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B. NARCOTICS VIOLATIONS

Our investigations into the importation and sale of heroin have revealed that accounts in foreign banks are depositories for the proceeds of heroin transactions. Because those accounts are secret, attempts to uncover persons directing the international dope traffic often end in complete frustration. Generally, money received for the sale of heroin in the United States is either carried to Europe by courier or hand carried to a local money exchange or bank where it is forwarded to an account in a Swiss bank. This account is often in the name of a paper corporation with an office in Switzerland. From that account, the money is transferred to an account in a European country under the direct control of the initial supplier of the heroin. Alternatively, the money may be given directly to the supplier from the Swiss account.

A series of cases prosecuted by my former office illustrates these operations. Indicted and convicted in two separate cases were members of a heroin importation conspiracy from which over 200 kilograms of heroin (worth $60,000,000 on the retail level) were seized during the past three years. Their methods of smuggling the heroin into the United States were varied. In one instance heroin was packaged into small sausage-like bags to be hidden in lavatories of planes on international flights and to be removed on the domestic leg of the flights after an initial arrival in the United States. In another instance, the cans and labels of the European exporter of food to the United States were obtained, the cans filled with heroin, labelled and then shipped as food to the United States. Ski poles and the technical components of oscilloscopes were also used as a hiding place for heroin.

In one of these cases, the facts revealed that as part of the payments for smuggled heroin during a three-week period in June of 1968, $950,000 was sent to a Swiss bank account of a Panamanian corporation with offices in Geneva known as the “Me Too Corporation". Couriers delivered $800,000 in cash to two money exchanges in New York City. From there the money was forwarded to the secret Swiss account of Me Too Corporation. While the appearance of unknown persons with large sums of money might have been questioned by the money exchanges, an official of the Swiss bank had previously advised them about the expected delivery of funds. Thus, because of their substantial business connection with the bank, the exchanges accepted these transactions as a professional courtesy. The other $150,000 in cash was deposited in the account of a South American brokerage firm with the First National City Bank. On the instructions of an authorized signatory of the account, a check for $150,000 was drawn on the account and mailed to the Swiss bank for the account of Me Too Corporation. Although there was no evidence in either of these cases that the money exchanges, or the local or Swiss bank had any knowledge of the underlying narcotics transactions, the vital part they played in the heroin traffic is unmistakable.

C. TAX VIOLATIONS

Obviously the ways in which secret foreign bank accounts are instrumental in avoiding payment of income taxes are almost as varied as the ways of earning the income in the first place. Our investigations have uncovered numerous instances where persons with very large incomes have almost completely avoided the payment of income tax through the use of secret foreign accounts.

In one case, a taxpayer claimed as a bad debt deduction the failure of a foreign company to repay a loan. In fact, the company was owned by him and the transaction called a "loan” was nothing other than a payment to himself in a secret foreign account.

In another case, a taxpayer claimed as a deduction interest payments he made on a loan from a foreign corporation. This was also a sham, since the corporation was created by him solely to appear as the lender and then act as a recipient, in a secret foreign account, of the phony interest payment. Other cases also involve false expense deductions, the falsity of which was concealed by a secret foreign account.

In numerous instances, reputable Swiss banks have loaned their depositor his own money so as to provide him with an explanation of the source of his spending money. Similarly, depositors have used their accounts to buy their own assets, typically real estate or mortgages. Ownership of the “transferred” asset then appears in the bank's name. In this fashion the depositors have recaptured the use of their foreign secret cash and have sheltered from United States taxation the annual income on the real estate, as well as any eventual gain on its sale.

As a result of the investigation into the Arzi Bank and its accounts, as well as other matters, dozens of cases have been referred to the Internal Revenue Service as potential criminal tax cases. Many of these involve the non-reporting of stock transactions and capital gains. Since, however, the process of criminal tax investigations takes the case out of the United States Attorney's office and is therefore slower than investigations into other areas of criminal conduct, indictments are not filed as quickly in this area.

One indictment that was returned clearly reveals the potential for tax fraud in the use of secret foreign accounts. According to the indictment, two salesmen directed about 75% of the commissions earned by them to the Swiss account of a foreign corporation, wholly controlled by themselves, on the false pretext that the corporation had earned these commissions. They thereby attempted to evade payment of taxes on about 75% of their income.

D. OTHER VIOLATIONS

At the beginning of my remarks, I briefly adverted to the use of secret foreign accounts in connection with the irregular financial transactions surrounding our military establishment in Vietnam. Specifically, the investigation revealed that a bank account in Switzerland was opened in 1966 by an American with strong underworld connections who was acting as a representative of several United States suppliers of service clubs and of a United States government hotel and recreation center maintained primarily for Americans in Saigon.

Since that time, on a regular basis, the American food suppliers have caused varying amounts to be deposited in this account. From time to time withdrawals were made by checks signed with a code name in favor of certain non-commissioned officers who were responsible for the purchases of the service clubs and in favor of the American civilian manager of the government owned recreation center. The account was used as a kind of clearing house for funds being paid by the suppliers to the clubs' buyers. It is believed that hundreds of thousands of dollars have passed through this and similar related Swiss accounts.

