For these reasons, which will now be spelled out more fully, ways must be found not to infringe-for the sake of devising yet another means of combating criminal activity-the fundamental rights of individual privacy and freedom from search, seizure and self-incrimination. Such a course would be tantamount to throwing out the baby with bath water. CONTROLS AS ENVISAGED In the Senate, a subcommittee of the Banking and Currency Committee will hold hearings, beginning June 8, on a bill presented last April and containing provisions similar to those of the House bill but going beyond it in two major ways that will be summed up below. The Treasury believes that the proposed legislation can be improved to achieve its objectives without giving rise to undue cost and administrative burdens and without endangering the traditional freedoms of American life. The House bill empowers the Treasury to require banks and certain other financial institutions and businesses to maintain records of checks and evidence of identity of individuals, other than the account holders, who make deposits and withdrawals. The Treasury could secure this information, for various law enforcement purposes, through existing legal processes. Furthermore, the bill empowers the Treasury to obtain-without subpoena or other legal process or reference to any crime or investigation-a vast amount of private information now reflected in tens of billions of personal and business banking transactions. Domestically, the Treasury, and through the Treasury the various regulatory and other agencies, would obtain from banks and other financial institutions and from persons dealing with them-reports of payment, receipt or transfer of U.S. currency and other monetary instruments. Internationally, reports would be required on all movements of U.S. and foreign currencies, or other monetary instruments, into or out of the country when they exceed $5,000 or equivalent on any one occasion, or $10,000 in any one year. The bill also requires disclosures of relationships and transactions with banks abroad. The Senate bill adds new provisions applicable to securities transactions involving foreign financial agencies. First, it bars U.S. brokers, banks and others from effecting transactions in U.S. securities on behalf of a foreign bank or broker unless the foreign bank or broker discloses the person for whom it is acting, or certifies that it is not acting for a U.S. citizen or resident. Second, it requires U.S. citizens or residents who place stock orders through foreign banks or brokers to give the foreign bank or broker permission to disclose the person's identity to the U.S. broker or bank with whom the transaction is ultimately effected. The Treasury proposes to amend the Internal Revenue Code to provide for "rebuttable presumptions" that U.S. citizens, residents and corporations engaging in certain international transactions would be deemed to receive untaxed income unless taxpayers provided sufficient information and records to the contrary. Under existing authority, the Treasury will, beginning with next year's tax returns, require all U.S. citizens, residents and certain other persons doing business in the United States to identify their direct and indirect interests in foreign bank accounts. INFRINGEMENT OF INDIVIDUAL PRIVACY The concern over violations of U.S. laws, including the tax laws, is justifiable. But inroads on the individual privacy of law-abiding citizens give rise to deep concern. Notwithstanding the widespread impression that the proposed controls would be applicable only to relationships and transactions with foreign banks, the truth of the matter is that they would cover a vast variety of domestic transactions. In American society today, the right of individual privacy is by no means absolute. For example, we accept filing tax returns that contain private information. But it is one thing to pay taxes, and quite a different thing to report deposits to or withdrawals from demand and savings accounts. The Treasury recommended that the reporting requirements be limited to transactions likely to have “a high degree of usefulness in criminal, tax or regulatory investigations or proceedings"; this recommendation, however, was not wholly accepted by the House Committee on Banking and Currency and the bill, as it stands, makes it mandatory for reports to be submitted on any domestic currency transactions without limitation. Such a breach of respect for, or indifference to, individual privacy would threaten to undermine the right of property. There is also much misunderstanding about the notion that bank records in the United States are "open" while those in a country like Switzerland are "secret." In the United States, as in all countries that respect individual freedom, bank records are private. U.S. banks, as a matter of common law, are liable to their customers for damages if, without consent or proper legal compulsion. they disclose information about the accounts of their customers. The image of the Swiss banks as veiled in secrecy for the sake of criminals and tax evaders is strikingly lacking in objectivity. It overlooks the fact that, in Swiss criminal procedure, a bank cannot refuse to release information-a duty that also applies to third countries-provided the offense for which a foreign authority seeks Swiss