Securities brokers under the supervision of the SEC have been subject to recordkeeping regulations for many years. The Treasury regulations, however, added the requirement that brokers obtain a signature card or similar document establishing trading authority over an account and make a reasonable effort to obtain a Social Security number for each account.

Reporting

1. Financial institutions are required to report to the IRS any unusual domestic currency transaction in excess of $10,000. This is only a modification of a similar requirement that was in effect for more than 25 years until it was repealed by the new regulations. The previous regulations required banks to report any unusual customer transaction involving more than $2,500. This requirement was challenged in the courts and the Secretary was prohibited from enforcing it until May, 1974.

2. Except for certain shipments made by banks, the international transportation of currency and certain other monetary instruments in excess of $5,000 are required to be reported to the Customs Service. As a result of the litigation referred to above, Treasury was prohibited from enforcing this provision until September, 1972.

3. The Act and regulations provided additional legal authority for placing the foreign financial accounts question on Federal income tax returns. They also required that certain records of such an account be maintained in the U.S. and provided severe criminal penalties for willful failure to report an account or to maintain the required records pertaining to it.

Compliance responsibilities

Sections 128 and 205 of the Act, which gave the Secretary the responsibility for assuring compliance, also gave him authority to delegate such responsibility to the appropriate bank supervisory agency or other supervisory agency.

In accordance with that authority, the responsibility for assuring compliance with the requirements of the regulations has been delegated as follows:

1. To the Comptroller of the Currency, with respect to national banks and banks in the District of Columbia;

2. To the Board of Governors of the Federal Reserve System, with respect to State bank members of the Federal Reserve System;

3. To the Federal Home Loan Bank Board, with respect to insured building and loan associations, and insured institutions as defined in section 401 of the National Housing Act;

4. To the Administrator of the National Credit Union Administration, with respect to Federal credit unions;

5. To the Federal Deposit Insurance Corporation, with respect to all other banks except agents of foreign banks which agents are not supervised by State or Federal bank supervisory authorities;

6. To the Securities and Exchange Commission, with respect to brokers and dealers in securities;

7. To the Commissioner of Customs with respect to reports of transportation of currency or monetary instruments and forfeiture of currency or monetary instruments;

8. To the Commissioner of Internal Revenue except as otherwise specified. This means, in effect, that the IRS has the responsibility for enforcement of those sections requiring persons who have foreign bank accounts to report them and to keep records pertaining to them, and those sections requiring financial institutions to report large and unusual currency transactions, as well as a responsibility to make certain that dealers in foreign exchange, transmitters - of funds, unsupervised or secret agents of foreign banks, and similar financial institutions are complying with the recordkeeping provisions of the regulations.

Overall responsibility for coordinating the procedures and efforts of the agencies listed above and for assuring compliance with the regulations has been delegated to my office.

The regulations were drafted under the supervision of a Treasury Policy Committee, chaired by the General Counsel of the Treasury Department, that also included the Commissioner of Internal Revenue, the Comptroller of the Currency, the Assistant Secretary (Tax Policy), and the Assistant Secretary (Enforcement, Tariff and Trade Affairs, and Operations) now (Enforcement, Operations and Tariff Affairs). Early in the drafting process its was generally agreed that due to the general law enforcement interest in the success of the regulations, there was a need for one office to serve as a focal point for the

coordination and review of all enforcement activities. The IRS offered to perform this function; but, for some reason, the Treasury Committee decided that the Office of the Assistant Secretary (EOTA) could more appropriately assume this duty.

Under the provisions of the regulations, the Office of the Assistant Secretary has advised each of the agencies having enforcement responsibilities concerning the implementation and enforcement of the regulations, and, to my knowledge, we have issued all exemptions and interpretations of the regulations.

While my office has not become involved in the day-to-day activities of those agencies having compliance responsibilities, the more serious violations and requests for interpretations, and exemptions are referred to us. We have attempted to monitor and coordinate the activities of the agencies without becoming unduly involved in their execution. Recently, in part, because of inquiries inspired by this Subcommittee, it has become apparent that in some instances our involvement should have been greater and we are currently expanding our activities.

FOREIGN BANK ACCOUNTS

Obviously, one of the principal purposes of the regulations issued to implement the Bank Secrecy Act 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 that was used to further another violation might also be cited as an 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, used as a basis for IRS investigations.

