portant. We believe that any action which would disrupt this relationship would not be in the public interest. The only way to deal efficiently with financial crimes is for the agencies with jurisdiction over them to work together and use their combined resources as effectively as possible. Instead of dividing the Government's programs, we need more organization and more mutual assistance. If unneeded restrictions are placed on the ability of law enforcement agencies to work with each other, the only group of people who will be organized will be the criminals. We recognize the importance of individual rights, including the right to privacy, as demonstrated by the fact that we conduct our investigations on a non-public basis and in accordance with the highest standards of due process and fair play. At the same time, we firmly believe that the government must reassess its priorities and balance the needs and interests of the general public against a limitation on the right to privacy of those few persons suspected of serious crimes. Our economic system cannot remain strong and viable if those bent on subverting it are able to deprive those responsible for regulating it of information needed in order to carry out their statutory obligations in the limited areas for which they are responsible. ATTACHMENT A June 25, 1964. To: All regional administrators, branch officers, all office heads and branch chiefs. Today at a hearing before the Senate Appropriations Committee a number of questions were raised concerning the use of income tax returns by the Commission. Without specifically criticizing the Commission, the Committee did express concern about possible misuse of returns by enforcement and other agencies. Although we have had no instances of abuse, in view of the Committee's concern, I thought it advisable to restate our existing procedures to insure that proper control is exercised over requests for income tax returns and that proper security measures are exercised to insure non-disclosure of returns in our possession. As you know, under present procedures, requests for income tax returns are forwarded from the regional and branch offices and from branch chiefs in the Division for submission to the Chairman's office. The Chairman must then, under Treasury Department regulations, make a formal request to the Commissioner of Internal Revenue for a copy of the return. In this process, we depend upon the Regional Administrators, Office Heads, and Branch Chiefs to assure that there is a reasonable basis for the request; namely, that the information in the return is reasonably necessary for proof of violations of the Federal securities laws. I think that particular care should be exercised up and down the line to insure that requests for income tax returns are evaluated in light of this test and supervisors should be convinced of both their relevance and necessity for purposes of the investigation. Once having obtained returns, extreme care should be exercised to treat them as confidential documents. Appropriate measures should be taken to protect the files containing these returns to prevent disclosure to persons other than those concerned with the particular investigation. Adherence to these cautionary measures will help to preserve our existing record of proper use of the returns and prevent any complaints of abuse in this area. ATTACHMENT B November 9, 1965. To: All division directors, office heads and Regional Administrators. As you are aware, pursuant to regulations of the Internal Revenue Service, we have made use of tax returns in connection with our enforcement program. They have been of great assistance to us. To insure their continued availability, it is important that we follow strict controls over the obtaining and use of such returns. The purpose of this memorandum is to reiterate and again specify the procedures in this regard. The following standards should be followed in requesting returns: 1. Requests for returns should be made only when necessary and only when the information sought is material to our inquiry; 2. The subjects of such returns should be persons who are participants or who have a material connection with the particular subject matter under inquiry; 3. The years requested should be pertinent to the scope of the inquiry; 4. Repeated requests involving the same persons should be avoided; and 5. If the return is for use in a pending criminal case, it is requested that the return be obtained by the United States Attorney who is charged with the prosecution of the case. PROCEDURES FOR OBTAINING RETURNS 1. Each request must be reviewed and approved by a senior official of the requesting Office or Division. 2. Regional Office requests should be forwarded to the Division of Trading and Markets. 