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Senator PROXMIRE. Yesterday, banking representatives argued that it is useless to try to control cash movements because couriers would figure out some other way of transferring funds outside the banking system. What is your view on this.

Mr. MORGENTHAU. You mean they are saying if the crime is going to be committed they want it done through their facilities?

Senator PROXMIRE. That is right.

Mr. MORGENTHAU. I would say certainly couriers will try to find other methods, but this legislation in title II already covers couriers, and I think the fact that the crime might be done some other way is no reason to delete this provision.

Senator PROXMIRE. How does the courier system work? Who employs the couriers? How do they transport the cash, and what do they charge?

Mr. MORGENTHAU. It works in many different ways. I think the couriers are provided by the banks in some cases, and in other cases they are provided by the Americans who want to take the money over and, depending on how effective law enforcement is at the time, the charge runs anywhere from 2 to 5 percent.

Senator PROXMIRE. How do they transport the cash?

Mr. MORGENTHAU. They transport it by having couriers pick it up in this country. It is also transported through the mails, and may be taken to the Bahamas. Often it is taken to the Bahamas and then transferred to Switzerland, sometimes to Canada.

Senator PROXMIRE. How would the pending legislation help in controlling these illegal currency shipments?

Mr. MORGENTHAU. I think chapter 2 of title II requires that these shipments be reported, and if they are not, you can prosecute for violation of that section. This would be a tremendous help.

Senator PROXMIRE. They are also subject to forfeiture; is that right?

Mr. MORGENTHAU. That is correct. If there is a seizure, they can be forfeited.

Senator PROXMIRE. You say that "In numerous instances, reputable Swiss banks have loaned their depositor his own money so as to provide him with an explanation of the source of the spending." Can you think of any legitimate reason why a depositor would want to borrow his own money?

Mr. MORGENTHAU. I suppose the only legitimate reason--this would not apply to a Swiss bank-but it could be if they wanted to get interest through the end of the month, they might borrow the money. Since the Swiss banks are not paying interest, that could not be a reason for this kind of transaction.

Senator PROXMIRE. Doesn't this practice come close to involving the Swiss banks as knowing participants in a tax-evasion swindle? Mr. MORGENTHAU. I think it comes close to it, but it could not be proven.

Senator PROXMIRE. What are the names of the Swiss banks engaged in this activity?

Mr. MORGENTHAU. I would say, oh, there must be a half dozen Swiss banks. I can't think of particular ones at this point, but at least a half dozen Swiss banks, including some of the big ones involved in this activity.

Senator PROXMIRE. I always thought it was illegal for U.S. citizens to buy and sell gold and yet you indicate a firm controlled by Mr. Cornfeld bought and sold $9 million worth of gold in 1 week in 1968. How was this possible?

Mr. MORGENTHAU. Yes, it bought and sold about $50 million worth. of gold. The profit was $9 million.

Senator PROXMIRE. The profit was $9 million? He bought and sold $50 million in 1 week?

Mr. MORGENTHAU. Right. And this was reported in the German press. That is where we picked it up. This was a matter that I had under investigation when I was with the U.S. attorney's office.

Senator PROXMIRE. How was he able to do that, in view of the laws? Mr. MORGENTHAU. That is one of the questions I wanted to find out about, but I didn't have the opportunity.

Senator BENNETT. Mr. Chairman, there are companies that are licensed to buy and sell gold even in the United States. We couldn't operate without Handy & Harman. They are people that serve industry. Senator PROXMIRE. That is for industrial purposes.

Mr. MORGENTHAU. I can assure the chairman that Mr. Cornfeld was not licensed.

Senator PROXMIRE. I don't imagine he was doing this for industrial purposes.

Mr. MORGENTHAU. No.

Senator BENNETT. You have testified

Senator PROXMIRE. That is a lot of dental fillings.

Senator BENNETT. That is right.

You have testified you think it is necessary to require an offshore broker to give a certificate that no American has any beneficial interest or is involved in his purchase.

Taking IOS as an example, conceivably it has more than one American stockholder. Could IOS or its investment fund ever certify that there was no American who had a beneficial interest in the stock it was selling?

Mr. MORGENTHAU. There are two answers to that question. Generally speaking, I think an offshore mutual fund would have difficulty in making that certification. Of course, in the case of the funds owned by IOS, Fund of Funds, and so forth, they entered into a consent order with the SEC saying they would not sell to Americans. So in that specific case they might be able to give that certification. But generally speaking, it would be very difficult for an offshore fund to do that. Senator BENNETT. That being the case, it would mean that they could not then buy and sell in the American market? That would just shut them off completely?

Mr. MORGENTHAU. I think with the regulation issued by the Secretary in connection with this provision, it would be very difficult for mutual funds to give that kind of certification and to buy and sell. I think that is right.

Senator BENNETT. Couldn't that be true in part for foreign banks who would have to certify they had no American stockholders? There is no law against an American buying stock in a foreign bank.

