Mr. LEVAL. There might be many reasons why that would be desirable and perfectly innocent. It would really depend on the circum

stances.

Senator PROXMIRE. Don't you have a pay a double commission if you go through a Swiss bank?"

Mr. LEVAL. You would have to pay a double commission.
Senator PROXMIRE. Why would he want to do that?

Mr. LEVAL. If you had an account which was in Switzerland for bona fide business reasons and you were investing funds temporarily, there might be reason why you would want to invest through the Swiss bank.

Senator PROX MIRE. If this were just a resident here————

Mr. LEVAL. Such a transaction might be very suspicious, and if it were arranged wtih the secret provision for giving the order in an undisclosed fashion, it would be highly suspicious.

Senator PROXMIRE. Would it be fair to say that it is obvious to a Swiss bank that securities orders placed by U.S. residents are probably in connection with some illegal purpose?

Mr. LEVAL. I would think so under the circumstances that I described, yes.

Senator PROXMIRE. Doesn't this make a Swiss bank a knowing participant in an illegal endeavor and destroy the argument that the Swiss banks are merely acting as bankers and have no knowledge of any illegal activity?

Mr. LEVAL. I think it is difficult to generalize. I think there are circumstances in which Swiss banks are clearly on notice that their services are being used by persons in other countries to violate the laws of other countries. There are also circumstances in which the Swiss bank is merely considered a safe depository in countries where the currency is in danger of devaluation or where the possibility of nationalization or something else is feared. I think one would have to examine the circumstances rather closely before generalizing.

Senator PROXMIRE. In those cases would you necessarily get a numbered secret account if you were simply concerned with the devaluation of currency?

Would there be any motivation in doing so?

Mr. LEVAL. All accounts are secret. The number rather than the name is a kind of unusual security that preserves secrecy even from the employees of the bank. A numbered account is not more secret from the outside world than a named account. They are all secret. Senator PROXMIRE. Senator Bennett?

Senator BENNETT. No questions.

(The prepared statement of Mr. Leval follows:)

STATEMENT OF PIERRE N. LEVAL

Mr. Chairman, Members of the Committee: The last ten years of jet travel and continuously growing prosperity have produced many profound changes among the Amercian people. They have produced varieties of sophistication with both good and bad effects. Not long ago even relatively prosperous Americans based their wealth almost exclusively on their salaries, reported all their income (which in any event was withheld), had little experience with stock markets, saw their own country first, and imagined the Swiss banks as a strange and sinister, perhaps mythological, fraternity of international financiers, characterized by the image of the "gnomes of Zurich". Since then, many Americans have made money on the stock market free of withholding, have traveled to Europe, to the Bahamas and the Orient. Many have learned that the exclusive

club of foreign banking, like many exclusive clubs, is easy to enter if you have the price of admission.

I would guess that the number of Americans using secret numbered bank accounts in Switzerland, Nassau, Panama and Hong Kong has multiplied a hundredfold in 20 years, and this growth has been matched by a growing awareness of the varieties of ingenious ways to use such accounts to escape legal obligations. At the same time, the proliferation of legal obligations and restrictions, and of reporting and disclosure requirements, have multiplied the instances in which one can benefit from the practical exemption conferred by a foreign secret account.

There have been changes in the foreign banking community as well. Of course there remain in Switzerland many honest conservative bankers such as brought Switzerland world-wide trust as an international banking capital. Such bankers will not permit their institutions to be used for fraudulent schemes, although they may have little interest in whether or not their customers pay taxes at home. But new breeds of bankers have grown up in Switzerland, as well as in Nassau, Hong Kong and Panama, who are hungry for business and will be happy to perform, behind the protection of the banking secrecy laws, almost any service which their customers require. Some such bankers have developed extremely close ties with U.S. racketeers, loansharks, bookies and with international narcotics traffic. In some instances small banks in Switzerland and elsewhere have even been purchased by U.S. racketeers to serve their requirements.

I would like to describe for you briefly this morning some of the many ways in which foreign bank accounts are currently used by American citizens to escape legal responsibilities.

