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Senator PROXMIRE. Recently a man named Max Orvitz was convicted in New York for violation of the SEC insider rules for the sale of $500 in debentures held in a Swiss bank. Mr. Orvitz' crime was discovered after a package containing $50,000 cash dropped and broke open in a New York post office.

Doesn't the bizarre nature of this case lead you to believe there are countless other transactions going on undetected?

Mr. WILSON. It would indicate that.

It is one of those strange combinations of circumstances that led to his undoing, but it would indicate that. I, myself, am convinced from what I have seen that we don't know really much about how much currency flows back and forth between the United States and Europe.

Senator PROXMIRE. What makes it particularly suspicious to me is when you recognize that $9 billion, as I understand it, of securities in this country were purchased from Switzerland, a little country with a small population, modest incomes, $9 billion purchased, when only $24 billion altogether was purchased from around the world.

This indicates to me there is something going on that is hard to explain on the grounds of ordinary commerce and trade and finance-

Mr. WILSON. I certainly agree with you.

Senator PROXMIRE (continuing). In a big way. In fact, that puts it much too conservatively. There obviously is a great deal of illegal action going on in order to take advantage of these secret bank accounts.

Mr. WILSON. I think there is no question that the pressure of the American income tax system operates so that many American citizens who are, in effect, evading the income tax system, use this as a method of investing their money.

Senator PROXMIRE. Is there any way you could tell us whether these are Mafia types doing this, criminal elements, or does it seem more reasonable that these may well be professional people doctors, lawyers,

executives of various kinds—who are evading tax laws in this way?

Mr. WILSON. The field I am familiar with, and I work in, is the criminal field and the organized crime work is in our division, and I can answer positively that organized crime figures are involved in this and on a rather large scale. The extent of others I have no knowledge of other people who are not in organized crime.

Senator PROXMIRE. Would it seem reasonable that this involves many evaders besides the Cosa Nostra ?

Mr. WILSON. I would think it would.

Senator PROXMIRE. Mr. Seymour, how important is it to your office to have microfilmed checks available in connection with criminal investigations?

Mr. SEYMOUR. I would say it is an indispensable tool of law enforcement.

Senator PROXMIRE. Do you know any cases where copies of checks of less than $500 were important?

Mr. SEYMOUR. I can think of a personal experience when I was part of the team that prosecuted the Frank Costello income tax case back in 1954 where we were able to prove cash expenditures of $18,000 growing out of an investigation of a single microfilmed check in the amount of I think $5.20.

Senator PROXMIRE. An excellent example.

The House bill exempts from the photocopying requirement checks under $500. If this were done, couldn't criminals rather easily evade the attempt of the act by simply writing a series of checks for $499!

Mr. SEYMOUR. I would think that is one way it might be done, although I think probably the experience of law enforcement is that one does not have to be even that devious to think of transactions under a fixed limit that might provide good investigative leads or provide techniques for evasion.

Senator PROXMIRE. Is it your impression that most banks microfilm checks except for the larger ones?

Mr. SEYMOUR. I think that is probably generally true, that the smaller banks tend to microfilm as a matter of course, and it is the larger, high volume banks that have discontinued it.

Senator PROXMIRE. If a large bank does not now microfilm checks, do you think this constitutes a competitive advantage which enables large banks to attract business away from small banks ?

Mr. SEYMOUR. My opinion would be that of an uncertain expert. I think you might ask one of the Treasury executives that question.

Senator PROXMIRE. How easy is it to open a numbered Swiss account? Can anyone do it?

Mr. SEYMOUR. Yes, indeed. We have indications of very active solicitation here in the United States on the most casual basis, sometimes over a drink in a Manhattan apartment.

Senator PROXMIRE. How does that solicitation occur? Mr. SEYMOUR. It can be done by representatives of the banks actually coming here and being introduced to people of means who might be interested in, say, violating margin requirements.

Senator PROXMIRE. They call on the phone like a boiler room operation?

Mr. SEYMOUR. It can be done on the phone, it can be done through the mail, it can be done face to face, and it can be done right here without the depositor ever leaving our shores.

Senator PROXMIRE. How much money is involved in opening an account?

Mr. SEYMOUR. Nominal. I think we have examples of $50.

Senator PROXMIRE. For $50 I could open an account in a Swiss bank today?

Mr. SEYMOUR. Yes.

Senator PROXMIRE. And conceal whatever cash transactions I wish to conceal ?

Mr. SEYMOUR. That is my understanding.

Senator PROXMIRE. How active have some of the Swiss banks been in soliciting accounts ?

