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quirement on one class of taxpayers, namely, those using foreign accounts. The justification can only be a dangerous and unfair presumption that those using foreign accounts are suspect and those using domestic accounts are not.

Having followed the hearings before your Committee, we feel that it is unnecessary to elaborate the statement which we have submitted to the House Banking and Currency Committee explaining that the use of foreign bank accounts by U.S. citizens, residing in the United States and abroad, and by U.S. corporations, doing business in the United States and abroad, is overwhelmingly lawful, proper and in pursuit of beneficial economic activities. It is just as unfair to burden these Americans with additional red tape and paperwork in the hope of catching criminals as it would be to impose such burdens on the customer of domestic banks for precisely the same reason.

Any unfairness to this class of U.S. citizen has a secondary discriminatory impact in that recordkeeping requirements not imposed on other taxpayers are likely to drive lawabiding Americans away from foreign financial institutions. The result is to discourage the grow of international banking and to isolate the U.S. economy thereby doing it great harm.

It is urged that S. 3678, or at least the report of your Committee, make it clear that Treasury's disclosure requirements pertaining to foreign accounts, presumably authorized by the Internal Revenue Code, should be limited to disclosure of the existence and identification of foreign accounts, that individual transactions need not be reported and that special records in connection with such accounts need not be kept except as required under existing laws and regulations. 3. Discrimination Between Domestic and International Transactions.

S. 3678, taking all of its provisions together, sets up a system of actual and potential disclosure of international transactions involving money and financing. The purpose is to provide law enforcement agencies with leads to funds held abroad for purposes of crime and evasion of U.S. laws. Faced with a steadily growing internationalization of banking and economic growth, it may well turn out that the Treasury Department has been authorized to gain access to a vast amount of economic data justifiable for such purposes as instituting an exchange control system but totally out of proportion to the objective of enforcing criminal and tax laws. Foreign countries with advanced economies and sophisticated governmental controls have found it impractical and unduly burdensome to government and business to keep close track of all international transactions.

The authority in this bill is broad enough to enable the Treasury Department to limit its regulatory activities to a scope commensurate with the size of the law enforcement problem. It would be helpful if the report of your Committee encouraged them to do just that. Our concern is that pressures resulting from a few well publicized criminal investigations might lead to full utilization of the powers under this bill with the result that the disclosure requirements applied to international transactions would impose such recordkeeping and reporting burdens as to discourage large volumes of international transactions which could be avoided at acceptable cost to the principals by conducting their business along more nationalistic lines. To administer this bill without discouraging international commerce will require skill and restraint by the Treasury Department. Its task could be made easier by explicit recognition of this problem in the report of your Committee.

II. PRIVACY

S. 3678 would authorize the Treasury Department to require an apparently unrestricted degree of disclosure by banks of information about their customers by means of access to records of banks (Sect. 101 and 122) and by means of reports (Sect. 221). These sections appear to be a complete abdication by Congress to the Executive Branch in a highly sensitive area of constitutional and political tradition. The fundamental question posed is whether the Treasury Department and, through the Treasury Department, the various law enforcement, regulatory and national security agencies, should have access, without need for subpoenas, to vast amounts of personal information which is reflected in tens of millions of personal and business bank accounts.

Members of our committee are in constant touch with foreigners banking in the United States and, therefore, are particularly aware of the sensitivity of foreign bank customers to any change in the relative conditions of banking in the United States compared to banking at home or in other international financial centers. If the Federal Government is to have unrestricted and indiscriminate access to information about private affairs from bank records and bank

reports, there is little question, in our judgment, that substantial banking business in the United States which criginates overseas would be transferred to foreign banks able to provide comparable service under conditions assuring better security against disclosure of private affairs to government agencies or others. We would expect American business and financial people to be concerned, but we speak with greater insight about foreign reaction. There is a historical habit of thought by law-abiding corporations and individuals, both in the economically developed and the underdeveloped countries of the free world, that distrusts indiscriminate disclosure of their affairs to public officials of their own or foreign governments. There is legitimate concern that information collected without their knowledge, frequently involving disclosure of other people's affairs as well as their own, may be misused merely because it is taken out of the context of related events.

As investment and trade move across international boundaries, even among the more economically advanced countries, a major influence on the location and flow of funds is the business "climate," as it has come to be called. A significant component of an inhospitable climate is the relative capacity and tendency of government agents to examine private affairs without safeguards for those affected. This is done in some foreign countries through extremes of regulation and through techniques which border on spying, including access to telephone conversations, to international cables and to international mail. Even certain of the economically advanced countries in recent years have seen a decline in their highly valued international centers of finance because their financial institutions have succumbed to the expanding power of a nationalistic central government. The point is not that the U.S. Government is presently in danger of being so characterized, but rather that banking is increasingly mobile and international, and that the security of private affairs is one influence directing the flow of funds.