The most widely resented legal obligation is payment of the income tax. The simplest tax evasion scheme is to receive income in cash without recording it on the books. As unreported cash accumulations grow large enough, they become difficult to hide. Foreign banks have furnished the best of hiding places. At one time Americans practicing this art had to get their cash to Switzerland on their own. But when the demand for some more convenient deposit service became widespread, a mechanism was supplied. Now well organized systems of couriers charging substantial fees regularly carry hundreds of thousands of dollars of unreported cash to foreign banks. Numerous insubstantial banks have grown up in the Bahamas, not because anyone wishes to keep balances there, but because it is easy to deposit cash in such banks only a half an hour from Florida. The deposit will immediately be credited to an account in a safe, substantial bank in Switzerland. Via the Nassau route have traveled untold amounts of unreported profits diverted from under the noses of the Internal Revenue inspectors surveilling the take of the Las Vegas casinos.

Imaginative businessmen, particularly those whose businesses involve transactions abroad, have found numerous more sophisticated devices for concealing their income. A recent investigation concerned some American manufacturers' representatives who had an extremely lucrative business selling on commission the products of American manufacturers to foreign department stores and military PXs. They formed a company in Lichtenstein, where the laws preserve the secrecy of stockholdings, caused a trustworthy Lichtenstein lawyer to be named managing director of the company, and advised all of their U.S. manufacturers that they had subcontracted much of their selling effort to the Lichtenstein company which thereafter was to receive the major share of the selling commissions to which they were entitled. As the Lichtenstein company received its commissions, its managing director and sole employee, who from his law office was simultaneously performing a like service for dozens of other tax evaders, would promptly deposit the commission checks into a coded bank account in Zurich belonging to the American salesmen. In this manner, hundreds of thousands of dollars escaped taxation.

Businesses which buy or sell abroad can escape taxation by opening a foreign bank account and developing with their foreign correspondents a system of double invoicing A United States importer will work out an understanding with his foreign supplier that the supplier's invoices will be overstated by some agreed percentage; the U.S. importer will pay the invoice price, thus overstating his costs for tax purposes, and the foreign supplier will immediately remit the excess to the importer's foreign bank account. A United States exporter will work the same device in reverse. He will be paid in the United States by his foreign purchaser on the basis of an understated invoice which is kept for show to the revenue officials. A true invoice will reflect the additional payments which the foreign purchaser will deposit in the American's foreign bank. Such devices

have been developed with refinement in countries which have severe exchange control restrictions.

Stock market traders often feel that with the brokerage commissions they must pay on the buy and the sell, it is hard enough to make a profit without having to pay taxes as well. An account in a foreign bank offers an ideal solution to the tax problem. It creates some administrative difficulties for day-to-day traders since communications with Europe are slow and expensive and since the foreign bank in a different time zone will be closed during a part of the U.S. trading day.

In recent years many accommodating U.S. brokers have worked out with the Swiss bankers a device for servicing the needs of such a customer. The customer will close his brokeragce house account and open an account in the Swiss bank. The Swiss bank will open a special sub-account in its name with the broker. The customer will continue to call the broker as before to place his market orders, and the broker will execute them. But the brokerage house will not retain any records showing that the transaction is executed for the customers account. The transactions will be entered in the account of the Swiss bank. Since the American broker maintains constant contact with the Swiss banking client either by telex or by telephone, it will be easy to make the customer's order appear to have originated in Switzerland. The customer will then have to pay two commissions, one in the United States and one in Switzerland; but he will have no taxes.

The proliferation of regulations surrounding trading in securities has given rise to many other uses of foreign banks. Among the most familiar of the regulations affecting the securities market is the prohibition of sales of stocks owned by controlling persons of corporations without a prospectus and registration statement filed with the SEC. Registration can be inconvenient, first because it is expensive and second because it may require the public disclosure of facts which the insiders would prefer not to disclose, such as excessive underwriting commissions to a broker, the bad financial condition of the company or even simply the fact that the insiders are dumping the stock of the company.

In several prosecutions brought in recent years by Mr. Morgenthau's office it was found that foreign bank accounts had been used by fraudulent boiler-room operations to pump out worthless stocks to the public without revealing circumstances which would have required registration and would have made the sales impossible. In several instances such operators had purchased the shells of defunct companies, placing the stock in foreign bank accounts; they caused traders to place unreal bids in the "pink sheets" of over-the-counter stock quotations. Salesmen then sold the stock over the telephone to an unsophisticated public at a price based on the "market value" reflected by the "bid" in the pink sheets. The salesmen often promised their customers that the investment would triple within six months. It is not unusual for the boiler room salesmen to receive a one dollar per share commission for sales of worthless shares of stock at $4 or $5. In some instances groups of controlling persons of listed but failing companies have sought to unload their stock in similar fashion. Foreign banks have been used to manipulate the price of the stock traded on the stock market. While selling thousands of shares through boiler rooms over the telephone in a manner that would not immediately affect the price of the shares quoted on the stock exchange, insiders could keep the quoted price high by causing the foreign bank to buy only a few hundred shares on the market. By buying four or five hundred shares a day on the exchange just before the close, the insiders could maintain an artificial price at which to sell many thousands of shares.

