had kept complete records the way this bill requires, then, I think a successful prosecution could have been obtained. I might add I think

these cases could be prosecuted anyway with the information currently available, but it would facilitate it. See, I think the thing that perhaps all people are not generally aware of is every major Swiss bank and most small Swiss banks maintain accounts in the United States with five or six American banks. Of course, American banks have branches abroad. So in any of these kinds of transactions, 90 percent of the business takes place here in the United States. So that if proper records were kept, then these cases could be successfully prosecuted, and I would hope the fact that the cases could be successfully prosecuted would be a deterrent to people engaging in this kind of activity.

Senator PERCY. We have reason to believe now that fortunes have been made just in this one narrow area of Government spending; that is, the spending by servicemen of their own pay in service clubs abroad and that profits are being scooped off and kickbacks made. The level of expenditure, however, is relatively small compared to the total expenditure in that war.

I have also heard considerable discussion about large profits made. by American companies and Vietnamese individuals on the war over there, and to the extent that these large profits are being made, there is pressure to keep that war going, and to the extent that the Vietnamese are scooping off profits, sending them to Swiss bank accounts for a haven in case things get tough over there, it certainly does not serve our interest. Is there any way that we can get cooperation from the South Vietnamese Government, considering the large underwriting that we make to that Government in order to have them enact comparable legislation so that together we can work to prevent Swiss accounts being established, or large profits being made on the war by Vietnamese individuals?

Mr. MORGENTHAU. I think it would be most helpful if we could get that kind of legislation enacted in Vietnam.

Senator PERCY. In other words, it is not unusual for our Government to cooperate in providing technical assistance as we have many countries. I know that Italy has been helped in instituting more efficient and effective systems for collecting taxes.

So you would recommend that whatever we do learn in the way of legislation might be then a technical assistance program our Treasury Department and various agencies, the Justice Department, could offer to the South Vietnamese Government to stop the profiteering that is going on over there.

Mr. MORGENTHAU. I certainly think it would be most helpful. Senator PERCY. I have no further questions. Thank you very much. Senator PROXMIRE. I would like to go back to the IOS situation briefly. Are you aware of any cases where IOS-controlled banks have been used to finance the purchase of IOS stock or IOS-controlled mutual fund shares?

Mr. MORGANTHAU. Yes, Senator. That is disclosed in their prospectus which they use to sell the securities abroad. I think it is something in the neighborhood of $40 or $50 million that has been lent by IOS banks and finance companies to IOS purchasers. In other words, you can buy shares of IOS-controlled mutual funds financed by IOS banks. Senator PROXMIRE. Can you make that prospectus available to us? Mr. MORGENTHAU. I will be glad to do that.

(The prospectus referred to is retained in the committee's files.)

Senator PROXMIRE. Can you identify the individuals involved? Mr. MORGENTHAU. Well, there are literally thousands of shareholders who have bought IOS shares.

Senator PROXMIRE. How about IOS stock as opposed to shares of mutual funds?

Mr, MORGENTHAU. I do know the names of several IOS officers. I think that when the audited statement of IOS comes out, and incidentally that statement was due April 15, and apparently Arthur Anderson has refused to certify the balance sheet as yet, but when that certified statement comes out, I think we will know who those stockholders are.

Senator PROXMIRE. What are the names of the IOS officers who have received loans?

Mr. MORGENTHAU. I understand that one of them is the former president of IOS, Edward Cowett.

Senator PROXMIRE. Who was the other one?

Mr. MORGENTHAU. I would rather not put that out publicly. I think that will be revealed very shortly when the IOS financial statements are available.

Senator PROXMIRE. In your statement you refer to certain irregularities in connection with the valuation of IOS-owned oil and gas leases in the Canadian Arctic. What were these irregularities?

Mr. MORGENTHAU. At the end of 1969, Fund of Funds and another mutual fund, IIT, controlled by IOS, wrote up the value of these Canadian Arctic drilling permits by some $90 million.

Senator PROXMIRE. Through dummy sales?

Mr. MORGENTHAU. Through dummy sales. It is quite complicated. The sales were actually made by King Resources to another American company and two American partnerships, but very little cash-actually only $450,000 in cash passed hands. But on the basis of that transaction, IOS wrote up the value of these leases by $96 million and proceeded to take a management fee of $9.5 million on the basis of these.

Senator PROXMIRE. That was 10 percent of the profit, in other words? Mr. MORGENTHAU. Yes.

Senator PROX MIRE. So, by spending $450,000 they got $9.5 million? Mr. MORGENTHAU. Yes.

Senator PROXMIRE. As I see it, chapter 4 of title II and title IV, both of which the Treasury wants to delete, are about the only provisions which would give the U.S. officials greater surveillance over firms such as IOS?

Mr. MORGENTHAU. I think that is right, Senator.

Senator PROXMIRE. You indicate that the Swiss and Bahamian banks have been involved in several corporate takeover accounts. How would the pending legislation affect this situation?

Mr. MORGENTHAU. Again this would require recordkeeping. It would indicate where there were link deposits. We have felt, but have not been able to establish, in a number of these cases, that in order to induce a Swiss bank to make a loan which appeared not to be adequately secured that there were deposits made to the account of that bank. And, of course, these disclosures would develop those kinds of link deposits and loans.