In 1970, the IRS had a substantial amount of information concerning the ownership of foreign bank accounts by U.S. persons. I understand that thePostal Service, with the approval of the Treasury Department, had conducted mail watches in 1968 and 1969 to help the IRS to identify those persons in the U.S. who had Swiss bank accounts and were using them in the evasion of 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 be compared with the responses to the foreign bank account question on the tax returns. Those persons, who appeared to have foreign bank accounts but who failed to disclose them to the IRS, obviously would be of special interest to the IRS.

In addition, it was intended that the IRS select for audit a substantial sample of those taxpayers in the higher income brackets who had failed to answer the foreign bank account question. The theory was that a person in the higher income groups would be more likely to consider all of the questions on a tax return and to have professional help in preparing his tax return. Therefore, his failure to answer the question should be more indicative of a deliberate violation than the failure of a person who took a standard deduction.

To my knowledge, Federal law enforcement personnel had no specific plans. for utilizing the IRS Forms 4683 that were required to be filed by those persons who had foreign accounts. The forms were to serve as simply another source of information to be considered when income tax returns were being screened for examination. The Form 4683 was a follow up to the question on the tax return itself; it required the taxpayer to identify and to provide specifics regarding his foreign bank account.

Apparently the IRS made a statistical analysis of a sample of the Forms 4683 filed in 1970 for the Office of the Assistant Secretary (Tax Policy). We understand that because of the relatively small sample, about 3,300 forms, and the somewhat indefinite form of some of the questions on Form 4683, the statisticians and economists were dissatisfied with the results.

Our recent review of that analysis indicates that although it may have. been inadequate for the use of economists, it contained some interesting information for law enforcement officials. The study shows that only 2,607 taxpayers disclosed that they had a financial interest in one or more but less than 25 Swiss bank accounts exceeding $10,000 in value. The total number of accounts involved was 3,031. Based on this data, rough estimates can be made concerning the total number of Swiss accounts reported and the number of taxpayers involved. The number of taxpayers who reported Swiss bank accounts appears to have been in the neighborhood of 17,500. This is significant because the mail survey covering the same period, I am told, disclosed that

more than 40,000 persons appeared to have had Swiss bank accounts during that period. From these statistics, it seems that about 20,000 persons failed to report Swiss bank accounts and, consequently, violated the regulations.

It is difficult to evaluate the effectiveness of the foreign bank account reporting requirement in combatting white collar crime, narcotics trafficking, and other organized crime. Much of its effectiveness could not be measured. Its deterrent effect would be intangible. Obviously, since the IRS did not undertake the programs that had been planned, a great deal of the value of the question was lost.

We are unable to comment on the general availability of the IRS Forms 4683 to the SEC, DEA, BATF, U.S. Customs Service, or other Federal agencies. To my knowledge, we have not received any requests for the forms. The information appearing on the income tax returns or the Forms 4683 would, of course, be available to such agencies if they have a specific legitimate need and make a request for it.

It appears to me that, perhaps, the information that the IRS currently has available from the 1973 and 1974 tax year returns could be analyzed and utilized in much the same manner that the data from the 1970 returns was supposed to have been used. A suggestion to that effect has been sent to the IRS.

While other agencies very well could have an interest in learning about secret foreign accounts, the IRS would normally have the greatest interest in them. It is generally recognized that persons who use secret foreign bank accounts are usually violating the Federal tax laws in some way even if they are primarily interested in accomplishing some other illegal purpose. That is why the IRS and the Treasury Department had been trying for so many years prior to 1970 to overcome the obstacles presented by foreign bank secrecy. The IRS's very strong support for the Bank Secrecy Act and former Commissioner Thrower's action in putting the foreign bank account question on the tax returns, even before the Treasury regulations required it, demonstrated that desire.

