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ferences in the cantonal laws in specific cases, that if we knew more about the Swiss law at the cantonal level we might find ourselves getting information that we don't get now because we stop at the Federal level in Switzerland.
Mr. ROSSIDES. This is exactly, Senator, our approach in the tax area. These negotiations started through a Federal judicial assistance treaty. Then, we decided to also make sure that there are no criminal tax cases, and we found there are.
Then we examined under our existing tax treaty the language that is in article XVI regarding exchange of information for fraud or the like. We are now vigorously pursuing that into the canton level in our discussions.
They are at a very crucial state. I am also an optimist, but
Senator BENNETT. I would like to move over to another series of questions.
Is it your feeling that the requirements in the legislation should more or less relate only to transactions that have a high degree of possible criminal, tax, or regulatory impact rather than that they should cover the general relationships of what might be legitimate business transactions ?
Mr. ROSSIDES. We do feel that, Senator, we feel that there should be a standard of a high degree of usefulness in criminal, tax, and regulatory investigations or proceedings. The tendency to do too much; we have a problem, let's legislate, let's bring in all the records as if that is the answer.
Do not overestimate what will happen with this legislation. This is part of a multidimensional problem. Legislation will definitely help. If you just had the legislation and nothing else, it is not going to be that much assistance. The legislation plus our administrative efforts plus our international efforts plus cooperation with the private sector we feel will be a help.
But just to have records, just to give the appearance to the public that we have handled this problem because we have now reuqired all these records and so on, it is not that helpful.
So, we want to zero in and make ourselves do the hard work of determining what is highly useful rather than the shotgun approach. I think it was the Commissioner of Internal Revenue that used that phrase, what we are looking for is the rifle approach rather than the shotgun approach on recordkeeping and reporting.
Senator BENNETT. Would it be a simple matter for individuals or institutions to evade title IV through the use of foreign accomplices?
Mr. ROSSIDES. I would believe so. I would add that title IV would be extremely difficult to enforce. So, the answer to that question would be“Yes."
Senator BENNETT. Do you have any thoughts about the $500 exclusion contained in th House bill recordkeeping requirement?
Mr. ROSSIDES. This was an amendment that was sponsored by Congressman Stanton in the House, Senator, and it is difficult of implementation. Some banks have indicated that when they microfilm they are not going to be able to distinguish between the $500 or the $10 or the $1,000, so, they are going to do them all, especially since the $500 exception does not apply to checks used in international transactions.
The comment has been made that this would be helpful to smaller banks. We have some comments in our technical section. Frankly, I
don't know, and this is one of the great problems about the domestic recordkeeping requirements.
An adequate study has not been done by anybody to date—by the House, by the Senate, by the Treasury. In the domestic area why start from the top and go down and say keep everything, which is literally the attitude of the bill? Our feeling is let us set a standard for highly useful. Let us tell the Secretary that he must study the matter and come up, as he has done in the international area, with a program.
The greater problem is literally not simply recordkeeping on checks. The greater problem is what do the law enforcement authorities do with the modern technology. We have not nearly gotten into that, the problem of computers and the problem of electronic data. How do we get these into court for evidence? This is the broader, even far more difficult problem.
Senator BENNETT. One final question.
Should foreign branches of American banks be required to meet the requirements to be imposed on domestic banks or should they be permitted to operate in accordance with the law of the country which they are established?
Nr. Rossides. Senator, I think in my judgment and it is not so much a personal view, but I think it is clear that they must operate under the laws of the country which they are in, just as the U.S. branches of foreign banks must operate under our laws.
While the United States, if it wishes to exercises it, has jurisdiction over entities owned or controlled by Americans that are located overseas, the jurisdiction should not be exercised so as to require them to violate the law of the foreign country in which they are located. This would put them in an impossile position. I think it is clear we should not be telling an American branch in France to operate under U.S. laws which are contrary to the law of France. We require, for example, a branch of a French bank in the United States to operate under our Federal and State laws.
Senator BENNETT. They cannot be required to operate under a dual system of law?
