national operations became so large in scope that in many cases the banks doing the largest volume of business in some major Swiss cities are now not the local Swiss banks, but the foreign branches of large American banks. Similarly, in the Bahamas alone 29 branches of American banks have been opened or authorized, far beyond the apparent needs of the tourist trade and the local economy. This opening of foreign branches by American banks is not just characteristic of banks whose main offices are located in the financial centers of New York, Chicago, Los Angeles, and San Francisco, but also of banks centered in other places as well.

As a result of this expanded activity by American banks, transfers of funds, illicit and otherwise, through domestic banks on the way to secret foreign bank accounts became commonplace; the domestic clearing and correspondent facilities of U,S. banks became essential in many instances to the carrying out of illegal schemes involving foreign banks. For example, the facilities of a California bank and a midwestern bank were used, under circumstances that should have aroused suspicion, to transfer funds that were used to pay kickbacks to employees of noncommissioned officers clubs in Vietnam from an American company to a Swiss bank.

And when U.S. law enforcement agencies have sought to subpena U.S. banks to produce records of accounts maintained in a foreign branch in the belief that these accounts were being used to commit crimes in the United States, the banks have refused to produce such account records on the ground that by so doing they would violate the bank secrecy law of the country where the bank is located. This refusal has in some cases been sustained by our courts. I find it is shocking that a U.S. bank, by opening a branch abroad, can lend its facilities to citizens who are defrauding the Government and violating our laws and then successfully deny its obligation to make account records available to the Department of Justice by claiming that the laws of a foreign country would be violated.

A startling development of recent years has been a significant change in the identity and ownership of foreign banks. Today numerous banks in Switzerland and the Bahamas are owned and controlled not only by Americans, but in some cases by American hoodlums closely linked to loan sharking, gambling rackets, and other illegal activities. Such a bank does not need a large working capital to be a useful element of an illegal business. Its function is not to provide funds for the business so much as to provide an unreachable depository for illegal profits. Such a bank migh even not keep its accumulated funds on deposit, but might well redeposit them in a more substantial foreign bank or even in a U.S. bank. An American criminal who is not content simply to accumulate wealth in a foreign bank can easily and safely cause the bank to "lend" it back to him. These devices and many others are all at the disposal of this growing number of "foreign banks controlled by or connected with the Americans and the American underworld.

Taking these different types of operations together the genuine foreign bank, the foreign branch of an American bank, and a foreign bank controlled by Americans and American hoodlums—I would conservatively estimate that their secret accounts hold hundreds of millions of dollars which has been used in or are fruits of violations of American law.

There is, however, a larger aspect to the problem. The significance of foreign financial institutions immune from the same governmental processes to which domestic institutions are subject goes well beyond the extent to which they are a cloak for conduct in violation of our laws. The leverage incidentally developed by a handful of private investors through vast accumulations of capital not in any way subject to our laws can, at a time of financial instability, represent a serious threat to the national economy.

For example, as a result of the Foreign Investors Tax Act of 1966 which was designed to encourage foreign investment in the United States, a corporation whose sole activity in the United States is in securities transactions is not subject to U.S. taxation. In general, this act has initially achieved its purpose as billions of "foreign" dollars have been invested here. The corporate investors, however, remain beyond the practical reach of the Securities and Exchange Commission and other law-enforcement agencies. In the long run the fact that these offshore funds, run by Americans, and investing in American security and real estate, are operating beyond the practical reach of the law may be detrimental to American investors, to foreign investors in the American market, and ultimately to the balance of payments itself.

For example, there is the case of Investors Overseas Services, Ltd. (IOS), and its mutual fund subsidiaries. With mutual fund assets before the break in the market of almost $2 billion, about two-thirds of its assets are in the form of securities in U.S. corporations. Just during the past few weeks it has been alleged by responsible sources that IOS has been engaged in a number of practices improper under American law. One instance cited is the phony writeup of oil and gas leases to lands in the Canadian Arctic, apparently done with the assistance of American companies; another is large loans to insiders by foreign banks owned by IOS. Disclosure of these transactions has had the inevitable effect of encouraging redemption of IOS shares at the rate of almost $3 million a day since May 1. To pay those redemptions they have had to sell securities in the American markets. There is strong evidence that IOS-controlled mutual funds have been dumping securities in U.S. markets to raise cash to satisfy these and other cash demands of its stockholders and creditors. In an already jittery market the weakening effect of such sustained selling activity is obvious. If foreign financial transactions by Americans were subject to disclosure requirements, the alleged writeups and insider loans might well have had to have been disclosed and the subsequent redemptions and coincident selling forestalled.