3. All requests must be prepared for the signature of the Chairman. When forwarded to the Chairman's Office, a copy of each request must bear the legend "Approved" and must be initialed by the senior official to indicate his review and approval of the request as being in conformity with this memorandum. CARE AND CUSTODY OF RETURNS It is the responsibility of the receiving Office or Division to insure that: (1) The returns are properly retained in the investigative files; (2) they are made available only to those members of the staff who are directly involved in the investigation or in related matters; and (3) persons having access to returns should be cautioned as to the confidentiality of the information contained therein and as to the penalty provisions of section 7213 of the Internal Revenue Code and section 1905, Title 18, U.S.C. regarding unauthorized disclosure of such information. You are reminded that these standards represent the least that is required in connection with the use of returns. I cannot urge you too strongly to use the utmost judgment and discretion in all cases. It is only in this way that we can protect all persons involved. To: All Regional Offices. ATTACHMENT C March 22, 1967. From: Division of Trading and Markets. Subject: Income tax returns. It has come to our attention that some field offices in requesting income tax returns are needlessly specifying that they receive certified copies of the returns. This only delays action upon your request. We, therefore, urge that you request "certified" income tax returns in only those instances where formal use of them is planned. In all other instances ordinary copies of the returns should be sufficient. Samples of the form income tax letters now in use are enclosed. You will observe that one of the forms covers requests for "certified" copies and the other for ordinary copies. In making your request please make sure the proper form is being used. Of course, in determining whether income tax returns should be requested, their appropriate use and the care that must be given them, we direct your attention to Chairman Cohen's memorandum to all field offices of November 9, 1965, a copy of which is attached. Attachment. SHELDON S. COHEN, SECURITIES AND EXCHANGE COMMISSION, Commissioner, Internal Revenue Service, Washington, D.C. DEAR SIR: In connection with an official investigation involving possible violations of the Federal securities laws, it is requested that we be furnished with copies of the income tax returns listed below. It is requested that such returns be transmitted directly to: If further information is required concerning this matter, your staff may make direct contact with that office. Mr. ROSENTHAL. Did the SEC ever make a request of IRS for information regarding foreign accounts maintained by corporate directors or officers that was rejected? I want to restate the same question Mr. Mezvinsky asked. Have you had absolutely 100-percent cooperation? Mr. SPORKIN. I do not recall ever being turned down. The requests are sometimes slow, but that is bureaucracy. I do not think we have ever been turned down by IRS on any matter. I think their cooperation has been super. We would like to keep it that way. Mr. ROSENTHAL. Are you comfortable in your relationship with IRS? Mr. SPORKIN. Yes. Mr. ROSENTHAL. Thank you both very much. Our next witness is the Honorable David Macdonald, the Assistant Secretary of the Treasury. STATEMENT OF DAVID R. MACDONALD, ASSISTANT SECRETARY OF THE TREASURY, ENFORCEMENT, OPERATIONS AND TARIFF AFFAIRS; ACCOMPANIED BY JAMES J. FEATHERSTONE, DEPUTY ASSISTANT SECRETARY, ENFORCEMENT; AND ROBERT J. STANKEY, JR., ASSISTANT TO THE DIRECTOR, FINANCIAL CRIMES AND FRAUDS, OFFICE OF LAW ENFORCEMENT Mr. MACDONALD. First, I would like to introduce, on my right, Jim Featherstone, Deputy Assistant Secretary for Enforcement in the Department and, on my left, Robert Stankey, who is on our enforcement staff and is the man in charge of coordinating activities under the Bank Secrecy Act. I would like to thank you, Mr. Chairman and the subcommittee, for the opportunity to testify today concerning the history and implementation of the Bank Secrecy Act. This act has played a key, but unobtrusive, role in law enforcement activities directed against tax evasion, political and commercial corruption, and other white collar crime. We are particularly indebted to you, Mr. Chairman, and to the subcommittee and its staff, for sharing with us the results of your indepth analysis of the administration of the act. As a result of that analysis, we have already requested the IRS and the U.S. Customs Service to take actions which we feel will substantially increase the effectiveness of certain of the Treasury regulations that were issued to implement the act. While we understand that these hearings are primarily concerned with the use of secret foreign financial accounts, we would like to present some general background information which led to the enactment of the current law and its legislative history. We will then concentrate on the foreign bank account issue. Prior to the introduction in 1969 of legislation which was to be enacted as Public Law 91-508, there was consensus within the law enforcement community that foreign financial facilities were being used to shield violations of U.S. law. Testimony before the House Banking and Currency Committee in 1969 by the former Commissioner of the IRS indicates that agency's particular concern that defects in the law as it existed at that time be remedied. Stressing the corrosive effect of hidden foreign assets on the concept of voluntary compliance upon which our revenue system is based, former Commissioner Thrower requested legislation which would insure failure to those who would seek avoidance of tax liability through such tactics. Three techniques were cited in those hearings: The use of foreign bank accounts as repositories for