This Administration recognizes the widespread moral decay that would result if these practices are permitted to continue and expand. We are determined to do something about them.

The Administration has acted in four interrelated areas:

First: The development of solutions has been elevated from an ad hoc case-bycase approach to the foreign policy level. Treaty discussions have been undertaken with the Swiss authorities and we are in the process of contacting other governments. We are reviewing all of our tax treaties with this problem in mind. Second: The Treasury is carrying out a comprehensive administrative review of current procedures and an analysis of what further can be done under existing statutory authority. We have already decided, with respect to taxable years beginning January 1, 1970, to require every United States taxpayer to disclose his direct or indirect interests in foreign bank, brokerage and similar accounts on his tax return.

Third: The Treasury has made, on behalf of the Administration, certain legislative proposals regarding this problem, many of which are incorporated in the bills before this Committee. Further views on legislation are being presented in this statement and in Attachments A and B. Proposals for the amendments to the Internal Revenue Code will be presented to the House Ways and Means Committee and the Senate Finance Committee.

Fourth: The Treasury is using the expertise of the private sector in this work, especially to obtain information on the methods by which international financial transactions are actually or might be carried out.

Before discussing our actions in these four areas, I must emphasize three fundamental concerns that predominate in formulating Treasury's enforcement efforts.

First, the United States dollar is the principal reserve and transactions currency of the world. Foreign holdings of U.S. dollars are huge, amounting to some $43 billion in liquid form. This fact itself is a mark of the confidence which others have in the political and economic stability of the United States and is a tribute to the success of the international trade and payments system we have been creating a system of progressively fewer restrictions to the flow of goods and capital. The overwhelming bulk of the rapidly growing volume of international transactions by Americans and foreigners alike are not only legitimate business and personal transactions, but serve the larger interests of the United States in effective monetary arrangements and freely flowing trade and payments. It has, therefore, been of paramount concern to us that the proposals we are making will in no way restrict the regular and efficient flow of domestic and international business, or personal transactions, or diminish the willingness of foreigners to hold and use the U.S. dollar.

The second consideration 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, 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 is no certainty as to the extent foreign bank accounts are used by U.S. citizens and residents, the number being used for illegal purposes, or the size of the tax fraud and other criminal violations shielded by such accounts. Even though the number of persons involved and the amounts of tax fraudulently evaded by these means may be small in comparison to the total number of U.S. taxpayers and total tax collections, the principle involved is central to proper adminstration of our self-assessment system of taxation: tax fraud schemes must be attacked vigorously.

Rapid means of international transportation and communication have greatly facilitated the free flow of funds and commerce across what were once thought to be great distances. While these advances are of great benefit to the world economy and international understanding, they have also added to the problem of tax fraud and other crimes through the use of secret foreign bank accounts. During the last few decades the use of commercial banks to gather savings and hold the deposits of individuals has grown substantially. In times 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. The request for a bank to transfer is an active alternative to the the check. With the convertibility of currencies, particulraly the dollar, and with the increasing inter46-824-70-12

relationship of our economies, international financial transactions often involve foreign bank accounts in at least one stage or another.

The United States, of course, does not have nor should it seek jurisdiction over foreign financial instiutions not engaged in trade or business in the United States. Once funds owned by U.S. citizens and residents leave the United States, the Internal Revenue Service, the Securities and Exchange Commission and other U.S. law enforcement agencies cannot normally trace these funds in the foreign country unless the foreign government has agreed to conduct investigations on our behalf. In contrast, where only domestic financial institutions are used, our investigators can frequently pick up the trail at various junctures and trace transactions from bank to bank.

