1. 2. 3. 4. 5. 6. 7. 8. 9. TAX SHELTER MONEY CIRCLE--ADVANCE MINIMUM ROYALTY PAYMENT Investor's $5,000 cash payment is deposited in King Investments, Ltd's account at Haven National Bank, a bank located in a tax haven country. King Investments, Ltd., issues a check for $15,000 to Gold Company Inc., a related corporation, despite the fact it has only $5,000 in its account. Gold Company, inc, issues a check for $15,000 to Able Coal Company, Inc., a related corporation, despite the fact it had a zero balance absent the deposit of King Investments, Ltd's worthless check. This check is purportedly a loan to Able Coal Company, Inc. Able Coal Company, Inc. issues a check for $15,000 to Mineral Investments, Ltd., a related corporation, despiet the fact it had a zero balance absent the deposit of Gold Company, Inc's worthless check. This check represents the loan made by Able Coal Company Inc. to the investor for 3/4 of his advance minimum royalty payment to Mineral Investments, Ltd. Mineral Investments, Lt., by issuing a check for $15,000 to King Investments, Ltd., completes the money circle. This check is wirtten despite the fact Mineral Investments, Ltd. had a zero bank balance absent the deposit of Able Coal Company, Inc's worthless check. This check is purportedly issued for investment in King Investments, Ltd. demand debentures. All of these companies are owned by the promoter and were organized by him in a tax haven country. All of these companies maintain bank accounts at the same offshore bank. The offshore bank, Haven National Bank, processed the checks even though there were insufficient funds in each account to cover these checks. This money circle was created to give the impression that the $15,000 loan made by Able Coal Company, Inc., to Mineral Investments, Ltd. for the investor's advance minimum royalty payment was a bona fide loan from a non-related corporation. 10. In reality, this purported $15,000 loan on which the investor based his deduction was nothing more than a sham, as this money circle merely created the appearance of a loan. By controlling the companies involved and by using accounts at the same bank on the same day, the promoter devised a ruse that generated cancelled checks nad other trappings of loans when, in fact, there were no loans. FOR RELEASE ON DELIVERY STATEMENT OF THE HONORABLE JOHN M. WALKER, JR. BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS Mr. Chairman and Members of the Subcommittee; Thank you for the opportunity to present our views on the problems raised by the use of foreign corporations and financial institutions to facilitate violations of U.S. law. Our interest in this subject flows naturally from the interests and functions of two Treasury law enforcement agencies, IRS and Customs, to protect the revenue and our national economic interests, as well as to collect taxes and duties. In addition, since the passage of the Bank Secrecy Act in 1970, we have had a special responsibility with respect to transnational investigations. When the Bank Secrecy Act was introduced by the Chairmen of the Senate and House Banking Committees, it was clear that they intended the Bank Secrecy Act to play a mojor role in combatting the use of foreign bank accounts to facilitate violations of U.S. laws. During the hearings that proceded the passage of the Bank Secrecy Act, officials from several government agencies testified concerning the need for assistance in identifying suspicious transactions and movements of currency and documenting international transactions in general. The Act was intended to assist law enforcement officials by providing for the retention of records of all significant international transactions as well as reports of unusual domestic currency transactions, the international transportation of currency and other monetary instruments, and reports of international financial transactions or accounts. It is the linchpin for all investigations of financial activity; it was specifically designed to deter transactional crimes. The reporting requirements of the Bank Secrecy Act provide a unique way to follow unusual cash flows including cash flows caused by major durg traffickers and their money launderers. Indeed, the tracking of cash flows throuhg the reporting requirements of the Act frequently leads to the identification of drug trafficking organizations. As an added bonus, the Bank Secrecy Act imposes criminal sanctions on those who fail to comply with its requirements. The major narcotics trafficker, who carefully insulates himself from actually handling drugs, can still be brought before the bar of justice for failure to comply with the reporting requirements of the Bank Secrecy Act or for income tax violations, even though there may be an inability to establish the underlying narcotics offense. The Act authorizes the Secretary of the Treasury to issue regulations to carry out the purposes of the Act. The principal provisions are: 1. 2. 3. Banks and other financial institutions must maintain records that the Secretary determines have a high degree of usefulness in criminal, tax, or regulatory investigations. They must report to the Treasury Department transactions involving currency or other monetary instruments as the Secretary may require. The international transportation of currency and other monetary instruments in excess of $5,000 must be reported to the Treasury Department. 4. The Secretary must require U.S. citizens, residents, and persons doing business in the United States to maintain records or file reports, or both, of foreign financial transactions. Regulations After considering the Congressional mandate expressed in the Act and the committee reports, the Treasury Department issued regulations which currently contain the following recordkeeping requirements: 1. 2. All financial institutions are required to maintain the following records: a. Instructions, given or received, concerning transmission out of the U.S. of credit funds, currency or other monetary instruments, checks or securities of more than $10,000. b. Each extension of credit in excess of $5,000 except for those secured by real estate. Banks, savings and loans, and credit unions must also retain a copy of the following records: 3. e. f. g. h. Each check or draft in excess of $10,000 drawn on or issued by a foreign bank which is paid by the domestic bank. Each check in excess of $10,000 received directly from a foreign financial institution. Records of each receipt of currency, other monetary instrument, securities, checks or credit received from a foreign financial institution. Records necessary to reconstruct a checking account and to furnish an audit trail for each account transaction over $100. 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 of each account. In addition, the regulations prescribed the following reporting requirements: 1. Financial institutions are required to report to the 2. Except for certain shipments made by banks, the 3. U.S. persons are required to report annually a financial interest in or signature authority over a foreign financial account. Certain records of such an account are required to be maintained in the U.S. 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: |