file the required currency transaction report with the IRS. The bank examiners who had been relying very heavily on the internal auditors of the banks to catch violations, were generally unaware of this type of violation until the IRS and other law enforcement units brought them to our attention.

When it became apparent that a number of banks were not doing an adequate job in policing their currency activities, we met with the FDIC, the Federal Reserve System, and the Office of the Comptroller of the Currency to develop more detailed guidelines for the bank examiners. The new guidelines, which we believe will noticeably improve the effectiveness of the examiners, were approved on February 17, 1976, for distribution to the field organizations of the bank supervisory agencies.

As a result of the inquiries made by your staff in connection with these hearings, we also became aware of a need for an improvement in the utilization of the reports that the regulations require to be filed with the IRS and the U.S. Customs Service. In our opinion, they are not being utilized as fully as the Congress intended when it directed the Secretary to initiate them.

To overcome this deficiency, we have developed a system for processing the reports that would assure the close cooperation of the IRS and Customs and facilitate the timely disclosure of pertinent information from the reports to other Federal law enforcement agencies that have a legitimate interest in them. If the IRS reacts favorably to this proposal, we believe that we will be able to develop information concerning large currency transactions and movements that will be especially valuable to DEA and IRS.

We also intend to take the following actions to improve the administration of the regulations:

1. Meet with the bank supervisory agencies to review certain areas of what appears to be chronic non-compliance with the regulations. This would include such matters as the failure of large numbers of banks to record the purpose or nature of certain loans, and the failure of banks to request customers to supply taxpayer identification numbers when a new account is opened.

2. Issue a major revision of the regulations that would clarify the compliance responsibilities and eliminate recordkeeping and reporting requirements in certain instances where they do not appear to be useful.

3. Propose that some type of foreign financial accounts question be reinstated on Form 1040.

ADDITIONAL LEGISLATION

As you may be aware, President Ford has requested legislation that would amend the Bank Secrecy Act so that it would be more effective against international narcotic dealers. He has proposed that Customs be given specific authority, under certain conditions, to search travellers departing the United States. We would be grateful for any support the members of the Subcommittee would be inclined to give the President's proposal.

COMMENTS ON THE NEED FOR THE ACT

It appears to me that in recent years the news media have reported many investigations that have illustrated a continuing need for the Act. There have been a great many cases, involving corruption and organized crime in which bank records played a vital role. In addition, each year there are more than a thousand criminal tax investigations in which bank records must be reviewed. It is also obvious that, while records of bank transactions are often obtained from sources outside the bank, the fact that the regulations require banks to retain records encourages the public to be forthcoming. People will often be cooperative when they realize that the information being requested is also available from another source. The recordkeeping regulations serve as an insurance policy to make certain that records of financial transactions will be available when they are needed.

The reporting provisions of the act serve two purposes. They direct the attention of Treasury law enforcement authorities to unusual financial behaviour and provide a record of transactions or transfers that are not usually documented.

Although travellers enter and leave the U.S. more than 200,000,000 times each year, only about 15,000 reports of the international movement of currency and monetary instruments are filed. The fact that less than one traveller in 10,000 files a report clearly shows that the international transportation of $5,000 in currency or its equivalent is unusual in today's world. Therefore, it is logical

to assume that they would be a good source of leads to certain criminal operations, and it is not surprising that the Customs Service has found that several hundred of the reports appear to have been filed by persons who are on record with Customs as being related to some type of illegal activity.

The domestic currency transactions that are required to be reported are also very uncommon. Although there are tens of billions of banking transactions in this country each year, only about 20,000 of them are reported under the provisions of the regulations. Because these reports describe extremely unusual financial activity, they have proven useful to the IRS in its tax function, and we believe that they should also be useful to DEA and other enforcement agencies. Since the reporting requirements make it more hazardous for criminals to deal in large amounts of currency, carry currency abroad, and operate a foreign bank account, we believe that the requirements must have a general deterrent effect on many persons who might be tempted to engage in illegal schemes that require such activities.

The arguments in IRS Commissioner Thrower's testimony, referred to earlier in this statement, concerning the connection between secret foreign bank accounts and tax fraud are still valid today. In addition, it should be emphasized that, since domestic bank records are very important in all phases of tax enforcement and collection, the bank recordkeeping provisions in the regulations are needed to help maintain the integrity of the tax system.