As a practical matter, experience both here and abroad teaches that unnecessary disclosure can lead to expensive timeconsuming involvement with government agencies, even though the activity is entirely legal. This problem is more serious in some countries than others, but as the regulation of private affairs intensifies throughout the world, the idea that disclosure to governments should be limited to lawful investigations of specific matters is increasing, both in the United States and abroad. This is generally understood and accepted as a way of life by experienced regulatory and revenue-producing agencies in the economically advanced countries. They are not eager for a deluge of information for which they must be responsible.

We believe that the priority to be given to using bank records and reports as a tool of law enforcement must be balanced against the importance of a reasonable degree of protection of private information from disclosure to governments outside of well-established procedures for lawful investigations which are disciplined by the necessity for obtaining judicial or administrative subpoenas specifically authorized by law. The impression may be created by the proposed legislation that it is intended that the Federal Government have access to private information through the banking system in the United States which would greatly expand the fact-finding powers of the Federal Government.

Under present law, government access to information from banks is generally believed to be confined to the purpose of regulating banks and perhaps to developing statistically information which does not disclose private affairs. An anomalous exception is the 1917 Trading With the Enemy Act, which has been relied upon for the largely unsuccessful experiment in obtaining reports (so-called "TCR" reports) of "unusual" transactions from banks, which, as explained by a memorandum to all banks from Secretary Anderson, dated August 3, 1959, are for use in law enforcement. The bill under consideration would frankly identify the purpose of these reports as law enforcement, thereby placing banks in the position of exercising a necessarily poorly informed judgment as to what is "unusual." in the sense of cause for suspecting crime, and of volunteering information about customers with whom they have a fiduciary relationship. The fact that something like this has been going on in a desultory fashion under a statutory authority which obscures the purpose of the TCR reports should not deter a careful look at whether the practice is good for the banking system, fair to the law-abiding, fair to the suspect, consistent with existing law, and sufficiently useful to law enforcement.

To make the privacy point entirely clear, it may reasonably be asked how a public figure would feel about a knock-down drag-out public fight with a hostile administration equipped with easy access to each of the deposits and withdrawals

from the bank (and brokerage firm) of that public figure, or anyone associated with him, over the last 6 years or longer. This use of "information power," enhanced by modern retrieval methods, would be obviously improper, but the invitation implicit in the proposed legislation might overcome any inhibitions in the heat of political battles. The disclosed transactions, it may be assumed, are entirely above criticism when put into context, but the explanations of complex matters have a way of never catching up with the initial publicity. It is respectfully submitted that a loose assumption that future governments will always play fair in crime, politics, national security, business regulation should not be the basis for legislation which puts private bank records into government hands. The complex balance between law enforcement and individual rights is directly raised by this bill and your Committee's intentions should be made clear. Accordingly, it is suggested that the bill include a clear restriction on Treasury's access to information about private accounts with domestic financial institutions to the following circumstances:

If your Committee decides that access should be less restricted, the bill should extinguish claims against banks arising from disclosures pursuant to this legislation and define the relevant responsibilities of banks to those using their services.

III. FOREIGN TRADING IN DOMESTIC SECURITIES

Section 31 (a) of Title IV would impose a certification procedure on foreign financial agencies placing orders in the United States for the purchase and sale of domestic securities in transactions which come under the jurisdiction of the Securities and Exchange Act of 1934. In the opinion of those members of our committee who have had an opportunity to comment to the undersigned, the result of this restriction would be to eliminate most of the orders placed through foreign financial agencies to buy or sell domestic securities. Various witnesses at the hearings before your Committee have represented the volume of such transactions in the billions of dollars. To disturb participation of this magnitude in the securities markets of the United States at any time, but particularly at this time, would obviously have an unsettling and perhaps dangerous impact. It would have equally profound long-term adverse effects on the growth of international investment and financing activities in that part of the world which depends on capital markets.

The reason for this general opinion from those who are close to foreign financial institutions which are vehicles for foreign trading in the United States securities markets is simple: these transactions must be conducted with extreme rapidity and at very low cost. The requirement for certification of any fact, much less facts about the principal behind a particular transaction, would require some degree of investigation and would take some time before a certification could be made in good faith. The compensation to the foreign financial institution handling the transaction would not begin to cover the costs involved in ascertaining the facts and the less tangible cost of taking legal responsibility on such subjects.

The result is likely to be the discouragement of the use of foreign financial facilities not only by U.S. citizens but also by foreign traders in the American securities markets. Coupled with the comparable potential for indirect discrimination against foreign financial institutions contained in Chapter 4 of Title II of this same bill, Title IV greatly increases prospects for this legislation to be interpreted abroad as protection for U.S. financial institutions. If it is impractical because of U.S. regulations for foreign banks and brokers to handle trading orders in U.S. securities markets, it can be anticipated that it will be made impractical for U.S. financial agencies to handle trading orders to be executed on the foreign exchanges. The problem is further compounded by the uncertainties resulting from the inherent inability to enforce reliability on any foreign certification procedure.

It is hoped that less disturbing and more effective ways can be found to achieve the objective of Title IV.