Mr. MORGENTHAU. They could either certify they had no American stockholders or they could disclose the name. They have the option of disclosing the name of the American stockholder.

Senator BENNETT. But if you have a thousand stockholders or 2,000 stockholders, and they are changing from time to time, couldn't this become kind of an administrative nightmare, this question of certification?

Mr. MORGENTHAU. I would think that the Secretary of the Treasury would issue appropriate regulations to take care of the corporate seller of securities. I think this is designed primarily to define the individual seller who is an American citizen.

I would think appropriate regulations would need to be introduced which would exempt the corporate seller or provide special provisions for the corporate seller.

Senator BENNETT. Then there is another comment-and I am quoting from testimony of the next witness, Mr. Chairman, who is going to say: "Foreign investors like U.S. investors want their orders executed promptly. As the bill is presently drafted, the European investor could not have his order executed for 4 or 5 days until the U.S. broker received the certificate. As drafted, this provision would probably terminate foreign investment in the United States."

Mr. MORGENTHAU. I think there would have to be adequate provisions so that there could be a simultaneous execution of the orders. Senator BENNETT. In other words, we have got to write the regulations so there are loopholes.

Mr. MORGENTHAU. Not loopholes, just where they are workable and practical.

Senator BENNETT. One man's convenience is another man's loophole. Mr. MORGENTHAU. Could be.

Senator PROXMIRE. I want to thank you very much, Mr. Morgenthau. I can see why you have won such an outstanding reputation by your great service in New York City. You have been a fine witness this morning, most responsive, and most expert in a very complicated

area.

Thank you very much.

Senator BENNETT. Mr. Chairman, I would not want the record to show that I am antagonistic to Mr. Morgenthau. I think his testimony is very helpful in that it has contained more detail than any we have had previously in terms of the type of problem that we have to face. Mr. MORGENTHAU. Thank you very much.

(The prepared statement of Mr. Morgenthau follows:)

STATEMENT OF ROBERT M. MORGENTHAU

Mr. Chairman and Members of the Committee, Thank you for the invitation to appear before your Committee.

Information and evidence developed in recent years shows that secret foreign accounts are used to conceal tax frauds, securities fraud and many other types of criminal conduct ranging from the smuggling of heroin to payoffs to government employees. But in addition to these specific substantive violations, the availability of the secret foreign account to those with the resources to utilize it has created a loophole in our laws and in law enforcement. In a democratic society such as ours, which depends on voluntary compliance, a gap available to some tends to discourage compliance on the part of the large majority otherwise willing to comply.

Unless this loophole is closed, the honest business and professional man will be put to a great competitive and economic disadvantage and millions of other Americans will lose the confidence that the laws of this country are being fairly and impartially enforced. We will not have fair and effective law enforcement in this country without a systematic and vigorous effort to bring all criminals

including those who hold positions of responsibility and power in the business and financial world to the bar of justice.

In this appearance before this Committee I would like to give a general description of the nature and scope of activities involving the use of secret foreign accounts and their potential danger to the United States, then to discuss some of the fact patterns in this area that have been uncovered and finally to indicate my support for legislation designed to subject to our laws the use of secret foreign accounts by American citizens, and why I consider such legislation vital.

Abuse of secret foreign accounts is no longer limited to members of organized criminal syndicates and hoodlums. Although the use by the organized underworld of these accounts is substantial, to an ever-increasing extent they are now being used by wealthy and otherwise respectable persons in the business and financial world to cheat on taxes, to trade in securities in violation of our securities laws, to trade illegally in gold, to perpetrate corporate and other frauds, and to hide the fruits of other white collar crimes. The Swiss bank is where the organized underworld and respectable business man meet.

For years these violations were left virtually untouched by law enforcement agencies, in large part because investigation in this area is far more demanding in terms of time and expense than in more conventional areas of prosecution and far less promising of results. Similarly, there was no attempt by legislative bodies to remedy any of the evils flowing from foreign bank secrecy.

As a result of this almost total lack of enforcement, the abuses flourished. The activities of the unscrupulous businessman paralleled those of the hoodlum in determination to violate our laws through ingenious use of secret foreign bank accounts. Because such use represented "business" to them, foreign banks began openly to solicit secret accounts in this country, in many cases using as selling points the many advantages, illicit and otherwise, that flowed from the secrecy laws of their countries. Many foreign bankers organized systematic courier services to transport large amounts of cash from the United States to Switzerland and Nassau and other tax havens and set up branches and representatives in the United States to solicit and service customers. Many American banks opened branches in these foreign tax havens so that their customers could also avail themselves of the advantages provided by secret bank accounts. These American banks sought out, exploited and asserted the protections of local secrecy laws as vigorously as the foreign banker.

Their multinational operations became so large in scope that in many cases the banks doing the largest volume of business in some major Swiss cities are now not the large local Swiss banks, but the foreign branches of large American banks. Similarly, in the Bahamas alone 21 branches of American banks have been opened or authorized, far beyond the apparent needs of the tourist trade and the local economy. This opening of foreign branches by American banks is not just characteristic of banks whose main offices are located in the financial centers of New York, Chicago, Los Angeles and San Francisco, but also of banks centered in other places as well.

