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BANKERS ASSOCIATION FOR FOREIGN TRADE—Continued

MEMBER BANKS-ARRANGED BY STATES AND CITIES—continued

(Tacoma):

Wyoming (no members). National Bank of Washington Puerto Rico (Ponce) : West Virginia (no members).

Banco Credito y Ahorro Ponceno Wisconsin (Milwaukee) :

(San Juan): First Wisconsin National Bank of

Banco Popular de Puerto Rico Milwaukee Marine National Exchange Bank Marshall & Ilsley Bank Senator PROXMIRE. Thank you, gentlemen, very much. Your testimony has been most helpful. Again I apologize for keeping you so late.

The committee will stand in recess until 10 o'clock tomorrow morning when we have four witnesses, including Mr. Robert Morgenthau.

(Whereupon, at 1 p.m., the committee was adjourned to reconvene the next day at 10 a.m.)

FOREIGN BANK SECRECY

a

WEDNESDAY, JUNE 10, 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, Bennett, and Percy.

Senator PROXMIRE. The subcommittee will come to order. Our first witness this morning is Mr. Robert Morgenthau, of New York City.

Mr. Morgenthau, would you come forward? We are delighted to have you with us. You have done a great deal of work in this area, and

a we are looking forward to your testimony.

Senator PERCY. Mr. Chairman, I have a statement of about 3 minutes.

Senator PROXMIRE. I want to call on Senator Percy, who has a brief statement he would like to make.

Senator PERCY. If you would excuse me for just a moment, I unfortunately was not able to be here for the opening of these hearings and would like to make a short statement.

Senator PROXMIRE. Senator Percy.

Senator PERCY. Mr. Chairman, the problem that is causing many of us great concern, and I think is of concern to a great many Americans, is the current increase in tax and criminal activity which has been aided and concealed by the use of foreign bank accounts, especially in those countries that offer a maximum degree of bank secrecy, and therefore the importance of these hearings today is to consider two similar bills which attempt to curb this increase, S. 3678 introduced this morning by our distinguished chairman from Wisconsin, Senator Proxmire, and H.R. 15073, passed by the House on May 25, 1970.

There appears to be widespread agreement on the need for legislation to curb the illegal use of foreign bank accounts. H.R. 15073 was passed unanimously, and at the hearings held by the House Committee on Banking and Currency on the subject, all administrative agencies that testified supported the implementation of legislation to curb the illegal use of these accounts.

The American banking community has also supported the need for corrective measures in this area. While there has been uniform support for legislative action to control secret foreign bank accounts, there has been some disagreement over the specific means to be employed toward this end.

The Treasury Department, speaking on behalf of the administration, strongly opposed several elements of H.R. 15073 and urged the enactment of several other provisions.

Moreover, S. 3678, introduced by Senator Proxmire includes an additional provision not found in the bill passed by the House. This provision would prevent U.S. securities brokers from transacting business on behalf of a foreign entity unless that entity disclosed the person for whom he is acting, or certified that he is not acting for a U.S. citizen or resident. It is a new and different concept which certainly deserves the most thorough and careful study.

I believe that these differences will be thoroughly discussed and examined by our committee, and that all Members of the Senate will give careful consideration to the legislation before it. I would also like to note that the new legislation is just one element of the program necessary to effectively curb the illegal use of foreign secret bank accounts.

I am pleased with the efforts being made presently in connection with other elements of the needed program. In addition to legislation to strengthen our own legal framework to combat this problem, the United States must seek increased assistance from foreign nations, especially those in which secret accounts are maintained for illegal purposes.

I am pleased with the vigorous efforts being made by the administration to obtain increased assistance in tax and criminal matters from Switzerland and the approach that is also being made for increased assistance from other nations.

I am also pleased with the increased efforts being made by the Internal Revenue Service and other law-enforcement agencies to improve existing enforcement methods and techniques in order to maximize their efficiency in combating the problem.