Indeed, if IOS had been subject to our disclosure laws perhaps the financial difficulty it has found itself in since the beginning of the year would have been avoided. Similarly, if foreign financial transactions were subject to disclosure requirements the comparable deterrent effect might have been felt. Absent these disclosure requirements, shady financial practices can be engaged in to the benefit of a few insiders. Unfortunately, I don't think we've seen the end of the IOS problem and its ramifications. The American markets and investors have already felt the effect of the dumping of securities by IOS. In the future, because the completely unchecked conduct by Americans running IOS has caused European investors to lose confidence in American-run companies and securities, their willingness to purchase

American securities has no doubt been reduced. Thus, the very result sought by the Foreign Investors Tax Act has been frustrated.

Now, I have set forth in the following pages outlines of many of the kinds of cases which involve the use of secret foreign bank accounts to violate American law. For instance, in the Gulf Coast Leaseholds case, which took 9 months to try, a "Lichtenstein trust" and Swiss bank was used by an American promoter to sell unregistered stock in manipulation and fraud, and this promoter made a profit of $4 million on an initial investment of $20.80.

The Hayutin case and the Allied Entertainment cases involved the use by Americans of Swiss banks for manipulation and sale of unregistered stock. There are a number of cases involving the improper use of margin, the violation of insider trailing provisions, the use of a Panamanian dummy corporation for the purchase of new-issue stocks and the use of a Swiss bank to conceal it, and so on involving American brokerage firms and companies and American investors. The use of foreign accounts in connection with takeover attempts, the use of Swiss bank accounts in connection with the importation and payment for the importation of heroin, a large number of tax violations, including one case where allegedly on a small Boston bookmaker by the name of Francis Vitello had an account with over $1,200,000 in the Union Bank of Switzerland, and, of course, if title II had been in effect at that time, he would have either have had to report that transfer of funds to the Union Bank of Switzerland or have been prosecuted for the failure to report.

In conclusion, I would like to say on the basis of my experience as a U.S. attorney, I unqualifiedly support legislation designed to eliminate the abuses flowing from the use by Americans of secret foreign accounts. I am concerned, however, with reports that some of the largest domestic banks have opposed effective legislation such as the House bill and the one before this committee. I am still more concerned since, as I understand it, the main ground of criticism from the banks is that the proposed changes in the law impose unreasonable recordkeeping burdens upon them.

It is unfortunate that the domestic banks that have opposed the bill are to a large extent the very same banks that have opened foreign branches which provide secret numbered accounts to their customers, who in all too many instances are U.S. citizens intent on violating U.S. law. These banks have successfully sought the advantages of both worlds-ready access to U.S. capital and the protection of secrecy laws of countries that welcome our dollars but refuse our subpenas. At the same time they have failed to police themselves so that their foreign facilities are not abused by U.S. citizens, they have always resisted efforts to require the production in the United States of the records of their foreign branches on the ground that such production would undermine the ability of their foreign branches to compete with local banks.

Passage of effective legislation is vital at this time for a number of reasons. First, in recent years the U.S. Government has at last shown a willingness to commit its powers and resources to stamping out criminal conduct committed by the wealthy through the use of secret foreign accounts. Those who would perpetrate these crimes are fully aware of this commitment and are anxiously awaiting to see whether it is a permanent part of our law enforcement programs

or a transitory whim that will shortly disappear. If a bill such as your committee's cannot be enacted, I am afraid that this commitment will no longer be taken seriously and that crimes of this sort will continue to flourish.

Second, the defeat of effective legislation will have other serious implications. Wherever we turn today we find a deep concern over crime rates, especially those violent crimes that are lumped together under the heading "Crime in the Streets" and are generally committed by the poor. Our Government has purportedly declared a war on crime, and many bills have been introduced in this Congress providing for remedies such as no-knock searches, preventive detention. and other measures which impose far more than recordkeeping burdens on various classes of persons.

It would be unfortunate indeed, if the administration's war on crime were ever to be viewed as solely a war on the crimes of the poor and underprivileged, for there is no faster way of dissipating respect for law and order than creating the impression that the law is only enforced as to certain groups of persons and that others can commit crimes with impunity. We must be willing to stand by our national goal of equal justice under law. Basic commonsense and fairness tell us this.