Mr. Rossides. They certainly should not be required to operate under U.S. law when that would require them to violate foreign law. Moreover, we should try to avoid putting branches of American banks under unique rules not applicable to their competitors, even if these rules were not in violation of foreign law, since this places U.S. branch banks at a major competitive disadvantage.
Senator BENNETT. That is all. Thank you.
Senator PROXMIRE. Again I want to apologize for being late, and that is the reason for the late hour. I will be as swift as I can in the questioning, Mr. Rossides. I am delighted you are here. You are certainly one of the outstanding authorities, perhaps the outstanding authority on this legislation. You have worked very hard and very long on it, and you understand many aspects of it that some of us just understand in part.
There seems to be a controversy over the record of Treasury support for this type of legislation. Press reports have indicated that the provisions of H.R. 15073 and S. 3678 were drafted with the aid of Justice officials and that Justice was prepared to endorse the legislation, but that a meeting between you and representatives of several large banks convinced the administration to soften its position. Could you give us your version of this dispute?
Mr. Rossides. Senator, I would be happy to. Even in the rewording of the question about the dispute there is a slight change from what was
alleged by certain persons as to what happened. They alleged that the Treasury drafted the H.R. 15073. I think now they are alleging it might have been Justice.
Senator, I will answer it very briefly because I do not want to get into a controversy about past recriminations of who struck John. I think far more important is that we can agree on the obejctive and figure out the best way to get there. But in fairness to distinguished and hard-working Treasury staff who are here today, who were more annoyed at the accusation that they helped draft the original House bill, not because they did not agree with the objectives of the bill but they said they did not want to be associated with the kind of draftsmanship that was involved it was that bad.
We testified originally on December 4 and said the original bill in the House needed a lot more study, that it not only needed study, it needed more work.
On March 2 when I presented our testimony after several months of hard work, I was very pleased that the chairman of the House Banking Committee congratulated us, congratulated us on our efforts, and agreed to incorporate our suggestions, and then unfortunately they did not agree to accept all of the amendments we suggested.
We improved that original bill considerably. There were so many loopholes, bad draftsmanship. Finally, when we were not able to work it out between the two staffs cooperatively, we felt we had to come in with our own bill. That is why I am saying, Senator, I am not concerned with pride of authorship in H.R. 16444.
Senator PROXMIRE. In your view it was a matter of changing the poor draftsmanship and the loopholes and making corrections of this kind, it was in very large part technical corrections perhaps that were in error, it was not in your view a softening action?
Mr. ROSSIDES. Not only not a softening action, Senator, our amendments that we came in with on March 2 strengthened the bill.
Regarding the softening nonsense, this idiocy of trying to write legislation by leaks and rumors and so on and so forth, frankly, I don't like to quote newspapers, but when I gave a recent talk I decided to do that because of what I felt were the unfair charges regarding accusations about bank pressure and so on.
I have got a thick skin so I don't mind about false accusations that I gave in to pressure. But the proper way to write legislation is if you are dealing with a particular industry or group, you work with them.
The Washington Post pointed out that after 13 or 14 drafts, allegedly 13 or 14 drafts of the original House bill there had not been to that date one consultation by the House staff with the banking or brokerage community. The quote is the following and it was in a December 27, 1969, Washington Post editorial referring to the original Patman bill: "This is a subject, of course, on which bankers ought to have their say. The strange thing is that they had not been consulted while the bill was being drafted. Though it is of great importance to curb the misuse of hidden bank accounts abroad, it is equally vital to protect the free flow of international commerce and to avoid the imposition of unnecessary burden upon the banks."
This came up in the House, Senator. Congressman Reuss asked me, and he quoted from a magazine about pressure, and I said no, there was not. There was reverse pressure. The bankers came in and I was
in a meeting for a few minutes. The staff was there. I gave the policy position: the Treasury was determined to do something, we had moved ahead in the treaty area, we had moved ahead administratively to see what procedures could be changed, we were now looking for legislation. We wanted this assistance, and they pledged their assistance and I walked out of the meeting.
My point is, without this help we would not have been able to come up with these substantial amendments that we made in the bill. So, again I want to keep away, if possible, from, as I say, who struck John, because I think that this legislation can be helpful and, really, Senator, what we are trying to do is to get the best possible language.
