Case No. 5.—Earlier this year a grand jury subpoena was served upon an office of the bank located in New York City requesting:

"Any and all records, including but not limited to transcripts of accounts, loans, placements, ledgers, foreign exchange contracts, credit files, legal files, customer files, correspondence files, checks and deposits, credit and debit memoranda, records of telephone messages and messages sent by electronic or radio means and other memoranda and correspondence for the period June 1, 1972 through February 28, 1975 relating to the following:"

The subpoena then listed some 29 entities or individuals, some of which appeared to be foreign companies.

This, I hope, is as bad an example as we will obtain of an overly broad subpoena, although we have received another request to produce records that were 13 years old. In addition, by requesting "legal files" the subpoena apparently sought attorney-client privileged communications.

Fortunately, the solution in this case was that upon protest and representation that the particular office served had no such records the subpoena was withdrawn. However, like many large metropolitan banks, Crocker has foreign offices in addition to its domestic offices. Should it have been required to search each domestic and foreign office for these records the costs would be truly staggering; I estimate them to be in excess of $70,000.

This particular case raises the question of production of records from offices of banks located in foreign countries. That involves two problems: (1) how to obtain jurisdiction of other offices than the office served, especially if the other office is in a foreign country, and (2) should records be compelled to be produced from a foreign country office if such production will subject the bank to civil or criminal penalties under the laws of that foreign country. At the present time it appears to be the position of the IRS that if production of the records will merely subject the bank to civil liability to its customer under the laws of the foreign country that the IRS will seek to compel compliance. Neither of these questions have been definitely resolved by the courts, but the answers which are emerging appear to be that: (1) only the office served need comply unless the summons or subpoena expressly requests production of records from another office and (2) unless it would clearly violate criminal laws of the foreign country the summons or subpoena will be enforced.

Resolution of these problems appears to be beyond the intended scope of the legislation you are considering today, but you may wish to expand your concern to these areas. In that event, I will be happy to supplement the record with further information related to these problems.

Case No. 6. The bank has very recently received at least two informal requests from collection officers of the IRS for information regarding customers' accounts purportedly under section 6333 of the Internal Revenue Code of 1954. (IRS Forms 2270, "Notice of Requirement to Exhibit Books and Records" and FL-94 which is a form letter.) No time is specified for production of the records or information sought and the implication in Form 2270 is that immediate production is requested.

Interestingly, section 6333 authorizes the IRS to obtain information regarding a taxpayer's finances "if a levy has been made or is about to be made." Neither of the requests referred to were accompanied by a Notice of Levy or a representation that a levy had been or was about to be made. Indeed the only decided case under this section involved a situation where no levy was pending and the IRS agent prepared the form in the employer's office and immediately reviewed the records-the classic "pocket summons" approach.

In both of these instances I wrote to the IRS and said that without a Notice of Levy or written representation from the District Director that a levy was about to be made the request was not authorized by section 6333 and the bank would not comply. To my knowledge no further response to either request has been received.

Other situations which I have not included as cases involve frequent demands by IRS Special Agents to review the banks microfilm records of checks. Although the Agent may have a specific taxpayer in mind his review of the microfilm would provide access to information regarding thousands of other customers. These other customers' privacy would be invaded and I am certain if a particularly prominent or controversial name appeared it might catch the attention of the Agent.

Lastly during the Vietnam War there were many so-called telephone tax protests. It was not uncommon to receive requests to reveal the account for a list of 50 or more individuals from the IRS without specifying from which branch of the bank such information was sought and without the use of an administrative summons. The IRS was generally most cooperative in withdrawing these requests, but the fact they were made implies some compliance may have been obtained.

These six cases are typical of the demands made by law enforcement agencies for production of bank records. You will note that I did not include a single instance involving the use of a search warrant. Search warrants have occasionally been used. During the first six months of this year I can recall only two instances in which I was involved with a demand made by search warrant and they involved routine crimes such as murder and theft.

I believe that this fact demonstrates the most glaring deficiency in H.R. 214 as proposed. It deals solely with search warrants and those instances in which Federal law enforcement agencies can establish probable cause that a crime has been committed. The reasons law enforcement agencies seek bank records does not fit that pattern.

