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that the quoted language would give the President authority to provide for the sharing of the information obtained from reports filed under Title II by the Internal Revenue Service with other agencies, it would be useful to clarify this authority.
18. MARGIN REQUIREMENTS
Section 301 of the bills would give the Federal Reserve Board clear authority to apply margin requirements not only to lenders but also to borrowers. This is an entirely new concept in the regulation of credit as margin rules have been only applied in the past to lenders.
The Administration supports the extension of the margin requirements to borrowers provided it is made clear that there is no intent to regulate the availability of credit abroad to foreigners. Therefore, Section 301 should be amended to provide that only borrowers who are American citizens or residents and foreign persons controlled by or acting for them are subject to these requirements. In addition, it should be made clear that the requirements are applicable only with respect to the purchase of United States securities, or of foreign securities where the transaction is executed in the United States.
Moreover, as a technical matter the Treasury recommends these substantive changes in the margin requirement law be accomplished through the enactment of a new section rather than by amendment of Section 7(a) of the 1934 Act.
19. RESTRICTIONS ON DEALING WITH FOREIGN FINANCIAL AGENCIES
For the reasons stated in the statement of Assistant Secretary Rossides on June 9, 1970, the Treasury recommends the deletion of this provision.
20. ADMINISTRATIVE PROCEDURE ACT
In promulgating regulations under this legislation, the Administrative Procedure Act would be applicable. This would require that the notice and public procedure provisions provided in 5 U.S.C. 553 be followed.
Senator PROXMIRE. Our next witness is Mr. Carl Desch, senior vice president of the First National City Bank of New York, representing the New York Clearing House.
Mr. Desch, I want to apologize. It is a very late hour and I feel very badly that we have delayed you.
STATEMENT OF CARL W. DESCH, SENIOR VICE PRESIDENT, FIRST
NATIONAL CITY BANK, REPRESENTING THE NEW YORK CLEARING HOUSE; ACCOMPANIED BY ROY HABERKERN, PARTNER, MILLBANK, TWEED, HADLEY & McCLOY, NEW YORK CITY, AND JOHN F. LEE, EXECUTIVE VICE PRESIDENT, NEW YORK CLEARING HOUSE ASSOCIATION
Mr. DESCH. I should like to introduce two gentlemen with me, Mr. Roy Haberkern, a partner of Millbank, Tweed, Hadley & McCloy, a New York City law firm, and on my left, Mr. Lee, who is executive head of the New York Clearing House.
My name is Carl W. Desch, senior vice president and cashier of First National City Bank, and I appear here today on behalf of the New York Clearing House Association and its 10 member banks to present the views of the Clearing House on S. 3678. Since the introduction of similar legislation in the House, we have spent a good deal of time and effort considering legislation which would assist Federal authorities in the apprehension of tax evaders and other law violators who use international banking facilities to hide their activities.
I should perhaps begin by reiterating that Clearing House banks do not oppose carefully drawn legislation relating to recordkeeping and
reporting of financial transactions. We do, however, perceive at least five areas of concern in connection with the bill now before you. These
1. The unmistakable potential for invasion of privacy. -2. The existence of provisions which we believe could adversely affect the strength of the dollar.
-3. The almost unprecedented breadth of the regulatory discretion entrusted to the Secretary of the Treasury. -4. The operational difficulties, and even impossibilities, which could be created by some of the bill's provisions. -- 5. The possible adverse effects of the bill on the trading in, and the market for, American securities.
We believe workable solutions can be developed to alleviate the problems which we consider are presented by S. 3678 as presently drafted, and there is appended to my statement a paper suggesting certain changes in the language of the bill. Most of the recommended changes are discussed in the balance of my statement.
In testifying before the House committee we stressed the point that the proposed legislation should be consistent with basic concepts of individual privacy. As the members of this subcommittee are well aware, privacy in connection with one's financial transactions is an important part of the system of values which we Americans cherish and a condition which is protected by our system of law.
In this bill the potential for invasion of privacy arises primarily as a result of the broad definition of the term “monetary instruments” used in title II and the scope of regulatory authority granted to the Secretary of the Treasury. Title II as presently constituted would permit the Secretary, on a selective basis, to require a report on almost any transaction involving the banking system.