income that was not reported for tax purposes. Since U.S. investigators rarely have access to them, such accounts can be used very much like a safe deposit box. However, the funds on deposit in a foreign bank can usually be invested through the bank and earn additional untaxed income without disturbing the anonymity of the depositor. Second, the loan of money that has been deposited with a foreign bank back to the U.S. depositor without disclosing the original source of the funds. This permits the U.S. taxpayer not only to use his untaxed funds, but to take an interest deduction as well. Third, the use of foreign banks to handle securities transactions, frequently through U.S. brokers. Some of those transactions are for the purpose of concealing dividend income and capital gains; others are used to facilitate the violation of the margin limitations on security purchases. Many shortcomings in the law were isolated in the hearing process. Among these were: One, the absence of domestic bank records essential to connect the U.S. criminal to international currency transactions made through the financial institution; Second, the absence of legal authority to detect transactions in currency by courier; Third, the existence of unfavorable admissibility rules governing evidence secured through informants or foreign governments. In effect, our ability to obtain information concerning the deposit of funds in foreign bank accounts was quite limited. And course, once money was deposited in foreign banks governed by secrecy laws, there was little likelihood that information concerning it would surface. Congress attempted to alleviate these problems through passage of the Foreign Bank Secrecy Act. Legislation was initially spurred by concern over the use, by white collar and organized criminals and others, of secret foreign bank accounts in order to evade income taxes and hide the fruits of their illegal activity. This legislation, as originally introduced, was quite ambitious. The conference committee bill which was enacted into law required: One, banks and other financial institutions must maintain records that the Secretary has determined have a high degree of usefulness in criminal, tax, or regulatory investigation. Two, banks and other financial institutions must report to the Secretary transactions involving U.S. currency or other monetary instruments as the Secretary may require. Three, with stated limited exceptions, the international transportation of currency and other monetary instruments in an amount in excess of $5,000 must be reported to the Secretary as he may require. Fourth, the Secretary must require by regulation, persons, U.S. citizens, and resident aliens to maintain records or file reports, or both, disclosing certain details of their accounts or transactions with a foreign financial agency. Fifth, civil and criminal sanctions are provided for most violations. An exception was made for certain recordkeeping violation by federally insured financial institutions. Regulations issued by the Treasury in 1972 to implement the legislation's mandate with respect to recordkeeping, reporting, and compliance are found in part 103 of title 31 of the Code of Federal Regulations. In part, they impose on financial institutions the following requirements: The keeping of records necessary to reconstruct a checking account and to furnish an audit trail, including, but not limited to, all checks in excess of $100 and all incoming funds and credit from foreign sources. The reporting to the IRS of any unusual domestic currency transactions in excess of $10,000, and to Customs the international transportation of currency and monetary instruments in sums exceeding $5,000. Various Federal agencies, including the Internal Revenue Service, are charged with the enforcement of the act under the coordination of my office-coordination which is, incidentally, expanding at the present time in response, in part, to inquiries inspired by this subcommittee. The IRS is authorized by the act and required by the implementing regulations to place on Federal income tax returns questions relating to foreign financial accounts. One of the principal purposes of the regulations issued was to discourage the use of secret foreign bank accounts for illegal purposes by making the ownership of an unreported foreign bank account a crime in itself. In addition, the failure to report a foreign account used to further another violation might also be cited as indication of the willfulness of that violation. This would be especially true in tax cases. Finally, it was intended that the information obtained as a result of the regulations would be compared with other related information and, in some instances, be used as the basis for IRS investigations. In 1970 the IRS had a substantial amount of information concerning the ownership of foreign bank accounts by U.S. citizens. I understand that the Postal Service, with the approval of the Treasury Department, had conducted mail watches in 1968 and 1969 to assist the IRS in identifying those persons in the United States who had Swiss bank accounts and were using them to evade U.S. taxes. At the time the Bank Secrecy Act was being considered for enactment the IRS had another such survey in the planning stage. It was intended that the information gathered from the mail surveys would |