While the IRS must be the lead agency in finding secret foreign accounts if the public is to obtain this maximum benefit from the legislation, there is no reason why other agencies should not receive under legal limitations, IRS efforts in this area. As a matter of fact, I believe that I am only echoing the opinion of some recent IRS Commissioners when I say that the IRS should take the lead in the investigation of large international and domestic financial transactions and should assist and cooperate with the SEC. DEA, U.S. Customs Service, the FBI and other Federal agencies in such inquiries to the full extent permitted by law. In order to fulfill that role, however, the IRS would have to taken a more affirmative approach to its responsibilities under the Bank Secrecy Act regulations. Consequently, we have asked the Commissioner to participate in a program that would give the IRS a better opportunity to play a more meaningful part.

DISCLOSURE UNDER THE ACT

One of the issues raised by any proposal that attempts to cause agencies to cooperate and to share information is the problem of unauthorized disclosure. It is the Department's view that the information required under the Bank Secrecy Act can be freely shared by agencies within Treasury, under guidelines appropriate for such confidential information, even though the information is filed on IRS Forms 4683, 4789. and 4790.

Disclosure outside of the Department must be effected in accordance with the law and regulations. Section 212 of the Act states:

"The Secretary shall, upon such conditions and pursuant to such procedures as he may by regulation prescribe, make any information set forth in reports filed pursuant to this title available for a purpose consistent with the provisions of this title to any other department or agency of the Federal Government on the request of the head of such department or agency."

Obviously the Congress, for good reason, did not authorize full and uninhibited distribution of this sensitive data. Nevertheless, we believe that, with some effort on our part and the cooperation of DEA and other agencies that appear to have a legitimate need, the information can be made available to them on a timely basis. We are especially concerned about getting relevant financial information to DEA promptly so that it will be of maximum to drug enforcement agents.

BACKGROUND ON SECRET BANK ACCOUNT QUESTION

The record clearly indicates that the Office of the Assistant Secretary (EOTA) has been very interested in having the IRS make use of the Secretary's au

thority to require members of the public to disclose their interests in foreign financial accounts. In February, 1970, then Assistant Secretary Eugene Rossides advised the Secretary that he was planning to include a proposal for such a question in his March 2, 1970, testimony before the House Committee on Banking and Currency, which was then considering the Bank Secrecy Act.

Later, in the summer of 1970, when it was determined that the IRS had authority under the Internal Revenue Code to put the foreign bank account question on tax returns, the wording to be used was carefully reviewed before it was approved by Treasury officials.

On November 4, 1970, the Deputy Commissioner, IRS, sent a memorandum to the Deputy Assistant Secretary (Tax Policy) which referred to several conversations and attached a description of the IRS program for dealing with the tax return question and Forms 4683 related to foreign accounts. That program included the following actions:

1. Taxpayers who indicated that they had a foreign bank account, but who failed to attach a Form 4683 were to be contacted and asked to file the form. 2. An indication was to be made on the computerized record tax returns, the IRS "Master File," as to whether a taxpayer answered "YES" or "NO" or failed to respond to the question on the Form 1040.

3. Forms 4683 were to be detached and the files of the original forms were to be centralized in one IRS service center.

4. A register containing all or a portion of the names of those persons who disclosed an interest in a foreign financial account was to be extracted from the master file. This computer tape was to be used to produce a printout and to match against other information concerning foreign financial transactions. (The other information referred to was, in large part, the data obtained from the Swiss bank mail survey).

5. A statistical analysis of the distribution of the answers to the question was to be made as part of IRS's Statistics of Income program. A sub-sample of those returns on which the question was not answered was to be selected for follow up with the possibility that a program for the examination of other such returns was to be developed, especially if a large number of taxpayers failed to respond. 6. A scientifically selected group of returns with "YES" responses was to be examined for analytical purposes.

7. An IRS statistical study of the Forms 4683 was to be designed to accommodate the needs of the Office of International Tax Affairs and the Office of Balance of Payment Programs-both within Treasury.

To our knowledge, the IRS made few, if any, of the field examinations that would be required to carry out the law enforcement part of the program.

On October 16, 1972, following the issuance of the regulations in July, the Assistant Secretary (EOTA) sent the Commissioner of Internal Revenue a memorandum outlining a suggested compliance program for the IRS. That memorandum contained the following paragraph:

"With respect to the requirement that persons report and keep records of their foreign financial accounts on their income tax returns, in addition to the compliance checks that examiners would make in the course of normal audits, the IRS should examine a sample of the individuals who failed to answer the question. The IRS should also examine all individuals who failed to answer or who answered in the negative where the IRS has information that there should have been an affirmative answer."

