sugar in coffee, very sparingly." Many other examples could be cited, including prosecutions by the Criminal Division, the Tax Division and the United States Attorneys in a myriad of specific money laundering, fraud, tax protestors who engineer sham transactions through the sale of "common law trusts" established through offshore banks which they own or control. Suffice it to say that the scope of the tax haven problem is huge and that the efforts to combat it, while significant, important and increasing, have to date not reached a desirable and necessary level. I understand that all law enforcement components in Government dealing with these problems believe that the use of offshore banks and other entities for illegal activities continues to grow. There are a number of current initiatives and developments to confront and attack the offshore problems. Many of these are encouraging. But the concealment, the wide variety of uses made of offshore jurisdictions and their laws, and the size and complexity of many of the transactions make our efforts at this time seem small and inadequate by comparison. As I indicated before, an awareness of the problems is a vital first step in confronting the many illegal activities involved. The public, the Congress, others in Government not directly involved in law enforcement, and the media, all need further education and enlightenment. Hearings like this serve an extraordinarily useful purpose in this regard. In the closely related area of narcotics trafficking, the President and Attorney General Smith have adverted to the offshore money laundering problem. They have created the Drug Task Forces not only to interdict and stem the importation and distribution of narcotics in this country, but also to take the profit out of this invidious business. Thus, many of the investigations and prosecutions by the Task Forces will be directed at large scale and organized groups, with particular emphasis on their financial dealings and financial backers. We With respect to the offshore evidence gathering problems, there are also new initiatives being undertaken. Recently, our Division in conjunction with the Criminal Division and the Executive Office of United States Attorneys held an extremely productive conference on obtaining evidence from offshore jurisdictions for criminal purposes. brought together for the first time a large representative number of prosecutors with experience in obtaining foreign-source evidence. We also included representatives from all of the investigative agencies in Government that are encountering criminal activity involving the use of foreign banks, trusts and other entities. These agencies included the FBI, DEA, Customs Service, IRS Criminal Investigation Division, SEC, the Federal Reserve, Comptroller of the Currency, Postal Inspection Service, and U.S. Marshals Service. And we plan to hold further conferences of this type to coordinate activities and to seek administrative and legislative solutions to the offshore problem. The Prseident's Caribbean Basin Initiative legislation could provide a major breakthrough against bank and commercial secrecy in the Caribbean. The legislation contains provisions that countries in that area must relax secrecy through the negotiation of effective bilateral agreements with the United States before certain U.S. tax benefits would become available. Based on the recognition that the economies of many of these countries are highly dependent upon American tourist trade, that legislation would extend the convention tax deduction rule to Americans attending business seminars and conventions in those countries which had a bilateral agreement in place. The bilateral agreements contemplated by the Caribbean legislation are not the ordianry exchange of information clauses now contained in our tax treaties. Rather, the agreements would be similar to mutual assistance treaties insofar as tax matters are concerned. Both civil and criminal tax information would be covered and the information turned over would have to be in a form usable as evidence in a court proceeding. Of course, not all of the Caribbean countries with bank and commercial secrecy laws are dependent on tourism, but this legislation certainly is a large step in the right direction. It is important that tax, economic and other pressures be brought on all tax haven countries in a coordinated way if the use of offshore jurisdictions for U.S. criminal activities is to be curbed. Another development is the effort to include stronger exchange of information provisions in tax treaties being negotiated by Treasury Department officials. We in the Justice Department are particularly pleased with the coordination and cooperation we are receiving from the Treasury Department. Both the Tax and Criminal Divisions have been provided the opportunity to assist Treasury in formulating policies and specific treaty provisions. We are hopeful that some of these negotiations may result in exchange of information provisions that will increase the information and evidence available for prosecuting tax crimes. As described in detail by Assistant Attorney General Jensen, efforts are also being made to negotiate mutual assistance treaties. With respect to tax offenses, a principal source of information is the informational reports required by the Internal Revenue Code. Unless the participants in the