Senator PROXMIRE. I am concerned over your opposition to title IV which requires fuller disclosure on foreign stock transactions. Yesterday SEC said this provision would strengthen their ability to enforce our securities laws. I should think it would also enable IRS to reduce tax evasion. Why do you think it would reduce the flow of foreign investment in this country.
Mr. Rossides. Senator, I think on the question of strengthening enforcement, it possibly could help. I would have to analyze it a little more from that point of view.
Our concern was with the impact on the mobility of funds and the question of whether or not we are trying to regulate foreign businesses. Our feeling is that we should not be doing this, that it would not be that helpful.
I think the chairman of the Securities and Exchange Commission did defer on the question of the impact of this on the mobility of capital.
Senator PROXMIRE. He did that indeed, but he also indicated that it would help him in enforcing the securities laws.
Mr. ROSSIDES. It is a very difficult provision to enforce and to use to obtain reliable information; so, I am not so sure. I spoke with the chairman this morning very briefly. I just mentioned that I noted some of his testimony yesterday and that I would be testifying that we would want this provision deleted.
I guess when you say if we can get additional information as to who is doing what that that would be helpful. On that basis, SenatorI am not trying to duck the question, I am just trying to say it is a very difficult provision to enforce, and that clearly the problem of interference with the international flow of moneys into the United States, and the international mobility of moneys and business, generally so far outweigh the potential increase in law enforcement benefit that we just don't feel it is that close a question.
Senator PROXMIRE. I wonder how this would inhibit the flow of money into the country. Isn't it true that any reduction in so-called foreign investment might be due to U.S. citizens transferring their money out of secret foreign accounts because of the disclosure provisions, and would not most of their money come back in legitimate form?
Mr. Rossides. No. We don't believe that most foreign investment in the United States represents investments of U.S. citizens.
Senator PROXMIRE. Where do you think this $9 billion of funds invested from Switzerland into our markets is coming from? Does not that come primarily from U.S. citizens?
Mr. Rossides. We do not know, but it could come from innumerable foreign sources.
Senator ProxMIRE. It does not come from the Swiss.
Mr. Rossides. Well, it actually could come in large part from the Swiss, or other foreigners using Swiss banking facilities.
Senator PROXMIRE. $9 billion!
Mr. Rossides. We just do not know. But the $9 billion was approximately the gross purchases and sales of U.S. stocks and bonds in 1969. The total purchases from Switzerland in that year were $1.9 billion. The actual net inflow was $658.7 million. This is a small sum compared with the funds available for investment in Europe. The relatively small size of U.S. funds in Switzerland is also indicated by the fact that total short-term liabilities of Swiss commercial banks in dollars to U.S. residents in December 1969 were $140 million out of a total of $1.46 billion.
Senator ProXMIRE. Of course the whole purpose of title IV is so that we would know.
Mr. Rossides. The comments on the statistics, Senator, which my staff gives me as estimates, is that actually only a small percentage is estimated to be from U.S. citizens.
Senator PROXMIRE. How can you make any estimate if you do not know?
Mr. Rossides. That is why I said an estimate.
Mr. Rossides. It is based on the fact that the Swiss are world bankers. They are not the bankers for the United States. There are moneys there from all over the world. I would say the probability is clear that it is a small rather than a large percentage of the $659 million net investment in 1969. But I will discuss this within the Treasury and get estimates of other figures.
(A table showing Swiss purchases and sales of U.S. corporate bonds during the period 1954-69 follows:)
U.S. corporate bonds
U.S. corporate stocks
chases by Switzerland
of U.S. bonds and
+-55.5 +2, 176.4
+658.7 +1, 332.1 +426.7 +65.4 +14.1 - 200.3
- 14.2 +128.5 +166.0 +170.7 +253.9
+19.4 +101.2 +146.6 +142.0
Note: Classified as transactions with Switzerland on the basis of whether the address of the person giving the buy or sell order is a Swiss address. Gross purchase figures may include purchases of U.S. securities from other foreigners; the same with gross sales figures. However, the net purchase and sales figures tend to cancel out these transactions between toreigners, but probably do not do so completely for any single country breakdown.