As illustrated in Case No. 6, many demands for information are made simply in connection with attempts to collect tax liabilities. In those situations you may well wish to place governmental agencies in the same position as other creditors with no further rights to demand production of information. This indeed was the general principle of the Federal Tax Lien Act of 1966 with regard to priorities as a creditor. However, if governmental agencies are to have greater information gathering powers in this area I believe it is necessary for Congress to act to make it clear what those procedures should be.

The other cases demonstrate that law enforcement agencies are seeking bank records to determine if a crime has been committed and frequently solely to determine civil liabilities for taxes. These types of activities have been sanctioned by the United States Supreme Court since United States v. Powell, 379 U.S. 48 (1964) which held that to enforce an IRS summons under Section 7602 the IRS need not make a showing of "probable cause."

I do not believe it is necessary or desirable to require a showing of "probable cause." However, it is essential that procedures be adopted which will insure that requests for bank records are made only in connection with proper governmental functions in administering the law. Procedures whereby the citizen who may be adversely affected may challenge the request and which place the financial burden upon the party seeking production of the records will provide such insurance. At least I suggest these restrictions to you as a reasonable first step towards providing protection for the citizens right of privacy balanced against the government's need to know.

Although I recommend the approach of H.R. 2752 instead of or by way of amendment to H.R. 214, there are problems with H.R. 2752 which I would like to discuss later. I would now like to discuss the financial burdens imposed upon banks in attempting to comply with law enforcement demands and to protect their customers' rights.

With regard to the matter of costs let me first refer to the testimony of Mr. Richard L. Wood, Vice President, First National Bank of Chicago, on July 18, 1975, before the Subcommittee on Oversight of the House Committee on Ways and Means, in which he stated that the average cost to the First National Bank of Chicago in complying with IRS summons was approximately $225 per summons. If this is multiplied by a conservative estimate of the number of similar demands upon a bank the size of Crocker Bank during the course of a year (which we estimate to be more than 2,000) the cost are more than $650,000 per year. Although these estimates are just that, it appears that the average cost of compliance with a summons or subpoena for large, medium and small banks is in the range from $225 to $350. A very large bank such as Bank of America may receive 5,000 to 6,000 IRS summons during a year for a compliance cost of $1,000,000 to $2,000,000. (These are an estimate based upon only very preliminary surveys and should not be relied upon without a more thorough study except for providing a most general impression of the magnitude of the problem.) In my office we have 4 attorneys in charge of reviewing these matters and many others who assist us. Our time records for the months of February through May, 1975 show that we devoted approximately 300 hours to these problems. If those hours were charged to the client at the purely hypothetical rate of $50 per hour the legal fees involved would average $3,750 per month.

However, those costs are only the tip of the iceberg. Three vice presidents for operations screen matters before they are referred to us. We have also trained 12 operations officers throughout the state of California to assist in screening demands for information. Beyond that we have prepared instructions and are in the process of preparing a manual for each branch manager to have available to instruct him in the procedures to be followed when demands for information are made upon him. The accumulated daily time of all of these bank officials and employees together with the associated costs of copying, preparing letters, telephone calls and if necessary personal appearances is a material drain on any bank's resources. Most importantly these procedures do not meet the basic requirements of fairness to the bank depositor even if they are 100% efficient. Only by giving notice to the depositor and allowing him to participate in these proceedings as a matter of right will fairness be achieved.

There are reported judicial opinions which deal with the costs involved in compliance with IRS summons which I would be remiss should I fail to call them to your attention. First, is the opinion of Judge Teitelbaum of the Western District of Pennsylvania in United States v. Pittsburgh National Bank, et al., F. Supp. (Feb. 3, 1975). In that case six summons were served on three banks by an IRS Special Agent. Together the three banks would have been required to search their records at a total of 276 banking locations. Judge Teitelbaum ordered the IRS to pay the costs incurred by the banks in searching their records and producing copies which he estimated to involve several thousands of dollars. In doing so his reasoning was as follows:

"I think we must also closely examine the due process factor of requiring banks or other institutions to go to the considerable expense of assembling such documents. It seems to me that what is not fair is not due process and that the Government should pay the cost of such search as a condition precedent to obtaining any documents.

*

"It is my belief that before these banks, or indeed any others, are required to spend thousands of dollars in employees' time in response to a § 7602 summons, the IRS should have some basis to believe that: 1. the records do exist and are in possession of the bank; 2. the records sought do have some bearing on the customer's income tax liability; 3. the IRS has exhausted all other and less costly alternatives to obtain the same documents.