international transaction are required by law to supply the information, and do supply the information when it is required, the transaction often remains undetected. The Government also needs to improve its analysis of information already available to insure that international transaction information gaps do not exist. Additionally, we must continually alert our investigators and prosecutors to the sources of available information. The Tax Division believes that careful study ought to be given to the creation of a single list of sources of information about foreign transactions that is currently available within the Government. Some recent decisions involving the enforcement of summonses issued by the IRS and grand jury subpoenas in tax cases indicate, I believe, that some progress is being made through litigation concerning offshore evidence problems. The most important cases in a tax context are United States v. Vetco, Inc., 644 F. 2d 1324 (9th Cir., 1981) decided by the Ninth Circuit in 1981, and In re Grand Jury Proceedings, United States v. Bank of Nova Scotia, 691 F. 2d 1384 (11th Cir., 1982) decided by the Eleventh Circuit last November. In Vetco, the court upheld the enforcement of an IRS summons issued to Vetco for records of its Swiss subsidiary. Vetco argued that compliance would require the Swiss bank to violte Swiss secrecy laws which make it a criminal offense to disclose business records. The court applied the balancing test set forth in the Restatement of the Law of Foreign Relations and concluded that the strong American interest in collecting tax and prosecuting tax fraud justified an intrusion on Switzerland's interest in preserving secrecy of such records. In the Eleventh Circuit decision in Bank of Nova Scotia, the Government was successful in obtaining bank records from the Nassau branch of a bank that also had a Miami branch on which the subpoena was served. No question of jurisdiction was involved but the bank contended that Bahamian bank secrecy law prevent its compliance and would subject it to criminal liability if it complied. Again, the balancing test was applied and the court's conclusion was that the investigatory function of the U.S. grand jury outweighed the Bahamian secrecy interest. These cases are important where there is a contact in the U.S. sufficient to suppport the summonsor subpoena. Problems with corporations or other entities in offshore jurisdictions arise, however, where they have no U.S. contact through parent or subsidiary or by doing business or otherwise being present in the U.S. Thus, these decisions, while a step in the right direction, will not solve all of the problems. Indeed, the path toward a comprehensive solution is not through the courts, but rather through negotiation of treaties and the exchange of information agreements for law enforcement purposes generally and for tax cases in particular. While there has been some progress in that area as well, more can and will be done. Yet as long as governments provide annonimity for criminal transactions by maintaining strict confidentiality of bank and corporate records, permitting anonymous corporate ownership through bearer shares or nominees, and promoting these "benefits" for the conduct of illegal activities, we will continue to encounter difficulty in investigating and prosecuting these tax fraud schemes. In closing, I would like to make the following observations. In testimony last year, I illustrated the complexity of these problems by referring to illegal, widely promoted tax shelters that use fictitious transactions through multiple offshore entities and banks. My conclusion then, and it still is, was that each prosecution of a major scheme in the shelter area involved a major outlay of resources by both the Internal Revenue Service and the Department of Justice in the investigation, preparation and trial of the case. The same can be said of money laundering schemes, offshore "common trusts" created by tax protestors and many other criminal activities we face today. With the advent of easy travel to foreign jurisdictions, the sophistication of planning that goes into these illegal transactions, the proliferation of banks and trusts and other entities to attract ill-gotten gains, and finally the secrecy and concealment that is inherent in these criminal activities, the law enforcement community has a formidable job for which both the tools and manpower are essential. The potential for damage to our voluntary tax system by the misuse of offshore banks must be recognized and every effort must be made to deal with the offshore problem. Given the ramifications of illegal use of offshore banks and other foreign entities at a time of fiscal austerity and budget deficits, these hearings are timely. I am certain that this Subcommittee will build a record that can result in positive legislative and administrative recommendations to make tax administration and law enforcement more effective. In order to give the Subcommittee some idea of how offshore transactions are used for tax evasion an Appendix to my statement includes illustrations of tax evasion schemes using offshore banks. In addition, we have provided the Subcommittee with a copy of a recent indictment which shows how an offshore "common trust" scheme was marketed by a tax protestor. I would be pleased to answer any questions that the Subcommittee may have. |