Mr. SEYMOUR. I think it really depends on the banks. By and large it tends to be the smaller, agressive banks who are actively soliciting, and from our indication doing so for illegal purposes.

Senator PROXMIRE. The Senate bill goes beyond the House bill by prohibiting U.S. brokers from accepting stock orders from foreign banks unless the foreign bank discloses the party for whom he is acting or certifies he is not acting for a U.S. citizen or resident. How effective would this provision be in curbing violations of our securities laws?

Mr. SEYMOUR. Again, I would suspect that the representatives of the Securities and Exchange Commission could give you a definitive an

a

swer, but speaking from a law enforcement point of view, I can visualize that such requirements would both be of assistance to us in giving us information leading to violations of margin requirements, insider trading, that sort of thing, and also I would think I could conceive that would serve as a self-policing technique by discouraging the use of these foreign banks as hidden conduits and nominees for transactions which are in plain violation of our laws.

Senator PROXMIRE. Based upon your experience, would you estimate that there has been fairly widespread violation of the Federal Reserve Board's margin requirements through the use of foreign lenders?

Mr. SEYMOUR. I hesitate only on the word "widespread." I don't think we have enough information to give you a solid estimate of the full strength of it, but I do know that we have seen enough, repeatedly, to be sure that there is a much larger iceberg beneath the surface than we have been able to find. It certainly is not isolated.

Senator PROXMIRE. Would you estimate that unrestrained margin trading through foreign lenders might have contributed to an unsustainable stock market boom and the subsequent sharp decline?

Mr. SEYMOUR. Again, I think you had better ask other experts, but it is certainly apparent

Senator PROXMIRE. We are all experts in the stock market as we are all experts on politics.

Mr. SEYMOUR. Clearly violations of the margin requirements constitute a factor in speculation on the market. The extent of that factor in light of other factors has to be appraised but plainly the Swiss and other foreign banks have been used for the purpose of speculation on the C.S. exchanges, and have plainly had a deleterious effect.

Senator PROXMIRE. Mr. Wilson, before you leave, I would like to say that I am deeply distressed about this Fitzgerald matter, not just simply because I happen to be involved in it, but because if we are going to get information from honorable and conscientious civil servants, it seems to me that we have to see that they are protected or at least action is taken against those who would persecute and intimidate them.

The law is on the books. This is an administration which has taken great pride in enforcing law and order, which it should, and every administration should. That is the function of the Department of Justice.

If we do not prosecute people in high places, especially in the Defense Department, when there is a prima facie violation, you delay and postpone and fail to bring justice there, I just wonder what confidence we can expect the American public to have in our system of justice.

Mr. WILSON. I can appreciate your concern for that, and I think it is a very valid concern. I can assure you that we will get all the facts in that matter and to the extent the laws permit and the rules and customs of the Justice Department permit, I would like to have a conference with you and discuss with you what I am permitted to discuss with you, and I will look forward to doing that.

, Senator PROXMIRE. Thank you very much. I would appreciate that a great deal. I hope that we can make this matter public as soon as possible. I thank both of you gentlemen for very useful and helpful testimony.

(The full prepared statement of Mr. Seymour follows:)

STATEMENT OF WHITNEY NORTH SEYMOUR, JR., U.S. ATTORNEY,

SOUTHERN DISTRICT OF NEW YORK My name is Whitney North Seymour, Jr., United States Attorney for the Southern District of New York. I am extremely honored to appear before this Committee to share with you the experiences our office has had in attempting to deal with problems of banking secrecy.

Secrecy and subterfuge are the white collar criminal's 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 swindler, 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 account 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 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 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 United States 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” business man'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 securites 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 currenty 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 and Company 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% of the purchase price at a time when the Federal Reserve Board required the payment of between 70% and 80% 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 three million dollars 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 under way 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 record-keeping 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 one million dollars 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."

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.?

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 payments.

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 U.S., 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 respectability, 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.

Senator PROXMIRE. Our next witness is the Chairman of the Securities and Exchange Commission, the Honorable Hamer H. Budge, accompanied by Irving M. Pollack, Director, Division of Trading and Markets.

Mr. Chairman, we are delighted and honored to have you with us. You are an old friend of the committee.

1 United States v. Olin Mathieson Chemical Corporation, 368 F. 2d 525 (2d Cir. 1966).

2 E.g., 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), cert. denied, 383 U.S. $07 (1966) (evasion of income taxes on one million dollars in unreported capital gains in Canadian mining stocks proved chiefly through bank records).

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