For example, under title II, chapter 2, some future Secretary could require the banks and brokerage houses of candidates of opposition parties to report to the Secretary in detail all of the candidates' financial transactions.
The possibilities for unwarranted invasion of privacy under title II, chapter 3 are equally great. Section 231 would require the filing of reports on the export or import of currency or monetary instruments which exceed $5,000 on one occasion or an aggregate of $10,000 in any calendar year. The effect of section 232 would be to require the filing of these reports in advance.
As an illustration, newspapers and television networks which give a total of more than $10,000 in 1 year in cash and checks to all reporters to defray overseas expenses could be required to file advance reports indicating, and I quote, “The origin, destination and route of the transportation” and “the identities of the person from whom the monetary instruments are received, or to whom they are to be delivered." This could require naming all the reporters' overseas contacts, and even the restaurants where they expect to have lunch.
Consider the burden of regulations which could require detailed accountings from all employees of any organization-religious, charitable, commercial or relief agencies—which sends out of the country any monetary instruments in an aggregate amount exceeding $10,000 in any one calendar year.
A person who works in Windsor, Ontario, and lives in a suburb of Detroit, for example, would transport currency and monetary instru
ments from a place within the United States to a place outside the United States every working day of the year, and, if he carried an average of $50, he could easily exceed the $10,000 aggregate in a cal
Concern about the possibility of infringement of the right of privacy in financial transactions is one of the factors which led the Senate to pass Senator Proxmire's bill, S. 823, the “Consumer Credit Reporting Act,” in November 1969. That bill is designed to limit not only private access to the files of credit information agencies, including banks, but also access by governmental agencies. Considering S. 823, the Senate presumably weighed the conflicting claims of individuals to privacy and of the agencies as to the need for information and decided that the balance should be tipped more in favor of individual privacy than was the case under existing law. We suggest that the present bill, if enacted without some further safeguards, tips the balance too far in the other direction, and would be tantamount to a declaration that a person's bank account is no longer private in that it must be revealed to the Federal Government acting without consent or proper legal compulsion.
In our earlier testimony we supported an expanded system of mandatory reports in connection with large and unusual "cash and near cash” transactions. However, we know of no reason for including in such a reporting system any instruments other than cash or the practical equivalent of cash. We, therefore, urge that the term “monetary instruments” be defined to include only coin or currency of the United States, and, in addition, such foreign coin or currencies and such types or classifications of travelers' checks, bearer negotiable instruments and bearer investment securities as the Secretary may by regulation specify for the purpose of the provisions of this title to which the regulation relates.
We also urge a revision of the purpose of title II so that it relates, as in the case of title I, only to reports of transactions which have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings. Moreover, as I will discuss later, regulations should be authorized only if they have general applicability and are objectively appropriate to carry out such purpose.
We have suggested changes which would minimize some of the burdens on the public in filing these reports. It would seem appropriate to limit domestic transaction reports to amounts in excess of a stated minimum, say, $2,500. The problems with respect to the reporting of monetary instruments taken outside the country could be eased if each person removing monetary instruments from the country was required to report that fact on his departure and upon his return was required to report his major expenditures within limits specified by the Secretary by regulation, including a broad exception for personal expenditures.
We are gravely concerned by the possible impact of the bill on the international position of the dollar. One of the reasons for our suggestion to limit reports of currency carried by travelers for their individual use was to ease the fear that the legislation now before
is the beginning of a system of American exchange controls. Even more important, the complete elimination of chapter 4 of title II would be necessary to reassure the foreigners who hold billions of dollars in liquid or semiliquid form that we are not plunging toward exchange controls.
Chapter 4, title II would direct the Secretary to require from any resident or citizen of the United States or person in the United States doing business therein who engages in any transaction or maintains any relationship with a foreign financial agency to maintain records or file reports, or both, in such form and detail as the Secretary may require as to the identities of the parties and the nature of the transaction. The scope of the authority granted to the Secretary to prescribe regulations is so great that the Secretary may, in effect, instítute surveillance of any foreign financial agency.
Under section 241 a foreigner in the United States doing business in the United States could be required to report to the Secretary the details of his checking account and brokerage account at home. Similarly, a U.S. citizen residing abroad could be required to report all his transactions with his local foreign bank. U.S. corporations doing business abroad could be required to report on all transactions with foreign financial institutions.