1. Compliance Cost to Banks

IV. MISCELLANEOUS

The Treasury proposals identify substantial new record-keeping requirements and suggest amplified TCR reports. The impact may be greater on foreign-owned banks in the United States than other banks, because the former are primarily concerned with international transactions. The problems posed by a full and literal implementation of the recordkeeping proposals would create a significant increase in the costs of banking, largely in additional recordkeeping. We believe

that these problems can be worked out to preserve the objectives of the bill, provided Treasury has broad enough authority to make practical decisions after the banking industry has fully discovered and communicated its problems to Treasury. Ample notice and opportunity for banks to comment will be necessary. 2. Extraterritorial Effects

Section 203 (f) of the bill identifies "domestic financial institutions" in such a manner as to cover any foreign bank doing business "in any place subject to the jurisdiction of the United States". The hearings and the sponsors indicate an intent to avoid direct regulation of foreign banks. Whether intended or not, it should be readily apparent that any attempt to impose the reporting requirements of Section 221 on foreign banks in order to carry out domestic law enforcement objectives would be unenforceable, except by restricting their business in the United States, a result which would invite protest from abroad and a disturbance of international banking relations on which major U.S. banks depend in their growing overseas activities.

Whatever approach to Chapter 4 of Title II is finally approved by your Committee, reports of foreign accounts should be limited to U.S. citizens and corporations (Section 241 requires reports by foreign corporations doing business in the U.S. and foreigners residing in the U.S.). Foreign corporations doing business in (or resident in) the United States are a rapidly increasing proportion of all customers of foreign banks. Any attempt to bring their foreign activity under U.S. Government scrutiny would be unwise and difficult to enforce. The use of dummy foreign corporations owned by U.S. criminals or tax evaders should be dealt with through the U.S. stockholder. Furthermore, if the foreign corporation is set up for illegal purposes by a U.S. citizen, it may be assumed that it would not engage in business in the United States if the result were to cause its owner to file Treasury reports. There would be no assist to law enforcement to justify the obvious difficulties. Foreign individuals resident in the U.S. are predominantly aspiring immigrants who might be spared any new dimensions in red tape.

V. CONCLUSION

For the reasons set forth above, it is respectfully requested that your Committee take the following steps:

1. Delete Chapter 4 of Title II (Sections 241 and 242) with the explanation that they are superfluous because the Treasury Department has ample authority under the Internal Revenue Code to require disclosure on income tax returns with regard to foreign accounts.

2. Include in your Committee's report on this bill a comment indicating that the objectives of Chapter 4 of Title II are satisfied by the announced plan of the Internal Revenue Service to require identification of foreign accounts on the income tax return forms, and caution against discriminatory recordkeeping requirements imposed on U.S. citizens and corporations owning foreign accounts beyond the requirements of existing regulations.

3. Caution in your Committee report that any reporting or recordkeeping requirements applicable to international transactions and not to domestic transactions be limited to cope with genuine law enforcement needs and not be allowed to develop into a comprehensive source of data on all private international transactions crossing U.S. boundaries.

4. Add a provision restricting access by the Treasury Department, or any other agency of the U.S. Government, to information derived from private accounts with domestic financial institutions to these specific purposes: law enforcement when authorized by a subpoena; regulation of the financial institution; and compilation of statistics when safeguards are provided against identification of private information.

5. Delete Title IV.

6. Remove institutions organized under foreign law from the definition of "domestic financial institution" in Section 203 (f).

7. In the event that Chapter 4 of Title II is retained, delete from Section 241 "or person in the United States and doing business therein" (which refers to foreign citizens and foreign corporations).

On behalf of each member of the committee, we wish to express our appreciation to your Committee and its staff for their courtesy in considering the above views.

Respectfully submitted,

STEUART L. PITTMAN, Counsel for Committee of Foreign-Owned Banks.

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[From the Monthly Economic Letter of the First City National Bank of New York.

June 1970]

WEIGHING THE CONSEQUENCES OF CURRENCY SURVEILLANCE

A bill passed by the House on May 25, after a brief floor debate, would impose controls on a vast variety of movements of funds at home and across national borders, as well as on transactions and relationships with banks abroad. The proposed legislation would have far-reaching consequences for U.S. citizens, foreigners residing in the United States and corporations doing business in the United States and for the standing of the U.S. dollar as the major transactions and reserve currency of the world.

The stated purpose of the proposed legislation is to prevent movements of money and the use of banking facilities, at home or abroad, by those engaged in organized crime, tax fraud and violation of margin requirement and other securities regulations. The aims are commendable. The banking community endorses them fully.

But the surveillance of monetary and banking transactions, at home and internationally, raises constitutional and ethical questions of the same order of gravity as if the Government were to be given the right, at random, to open mail or to listen to telephone conversations. Moreover, the legislation, if enacted, would involve sizable direct and indirect costs and serious inconveniences for the public. Abroad, the controls would, sooner or later, cause doubts among traders, investors and bankers about the attractiveness of the United States as a center to keep working balances, reserves and savings.

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