I. FOREIGN POLICY-DISCUSSIONS WITH SWITZERLAND

As you know, we have been holding discussions with the Swiss government to explore the possibilities for a treaty for mutual assistance in criminal matters. We are also reviewing our 1951 income tax treaty with Switzerland to make sure that we are making full use of the provisions which provide for the exchange of information "for the prevention of fraud or the like in relation to taxes" covered by the treaty. Our third round of talks with the Swiss was held in Washington in March, the United States being represented by an interdepartmental group from the State, Treasury and Justice Departments and the Securities and Exchange Commission. A Treasury delegation visited Bern in May and further talks are scheduled for next month. The talks are at a crucial stage, but it will probably not be until the Fall or later when we know whether an agreement can be reached.

We believe Article XVI of the existing tax treaty already requires, except in a narrow range of circumstances, the exchange of information in tax fraud investigations and proceedings to the extent that the laws of both countries provide for the obtaining of the type of information sought. Swiss law makes an important distinction between simple tax evasion and tax fraud, which is an aggravated form of tax evasion. Whereas individuals guilty of simple tax evasion under Swiss law are not considered to have committed "crimes" as we know the term, and thus are not subject to jail sentences, tax fraud in connection with the Swiss federal withholding tax on interest and dividends and the income tax laws of sixteen of the twenty-five Swiss cantons, including the economically more important cantons, is deemed a criminal offense which can result in the imposition of jail sentences and which is handled in criminal rather than administrative proceedings.

This distinction between tax evasion and tax fraud becomes of essential importance, not only because the tax treaty requires the exchange of information in tax fraud cases, but also because under Swiss law the obligation of a bank to observe secrecy about the affairs of its depositors is superseded by the duty to furnish information, give testimony, or produce documents in criminal proceedings which include tax fraud proceedings.

We believe that our tax treaty entitles us to obtain no less information than is obtainable by Swiss authorities in comparable proceedings. However, some have suggested an interpretation significantly at variance with that of the United States which could severely restrict the exchange of information under the tax treaty.

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

II. THE ADMINISTRATION'S PROGRAM FOR OBTAINING INFORMATION ON FOREIGN ACCOUNTS AND TRANSACTIONS

The Treasury, as part of the Administration's program, has been developing a system for obtaining information on foreign bank, brokerage and similar accounts and international transactions of U.S. citizens and residents for use in tax determinations and criminal and regulatory investigations and proceedings. I will discuss each of the parts of our system in turn and indicate how it relates to the bills before the Committee and to other legislation.

1. Foreign account disclosure requirement

Each U.S. taxpayer will, with respect to taxable years beginning on or after January 1, 1970, be required to disclose his interests at any time during the taxable year in foreign bank, brokerage, and similar accounts on his tax return. This requirement will be imposed under section 6011 (a) of the Internal Revenue Code. We may also recommend to the House Ways and Means Committee and the Senate Finance Committee a special penalty for failure to furnish this information.

In connection with this disclosure requirement, we have under consideration a proposal to issue regulations, pursuant to existing statutory authority, requiring taxpayers with such interests to maintain specified records of transactions they have with these accounts. These records would correspond to the type of evidence taxpayers are now expected to produce when their returns are audited.

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.

2. International transactions recordkeeping by banks and other financial institutions

The extent to which our financial institutions have been keeping records of domestic and international transactions has undergone considerable change in the last few years as a result of technological advancements in the industry. The multiplication of transactions in the banking industry has only been made possible through the extensive use of electrical office machinery and computers. All of us have noticed how our own monthly bank statements have changed in format and procedures in the last few years, reflecting at a personal level the changes that have taken place in the industry. With these changes, the traditional copies and forms which the banks have retained in their own files have been reduced primarily for reasons of operating efficiency. This has occurred at the same time the public has focused on the use of international banking transactions to disguise criminal acts.

Since bank records can help in dealing with such crime, the Treasury recommends that banks and other financial institutions located in the United States be required to maintain certain minimum records of foreign transactions.

This would assist our law enforcement agencies to trace transfers of funds across our borders by U.S. citizens and residents and help investigation of foreign accounts subject to the foreign account disclosure requirement. In many cases, these requirements would codify present practices. Primarily, we seek improved availability of records.

