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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 United States citizens intent on violating United States law. These banks have successfully sought the advantages of both worlds—ready access to United States capital and the protection of secrecy laws of countries that welcome our dollars but refuse our subpoenas. At the same time they have failed to police themselves so that their foreign facilities are not abused by United States 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, and now they oppose effective legislation.

Passage of effective legislation is vital at this time for a number of reasons. First, in recent years the United States 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 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 record-keeping 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 groups of persons and that others can commit crimes with impunity. We must be willing to stand by our national goal of equal justice under law. Basic common sense 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 millions of these honest Americans, black and white, young and old, to pay taxes without questions—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.

Senator PROXMIRE. Our next witness is Mr. Pierre Leval, of New York.

Mr. Leval, we are happy to have you. As I understand it, you are former assistant to Mr. Morgenthau and have worked with him in his office, is that correct?

STATEMENT OF PIERRE N. LEVAL, NEW YORK, N.Y.

Mr. LEVAL. That is correct. During my years that I worked with Mr. Morgenthau, I spent a good deal of time working on the problems of

I abuses of foreign banking by American citizens and residents.

Senator PROXMIRE. I might say, incidentally, just as Mr. Morgenthau abbreviated his statement, we put the entire statement in the record, the same thing will apply to you. Any part of your statement you would like to skip over, we will print it in the record in full.

(The statement appears on p. 273.)

Mr. LEVAL. In the statement filed with the committee I have described some of the less known and more sophisticated devices by which U.S. persons escape legal obligations by using foreign secret bank accounts. I believe that legislation will be helpful to control such abuses. I think the bill before this committee contains many useful provisions.

I would like, however, to call the attention of the committee to certain provisions which I believe go further than is necessary; create administrative burdens on individuals which will not be useful to law enforcement; will result in unfairness; and, in one instance, which will give to the Secretary of the Treasury a confiscatory power which may well violate the Constitution.

Let me address myself first to chapter 3 of title II, “Reports of Exports and Imports of Monetary Instruments.” Now this provision was originally designed to cover couriers who carry money out of the country for tax evaders. There is a reason for special concern for currency because it leaves no trace in bank records.

But, as the provision was passed by the House and as it is now before this committee, the bill goes much farther. It covers all “monetary instruments” including checks, bills, stocks, and bonds. It is not necessary to be concerned about such instruments, even in bearer form, because their acquisition leaves transaction records in banks or brokerage houses. The bill also includes mailing, rather than only transportation. The effect of the bill as it is now drafted will be that

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business or any person having normal, frequent, aboveboard, innocent transactions with a foreign country will be required to make continuous reports to the secretary of the Treasury in matters that have no reason for any suspicion nor any suggestion of violation of law.

Furthermore, the consequence of an innocent, accidental failure to comply with the reporting provisions can result in forfeiture, which is an extremely harsh penalty, and that forfeiture is not limited by any guiding standards except that the Secretary of the Treasury may remit the forfeiture where he deems it just.

I think that those provisions go awfully far to accord a confiscatory power to the Secretary of the Treasury. In my opinion, chapter 3 should be limited to transportation of currency and the forfeiture provision should be very, very carefully limited by standards relating its operation to violations of law.

Chapter 4 of title II, I believe, would serve a desirable purpose if it required disclosure of a foreign bank account and if it required maintenance of records of foreign transactions. But as now drafted, subject to regulation by the Secretary, it requires the filing of reports of all transactions with a foreign financial agency.

In the case of a person doing business abroad, he might have daily letter of credit transactions which would have to be reported. Å family traveling abroad would have to report every time it went to the bank to cash travelers checks. I think this goes too far.

I would like to address a few brief comments to chapter 4, title IV, section 401. I believe as that section is now drafted, it will create problems which were not intended and will cause very serious inconvenience.

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The section prohibits a broker from accepting orders from a foreign financial institution unless that institution discloses the names of all persons having a beneficial interest or certifies that no Americans have a beneficial interest.

I believe that the effect of that provision, as it is now drafted, will be to prevent any U.S. broker from accepting any further orders from any kind of offshore or foreign fund, because such a fund could not possibly give either of those certificates.

In many cases, their shares are in bearer form. Even with registered shares, the foreign fund could not possibly know whether any of its shareholders were American residents. They would therefore be prevented from any further trading on U.S. markets.

The same observations would be true of a bank placing an order for its own account or for the account of another corporation. I think that this provision must be limited to deal with situations in which a bank places an order for individual account holders.

I think, furthermore, that some thought should be given to the serious time delay that would be required by the mailing of a certificate. Investors wish to have their orders executed promptly. Under this statute, the order could not be executed for several days until the broker received the certificate. Perhaps the required certification should be given by cable or verbally on the telephone. Otherwise, I think that this provision would effectively close the door on all further investments by Europeans or foreigners in the United States.

Thank you very much.

Senator PROXMIRE. Those are all very constructive suggestions, and I think some of them can be handled in the regulations and some, as you imply in your statement, perhaps should be written into the statute.

You do seem to imply that these changes can happen if the Secretary of the Treasury exercises his discretion without due regard or without any regard for the consequences.

Mr. LEVAL. I think that is right. I would like to point out in addition that the provisions of title Iỹ, the amendment to the Securities and Exchange Act, as now drafted, do not provide for such regulations which could ameliorate the problems that now exist. The prohibition is outright. I think perhaps that might be cured if a provision were made for regulation by the Securities and Exchange Commission.

Senator PROXMIRE. Can you explain the significance of a Lichtenstein trust and describe how it operates ?