Third, I believe that the vitality of our country rests in substantial part upon the willingness of free men freely to contribute their proportionate share to the national revenue. Our strength is to be found in the loyalty, industry, and will of the average man who works hard, raises his family, and believes in the responsibilities of his citizenship. We cannot expect the million of these honest Americans, black and white, young and old, to pay taxes without question-to dig deeply into pockets already trimmed by inflation-if their government is willing to overlook the fraud of those wealthy and powerful citizens who have discovered in foreign bank secrecy an almost totally secure means by which to evade taxes on millions of dollars of yearly income. The time has come when the laws must be changed so that the abuses of the past will be stopped. I am confident that this committee, with its wisdom and judgment, will act to insure that result.

Thank you very much.

Senator PROXMIRE. Thank you, Mr. Morgenthau. This is, I think, an outstanding statement. It puts the whole problem in its proper perspective, and I am especially happy to see your peroration, your ending, with its coming down very hard on the fact that if we really mean business on law and order, we have to prosecute crimes committed by the wealthy and powerful as well as by the poor and ignorant.

You had extensive experience as U.S. attorney. I guess you were in perhaps the best position of any U.S. attorney in the country with regard to this kind of action because you did have responsibilities, as I understand it, in New York City; is that correct?

Mr. MORGENTHAU. That is right.

Senator PROXMIRE. Of course, this is our financial center and where a great deal of our international financial transactions take place. I would like to ask you specifically, you say "Numerous banks in Switzerland and the Bahamas are owned and controlled not only by Americans but in some cases by American hoodlums closely linked to loansharking, gambling, and other illegal business." Can you give

us the name of an American hoodlum who owns a Swiss bank or a Bahamian bank?

Mr. MORGENTHAU. Well, since those cases were still under investigation when I left the office, I am reluctant to do it. I would be glad to give you the names of a couple of the banks. For instance, the Exchange and Investment Bank was one bank that was owned and controlled by American hoodlums, the Exchange and Investment Bank being a Swiss bank.

Of course, one of the difficulties in proving these kinds of cases is that evidence of ownership in Swiss banks is generally through bearer shares, so there is no registration of that ownership, and there are a number of tax cases looking into the ownership of the profits achieved through this ownership when I left, and since those cases were still under investigation, I do not feel free to discuss the names of those

owners.

Senator PROXMIRE. Chapter 4 of title II of the legislation requires persons who engage in or maintain relationships with foreign financial institutions to keep records and file reports. Yesterday, the Treasury suggested that those provisions be deleted on the grounds that they could be overly burdensome and they could invade a person's privacy. Do you think that these provisions are essential or could we dispense with them without substantially weakening the bill?

Mr. MORGENTHAU. I don't think there is any question, Mr. Chairman, that those records would be extremely helpful to law enforcement agencies in the development of cases against people engaged in securities fraud and stock fraud and other violations of the law.

Senator PROXMIRE. Can you think of any examples where the reports or records required under chapter 4 would have been useful in detecting lawbreakers?

Mr. MORGENTHAU. I think in virtually every case that we prosecuted involving stock fraud in the sale of stock these records would have been extremely helpful. Of course, I guess for every case we developed, there were probably a dozen we were unable to develop. With these records available, it would have been materially easier.

Take a case like the Gulf Coast Leaseholds case, which took 9 months to try, the second longest securities fraud case tried in the Federal courts and should result in a conviction. If the kinds of records required by chapter 4 would have been available, that would have merely shortened the prosecution of that case.

Senator PROXMIRE. It might be argued that people who have secret foreign bank accounts are already violating some law, hence they wouldn't hesitate to violate the legislation before us by not reporting. What is your response to this argument?

Mr. MORGENTHAU. Well, I think that that might be true, but I think because of the way this legislation is framed that many people who would otherwise violate the law would not violate this law. But if they did, it would be much easier to prosecute them, and that would have a substantial deterrent effect on us, and I think the net effect of this would be to cut down the violations of law.

Senator PROXMIRE. Title IV prohibits U.S. brokers from accepting orders from foreign banks unless the foreign bank discloses the identity of the party for whom it is acting or certifies that it is not acting for a U.S. citizen. The Treasury also recommended that this provision be deleted. What are your thoughts on the need for this provision? This