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Toward that end, in this instance, I feel that the best means to insure compliance with each of the three elements set forth above is to obligate the IRS to pay the bank the actual costs of searching their records."

I find Judge Teitlebaum's reasoning persuasive. That is, if the requesting agency must bear the costs of the search for and production of the records they will be more careful in making certain that they can demonstrate a need to obtain the information requested. Congress, in providing access to Federal government records by the Freedom of Information Act, placed the financial burden on the requesting party. I see no reason why it should not similarly be placed on the requesting party when it is the government which seeks records. To the contrary, for the reasons stated I believe that to place the financial burden upon the government would serve the basic purpose of H.R. 214-to restrict unwarranted government snooping into citizens' financial affairs.

Unfortunately this case stands apart from the vast majority of judicial decisions which have considered the question of costs. The prevailing view is that expressed by the Tenth Circuit in United States v. Continental Bank & Trust Company, 503 F.2d 45 (10th Cir. 1974). Also see United States v. Dauphin Deposit Trust Co., 385 F.2d 129 (3rd Cir. 1967), cert. denied, 390 U.S. 921. In Continental Bank & Trust Company the bank resisted an IRS summons. It alleged that compliance would require direct costs of $1,500. Therefore the bank claimed the summons was an unreasonable search under the Fourth Amendment and an unlawful taking of property under the Fifth Amendment. The Court rejected both arguments finding such costs to be the normal burden of citizens and a part of their general duty to respond to governmental requests.

Moreover, in the Continental Bank case, the bank tried to assert its customer's rights of privacy. The Court rejected these claims on the grounds that the bank had no standing to assert its customer's right of privacy and that such rights could not even be asserted by the customer if before the Court because the cus

tomer could not establish a reasonable expectation of privacy. It is only as to this later point-that bank customers have a reasonable expectation of privacy in records of their financial affairs, that Burrows and Miller conflict with the Continental Bank case.

The Continental Bank case provides a unique twist of the standing argument. When combined with Burbank we find that under Burbank the depositor lacks standing because he is not the party named in the summons and under Continental Bank the bank lacks standing to assert the depositor's rights-specifically his right of privacy! The bank then may only object upon technical procedural grounds, the customer on none.

I will not burden you with a discussion of the host of other cases. But I will point out that in one case the cost of compliance by the bank was estimated to be almost $30,000. United States v. First National Bank, 173 F. Supp. 716 (W.D. Ark. 1959). See also United States v. Jones, 351 F. Supp. 132 (M.D. Ala. 1972) and United States v. Zions First National Bank, F. Supp. 75-2 U.S.T.C.

¶9581 (D. Utah, June 23, 1975) (costs involved totalled $4,247.38).

I should now like to speak to the specific proposed legislation. First, H.R. 214 is primarily directed towards surreptitious information gathering by wiretaps and other means. The restrictions that would be imposed by H.R. 214 may be appropriate in that area. However, as applied to bank records I believe it is too restrictive for the reasons stated.

The standard of "probable cause that a crime has been or is about to be committed" would apparently prevent IRS civil investigations and eliminate Section 7602 summons. It would also prohibit obtaining information regarding a taxpayer's assets in connection with collection efforts. On the other hand the bill is in some respects too narrow as it would apply only to Federal investigations and would not similarly restrict state investigations. As you gentlemen are aware this subject is under consideration by other Committees. The IRS summons procedures under § 7602 and related sections present concerns from the law enforcement agencies' view that are peculiar to the tax area. If, as it appears, the House Ways and Means Committee is going to act in that area amendments to the Internal Revenue Code may be the most appropriate method of remedying the procedural problems in that area.

As you know the proposed "Right to Financial Privacy Act of 1975,” H.R. 2752 provides the basic remedies of requiring notice to the bank customer and granting the bank customer standing to contest demands for information. Those points I strongly support. As I noted before, such provisions will aid both banks and their customers by providing for a timely review of subpoenas, etc. by all interested parties.

There are other aspects of H.R. 2752 some of which are touched upon by my testimony today upon which I wish to comment.

One, the costs to the financial institutions of complying with subpoenas and other requests are considerable. Such costs should be borne by the parties substantively involved and not by the custodian of the records. Law enforcement agencies should bear the costs of searching and copying as well as witness fees. Customers should bear the costs of obtaining copies of the reports of examinations in Section 6(c) of H.R. 2752, as well as the costs of obtaining copies of the records furnished to law enforcement agencies, if requested.