As the above paragraph clearly indicates, the Assistant Secretary had a great interest in securing taxpayer compliance in this area.

Incidentally, the Commissioner's response of January 3, 1973, indicated that the IRS was, in general, receptive to the suggested program. The principal disagreement appeared to be over the size of the program, the number of returns to be examined. The Treasury program would have required about 20,000 examinations and the IRS was not willing to commit the manpower necessary for that large a project.

Although we did not send additional memoranda to the IRS to follow up on the apparent failure to implement the program outlined in the Commissioner's January 3 memorandum, we did maintain contact, at the staff level, until April or May, 1973. From January to May, we received a number of IRS papers that indicated IRS would eventually establish a program to investigate non-compliance with the requirement to disclose foreign bank accounts. It was not until June, 1973. that we learned informally that the Commissioner was considering removing the question from the Form 1040 and began to speculate about IRS intentions.

On July 6, 1973, the Assistant Secretary (EOTA) wrote the Commissioner and requested that the question remain on the Form 1040. That memorandum pointed to the fact that the regulations "virtually" require the question to appear on the form. Perhaps it would have been better if the memorandum had emphasized the fact that, under the governing regulations (31 CFR 103), the Assistant Secretary is responsible for the overall coordination of the compliance agencies and for assuring compliance with the regulations and that, consequently, the IRS should have referred the matter to him before making any changes. Nevertheless, the IRS did agree to leave the question on the Form 1040 and indicated some interest in the program. The Commissioner's September 24, 1973, memorandum to Deputy Assistant Secretary for Enforcement concerning the placement of the question on the return, ends as follows:

"We share your concern and interest in this important program and we will remain alert to the most effective way of highlighting the question on the Form 1040, within the limits of space, based on our experience with the 1973 Form 1040."

Although the Office of the Assistant Secretary (EOTA) received no further communications from the Commissioner concerning the removal of the question from the tax returns, I understand that the Office of the Assistant Secretary (Tax Policy) reviewed the 1975 tax form before it was approved for publication; but that office apparently was not aware of our interest.

It has been the position of my office that, currently, 31 CFR 103.24. in effect, requires the question to appear on tax returns used by persons who must report their interest in foreign financial accounts. The language is as follows:

"Each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship as required on his Federal income tax return for each year in which such relationship exists, and shall provide such information concerning each such account as shall be specified in a special tax form to be filed by such persons." (Underlining supplied).

Obviously, unless as required is construed to mean if required, the question is required under the regulations. The regulations, however, could be amended by the Secretary if he believed that to be necessary in order to permit the deletion of the question. It is my opinion that the Secretary has informally ratified the IRS actions in this matter, and that, perhaps, the regulations should be changed accordingly.

Since the reporting requirement was imposed under Section 241 of the Act which does not discuss the methods by which the Secretary will gather information pertaining to foreign bank accounts, the Act would not prohibit such a change.

If I had been consulted with respect to the removal of the question from Form 1040, I would have pointed out the fact that having the question on the Form 1040 greatly facilitated the enforcement of the reporting requirement. Under that arrangement every person who filed a Form 1040 had a good opportunity to become aware of the requirement. A person who had a foreign bank account during the years 1970 through 1974 and failed to report it would have difficulty pleading ignorance of the law. If he has answered the question "NO" and his account is discovered later, the element of willfulness will be clearly indicated. If he has failed to answer the question at all, he may attract attention to himself by the oversight.

The information on the Form 4683 is not nearly as valuable from an investigative point of view as is the response to the question on the return. If a person has failed to file a Form 4683, it will be quite difficult to prove that his omission was willful. The form is not related to the computation of the tax. He might argue that he failed to read the instruction booklet and, consequently, was unaware of the requirement to file the additional form.

CURRENT DEVELOPMENTS

In recent months, the Department has taken steps to improve the effectiveness of the implementation of the Act and the current regulations. For example, last year we began to get strong indications that the bank examiners were not detecting some serious violations. Certain of these violations involved the failure to report large currency transactions that were alleged to have stemmed from illegal drug operations. For a small commission, certain bank employees would exchange a drug dealer's smaller bills for $50 and $100 bills and agree not to