Mr. LEVAL. A Lichtenstein trust, Mr. Chairman, is a form of a business entity or investment entity that can be set up under the laws of Lichtenstein where secrecy applies as well as it does in Switzerland. Lichtenstein trusts have been used by investors, both in the United States and in countries all over the world, to further insulate the secrecy of their bank accounts in Switzerland or elsewhere. If I am not content simply to have a bank account which is secret in

a Switzerland, I can establish a secret trust in Lichtenstein and have my money placed in a Swiss bank by the Lichtenstein trust.

Senator PROXMIRE. It is kind of a redundancy that way, like wearing a belt and suspenders both.

Mr. LEVAL. Yes; in case you are worried that the one won't do the job.

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Senator PROXMIRE. How do American citizens place funds in secret foreign bank accounts? Are they solicited or do they take the initiative?

Mr. LEVAL. I think it happens both ways. Some Swiss banks, some more recently formed Swiss banks or newly acquired Swiss banks, have been very aggressive in gaining U.S. funds, and many of their representatives have come to the United States to solicit accounts actively.

Senator PROXMIRE. How do they solicit aggressively?

Mr. LEVAL. Through introductions from one person to another, in business connections; I suppose much the way that business is done by

Ι American brokers.

Senator PROXMIRE. Do they advertise?

Mr. LEVAL. I don't think there has been much public advertising by Swiss banks.

Senator PROXMIRE. How about telephone solicitation on a boilerroom basis?

Mr. LEVAL. I am not aware of any of this, Mr. Chairman.

Senator PROXMIRE. How easy it is for the average citizen to open up a Swiss numbered account?

Mr. LEVAL. If he knows how to go about it and he has enough money to justify the bank going to the trouble of opening the numbered account for him, it is very easy: You merely write to the bank or go to the bank and express your desires.

Senator PROXMIRE. Go to your own bank?

Mr. LEVAL. Go to the Swiss bank where you want to set up a numbered account.

Senator PROXMIRE. Would an American bank do it?

Mr. LEVAL. I would think it would depend on the bank. I know there are American banks which have furnished references which have told someone who wanted such a service performed that if he goes

and Mr. so-and-so at such-and-such a bank, or writes to Mr. so-and-so at this address, it will be accomplished for him. But American banks generally avoid having on their records that they have participated in the setting up of secret accounts for Americans in foreign countries.

Senator PROXMIRE. What is the minimum deposit required for a numbered Swiss account?

Mr. LEVAL. I think this varies from bank to bank. This is a question of how anxious they are to get the business. I think large, well-established banks will not go to the trouble of opening a special numbered account unless the deposit is one that is significantly large, at least $10,000.

Senator PROXMIRE. Do the Swiss banks pay interest on these accounts?

Mr. LEVAL. In the past the Swiss banks paid interest on their accounts, on ordinary checking accounts, but in more recent years the Swiss banks stopped paying interest and in some cases they even charged interest on the opening of a new account.

Senator PROXMIRE. How thoroughly do the Swiss banks check out their depositors? Can anyone put money in a Swiss account, or must he first establish his reputability?

Mr. LEVAL. Some of the most undesirable depositors in the world have money in some Swiss banks. On the other hand, there are banks

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which probably would be reluctant to take depositors whose reputations are bad. There are Swiss banks that are controlled by members of the Mafia and which are maintained for the purpose of being instrumental in the business of organized crime.

Senator PROXMIRE. Do Swiss banks send out monthly statements and, if so, how are they made!

Mr. LEVAL. Swiss banks do send out statements, but many depositors in Swiss banks make arrangements not to have their statements mailed to them. A service that Swiss banks offer to their customers is that all correspondence is maintained for the customer in a special file. When he visits the bank he sees all of his correspondence since his last visit and never receives anything in the mail.

Senator PROXMIRE. How does a depositor establish his identity in communication with his Swiss account? Does he only need his number, or are there other code devices?

Mr. LEVAL. The depositor can establish his identity by either signing his name to a letter or if provisions have been established for that, he can sign the number of his account or he can sign a code word. Any one such device is possible.

Senator PROXMIRE. When a U.S. resident uses a Swiss account for trading in securities, how does he initiate the transaction? Does he generally first contact the Swiss bank, or does he place the order directly with a U.S. broker?

Mr. LEVAL. Ordinarily, a U.S.citizen who had an account in Switzerland would have to place the order through the Swiss bank.

However, some U.S. brokers have arranged together with Swiss banks a mechanism whereby the broker will receive the U.S. citizen's order in New York without maintaining any record of that fact, will know the customer has an acocunt in a Swiss bank which maintains a general account with his firm and will execute the order as if he had received it from the Swiss bank. Since he would communicate many times a day with the Swiss banks, he can indicate on the telephone or on the Telex to the Swiss bank that such an order should be placed with the U.S. broker for the Swiss bank's customer.

Senator PROXMIRE. Is there anything illegal about a broker accepting an order by a U.S. resident on behalf of a Swiss bank?

Mr. LEVAL. There is nothing illegal about it, but if it is done in the manner I have just described, it may be illegal for the broker to accept orders from a person who is not authorized in documentary fashion to give those orders for the Swiss bank and it would be perfectly obvious to the brokers under those circumstances that he was participating in a concealment of an account used for violation of law.

Senator PROXMIRE. When a broker accepts such an order, isn't it rather obvious that he has become a party to some potentially illegal scheme on the part of his customer?

Mr. LEVAL. If he has cooperated in fraud by accepting an order from somebody that is not technically authorized to give it, yes, I would think that would be so. If the arrangement were otherwise; if it were fully disclosed, there would be no reason to suspect it.

Senator PROXMIRE. Can you think of any legitimate reasons why U.S. residents would want to place stock orders through a Swiss account rather than directly through a U.S. broker?

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