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collateralized by the same $200,000 which never leaves the foreign bank. We refer to this as a "plug" loan. The corporation then loans $200,000 of illegally obtained funds to one of its officials, describing the foreign bank loan as the source of this money. Everyone benefits the corporation deducts the interest on its foreign "loan" from its tax returns; the racketeer official deducts the interest he pays the corporation; more significant, he justifies possession of the $200,000 and defeats efforts to prove a net worth tax case. The foreign bank receives interest on money which it retains. The domestic money, illegally obtained, surfaces as clean money to be used in further illegal activities or to penetrate legitimate business.

We see the SEC frustrated in its endeavors to prove securities violations when stock distribution or the transmission of proceeds are channeled through foreign banks. Competent evidence to establish who owns stock-or who sold it-or who was paid for it becomes difficult and often impossible to obtain. It is reasonable to assume that in many cases these devices are employed to violate the antifraud provisions of U.S. securities laws and to evade payment of Federal income taxes.

We are deeply concerned when foreign secrecy laws prevent foreign bankers from introducing foreign bank documents into evidence. We are equally concerned when domestic banks and other domestic financial institutions fail to retain records highly useful to enforcement of the criminal laws-Federal, State, and local. We realize that couriers jet to all parts of the world carrying with them the profits of criminal conspiracies. We need a "handle" on these people by which they can be convicted for failure to declare the funds they carry or, more important, induced to name the principals for whom they work.

Mr. Chairman, in describing these situations which occur on a daily basis I consider that I have supported the need for the type of legislation now before this subcommittee. I would like at this point to make a suggestion on the immunity provision appearing in S. 3678.

That provision is section 211 of title II-Reports of Currency and Foreign Transactions. By its terms it would grant immunity from prosecution "on account of any transaction" concerning which a witness is compelled to testify. S. 30 which passed the Senate on January 23, 1970, is designated the "Organized Crime Control Act of 1969." S. 30 would repeal some 50 immunity statutes now in effect and substitute therefor a single, general immunity statute applicable to court proceedings. The extent of the immunity would be limited to the testimony which was compelled or to leads obtained from it. It would not include a "transaction" involved if the Government could demonstrate its case was based on evidence independent of the compelled testimony. I would suggest therefore the deletion of section 211 from S. 3678 or, in the alternative, the substitution of the type of immunity provision set forth in section 6002 of S. 30.

In my testimony of December 4 before the House Banking and Currency Committee, I discussed at some length the negotiations between our Government and the Swiss Government looking to a treaty of mutual assistance in criminal matters conducted here and in Swit zerland. A working-level draft of the proposed treaty will be considered by representatives of both governments in mid-July and we are

hopeful a meaningful agreement can ultimately be achieved. I must admit, however, that a viable treaty with the Swiss will not provide a total response to the criminal challenge. Other jurisdictions have adopted commercial secrecy laws. From the islands of the Bahamas to the Middle East to Hong Kong we find these laws impeding the search for evidence. We must be certain we do not substitute the bank secrecy system of one area for that of another. Flexibility is required, and I fully endorse the discretion which S. 3678 gives the Secretary of the Treasury to eliminate or modify the reporting of transactions by Americans with foreign financial institutions.

Mr. Chairman, by its unanimous approval of the companion bill to S. 3678 the House of Representatives demonstrated its determination to end the threat to the laws of the United States through the use of the secrecy laws of other nations. I am confident that the hearings before this subcommittee will demonstrate anew the grave problem and will result in logical solutions. Whether the legislation before us can be improved as it relates to recordkeeping and reporting and thus made even more effective, I leave to experts in the field of banking and finance. No one, however, can dispute the objectives of this legislation. Thank you, Mr. Chairman.

Senator PROXMIRE. Thank you very much, Mr. Wilson.

Mr. Seymour, would you want to go ahead with your statement now?

Mr. SEYMOUR. It is up to the pleasure of the chairman.
Senator PROXMIRE. Fine.

Mr. SEYMOUR. Perhaps, Mr. Chairman, I might, for your convenience really, submit my formal written statement on the understanding that it can be adopted as my testimony in chief.

Senator PROXMIRE. Without objection, your statement will be printed in full in the record.

(The full statement appears on p. 71.)

Mr. SEYMOUR. My name is Whitney North Seymour, Jr., U.S. attorney for the southern district of New York. I am extremely honored to appear before this committee to share with you the experience our office has had in attempting to deal with problems of banking secrecy.