Assistant Secretary Rossides, in his testimony before the House committee, indicated that one of the fundamental concerns of the Treasury was that the legislation not affect the dollar as the principal reserve and trading currency of the world. He stated that foreign holdings of U.S. dollars are huge, amounting to some $43 billion in liquid form. The Assistant Secretary attributed this to our system of “progressively fewer restrictions to the flow of goods and capital.” The Treasury Department urged the elimination of chapter 4 and suggested instead a requirement that persons disclose any direct or indirect interest in a foreign bank account or other account in a foreign financial institution in conjunction with the filing of annual income tax returns. Recent announcements in the press indicate that the Treasury has implemented this proposal without legislation.
The pattern of regulatory authorization to the Secretary of the Treasury in titles I and II of S. 3678 is another troublesome aspect of the proposed legislation. The authority given to the Secretary under some sections is almost limitless. He is permitted to adopt regulations directed at some but not all persons engaged in the same or a related activity. The bill, as well as its counterpart passed by the House, also contains provisions which would authorize regulations unrelated to the purposes of the legislation.
We recognize full well that a busy Congress cannot draw up the very detailed regulatory provisions which will be needed to assure that the bill now before you will accomplish its purposes and at the same time not unduly abridge personal privacy or unduly burden trade and commerce. Quite obviously, therefore, any legislation which you pass will vest broad discretionary authority in the Secretary of the Treasury. We submit, however, that some controls on that authority can and should be prescribed, and we urge the adoption of provisions which would :
1. As suggested earlier, permit the requirement of reports under title II only if such reports have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings,” the same language which now appears in title I;
2. Make it clear that interested parties could participate in the Secretary's rulemaking procedures and could challenge regulations in court without the necessity of first having to violate them; and
3. Require that regulations and exemptions therefrom should be applicable to prescribed classes of persons, not particular persons, and that such classes must be reasonably defined in the light of the purposes of the legislation.
Some additional points which I would like to make relate primarily to implementation of the proposed legislation.
While it was indicated in certain of the testimony before the House committee that the provisions of titles I and II would apply only to domestic offices and to functions performed within the United States, we believe this point should be made clear. The foreign branches of American banks are quite properly subject to the laws of the country in which they are located. Any legislation which could be interpreted to require the production of records in violation of such laws must be avoided if banks are to continue in business abroad. Foreign branches have contributed importantly to our overseas trade and balance of payments position. To legislate them out of existence would delight our foreign competitors, be adverse to our national interest and be a hardship to the individual banks involved.
The provisions in title I requiring banks to identify individuals authorized “to make withdrawals, or otherwise act” with respect to an account continue to be a problem. In its report, the House committee points out that this provision would require banks to identify their customers. If that is the intent we urge that the provisions be so limited. Without such modification, the language proposed would authorize the Secretary to impose impossible requirements as to the identification of employees or agents such as messengers and persons making night deposits or mail deposits, all physical impossibilities.
Another difficulty with chapter 3 of title II is that its aggregation concept as applied to financial institutions simply will not work, and we urge its elimination as to financial instructions acting as intermediaries. At the time of the first import or export of a monetary instrument, a financial institution would have to determine the aggregate amount which such customer would import or export through all its facilities during the year. How, for example, can Western Union possibly be expected to file a report, even after the fact, as to an individual who sends 11 $1,000 money orders to a foreign destination but who sends them from 11 different Western Union offices scattered all across the country?
We would suggest clarification of the term “photocopy" as used in title I. The word implies hard copy and not microfilm or other filmed records. The cost of photocopying the over 20 billion checks which are expected to be handled by the banking system this year would aggregate many millions of dollars while the cost of microfilming would, of course, be far less expensive.
Under the reporting provisions contained in section 223, a Secretary could designate certain domestic financial institutions as agents of the United States to continually receive and indefinitely hold reports on domestic financial transactions. This could result in a financial agency acquiring confidential information relating to the business of its competitors and their customers. We believe these reports should be filed directly with the Treasury.
There is one additional point of substance which I desire to make on the record retention requirements of title I. The bill would require the retention of a copy of each check paid and a record of each collec