legal assistance also punishable in Switzerland. This is no different than the situation in the United States, for any effort by foreign law enforcement agencies to obtain records in a U.S. bank would be rejected in the absence of a subpoena issued by a court of competent jurisdiction in the United States. In the Swiss view, tax matters and currency controls of foreign countries are regarded as of no concern to Swiss justice. It is the task of each individual nation to create for itself the legal order, political institutions and fiscal and monetary conditions that will induce confidence in its citizens that their private property will not be eroded by inflation or expropriated without genuine compensation. BURDENS ON THE PUBLIC Currency controls would involve not only intangible costs but also many tangible burdens on the American public. First of all, the contemplated legislation would impose record-keeping requirements-including massive photocopying of checks-substantially beyond existing banking practice. The numbers of checks flowing through the banking system is projected to reach about 23 billion this year. It is true that the House Committee bill (but not the Committee's Chairman) would exclude from the photocopying requirements domestic (but not foreign) financial transactions involving less than $500; but, even so, the end-result would be mounds of microfilm and paper. The specific records buried in these mounds would have to be retrieved whenever needed; and the systems of retrieval suitable for currency-control purposes would have to cut through the present systems geared to the requirements of the banks' own business and that of their customers. All of this would result in sizable increases in banking costs and charges to individuals and businesses engaged in legitimate trade. Furthermore, the photocopying, record-keeping and reporting requirements— superimposed upon the tightly scheduled and highly automated check collection processes-would inevitably slow down the flow of funds. The controls would thus run counter to current persistent efforts to make funds available to the payee at the earliest possible moment. It may be argued that these technical difficulties, inconveniences and costs would be quite acceptable if currency controls could effectively help in detecting and prosecuting criminals and tax evaders. The difficulty with this contention is, of course, that dishonest people are masters in avoiding or circumventing regulatory procedures or in conducting transactions in ways that leave no trail. WEAKENING CONFIDENCE ABROAD At stake is not only the right of Americans to conduct their business and monetary affairs in privacy but also the future of the dollar as the major currency in which businessmen, investors and bankers outside the United States effect payments and keep parts of their working balances, reserves and savings. Banking is increasingly international and mobile. The flow of funds is influenced by the legal and regulatory climate in various centers. It is possible that foreigners would hesitate to keep deposits or securities in a country that fails to provide reasonable protection against indiscriminate disclosure of private information. They know from experience that controls, more often than not, beget more controls, and might regard the type of currency surveillance envisaged by the bills now pending in Congress as a beginning of exchange restrictions. Furthermore, the proposed legislation would remain on the books permanently-not just provide a framework for emergency measures that could be lifted by administrative action when they became unnecessary. All this could induce individuals and corporations abroad to consider alternative methods of holding working balances, reserves and savings, including portfolio investments in the United States. Private individuals, banks and other businesses outside the United States maintain close to $30 billion of deposits and other short-term assets in U.S. banks. This figure includes accounts owned by U.S. citizens and corporations residing or doing business abroad. Other accounts are held by foreign nationals and corporations. If only a part of this $30 billion pool of dollar funds were to be transferred from banks in the United States to banks abroad-banks able to provide comparable services under conditions assuring better security against indiscriminate disclosure of private banking transactions to government agencies the result might well be a reshuffling of funds that would disturb sensitive money and capital markets. Sooner or later, a lessening of confidence might well induce private holders to convert some of their short-term dollars into other currencies. In addition, foreign nations are also holding some $30 billion in U.S. corporate stocks and long-term securities. If only a part of the $60 billion total of foreign-held shortand long-term assets were withdrawn, such conversions would lead to a buildup of dollars in the hands of foreign governments and central banks, which already hold dollar reserves in excess of $13 billion. The use of the dollar as a reserve currency is predicated on its use as a vehicle for private transactions. The ability to use and invest dollars freely is an essential and vital element in international trade and investment. As the U.S. Treasury has emphasized : The