Secrecy and subterfuge are the white collar criminals' best friends. The surest invitation to illegal conduct that man can devise is a hidden conduit for transmission of funds safe from the eyes of law enforcement officials. That is exactly what secret foreign bank accounts do. Although such accounts may be used with perfect innocence by some depositors, they are too tempting a lure for the tax evader, the securities swinder, the corrupter of public employees, the fraud and the cheat. The "little tin box" of the 1930's has been replaced by the Swiss bank accounts of the 1970's.

Over the course of several years our office has found a large-scale pattern of evasion of Federal criminal laws by cloaking financial transactions with the secrecy afforded by foreign law. The problem is far from confined to Switzerland. Similar secrecy obtains in Lichtenstein, Panama, the Bahamas, and other jurisdictions, and has been successfully used to carry out numerous violations of law.

Secret foreign accounts have been used in connection with violations of many different Federal statutes. For example, corporate insiders who do not wish to comply with the securities laws, and do not wish

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to report insider trading to the stock exchange or the Securities and Exchange Commission, take advantage of the secrecy afforded by foreign accounts to conceal their transactions.

Americans who wish to circumvent controls against stock market speculation can arrange for dealings through secret accounts to evade the Federal Reserve Board's margin requirements.

The classic use of secret accounts is, of course, for the evasion of income taxes. We have reason to believe that huge amounts, probably running into the many millions of dollars, find their way into secret foreign accounts each year for the purpose of evading U.S. taxes.

Some of this money is from proceeds of illegal transactions, some is from "skimming" of gambling profits, and some is the so-called legitimate businessman's concealment of capital gains or the diversion of funds for phoney sales.

Secret accounts are also used for bribery of public officials. Seven indictments returned in February 1970, in the southern district charge former employees of the military post exchanges with conspiring to subvert the honesty of the exchanges by accepting bribes. The indictments charge that the sales agency which paid the bribes handled part of the money through numbered secret Swiss accounts, with the added precaution of using a paper shredding machine to destroy records of specific transactions.

The indictments also charge that code names were used for the PX buyers to conceal their identities. Corporate financial transactions probably provide the greatest area of misuse of secret banking facilities. A secret foreign bank account provides an ideal vehicle for a corporate insider to buy and sell securities of corporations in which he holds a fiduciary position.

Our office currently has under active investigation the use of a series of secret foreign bank accounts for the illegal purchase of hundreds of thousands of dollars worth of securities of various corporations by an insider using information obtained in his capacity as an officer or director.

We also have evidence of the use of secret Swiss accounts in the allocation of new "hot issues" of stock. We are currently investigating several instances where corporate insiders and underwriters arranged for the sale of hot issues to Swiss banks which actually were acting as nominees for the very same people who had arranged the sales. These fraudulent transactions involve direct violations of the Federal Reserve Board's margin requirements.

A good illustration of the use of secret Swiss bank accounts to violate the margin requirements can be seen in a recent indictment now pending in the southern district of New York against the Weisscredit Bank of Chiasso, Switzerland. The indictment charges a conspiracy between the bank's chief executive officer and the first vice president of the New York brokerage firm of Shearson, Hammill & Co. under which American investors were permitted to purchase securities through the omnibus account of Weisscredit Bank at Shearson, Hammill by posting as little as 20 percent of the purchase price at a time when the Federal Reserve Board required the payment of between 70 percent and 80 percent cash on purchases.

The Weisscredit Bank arrangement was designed to conceal the identity of the American customers and also the margin violations.

The indictment charges that over $3 million of illegal credit was extended for the purchase of securities under this arrangement.

One of the more sophisticated financial intrigues made possible by the use of secret foreign accounts is the takeover of corporate ownership through dummy nominees.

Our office is currently investigating two separate situations involving the use of both Swiss and Bahamian banks for the accumulation of stock prior to a tender offer to avoid the reporting requirements of the securities laws. In one of these situations millions of dollars worth of securities were acquired through secret bank accounts and then used in a subsequent corporate takeover.

As you know, there are negotiations currently underway with the Swiss Government looking toward a treaty which would give limited disclosure of information in certain official investigations. We are hopeful that an agreement may be reached with the Swiss whereby more effective cooperation in criminal cases can be obtained.

But it is important to emphasize that greater assistance from the Swiss alone would not totally resolve the basic problem because of the availability of secret banking facilities in other jurisdictions. The need for further steps to deal with the problem would remain.

