REPLIES TO QUESTIONS OF SENATOR BENNETT

Question 1. On page 3 (Desch statement) you discuss privacy and mention S. 823. I agree with your point but didn't find any language to accomplish that purpose in your marked-up bill. Do you have such a recommendation?

Answer 1. There is no way to eliminate invasion of privacy completely. In our marked-up bill privacy would be protected principally by the amendments suggested to Sec. 202 (clarification of the purposes of the Title), Sec. 203 (1) (restriction of definition of monetary instruments), Sec. 501 (requirement that the Secretary's regulations apply to classes of persons and not to particular persons) and Sec. 502 (requirement that the Secretary issue regulations only after a hearing held under the Administrative Procedures Act with opportunity for participation by those persons affected). Although we did not specifically suggest it, we agree with Assistant Secretary Rossides that Sec. 202 could be further amended by inclusion of language similar to that included in Sec. 121 (b) of Title I: "It is the purpose of this chapter to require the maintenance of appropriate types of records and the making of appropriate reports by such businesses where such records or reports may have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings."

Question 2. On page 4, (Desch statement) you define monetary instruments. What types of instruments are you excluding, and why?

Answer 2. We exclude in our definition of monetary instruments personal checks, corporate checks, bills, notes, bonds and the like because we do not believe they are a substitute for currency. Chapters 2 and 3 of Title II originally dealt exclusively with currency and we believe for the reasons stated in the answers to the preceding question that reports under those Chapters should be limited by statute to cash or cash equivalent. There has been no call for, or demonstrated need to know, the movement of all negotiable instruments which are the normal, legitimate means of commerce and which pass by the mail or otherwise throughout the world.

Question 3. The point you make on page 10 [Desch statement] using the AT&T example, is well taken. How can such transactions be excluded without opening up possible loopholes?

Answer 3. The Secretary should be encouraged to exempt by class checks or drafts which issue in the normal, usual business transactions. The AT&T situation is but one example. After all, the original purpose of this legislation was to get at the unusual transactions, outside the normal business practices, by which certain persons are able to conceal their fraudulent dealings. We don't believe it is necessary to mandate the copying of domestic checks and we continue to urge that the legislation require only recording of international transactions.

Senator BENNETT. That is all, Mr. Chairman.

Senator PROXMIRE. Thank you, gentlemen, very much.

You have been most helpful and we appreciate it.

I would appreciate it very much if our last two witnesses could come forward together, Mr. Coleman McGehee, president, First and Merchants National Bank, Richmond, Va., representing the American Bankers Association, and Mr. William Boyd, Jr., senior vice president of the Pittsburgh National Bank, representing the Bankers' Association for Foreign Trade.

Again I want to apologize to you gentlemen for this very late hour, but I think you understand the circumstances.

Mr. McGehee, would you go right ahead.

If you do abbreviate your testimony, the entire statement will be printed in full in the record.

STATEMENT OF C. COLEMAN MCGEHEE, PRESIDENT, FIRST AND MERCHANTS NATIONAL BANK, RICHMOND, VA.; ACCOMPANIED BY WILLIAM BOYD, JR., SENIOR VICE PRESIDENT AND MANAGER, INTERNATIONAL BANKING, PITTSBURGH NATIONAL BANK, PITTSBURGH, PA.

Mr. McGEHEE. I am C. Coleman McGehee, president, First and Merchants National Bank, Richmond, Va., and a member of the Bank Management Committee of The American Bankers Association. I am appearing for the Association, on behalf of its member banks, to express its views on S. 3678 and H.R. 15073.

These bills have as their main objectives the promulgation of requirements designed to aid duly constituted authorities in lawful investigations and to prevent the premature destruction of certain types of evidence having a high degree of usefulness in the establishment of civil and criminal liabilities.

S. 3678 is nearly identical with H.R. 15073 passed by the House of Representatives on May 25, 1970.

S. 3678 contains an additional title which does not appear in H.R. 15073 relating to the reporting of securities transactions involving foreign financial agencies.

In order to avoid any misunderstanding, let me repeat the statement made by the representative of The American Bankers Association to the House Banking and Currency Committee on H.R. 15073, namely, that The American Bankers Association and its members desire to cooperate to the maximum extent possible with law enforcement agen

cles.