As a result of this expanded activity by American banks, transfers of funds, illicit and otherwise, through domestic banks on the way to secret foreign bank accounts became commonplace; the domestic clearing and correspondent facilities of United States banks became essential in many instances to the carrying out of illegal schemes involving foreign banks. For example, the facilities of a California bank and a midwestern bank were used, under circumstances that should have aroused suspicion, to transfer funds that were used to pay kickbacks to employees of non-commissioned officers clubs in Vietnam from an American company to a Swiss bank.

And when United States law enforcement agencies have sought to subpoena United States banks to produce records of accounts maintained in a foreign branch in the belief that these accounts were being used to commit crimes in the United States, the banks have refused to produce such account records on the ground that by so doing they would violate the bank secrecy law of the country where the bank is located. This refusal has in some cases been sustained by our courts. To me it is shocking that a United States bank, by opening a branch abroad, can lend its facilities to citizens who are defrauding the government and violating our laws and then successfully deny its obligation to make account records available to the Department of Justice by claiming that the laws of a foreign country would be violated.

A startling development of recent years has been a significant change in the identity and ownership of foreign banks. Today 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 rackets and other illegal businesses. Such a bank does not need a large working capital to be a useful element of an illegal business. Its function is not to provide funds for the business so much as to provide an unreachable depository for illegal profits. Such a bank might not even keep its accumulated funds on deposit, but might well redeposit them in a more substantial foreign bank or even in a United States bank.

An American criminal who is not content simply to accumulate wealth in ✔ a foreign bank can easily and safely cause the bank to "lend" it to him. These devices and many others are all at the disposal of this growing number of "foreign" banks controlled by or connected with the Americans and the American underworld.

Taking these different types of operations together-the genuine foreign bank, the foreign branch of an American bank, and a foreign bank controlled by Americans and American hoodlums, I would conservatively estimate that their secret accounts hold hundreds of millions of dollars which have been used in or are fruits of violations of American law.

There is, however, a larger aspect to the problem. The significance of foreign financial institutions immune from the same governmental processes to which domestic institutions are subject goes well beyond the extent to which they are a cloak for conduct in violation of our laws. The leverage incidentally developed by a handful of private investors through vast accumulations of capital not in any way subject to our laws can, at a time of financial instability, represent a serious threat to the national economy.

For example, as a result of the Foreign Investors Tax Act of 1966 which was designed to encourage foreign investment, a corporation whose sole activity in the United States is in securities transactions is not subject to United States taxation. In general, this Act has initially achieved its purpose as billions of "foreign" dollars have been invested here. The corporate investors however, remain beyond the practical reach of the Securities and Exchange Commission and other law enforcement agencies. As a result in the long run the fact that these offshore funds, run by Americans, are operating beyond the practical reach of the law may be detrimental to American investors, to foreign investors in the American market and ultimately to the balance of payments itself.

For example, there is the case of Investors Overseas Services, Ltd. (IOS), and its mutual fund subsidiaries. With mutual fund assets before the break in the market of almost 2 billion dollars, about two-thirds of its assets are in the form of securities in United States corporations. Just during the past weeks it has been alleged by responsible sources that IOS has been engaged in a number of practices improper under American law. One instance cited is the phony write-up of oil and gas leases to land in the Canadian Arctic, apparently done with the assistance of American companies; another is large loans to insiders by foreign banks owned by IOS.

Disclosure of these transactions had had the inevitable effect of encouraging redemption of IOS shares at the rate of about 3 millions dollars a day since May 1. There is strong evidence that IOS controlled mutual funds have been dumping securities in United States markets, to raise cash to satisfy these and other cash demands of its stockholders and creditors. In an already jittery market the weakening effect of such sustained selling activity is obvious. If foreign financial transactions by Americans were subject to disclosure requirements, the alleged write-ups and insider loans might well have had to have been disclosed and the subsequent redemptions and coincident selling forestalled.

Indeed, if IOS had been subject to our disclosure laws perhaps the financial difficulty it has found itself in since the beginning of the year would have been avoided. Similarly, if foreign financial transactions were subject to disclosure requirements the comparable deterrent effect might have been felt. Absen, these disclosure requirements, shady financial practices can be engaged in to the benefit of a few insiders. Unfortunately, I don't think we've seen the end of the IOS problem and its ramifications. The American markets and investors have already felt the effect of the dumping of securities by IOS. In the future, because the completely unchecked conduct by Americans running IOS has caused European investors to lose confidence in American-run companies and securities their willingness to purchase American securities has no doubt been reduced. Thus, the very result sought by the Foreign Investors Tax Act has been frustrated.

With respect to specific violations uncovered by my office, as you can well imagine, a secret foreign account is of great value to a law violator in virtually

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