The regulations serve to inhibit the laundering of money obtained from illegal sources. Financial institutions must keep records of transactions. Banks are required to report unusual currency transactions. Foreign bank accounts must be reported. Customs is on the alert for large international movements of currency. All of these conditions make it more difficult to move money without leaving a trail that law enforcement officers can follow.

The creation and retention of that audit trail is the basic benefit that is being obtained from the Act. Whether the illegal activity involves commercial or political corruption, tax evasion, securities fraud or theft, smuggling, drug trafficking, or some other form of organized crime, the common ingredient is usually money; and, if the money can be traced, the criminals are likely to be apprehended.

In closing, Mr. Chairman, I would like to note that we in the United States pride ourselves on having a voluntary tax system which is designed to assess, equitably, upon all members of our society, the cost burdens of government. I believe that nothing so effectively promotes the voluntary acceptance of our tax system by the public than seeing those who flount the system brought to justice. The fact is that the hard-working wage earners find their income taxes withheld and paid into the Treasury without any further voluntary act on their part. Even the bulk of corporate taxpayers find their latitude in avoiding their tax liabilities quite restricted by the discipline and control imposed by independent public accountants and the necessity of reporting income to their shareholders. The individual "entrepreneur" who is engaged in questionable or illegal activities, such as narcotics trafficking or securities fraud, however, finds his tax obligations to be truly "voluntary." This individual often files no tax return whatsoever or a false return that is concocted in such a way that it avoids those characteristics which would precipitate an audit. Illicit transfers of funds abroad and movements of large sums in currency are this man's stock in trade.

In order to have a tax system which does not truly discriminate in favor of illegal sources of income, special law enforcement efforts are necessary to identify illegal income and tax it. The Bank Secrecy Act was intended to support those efforts. It not only assists in locating illegal income; it encourages those who have such income to "voluntarily" pay their taxes.

DEPARTMENT OF THE TREASURY,
Washington, D.C., August 13, 1976.

Hon. BENJAMIN S. ROSENTHAL, Chairman, Commerce, Consumer and Monetary Affairs Subcommittee, Committeeon Government Operations, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: During my testimony on June 28, 1976, the Subcommittee. requested additional information concerning a Swiss Supreme Court decision relating to the nature of the information Switzerland can provide the United States under the tax treaty and the impact the decision will have upon the treaty on mutual assistance in criminal matters that recently was ratified by the Senate. The attached excerpt from the Swiss Supreme Court Judgement of May 16,

1975, appears to provide the background the Subcommittee requested. In discussing its decision pertaining to the tax treaty, the Swiss Supreme Court also refers to the mutual assistance treaty. The Court contrasts the general provision in the tax treaty for the "exchange" of "information" with the explicit provisions of the new mutual assistance treaty which calls for, among other things, the taking of depositions or other statements, the delivery or securing of court records, documents, or other evidence, and the authentication of documents. In my opinion, the Swiss Supreme Court decision has, in effect, negated any hope there may have been that Swiss bank records, in admissible form, would be provided to the IRS under the tax treaty. Consequently, the provisions in the mutual assistance treaty that require assistance in criminal tax cases involving members of organized criminal groups have become even more significant than they were at the time the treaty was initially approved by the United States and Switzerland in 1973.

Excerpt from the Judgment of May 16, 1975 in the matter of X. and Bank Y. versus Eidg. Steuerverwaltung [Federal Internal Revenue Service] Furnishing of information pursuant to the Double Taxation Convention of May 24, 1951, between Switzerland and the United States of America (DBA-US).

1. Permissibility of administrative assistance based on a new American request for administrative assistance in the same tax fraud proceedings (Erw. [Consideration] 1).

2. Nature and scope of the exchange of information obligation pursuant to Art. XVI of the DBA-US; implications of the relevant arguments in the judgment of the Federal Court of December 23, 1970 (Erw. 2).

A. The Double Taxation Convention concluded between Switzerland and the United States in 1951 (DBA-US) contains the following provision on mutual administrative assistance by means of exchange of information in Art. XVI, par. 1:

"The competent authorities of the contracting States shall exchange such information (being information available under the respective taxation laws of the contracting States) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or the like in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any person other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or any trade process."