The legislation before your subcommittee deals with the need for adequate recordkeeping in domestic financial transactions as well as with the problem of foreign banking secrecy. Treasury witnesses can best advise this subcommittee on precisely what recordkeeping methods place a burden on banks and depositors not commensurate with the prospective benefits to law enforcement.

Even as a prosecutor seeking every iota of relevant information, I recognize that there is a point where too many records can be counterproductive. I would emphasize from my standpoint, however, that it is often only because of the availability of bank accounts that the perpetrators of crime can be identified. This includes not only financial crimes, but other crimes involving illegal businesses which generate cash.

In one case in our office involving illegal secret kickbacks on approximately $1 million of sales of pharmaceuticals financed by foreign aid funds, microfilms of American bank records were of critical importance in uncovering payments to secret accounts representing the kickbacks. (United States v. Olin Mathieson Chemical Corporation, 368 F.2d 525 (2d Cir. 1966).)

Microfilmed bank records have proven equally indispensable in numerous other cases involving the most variegated types of illegal activity, including consumer fraud, false financial statements, and income tax evasion. (For example, United States v. Armantrout, 411 F. 2d 60 (2d Cir. 1969), consumer fraud similar to chain letter in which customers were told they could obtain rugs at no cost but ended up with large payments due to bank; United States v. Cohen, 37 F.R.D. 26, S.D.N.Y. 1965, fraudulent financial statements proved in part by microfilms maintained by factoring agency; United States v. Campbell, 351 F.2d 336 2d Cir. 1965, certiorari denied, 383 U.S. 907 (1966). evasion of income taxes on $1 million in unreported capital gains in Canadian mining stocks proved chiefly through bank records.)

As an assistant U.S. attorney in the mid-1950's, I was a member of the prosecution team that successfully convicted Frank Costello, one of the first organized crime figures sent to jail for income tax evasion.

This conviction, based on the net worth theory, would have been impossible without microfilmed bank records of checks to prove payment.

Mr. Chairman, we are most anxious to cooperate with you in dealing with the constantly expanding threat to the integrity of the enforcement of our laws by the continued shroud of secrecy surrounding foreign bank transactions.

In this modern age of rapid communications, universal air travel, and complex financial relationships, the white-collar criminal has all the advantages. He can conduct operations outside the territorial limits of the United States, can cover his tracks with a maze of legal devices, and can conveniently conceal the fruits of his crimes through secret foreign bank accounts.

The fiber of the Nation depends on equal enforcement of our criminal laws against those who wear the guise of respectablility, while they cheat their fellow countrymen who are conscientiously paying their taxes and conducting themselves as honest citizens. We must have sophisticated laws equal to the challenge of uncovering sophisticated crimes. We cannot settle for less.

Then, Mr. Chairman, let me make a few informal comments, if I may. My testimony today should be in the context of the testimony from the southern district of New York which has previously been submitted by my predecessor, Robert Morgenthau, before the House committee. I think it might be useful if I just remind the committee that Mr. Morgenthau in December of 1968 identified a number of cases that were then pending or under investigation in our district, and then similarly last December, December of 1969, identified such matters. And I have in my statement today tried to bring up to date some of the current activities in our office which were part of that same trend.

Let me just list for you very briefly what the nature of some of those cases are because I think they give the setting of what the committee is considering today.

Among the cases that Mr. Morgenthau identified was one that involved the use of a Lichtenstein trust company in combination with Swiss banks to market a quarter of a million shares of unregistered stock and permitted an escalation in the price of the stock to something like $16 a share, and finally after the profits had been taken it dropped down to a dollar a share.

Another case in which a corporate insider used a Swiss bank account to deal in a quarter of a million dollars in stock in his own company is the Arzi Bank case in which the Arzi Bank became a vehicle for a margin of only 10 percent at the time the Federal Reserve Board was requiring between 70 percent and 80 percent in stock purchases.

Another indictment charges the use of a combination of a Lichtenstein trust company and a Swiss bank account to receive some $3 million in commissions on sales which then became unreported income for tax evasion.

Another example from our district involved the sale of a piece of real property to a Swiss trust, actually by the vendor selling to himself as the vehicle for getting some millions of dollars in clean money which was actually his own money, and then arranging to have the property managed by a Swiss bank and thereby collecting the proceeds on the vendor's own behalf.