In recent years the Securities Exchange Commission and our courts have developed increasingly stringent rules covering stock trading by insiders. It is deemed unfair, and in some cases fraudulent, for an insider to a corporation to buy or sell his company's stock on the basis of information which is not available to the other stockholders or to the public at large. Section 16(b) of the Securities Exchange Act of 1934 prohibits an insider from making any profit from a purchase and sale of the stock of his corporation within a six month period; this rule is designed to prevent unfair profits from use of secret inside information. These restrictions vanish when the insider does his trading through a foreign secret bank account. The bank will place the order in its own name, leaving no record in the United States identifying the holder of the account. The dangers of this device go further than merely permitting an insider to earn illegal profits. For if the insider is in a position of absolute power in the corporation, he can manipulate corporate news and corporate actions so as to create for himself and other directors opprtunities for quick trading profits. He can sell short the day before the Board announces a passed dividend. He can buy before announcing important mineral discoveries. He can almost manufacture at will occasions for trading profits.

The margin requirements of the Federal Reserve Board have created additional inducements to market traders to operate through foreign banks. In order to protect the stability of the market from excessive gyrations produced by speculation on credit, the Federal Reserve Board has tightly restricted the amount of money which banks and brokers may loan for stock purchases. Were it not for these restrictions brokers would often be willing to make considerably larger loans, particularly if by doing so they would increase their immediate commission business. Many brokers have therefore illegally arranged for their customers to open accounts in foreign banks so as to be provided with loans in excess of the margin requirements.

The fast profits to be made in hot issues of new securities have caused abuses of foreign accounts. A broker could open his own secret account in a foreign bank and cause that bank to request allotments of issues which his house brought out. If the issue sold well with a premium in the after-market, he would allot a generous share to the foreign bank. Less successful issues would go to other customers.

The list of laws and regulations which can be circumvented by acting through a secret foreign bank account is extremely long, and grows longer with each new prohibition, obligation, or tax. Many Americans have illegally purchased gold through Swiss banks. The promulgation of the Interest Equalization Tax placed a substantial cost on investments by Americans in foreign securities, which could be avoided if the securities were purchased through a foreign bank. A few years ago some imaginative traders used the Interest Equalization Tax, then at 15%, as a device to earn millions of dollars in fraudulent profits. Through a foreign bank they would purchase foreign securities which were also traded on American exchanges. Such shares were quoted on U.S. markets at two prices-one price for foreign owned shares free of Interest Equalization Tax, and a different price (usually nearly 15% higher) for shares as to which it was certified that the tax had been paid. They would then cause the foreign bank to sell the shares through a U.S. broker, furnishing a false certificate to the effect that the tax on such shares had been paid. The shares would therefore be sold to U.S. persons at a price nearly 15% higher than their purchase price. In effect, they were collecting the Interest Equalization Tax in place of the Government.

Foreign secret bank accounts have also served as a safe haven for money stolen or earned through some illegal activity. A case was discovered recently in which hundreds of thousands of dollars of embezzled welfare funds were diverted to a Swiss bank. Huge profits from narcotics traffic have been hidden in secret bank accounts in many different countries. Illegal kickbacks from exports financed by AID programs have been placed by American manufacturer in Swiss banks for the benefit of corrupt foreign purchasing agents. Corrupt American government officials also have received payoffs in foreign accounts. Prosecution and prevention of such illegal dealings has been extremely difficult. The wall of secrecy surrounding Swiss banks is practically impenetrable. It is true that Swiss law provides for the disclosure of a bank account where it has been used in furtherance of a crime, but the definition of crime for this purpose does not include violations of tax laws or securities regulations; it is limited to the universally recognized common crimes. Furthermore, the use of the secret bank account will often conceal the occurrence of the crime, or at least the identity of the criminal.

The success which Mr. Morgenthau's office achieved in its investigations of criminal misuse of foreign banks resulted in many instances from the discovery of traces left among the records of American banks and brokerage offices. For this reason, I believe that certain provisions of the bill which is before this Committee will serve a useful purpose in the detection of criminal misuse of foreign banks, especially the provisions of Title I.