B. On the basis of Art. XVI of the DBA-US, the Internal Revenue Service in Washington (IRS) asked the Eidgenoessische Steuerwervalting (ESV) on October 16, 1969, for information from the books and records of the Bank Y. in A. on transactions of the bank with the American citizen X. or American corporations controlled by him.

The EStV conducted an audit of the bank. The suspicion of the IRS to the effect that X. himself had supplied the bank with the funds for the loans the bank had granted him was largely confirmed. The EStV compiled the results of the investigations in a report, notifying the parties concerned that it would comply with the IRS request for administrative assistance by furnishing it with this report (Section B of its ruling of March 23, 1970). The objections of X. and of the bank to the envisaged administrative assistance were rejected by the ESIV.

The administrative-court complaint filed by X. to prevent the transmission of the official report was rejected by the Federal Court in its judgment of December 23, 1970 (BGE 96 I 737). The Federal Court found that the offenses of which X was suspected involved "fraud or the like" as defined by Art. XVI of the

DBA-US, concluding that in the event of tax fraud information from banks was to be considered available information, since according to the cantonal law of the leading banking cities of Zurich, Basel, and Geneva, banks were under obligation to supply information in connection with tax fraud proceedings. The fact that professional secrecy was mentioned in the text of the DBA-US did not mean that in cases involving fraud information could not be exchanged because of banking secrecy even though the bank was under obligation to furnish information under Swiss law.

C. (a) On April 19, 1971, the EStV delivered the official report to the American tax authorities. Thereupon the latter claimed that this report would not satisfy an American court; for purposes of evidence in a court proceeding certified original records were needed. In its second request for administrative assistance of November 10, 1972, the IRS demanded that the evidence required according to American procedural law be furnished, asking for the transmission of all documents of the bank that were in any way related to the matter on the one hand, and the questioning of witnesses able to testify on the individual documents on the other hand.

(b) With its ruling of August 31, 1973, the EStV informed the bank and X. that it would comply with the second request for administrative assistance. While the ruling rejected the thorough questioning of witnesses requested by the IRS, it ordered seizure of the bank documents related to the matter as well as a brief questioning of the bank employees responsible for issuing them in accordance with Swiss procedural law (Arts. 286-292 of the BStP [Federal Code of Criminal Procedure]).

(c) Appeals by X. and by the bank were rejected in essence by the ESTV on February 12, 1974.

The view of the appellants that the wording of Art. XVI of the DBA-US merely permitted the granting of information but not the procurement and delivery of records was declared incorrect. If the EStV was granted competence regarding clarifications as far-reaching as that which followed from the Supreme Court judgment of December 23, 1970 (BGE 96 I 737, spec. 746 and 750), there was no reason why it should be prevented from taking the measures needed to secure the evidence in support of its information.

The appeal was merely approved in part in that the parties concerned were granted the right to object to the seizure or the authentication of specific documents and, possibly, to appeal the rejection of the administrative-court appeal. D. Regarding the ESTV decision on the appeal, X. and the bank filed an administrative-court complaint. Primarily, both appellants are asking that the second IRS request for administrative assistance not be complied with and consequently, that the EStV ruling of August 31, 1973 and the ruling on the appeal of February 12, 1974 be reversed.

Furthermore, the complaint of Mr. X. sets forth two secondary motions: par. 2 of the ruling of August 31, 1973 should possibly be reversed insofar as it contained an order for the bank records to be checked for their authenticity and to be certified; and, regarding par. 4, the transmission of original bank documents or of certified photocopies of such original documents to the IRS should possibly be rescinded.

