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FOREIGN BANK SECRECY

TUESDAY, JUNE 9, 1970

U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,

Washington, D.C. The subcommittee met, pursuant to adjournment, in room 5302, New Senate Office Building, Senator William Proxmire (chairman of the subcommittee) presiding.

Present: Senators Proxmire and Bennett.

Senator BENNETT. Ladies and gentlemen, Senator Proxmire, who is chairman of the subcommittee is appearing as a witness before another committee in the Senate, and therefore he has asked that I start the hearings. Our first witness today is the Honorable Eugene T. Rossides, Assistant Secretary of the Treasury for Enforcement and Operations.

Mr. Secretary, if you will identify the people who are with you at the head table, and then you may proceed as you please. STATEMENT OF EUGENE T. ROSSIDES, ASSISTANT SECRETARY FOR

ENFORCEMENT AND OPERATIONS, DEPARTMENT OF THE TREASURY; ACCOMPANIED BY ROBERT COLE, SPECIAL ASSISTANT FOR INTERNATIONAL TAX AFFAIRS; WILLIAM L. DICKEY, DEPUTY ASSISTANT SECRETARY; MICHAEL BRADFIELD, ASSISTANT GENERAL COUNSEL; BERNARD MEEHAN, SPECIAL ASSISTANT, COMPLIANCE STAFF, INTERNAL REVENUE SERVICE; AND ROBERT ROSTHAL, DEPUTY CHIEF, GOVERNMENT OPERATIONS SECTION, DEPARTMENT OF JUSTICE

Mr. Rossides. Thank you very much, Mr. Chairman.

With great pleasure I introduce on my right Mr. Robert Cole, who is in charge of the International Tax legislative staff at the Treasury and who has been our executive secretary on the Treasury Task Force on Bank Secrecy.

On my left is Mr. Ira Tannenbaum, attorney in our Tax Legislative staff and secretary of our Treasury Task Force.

Also accompanying me is my deputy, Mr. William Dickey.

On the far right is Mr. Bernie Meehan, special assistant on the Compliance Staff of the Internal Revenue Service. And on my far right is Mr. Robert Rosthal, deputy chief of the Government Operations section of the Department of Justice who has been working closely with us. Waiting right behind me is Michael Brodfield, Assistant General Counsel, Department of Treasury.

(147)

Senator, if I may, my testimony is rather long and there are attachments that total over 30 single spaced pages. If I may summarize and offer the testimony for the record.

Senator BENNETT. The testimony with the attachments will be included in the record in total, and we will be happy to have you summarize it in any way you please.

(The complete statement appears on p. 170.)

Àr. ROSSIDES. Senator, when this administration took office, this was one of the problems in law enforcement that faced us and that we took a great deal of interest in doing something about it. At the Treasury we joined with our fellow Departments at Justice and State and with the cooperation of the Securities and Exchange Commission we formed a team that entered into serious negotiations with the Swiss Government.

In effect the President and the administration decided to elevate the problem of bank secrecy from an ad hoc basis—trying to obtain information from time to time when a particular case would come upto a foreign policy level of negotiating a workable treaty so that we could obtain information from foreign countries on a usual and easy basis.

Actually, our program developed into a four-part program of the administration. I would call the President's reform program to do something about foreign bank secrecy.

The first, as I have mentioned, is the foreign policy approach. In this case we are not just dealing with the one country, Switzerland, which I will mention a little further on, but in effect we are reviewing all of our existing tax treaties to see that the information exchange provisions are adequate. In any new treaties we will make sure that such provisions will be adequate.

Secondly, and it is part of the philosophy—my own philosophy and, I believe, it is also the philosophy of the administration let's look at the laws we have, see how we are administering them, and see what additional regulations we may be able to put into effect under existing law. I will discuss that. That is the administrative area, and I think one of the key things that we have done, and one that I have great hopes for is that we have made a firm decision at the Treasury that on next year's tax return there will be a requirement that those persons having an interest, direct or indirect, in a foreign bank, brokerage or similar account will have to check off on the tax return that they have that interest.

Thirdly, we have made on behalf of the administration legislative proposals. This is the first time that I am aware of that there have been any legislative proposals made by any administration in recent history. We intend to have additional proposals as they come along for the Ways and Means Committee and of course the Finance Committee.

The fourth area is to work closely with the private sector in learning more about the techniques and methods of international tax evasion and international financial crimes. I believe that in this day and age when the speed of communications is such that today you can be here in the United States and in a few hours you can be in another country, the opportunities for such evasion and crimes are increased. An analogy would be what Chief Rowley of the Secret Service mentioned; in the old days when counterfeit bills would appear in a city or in a particular State, it would be localized there, today it can appear there and that

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same bill the next morning can appear across the country in another State.