This Association and commercial banks generally are deeply interested in the apprehension of criminals and limitation of their activities both in this country and abroad. Banks are more directly concerned than most citizens because many of them have suffered heavy losses from criminal activities with resultant increases in costs to the entire banking industry. We too are concerned wth the public interest aspect of the blll and desire to do everything in our power to protect that interest.

S. 3678, and H.R. 15073 as it passed the House, do not raise the same concern to banking institutions as did the initial provisions of H.R. 15073. We believe that under these bills the Secretary of the Treasury has authority to develop practical guidelines or regulations that can be followed by commercial banks without incurring prohibitive expense and without violating the right of privacy of their customers. We base this position on the language in section 101 (Section 21(d) of the FDIC Act) that banks will make photocopies of checks "to the extent the regulations of the Secretary so require" and the broad exemption provisions in section 206 of the bill.

Banks have an obligation to their customers to maintain the privacy of their personal financial affairs except in response to subpena or other regular legal process.

Information made available to law enforcement agencies from bank records should be confined to the records of those persons who are subject to active investigation and only in response to subpena or comparable legal process. This would protect the rights of the individual and the responsibility of the financial institutions and would be consistent with long recognized principles of law.

The maintenance of individuals' right of privacy has also quite properly been a matter of concern to the Congress. This has been recognized in the report of the House Banking and Currency Committee on H.R. 15073 when it is stated that "there is nothing in this bill which would make such records any more accessible to law enforcement officers much less anyone else, than they are now" and "again, it must be emphasized that the records required to be maintained are accessible only through legal process."

Senator Bennett did raise a question earlier about the privacy aspect and we would like to recommend for your consideration that an additional section be included in the bill reading somewhat as follows: 7 Access to Records. The records or evidence maintained by insured banks and other institutions pursuant to the provisions of this Act and the regulations issued thereunder shall be made available to law enforcement officers or other appropriate officials with respect to specific named individuals, pursuant to subpoena or other lawful process.

Many of the questions initially raised by the American Bankers Association with respect to the financial recordkeeping requirements under title I of the bill can be met under the broad discretionary authority given to the Secretary of the Treasury under S. 3678 and under H.R. 15073, as passed by the House. However, there are some matters which should have the committee's attention.

Under section 21(a)(1) of the amendment to the FDIC Act reference is made to identity of persons. This term is used throughout the bill. Usually banks identify customers by names and addresses and rely upon signatures to identify them. If the bill contemplates some other means of identity this would impose an unjustifiable burden on banks and seriously disrupt services to bank customers.

Section 21 (a) (2) requires the maintenance of appropriate types of records. Banks maintain records in various forms and by various methods. It would be more accurate to require banks to maintain records of types of transactions designated by the Secretary. The type of record should be left to the bank so long as it reflects the data which the Secretary considers essential to serve the needs of the Government. Section 21(g) authorizes the Secretary to require banks to retain records for any length of time designated by him. This authority should be qualified with a provision that such records could not be required to be retained for a period longer than 6 years beyond the year in which the transaction occurs.

Section 21(h) requires the Secretary to make annual reports to the Congress of his implementation of the authority conferred by this section and any similar authority, and so forth.

We think this is a good idea. It is recommended that the report should also be required to indicate the use made of the records required under the act and the number of criminal, tax, and regulatory investigations involved in such use.

We make this suggestion in order that the Congress can determine whether the use made of the records and reports justify the expenses that will be incurred by banks and other persons to comply with the regulations issued by the Secretary of the Treasury.

Section 221 of S. 3678 requires that transactions involving any domestic financial institution shall be reported to the Secretary of the Treasury at such times, in such manner and in such detail as the Secretary may require if the transactions involve the payment, receipt, or

under such circumstances, as the Secretary shall by regulation transfer of U.S. currency in such amounts, denominations, or both, or prescribe.

It is not possible to comment with any preciseness on this section since the magnitude of the reporting requirements will depend upon the kind of reports required under the regulations to be prescribed by the Secretary.

The expenses that could be imposed upon banks and other domestic financial institutions could be substantial, even if the Secretary exempts under his regulations transactions which on their face are recognized as legitimate transactions by reputable organizations, such as cash from operations of toll roads, public utilities, and so forth. Inasmuch as there is $50 billion of U.S. currency outstanding in circulation, we believe a floor on the amount of any single currency transaction that must be reported should be set by the Congress at some reasonable amount.