In support of the main motion the complaints claimed first of all that the second administrative assistance proceeding involved an important definition of the obligation to furnish information as recognized in the judgment of the Federal Court of December 23, 1970. According to the past administrative practice of the ESTV and to the concept underlying the assurance of administrative assistance in the state treaty, the DBA-US, (as well as in the Double Taxation Conventions with Great Britain, France, and the FRG) mutual administrative assistance between states referred to the procurement of information but not to the delivery of records the authentication of such records, and the questioning of persons, especially bank officials, on the transmittal of the minutes of such questioning to foreign countries. The judgment of the Federal Court of December 23, 1970 was not meant as a guideline, let alone an order, to the EStV prescribing the manner in which it was to render administrative assistance in the future. The measures now being contested involved the securing of evidence according to American procedural law, not information available under Swiss administrative practice. Extension of administrative assistance to include the seizure and delivery of documents pertaining to tax matters was no longer in accordance with Art. XVI of the DBA-US.

The bank then went on to assert that the question of granting administrative assistance in the case at hand was res judicata because of the Federal Court

judgment of December 23, 1970 and that there was no reason for coming back to this matter which had been settled by judgment.

The complaint of Mr. X. explained in detail that the United States would not be able to comply with the requirement imposed by the state treaty that the information be treated as secret because of its procedural law and that for that reason alone any more far-reaching administrative assistance should not be provided. Mr. X. furthermore maintained that the expenditure for implementation of the contested ruling appeared excessive in view of the fact that the usefulness of the evidence that might possibly be furnished by Switzerland was doubtful because of American procedural law.

Excerpts from the reasons given for the ruling:

1. The objection raised by the bank that the second IRS request for administrative assistance should not have been considered since it involved a matter settled finally by judgment is not sound. The compliance with the first request for administrative assistance following the Federal Court judgment of December 23, 1970, did not create a “res judicata" which would rule out a new request for administrative assistance in the same tax fraud proceeding. A new request by the American tax authorities for further information and transmittal of evidence could not be rejected by the EStV on the basis of the Supreme Court judgment on the grounds that this was a matter settled by judgment, reference to which ought not to be made, because the questions pertaining to the scope and implications of the obligation to provide information as defined by Art. XVI of the DBA-US that were raised by the second request for administrative assistance were not resolved in the first proceeding. The EStV did not violate any Federal law by considering the second request for administrative assistance and by examining whether Art. XVI of the DBA-US constituted an obligation not merely to furnish an official report, but also to provide evidence complying with American rules of procedure.

2. Art. XVI of the DBA-US provides for the exchange of information. In the case in question, the EStV on the basis of the first request, furnished the IRS with the requested information in the form of an official report.

In its second request for administrative assistance of November 10, 1972, the IRS now requests that the original documents or certified copies be furnished and that there be an interrogation of persons. The IRS is not prepared to make do with information but rather requests that the evidence required under American law be furnished through administrative assistance as well

(a) According to its wording Art. XVI of the DBA-US refers to the granting of information: The competent authorities of the contracting States are to furnish each other for the purpose stated (implementation of the Convention prevention of fraud etc.) with information avaliable to them under their respective taxation laws. As shown by the records the EStV, since the entry into force of the DBA-US has always understood its contractual obligation of exchanging available information to mean that it was to furnish the American authorities with information as far as possible but not as a rule, that it was to furnish specific evidence in addition to that. This customary interpretation, based on the wording of the Convention, of the obligation to render administrative assistance under the state treaty seems correct.

(b) According to the Swiss view fiscal offenses are exempt from judicial assistance in criminal cases (Art 11, par. 1 Aus1G. Art 2, subsection (a) of the European Convention on Judicial Assistance in Criminal Cases of April 20, 1959/March 20, 1967). The history and the text of Art. XVI of the DBA-US do not provide any support for the assumption that Switzerland, relinquishing the principle of not furnishing judicial assistance in fiscal cases, had intended to assure the tax authorities of the United States of comprehensive judicial assistance in cases involving tax fraud. the obligation ensuing from the state treaty merely includes the exchange of such information as would be available in such cases to the tax authorities under the laws of the country to which at the request is addressed. As proved by the provision in the actual judicial assistance Convention a more far-reaching obligation to render assistance in a criminal proceeding involving taxes conducted by the requesting state would not merely have been stated in terms of the competent authorities being obliged to exchange available information.

This basic view was just reconfirmed vis-à-vis the United States in the state treaty on mutual judicial assistance in criminal cases concluded in May 25, 1973 but not yet ratified by Switzerland. It provided for judicial assistance in criminal cases involving tax matters only in investigations involving leading figures from

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