On the other hand, I respectfully call to the attention of the Committee certain provisions which, in my opinion, go far beyond the need of law enforcement, create administrative obligations on individuals which will be burdensome and unproductive, and delegate a confiscatory power to the Secretary of the Treasury which is so broad that it probably conflicts with the Constitution. These provisions occur primarily in Chapters 3 and 4 of Title II.

Chapter 3 entitled Reports of Exports and Imports of Monetary Instruments, creates very substantial risks of injustice. First, the forfeiture provision of Section 232 seems unduly severe when taken together with reporting requirements which are so broad that countless violations will occur by oversight without intent to break the law. To provide for forfeiture in such instances, if constitutional, will at least cause many harsh injustices. This risks furthermore to

encourage corruption in government officials. Nor are these dangers cured by the authorization to the Secretary in Section 234 to remit forfeitures where he deems just. No standards for remission are provided and there is no assurance that the Secretary's discretion will be wisely or justly administered. The discretion conferred by this Section is so extensive, especially in the context of confiscation of property, as to raise serious doubts of its constitutional validity.

The reporting provisions of Section 231 are so broadly inclusive that they will place unrealistic burdens on private individuals and businesses in a context in which they will serve no law enforcement purpose. As originally conceived in the early drafts of the House Bill (H.R. 15073), this provision was conceived as a weapon against couriers who rendered a service to U.S. tax evaders by transporting large amounts of currency out of the country to tax safety in a foreign secret bank account. The early versions of the bill properly focused on currency since it can be transported without leaving any documentary trace in U.S. banking institutions. Furthermore, a provision requiring a traveller to declare large amounts of currency on his person on leaving the country will not carry a high risk of unintentional violations by innocent persons since his obligation can be easily called to his attention at the border crossing or customs. But the draft passed by the House and proposed in the Senate has gone far beyond this simple early conception. The substitution for "currency" of "monetary instrument" (including checks, notes, bonds and stock), and the inclusion of items sent and received in the mail, will require recurring reports of every kind of innocent everyday international transaction which is fully documented in the books and bank records of American individuals and businesses. Importers buying abroad, manufacturers selling abroad, a father sending money to a son studying abroad, an investor receiving dividends from abroad, all must file reports setting forth the "origin, destination and route of the transportation" of the monetary instrument, and they will be subject to forfeiture as well as jail if they forget to do so. I would suggest that the provision be limited to deal with the evil for which it was conceived, the transportation out of the country of currency. The concern for bearer instruments is not warranted since the purchase of such instruments creates bank records which will be preserved. The forfeiture provision might either be deleted or limited to circumstances in which the failure to disclose is proven to have been in knowing furtherance of a felony. A tax lien might be more appropriate.

Similar comments are applicable to Chapter 4, Section 241 which requires an individual to file a complete report on the occasion of any transaction with any foreign financial agency. This Section was originally designed to require the disclosure of a foreign bank account. Such a requirement would be desirable for the enforcement of tax laws and other laws and would not be unreasonably burdensome, particularly if the disclosure were to be made annually on the income tax return. As passed by the House, however, this Section requires the individual on pain of jail to maintain records or file reports, or both, of every transaction with a foreign financial institution, unless exempted by the Secretary. A family on a summer vacation abroad may be obliged to file such reports every few days, each time they stop at a bank to change travellers checks. An importer may have daily reportable letter-of-credit transactions with foreign banks.

I do not believe that this Section serves any useful law enforcement purpose beyond the requirement of disclosure of a foreign bank account. It creates unrealistic and unreasonable reporting burdens. The authority of the Secretary to make exemptions is not a sufficient protection. The Secretary should not be granted a regulatory authority which goes far beyond desirable limits.

I think an important distinction should be drawn between the imposition of elaborate record-keeping requirements on banks (as under Title I of the Bill) and the imposition of similar requirements on individuals and non-fiduciary businesses. Banks are equipped to record such information; much of their business consists of keeping extensive records, and many banks keep such records as would be required under Title I without even being obligated to do so. To impose such requirements on banks seems neither overburdensome nor unreasonable. On the other hand, individuals and non-fiduciary businesses cannot reasonably or realistically be required to keep records and file reports of countless innocent meaningless transactions. Reporting and recordkeeping obligations should be imposed on them only where important and carefully tailored to serve their purposes in a reasonable way.

May I offer a further comment with respect to the proposed Section 31(a) of the Securities Exchange Act of 1934 as contained in Title IV, Section 401 of the Bill. This Section is designed to require foreign banks which place orders with