The legislation could establish requirements for record-keeping with respect to international transactions by authorizing the Secretary of the Treasury to prescribe particular records which must be maintained. While we originally recommended this approach, it now seems to us that in addition the legislation can appropriately provide that banks and other financial institutions located in the United States be required to maintain six specific types of records as follows: (1) Records of foreign remittances transferring funds abroad.

(2) Records of foreign remittances transferring funds to the United States. (3) Records of large checks negotiated abroad drawn on banks located in the United States and records of large foreign credit card purchases by U.S. citizens and residents.

(4) Records of foreign checks transmitted abroad for collection.

(5) Records of foreign drafts.

(6) Records of letters of credit and documentary collections.

As experience is gained and methods of business change, the Secretary would be authorized to issue regulations adding specific types of international records to those required or to suspend the requirement as to any type of record specified in the statute. With respect to retention period, we recommend that the statute prescribe a general six-year retention period with authority conferred on the Secretary to reduce the period where appropriate. The Secretary should have authority to establish the magnitude of transactions or documents subject to the requirements or to set exceptions on the basis of other criteria.

A further description of the international records we recommend and some details on the contemplated record-keeping requirements are set forth in Attachment A.

If the Internal Revenue Service could survey the foregoing records of international transactions, either by examining them on the premises of the bank or other financial institutions or by requiring information returns as to some of

the contents of the records, the usefulness of the records in providing initial leads to cases of possible tax evasion would be enhanced. Such surveys, however, would extend the utilization of the records beyond their traditional role as a source of information and evidence in an examination of a particular taxpayer. The Internal Revenue Code authorizes the Internal Revenue Service to obtain and examine records maintained by banks and others in connection with the determination of the tax liability of particular taxpayers. There is also a statutory basis for arguing that the Internal Revenue Code authorizes the use of compulsory process for a survey of the records of a financial institution located in the United States. Nevertheless, the Internal Revenue Service has not generally asserted such survey authority, the scope of which has not been reviewed by the courts.

We decided against seeking specific statutory authority extending the rights of the Internal Revenue Service to survey the records of international transactions in banks and other financial institutions. In deciding this, we considered the constitutional prohibition against unreasonable searches and seizures and the need to avoid unnecessary incursions against the right of privacy. While it is clear that obtaining records by establshed discovery procedures from the banks and other institutions in connection with the examination of a particular taxpayer would not violate these rights, provision for a survey of such records raises a much more serious questions. We are also concerned that surveys or information returns could have an adverse effect on legitimate foreign investment in the United States. It has been the tradition overseas to place great emphasis on the privacy of financial transactions and a breach of this tradition could adversely affect the flow of foreign funds to the United States.

Balancing these factors, we concluded that it would not be appropriate for us to suggest legislation extending the rights of the Internal Revenue Service to survey the records of banks and other institutions.

Next we considered the approach taken in sections 241 and 242 of S. 3678 and H.R. 15073 which could be used to accomplish the same result by requiring banks and other financial institutions to file information returns setting forth the information contained in the international records. For the same reasons that we have concluded that we cannot support new legislative authority for the survey of records not tied to a particular taxpayer investigation, we believe it inappropriate to support legislation requiring reports of information obtained from the records of international transactions. Since sections 241 and 242 of the bills authorize such reports, we cannot support their inclusion unless they are substantially amended.

This is a very delicate area which requires full consideration of the constitutional prohibition against unreasonable searches and seizures, the need to avoid unnecessary incursions against the right of privacy, the international reaction, and the needs of the Internal Revenue Service for information. We intend to do additional work in this area with the thought that if a sound proposal can be developed, it will be presented to the Congress.

3. Reports of Exports and Imports of Currency

In addition to international transfers through banks and other financial institutions, funds can be transferred directly by the physical movement of U.S. currency or its equivalent.

In order to make sure that records of such direct transfers are available for the purpose of verifying income tax returns and for criminal law enforcement. the Treasury proposes that persons importing or exporting on one occasion $5,000 or more of U.S. currency or its equivalent be required to file an information return prior to the importation or exportation.