overwhelming bulk of the rapidly growing volume of international transactions by Americans and foreigners alike are not only legitimate business and personal transactions, but serve the larger interests of the United States in effective monetary arrangements and freely flowing trade and payments. STATEMENT OF S. DAVIDSON HERRON, JR., FINANCIAL VICE PRESIDENT, The following is a brief statement of the position of INA Corporation on the subject of Senate Bill S. 3678, dealing with financial record keeping and reports of currency and foreign transactions. INA Corporation is perhaps uniquely affected by this bill before your committee; while we are not a banking institution, our corporate family influences a number of the other financial institutions enumerated in the bill, and directly affected by its provisions. Our subsidiaries include a registered broker-dealer, an investment banker, several insurance companies, and other businesses performing related functions. At the outset, I would like to state that INA Corporation concurs in the expressed purposes of this proposed legislation, and is anxious to cooperate in the formation of an efficient and effective process for the accomplishment of those purposes. We fully appreciate the difficulty of structuring a mechanism which will facilitate the detection and prosecution of fraudulent and illegal use of financial institutions and which, at the same time, will not impose an impediment on the free flow of domestic and international commerce. We concur in that testimony before the House Banking and Currency Committee, and other testimony before your committee, supporting the need for fairly broad discretionary powers for the Secretary of the Treasury in order to effect the purposes of such legislation. We also believe that these broad and extraordinary powers should be conferred with an explicit purpose, upon a showing of necessity, and with adequate guidelines to indicate the legislative intent in conferring such powers. In the fields of investment banking and securities broker-dealerships, our views are substantially in accord with those of other institutions and regulatory associations and agencies in these fields. Testimony of other witnesses has illus trated that, under certain very special circumstances, such institutions may be used to execute and to conceal illegal and fraudulent monetary transactions. We presume that, in the execution of his extraordinary powers, the Secretary of the Treasury would confine himself to those specific practices and instances which are known to be used for such purposes, or which are likely to be used for such purposes, and where the ordinary record keeping and other business practices do not accommodate detection and prosecution We are particularly concerned with the extension of this proposed legislation to include insurance companies. Throughout the testimony on the House side, and in the testimony thus far before this committee, we find no indication that insurance companies have been used for such illegal purposes, nor even a hypothetical example of how they might be used. Furthermore, there has been no indication to date that the record-keeping practices of the insurance industry impede criminal investigation or prosecution. The history of this legislation to date would give the Secretary absolutely no guidelines relating to the insurance industry, and provide no indication as to what records should be kept, or what reports should be required. Insurance Company of North America is one of the oldest and largest insurance companies in the United States. It has historically been an international insurer, operating throughout the world through foreign branches of the U.S. corporation and through foreign subsidiaries. With our special knowledge of this field, and with our understanding of the purposes of this legislation, we can find no reason why insurance companies should be included among the other financial institutions enumerated in this proposed legislation, and no reason why insurance transactions should be included under the record-keeping requirements. The inclusion of insurance companies creates ambiguities in the bill. For example, the authority of the Secretary under Title I to require maintenance of records extends to persons engaged in the business of transferring funds or credits domestically or internationally. In the absence of an exclusion, it is not clear whether this authority extends to insurance companies. Furthermore, there is no showing that the records customarily kept by insurance companies will not accommodate criminal investigation and prosecution. Section 122 authorizes the Secretary to require uninsured institutions to make reports to the Secretary regarding the ownership, control or management of such institutions. Any such requirement in the case of insurance companies would duplicate existing laws and regulations regarding the regulation of ownership and control of insurance companies. The monetary transactions of insurance companies are ordinarily conducted through banking institutions. Application of the provisions of this legislation to both the insurance companies involved, and to the banking institutions processing their transactions, would result in wasteful duplication. The addition of insurance companies to the proposed legislation is without any