Second, I believe the language on line 12, page 6 of the bill may be ambiguous. To clarify that language I suggest the insertion of the following phrase after the word "records" on line 12: "pursuant to a customer authorization under section 6(a)." In connection with the customer authorization contemplated in section 6 it would seem appropriate for a financial institution to incorporate the notice that the customer may revoke the authorization at any time and obtain a copy of the record of any examinations so authorized at his cost in the form of authorization itself instead of requiring a separate form.

Third, the cases cited illustrate the broad descriptions of records requested which you may wish to consider in connection with the definition of "financial records" in section 3(b). In this area it would be desirable at the outset to make it clear whether a law enforcement agency may obtain the name of a bank customer or a person's account number and the fact that the person is a bank customer without legal process. Recently we have received letters requesting the bank to confirm that certain named individuals were customers and if so their account numbers.

Fourth, the definition of "customer" should include someone who has in the past utilized or patronized the financial institution, but who is no longer patronizing the institution. Moreover, the definition may not include someone who unsuccessfully sought to patronize the institution. For example, a person who applied for, but was not granted, a loan, but who in the process provided certain information in connection with the application.

Fifth, the definition of "supervisory agency" in section 3(c) when considered in connection with section 11(b) and section 12 appears to be materially deficient. Under the Bank Secrecy Act of 1970 which is not part of the Internal Revenue Code, financial institutions are required to report certain transactions to the Treasury Department: Failure to include the Treasury Department within the definition of "supervisory agency" would therefore appear to preclude those reports of foreign currency transactions. (Form 4790) If that is the intent I am not certain I would disagree, but I would not wish to inadvertently achieve that result at the risk of substantial litigation.

Moreover, the Federal Trade Commission and other agencies have certain functions under the Fair Credit Reporting Act which require examinations and disclosure. 15 U.S.C. § 1681s Unless those agencies are included within the definition of "supervisory agency” the status of their right to examine credit records would be unclear.

Sixth, section 5(b) may pose a problem if the institution must show records to prove that a crime has been committed, for example, forgery. A distinction may be drawn if the bank is initiating the report of the crime for it is then acting in its own behalf and should be entitled to furnish sufficient information to establish "probable cause." If not, an institution reporting a crime may be subject to an action for defamation, etc. This situation is to be contrasted with the insufficient funds problem in Case No. 2, in which the investigation is initiated by law enforcement agencies.

Seventh, section 6(b) I believe properly prohibits requiring an authorization in order to do business with the institution, but it should not preclude inclusion of the authorization in standard banking forms with a box to check if the customer desires to grant the authorization, provided, of course, that the form itself makes it clear that the customer need not check the box.

Eighth, it should be made clear that section 9 includes grand jury subpoenas. Unless they are specifically included it may be argued that section 9 applies only to subpoenas for production in connection with trials. No other section, with the possible exception of section 7, could be interpreted to apply to grand jury subpoenas. The examples to which I have testified today make it clear that grand jury subpoenas should be included within the scope of this legislation. Indeed, because an accused may not have counsel when appearing before a grand jury and because grand juries rarely act independently of the prosecutor safeguards of the nature prescribed by H.R. 2752 are most needed in connection with grand jury subpoenas.

Ninth, Section 14(a)(1) is an open invitation to extensive litigation concerning the definition of the term "violation." As experience in the truth-inlending area shows, such term should be defined with great particularity to avoid later problems of interpretation. Potential problems include the following: (i) is a simultaneous release of the same information to multiple agencies more than one violation; (ii) does it constitute multiple violations if the requested information is given over piecemeal, or to different agencies, or is recopied later for dissemination by the receiving agency or agencies; and (iii) does it constitute multiple violations to gather and release information kept at separate branches, locations and by subsidiaries and affiliates.

In conclusion, I personally, and on behalf of Crocker Bank and its customers, welcome your efforts to provide fair procedures whereby the customers of banks may participate in their own behalf to protect their right of privacy. This is an important area of the law in which there is every evidence that a fair and easily administered procedure will not evolve from the judicial process. Accordingly, legislation of the nature of H.R. 2752, the "Right to Financial Privacy Act of 1975" is badly needed and I recommend that the approach of that bill be adopted in further consideration of H.R. 214 insofar as it pertains to bank records.

Thank you, Mr. Chairman and Members of the Committee, for the courtesy you have extended to me today in appearing before you.