In lieu of this requirement a possible alternative is that legislation could be drafted in line with the provisions of present Treasury regulations relating to TCR reports-Treasury currency reports (title 31, chapter 1, section 102.1 Code of Federal Regulations) except that it apply to transactions involving $5,000 or more without regard to denominations, and transactions involving any amount which in the judgment of the financial institution exceed those commensurate with the customary conduct of the business, industry, or profession of the person or organization concerned.

Section 223 of S. 3678 provides that banks may be designated by the Secretary to receive reports required to be filed under this legislation by other persons and to transmit such reports as the Secretary shall prescribe.

Since these reports would be received by the banks as agents of the Government, and assuming that there will be a considerable volume of work, the Secretary should be authorized to reimburse the designated financial institutions for expenses incurred by them. Banks would have to make records of reports received by them, and records of their transmittal to the Secretary. This involves expense to the banks, in addition to postal charges, which alone could amount to substantial sums for an individual bank. Otherwise, such reports should be forwarded to the Secretary by the parties involved.

The full impact of the provisions of sections 231 and 241 with respect to the transportation of currency and coin and financial dealings with foreign financial agencies also cannot be ascertained in the absence of the regulations which the Secretary is authorized to prescribe in order to implement them.

An initial examination of these requirements leads us to believe that they could raise far-reaching problems affecting our normal financial operations both public and private and our foreign trade with other countries.

I think it has already been pointed out in testimony presented to you gentlemen this morning. It is requested that section 231 (a) (2) be changed to delete the words reading "or in an aggregate amount exceeding $10,000 in any one calendar year." If these words are retained it means that the $5,000 minimum on any one occasion, set in this section for transactions that have to be reported, would be pointless since a bank would have to keep track of every transaction regardless

of size to cumulate them for the year against the $10,000 cumulative reporting requirement.

As a consequence costly recordkeeping procedures would have to be maintained to accumulate information concerning transactions which in most cases would not be subject to the reporting requirement at the end of the year.

It is recommended also that chapter 3, title II of S. 3678, covering the filing of reports of currency imports and exports, be changed to specifically exclude from the reporting requirements interbank transactions and transactions involving foreign monetary authorities for official purposes. U.S. currency is widely circulated in many parts of the world and large amounts of such currency is returned to the United States through regular banking channels. Any impediments to the free circulation of such currency could impair confidence in the U.S. dollar as a reserve currency.

The bills before you, in our opinion, give the Secretary of the Treasury broad authority to implement the objectives sought to be accomplished, namely, to provide a more effective means of apprehending persons in the United States evading the payment of taxes or otherwise engaging in illegal activities.

Commercial banks have always cooperated with law enforcement officers through lawful processes, and I can assure the committee that banks will continue their cooperation under the extended program provided for under S. 3678 and H.R. 15073. Commercial banks stand shoulder to shoulder with the Government in efforts to prevent persons from using bank facilities to further their illegal activities. We hope, however, that the Secretary of the Treasury will devise regulations that will not require an avalanche of records that will place heavy burdens and expense upon banks and serve no useful purpose to law enforcement officers.

Senator, it would appear to me that the IRS does have a bear by the tail, and we find the best way to hunt a bear is with a rifle and not a shotgun. We certainly want to cooperate with the Treasury and all other law enforcement agencies, sir.

Senator PROXMIRE. Thank you, Mr. McGehee.

Mr. Boyd.

Mr. BOYD. I understand that my statement and the attachments thereto will be a part of the record; so, I will just skip through my statement as brief as it is. (The statement with attachments appear on p. 236).

The BAFT is the association of approximately 130 U.S. banks that have international banking departments. You will find attached the names of our member banks listed by State and city.

Like everybody else, we are in favor of motherhood and our organization has gone on record in favor of the purposes of this bill. The banks suffer from crime you know as much as anyone else. We have our holdups about every few days. On the other hand, we are not persuaded that the records that would be maintained in accordance with the provisions of S. 3678 would be sufficient assistance to the duly constituted authorities to justify the very large accumulation of material that would result.

In addition, we are concerned lest the Congress feel that, in passing a bill with provisions similar to those of S. 3678 and H.R. 15073 which