There would be no restrictions on exporting and importing currency or the equivalent in any amount, and no return would be required of those exports or imports under the $5,000 level. The average international traveller would not be affected by this requirement. Those who reach this level could comply with this requirement by simply completing or turning in the report form which would be provided.

Enforcement of this provision, which would include a forfeiture provision, would require substantial additional manpower in the Bureau of Customs. 4. Rebuttable presumptions that U.S. citizens and residents engaging in certain foreign transactions are dealing with their own untaxed income

By means of the disclosure of foreign accounts, the required international records, reports of exports or imports of currency and, to a certain extent, Treas

ury Currency Reports, the Internal Revenue Service will be in a much better position to identify instances of tax evasion by U.S. taxpayers involving foreign accounts and international transactions than now. While such information would certainly be of use in reducing such evasion, there are limits to the benefits of the proposals so far made. We believe our effectiveness in law enforcement would be enhanced if the Internal Revenue Code were amended to provide rebuttable presumptions that persons who engage in certain international transactions and who do not furnish satisfactory information with respect thereto are dealing with their own untaxed income.

Legislative implementation of the presumptions would be through amendment to the Internal Revenue Code. The Treasury has discussed these matters with the staff of the Joint Committee on Internal Revenue Taxation and is developing proposals for submission to the House Ways and Means Committee and the Senate Finance Committee.

5. Administrative measures

The previous four parts of the Treasury's program to deal with tax evasion and other crimes facilitated by the use of foreign bank accounts have involved rules which would be applicable to taxpayers or financial institutions. There is, however, an important additional element that is necessary to make any law enforcement system work-adequate numbers of informed personnel and vigorous and comprehensive enforcement. The measures made available by the new legislation would require additional manpower.

A number of new approaches are being considered, including the establishment of a specialized group in the National Office of the Internal Revenue Service, with expertise in foreign banking and international transactions and the various possibilities for obtaining information. This group would be immediately available to field agents for consultation and guidance in cases which involve or might involve an undisclosed foreign account or international transaction. In addition, new instructions are being prepared for use by field agents which would require informing the National Office at an early stage about cases involving foreign banks for possible requests for information to foreign governments under treaty provisions.

The Internal Revenue Service also is evaluating whether it has in the past fully used the information which it has been able to obtain to draw inferences as to untaxed income. This is closely related to the statutory presumptions discussed above. While statutory presumptions will add strength to the inferences that are appropriate, even without these presumptions we believe that inferences can be properly drawn and tax liability established based on information which heretofore has not been considered sufficient to support a claim.

The Treasury recognizes that increased audit and enforcement activity will require additional manpower and perhaps data processing facilities in the Internal Revenue Service. Every attempt will be made to obtain sufficient funds for these needs and Bureau of Customs' needs in forthcoming Treasury appropriation requests.

III. THE ADMINISTRATION'S PROPOSAL FOR OBTAINING DOMESTIC INFORMATION

In addition to dealing with the problem of secret foreign bank accounts. S. 3678 and H.R. 15073 also deal with a basically separate problem area, law enforcement in a purely domestic context. Two provisions are involved: requirements for recordkeeping by banks and other financial institutions of records of domestic financial transactions, and Treasury Currency Reports.

1. Domestic Transaction Records of Banks and Other Institutions

While unlimited requirements for recordkeeping by banking institutions of all domestic transactions are undesirable and unnecessary, records of certain domestic transactions are often essential in the fight against tax evasion and other crime, especially organized crime.

Therefore, we recommend that the legislation provide discretionary authority in the Secretary of the Treasury to require that banks and other financial institutions maintain such records of domestic transactions as may be specified in regulations. Regulations would be developed to identify the types of documents subject to these requirements, specify the minimum amounts, establish the classification of documents (such as checks paid or checks deposited) and other classifications subject to these requirements and specify the retention periods.