Most important, and what should be kept in mind, are three fundamental concerns of the Treasury Department and the administration as we prepare our proposals and as we reviewed our administrative practices. The first is that the U.S. dollar is the principal reserve and transaotions of currency in the world. Foreign holdings of U.S. dollars are huge, amounting to some $43 billion in liquid form. We must do nothing which would in any way interfere with the free flow of goods and trade and capital into any unreasonable or any undue extent. Excessive measures would

give concern to our allies and other nations as to the position of the U.S. dollar.

I think one of the great results of our international payments system has been the free flow of the dollar back and forth and the absence of any kind of controls. It has, therefore, been of paramount concern to us that any proposals we make will in no way restrict the regular and efficient flow of our domestic and international business or personal transactions or particularly diminish the willingness of foreigners to hold and use the U.S. dollar.

The second consideration, Senator, is that consistent with our determination to deter tax and other evasion by U.S. persons involving foreign financial transactions, we have sought to develop proposals under which the benefits to our revenue system and to our law enforcement objectives outweigh costs and inconveniences of the proposals.

Finally, the third basic thought that has been in our minds, and a very important one, is that we have kept firmly in view our traditional freedoms, such as the constitutional prohibition against unreasonable searches and seizures and the right of our citizens to privacy.

In strengthening enforcement, we must not jeopardize these principles. There has been a lot of talk, also, Senator, as to the amounts of moneys involved in international tax evasion. Frankly, there are no firm statistics. No one can say how much. We don't know. However, whether the amount is large or small and whether the number of persons involved is great or few, nevertheless, the principle involved is central to the proper administration of our self-assessment system of taxation. Tax fraud schemes must be attacked vigorously.

I might add that in the last few decades there has been an increasing use of the commercial banks to gather savings and hold the deposits of individuals. In the past financial obligations were settled through the transfer of coin and paper currencies, but now with few exceptions the personal or corporate check settles accounts. With the convertibility of currencies, particularly the dollar, with the increasing interrelationship of our economies, international financial transactions often involve foreign bank accounts in at least one stage or another.

Another point that I think should be made is that the United States does not and should not seek jurisdiction over foreign financial institutions not engaged in trade or business in the United States.

I would like to discuss for a few moments our negotiations with the Swiss, if I may, Senator. We have had several conferences with the Swiss authorities, the latest one being in March of this year in which all four agencies participated. Then it was agreed there would be a Treasury team that would discuss the tax aspects separately with the Swiss. These discussions were held in Berne in May. Another meeting with the Swiss is scheduled next month at which all four agencies

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will be represented. I think it is important to understand that in Swiss law there is criminal tax fraud. I believe there has been some feeling that tax evasion is not a crime in Switzerland. Well, under that phraseology or the term of art "tax evasion” it is not, but tax fraud is a crime in Switzerland in most cantons, and they do have criminal tax prosecutions in Switzerland, and the principle of bank secrecy is superseded in crimintal tax cases in Switzerland. We believe that under our tax treaty with Switzerland of 1951 we are entitled to no less information than the Swiss would be able to obtain in their own criminal tax cases.

But further, Senator, our program involving foreign policy has not been solely focused upon Switzerland. The Treasury also has been reviewing the operation of our other tax treaty exchange of information provisions. We are examining the use of financial facilities in other foreign jurisdictions which offer shields of financial secrecy to the U.S. taxpayers.

Moreover, other countries have recognized that evaders and other criminals often go beyond national boundaries and have raised the possibility of international cooperation.

I would like to turn now to our five-point program for obtaining information on foreign accounts and transactions. The first area is our decision to require on next year's 1040 and 1120 tax returns an identification by the U.S. taxpayer of whether or not he owns or has an interest in an account in a foreign bank or owns or has an interest in a foreign brokerage or similar account.

We may also recommend to the Ways and Means Committee and this information. We may also be issuing regulations under existing the Senate Finance Committee a special penalty for failure to furnish authority requiring those persons that do have such accounts keep records of their transactions with the account.

We believe that this disclosure requirement will constitute a significant deterrent to the use of foreign accounts for tax evasion and other illegal purposes while in no way affecting the legitimate use of such facilities.

We feel this is an important advance, Senator, and we have great hopes as to its deterrent value, but experience will have to prove that.

Senator BENNETT. May I interrupt at that point ?
Mr. Rossides. Certainly.

Senator BENNETT. The fact that you are proceeding this way indicates that you are proceeding against evasion and not fraud. You used the word "evasion,” and that is why I wanted to raise the question.

Mr. Rossides. We would be proceeding against both. In fact, so far as enforcement of the U.S. revenue laws is concerned, "evasion” and "fraud” are virtually synonymous and interchangeable terms which connote conduct which is criminal and which also forms the basis for the imposition of the civil fraud penalty. It is Switzerland that ascribes to these two words a connotation of "lesser" and "greater" culpability and civil and criminal conduct. In other words, we would be proceeding against tax evasion in the United States for which there is a criminal penalty, whereas in Switzerland they simply say tax evasion is civil, unless it is aggravated, in which case it becomes tax fraud which is generally criminal.

In the United States we distinguish between tax avoidance and tax evasion. Tax avoidance is perfectly legal and involves a taxpayer

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