I was particularly encouraged with the recent announcement by the Treasury Department that the U.S. taxpayers will be required to declare their interest in foreign bank accounts on this year's tax return. I believe this requirement will be a very effective means of reducing the number of foreign accounts used for illegal purposes. Finally, I am pleased with the assistance and positive attitude shown

Ι by the American banking community and other sectors of the economy that can greatly aid law-enforcement officers in combating this problem of the illegal use of foreign secret bank accounts. I welcome these hearings, Mr. Chairman.

Senator PROXMIRE. Thank you, Senator Percy. I might suggest, Mr. Morgenthau, that, since you have quite a detailed statement—it is 29 pages—that, if you would like to abbreviate it in any way or highlight it, the entire statement will be printed in full in the record.

(Mr. Morgenthau's prepared statement appears on p. 260.)

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STATEMENT OF ROBERT M. MORGENTHAU, NEW YORK, N.Y.

Mr. MORGENTHAU. Thank you. I thought I would read the beginning and the end and probably summarize the cases to hold my presentation to 15 minutes or less.

Mr. Chairman and members of the committee, thank you for the invitation to appear before your committee.

Information and evidence developed in recent years shows that secret foreign accounts are used to conceal tax frauds, securities fraud, and many other types of criminal conduct ranging from the smuggling of heroin to payoffs to government employees. But in addition to these specific substantive violations, the availability of the secret foreign account to those with the resources to use it has created a loophole in our laws and in law enforcement. A democratic society such as ours depends on voluntary compliance. A gap available to some tends to discourage compliance on the part of the large majority otherwise willing to comply. Unless this loophole is closed, the honest business and professional man will be put to a great competitive and economic disadvantage and millions of other Americans will lose the confidence that the laws of this country are being fairly and impartially enforced. We will not have fair and effective law enforcement in this country without a systematic and vigorous effort to bring all criminals including those who hold positions of responsibility and power in the business and financial world to the bar of justice.

Today I would like to give a general description of the scheme and activities involving the use of foreign secret accounts and their potential danger to the United States, and then to discuss some of the fact patterns in this area that have been uncovered, and finally to indicate my support for legislation designed to subject to our laws the use of secret foreign accounts by American citizens, and why I consider such legislation vital.

Abuse of secret foreign accounts is no longer limited to members of organized criminal syndicates and hoodlums. Although the use by the organized underworld of these accounts is substantial, to an ever-increasing extent they are now being used by wealthy and otherwise respectable persons in the business and financial world to cheat on taxes, to trade in securities in violation of our securities laws, to trade illegally in gold, to perpetrate corporate and other frauds, and to hide the fruits of other white collar crimes. The Swiss bank is where the organized underworld and the respectable businessman meet.

For years these violations were left virtually untouched by law enforcement agencies, in large part because investigations in this area are far more demanding in terms of time and expense than in more conventional areas of prosecution and far less promising of results. Similarly, there was no attempt by legislative bodies to remedy any of the evils flowing from foreign bank secrecy.

As a result of this almost total lack of enforcement, the abuses flourished. The activities of the unscrupulous businessman paralleled those of the hoodlum in determination to violate our laws through ingenious use of secret foreign bank accounts. Because such use represented "business” to them, foreign banks began openly to solicit secret accounts in this country, in many cases using as selling points the many advantages, illicit and otherwise, that flowed from the secrecy laws of their country. Many foreign bankers organized systematic courier services to transport large amounts of cash from the United States to Switzerland and Nassau and other tax havens and set up branches and representatives in the United States to solicit and service customers. A tax evader not only needs a place where income taxes are virtually nonexistent, it also needs a place to protect the anonymity of the depositor. Many American banks opened branches in these foreign tax havens so that their customers could also avail themselves of the advantages provided by secret bank accounts. The American banks sought out, exploited and asserted the protections of local secrecy laws as vigorously as the foreign banker. Their multi

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