public background or legislative history. We respectfully propose that insurance companies be deleted from the definition of "financial institution" in Title II and that insurance companies be exempted from the record keeping and reporting requirements of the proposed legislation. If this proposal requires further support, it is respectfully suggested that additional hearings be scheduled to give the insurance industry and insurance regulatory agencies an opportunity to present their views. I would like to reiterate our desire to contribute to the development of legislation appropriately directed to the express purposes of this bill. We would be happy to respond to any request by the committee or its staff for additional information. あ INDEPENDENT BROKER DEALERS' TRADE ASSOCIATION, Senator WILLIAM PROXMIRE, Washington, D.C. Springfield, Mass., June 12, 1970. DEAR SENATOR PROXMIRE: While our organization represents only about ten percent of the registered securities dealers, they are small businessmen and are the first persons injured and the last to recover from any diminution in securities trading volume, any reduction in sales compensation, any lowering of underwriters compensation, etc. Therefore we have a serious and continuing interest in any action, private or public, which threatens to adversely affect the depth, continuity and liquidity of our securities markets, both listed and OTC. We think it would be a serious mistake for Congress to enact the proposed amendment to Section 7(a) of the Securities Exchange Act of 1934, which would apparently stop American investors, American borrowers, American brokers, and foreign lenders and borrowers from obtaining credit to finance the purchase and sale of securities from foreign banks or other sources on more favorable terms than those permitted by U.S. margin requirements promulgated by the Federal Reserve Board. This will obviously stop a lot of trading in American securities, and have a ripple effect exerting downward pressure on securities prices and the volume of trading. As we understand it, Section 7 authorizes the Federal Reserve Board only to establish margin requirements to prevent "excessive" speculation through the use of credit to finance securities transactions. We believe that domestic investors should be protected from the speculative fever, and securities markets should be protected from the destabilizing effect of speculation through a reasonable application of margin requirements. However, the proposed amendment to Section 7, is wholly unrealistic. It will only deny to American borrowers the right to use more favorable foreign credit, but foreign borrowers, individual and corporate, can continue to speculate in American securities, and to the extent that more liberal foreign credit destabilizes American securities markets, the situation would be unchanged. The only way to meet this problem would be to prohibit foreigners from investing in American securities in U.S. securities markets. This would of course violate our national policy of encouraging international trade, the free flow of capital, and would shut off the inflow of capital affecting our balance of payments, etc. We urge you to eliminate the proposed amendment of Section 7 of the 1934 Act from this legislation, because it denies to Americans the right to do business abroad under foreign laws in the securities field, while American shippers, manufacturers and others are permitted to compete by seeking out more favorable financing terms. More importantly, we think it can not achieve its purpose, and any law aimed at meeting a real problem that will fail to solve the problem should not be passed. It is simply a misguided grandstand gesture, and will only infringe on the laws of foreign nations and cause retaliation. Will you please include our comments in the record, and we hope your staff will consider our thoughts seriously in working on these bills. Sincerely yours, GENTLEMEN: It is hereby requested that the enclosed opinion in Summers v. Surety Savings and Loan Association, Court of Appeal of the State of California, Second Appellate District, Division Two, 2d Civ No. 34156, 1969, be made a part of the record in the hearings on secret bank accounts. It is the view of our membership that so long as the law as announced by now Chief Justice of the California Supreme Court, Donald Wright, in the within decision, then there is a real reason for your committee to do nothing regarding the secret Swiss Bank Account situation. While it would seem that a Citizen ought to be able to rely on the integrity of his own courts to protect his privacy, this decision speaks for itself, when it styles a malicious disclosure of the contents of a bank account an inocuous (sic) action, page 8, line 11. Let this letter also be spread into the record. Sincerely yours, JERRY B. RISELEY, Chairman, National League for Privacy in Bank Accounts. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, SECOND APPELLATE DISTRICT, DIVISION TWo 2D CIV. NO. 34156 ELEANOR ANN SUMMERS, PLAINTIFF AND APPELLANT, VS. SURETY SAVINGS AND LOAN ASSOCIATION, A SAVINGS AND LOAN ASSOCIATION AND JAMES B. JOHNSTON, DEFENDANTS AND RESPONDENTS Appeal from a judgment of the Superior Court of Los Angeles County. William H. Rosenthal, Judge. Affirmed. Jerry B. Riseley, for Plaintiff and Appellant. |