Possible fraud on creditors in bankruptcy proceedings can also be perpetrated through the use of secret foreign accounts. One indictment we obtained charged the president of a movie production concern with perjury when he testified, at a bankruptcy proceeding involving his company, that he did not have a Swiss bank account.

Another case, and one which ideally illustrates the potential effectiveness of Title II of your bill, is the Vitello investigation. During an investigation conducted by my office, we were able to establish that in the early 1960's a bookmaker in Boston named Francis A. Vitello opened a secret account at the Union Bank of Switzerland under the code name Unitechnic Finance Corporation Subaccount BOSTON. Although Mr. Vitello appeared to be a man of little financial substance, his Subaccount BOSTON as of March 1964 had a credit balance of $1,216,471.32. Ironically, in March 1964, one of Mr. Vitello's associates, who was then a prominent Washington attorney, stole over $700,000 of these funds by fraudulently transferring that sum to another Swiss bank under a forged authorization letter. Vitello was able to recover the money partially through the investigative efforts of an Internal Revenue Service agent who did not report the transaction to IRS and who was later convicted of bribery in an unrelated matter. Because of the complex nature of the transaction, many aspects of which are still shrouded in secrecy, 'the problem in proving a violation of U.S. law may be difficult to overcome. Had Title II been passed prior to this transaction, and had Mr. Vitello failed to report the transfer of the more than $1 million to Switzerland, it is likely that these prosecutorial problems would be substantially minimized.

We also have reason to believe that companies controlled by United States citizens may be illegally trading in gold, and information is needed to determine the dimensions of this problem. For example, one of the foreign based corporations controlled by Bernard Cornfeld, an American citizen, made a profit of nearly $9,000,000 by buying and selling gold in a one week period during the Spring of 1968.

On the basis of my experience as United States 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 record-keeping burdens upon them.

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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 United States citizens intent on violating United States law. These banks have successfully sought the advantages of both worlds—ready access to United States capital and the protection of secrecy laws of countries that welcome our dollars but refuse our subpoenas. At the same time they have failed to police themselves so that their foreign facilities are not abused by United States 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, and now they oppose effective legislation.

Passage of effective legislation is vital at this time for a number of reasons. First, in recent years the United States 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 record-keeping 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 common sense 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 millions of these honest Americans, black and white, young and old, to pay taxes without questions—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.

Senator PROXMIRE. Our next witness is Mr. Pierre Leval, of New York.

Mr. Leval, we are happy to have you. As I understand it, you are former assistant to Mr. Morgenthau and have worked with him in his office, is that correct?

STATEMENT OF PIERRE N. LEVAL, NEW YORK, N.Y.

Mr. LEVAL. That is correct. During my years that I worked with Mr. Morgenthau, I spent a good deal of time working on the problems of abuses of foreign banking by American citizens and residents.

Senator PROXMIRE. I might say, incidentally, just as Mr. Morgenthau abbreviated his statement, we put the entire statement in the record, the same thing will apply to you. Any part of your statement you would like to skip over, we will print it in the record in full.

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(The statement appears on p. 273.) Nir. LEVAL. In the statement filed with the committee I have described some of the less known and more sophisticated devices by which U.S. persons escape legal obligations by using foreign secret bank accounts. I believe that legislation will be helpful to control such abuses. I think the bill before this committee contains many useful provisions.

I would like, however, to call the attention of the committee to certain provisions which I believe go further than is necessary; create administrative burdens on individuals which will not be useful to law enforcement; will result in unfairness; and, in one instance, which will give to the Secretary of the Treasury a confiscatory power which may well violate the Constitution.

Let me address myself first to chapter 3 of title II, "Reports of Exports and Imports of Monetary Instruments." Now this provision was originally designed to cover couriers who carry money out of the country for tax evaders. There is a reason for special concern for currency because it leaves no trace in bank records.

But, as the provision was passed by the House and as it is now before this committee, the bill goes much farther. It covers all “monetary instruments” including checks, bills, stocks, and bonds. It is not necessary to be concerned about such instruments, even in bearer form, because their acquisition leaves transaction records in banks or brokerage houses. The bill also includes mailing, rather than only transportation.

The effect of the bill as it is now drafted will be that any business or any person having normal, frequent, aboveboard, innocent transactions with a foreign country will be required to make continuous reports to the secretary of the Treasury in matters that have no reason for any suspicion nor any suggestion of violation of law.

Furthermore, the consequence of an innocent, accidental failure to comply with the reporting provisions can result in forfeiture, which is an extremely harsh penalty, and that forfeiture is not limited by any guiding standards except that the Secretary of the Treasury may remit the forfeiture where he deems it just.

I think that those provisions go awfully far to accord a confiscatory power to the Secretary of the Treasury. In my opinion, chapter 3 should be limited to transportation of currency and the forfeiture provision should be very, very carefully limited by standards relating its operation to violations of law.

Chapter 4 of title II, I believe, would serve a desirable it required disclosure of a foreign bank account and if it required maintenance of records of foreign transactions. But as now drafted, subject to regulation by the Secretary, it requires the filing of reports of all transactions with a foreign financial agency.

In the case of a person doing business abroad, he might have daily letter of credit transactions which would have to be reported. A family traveling abroad would have to report every time it went to the bank to cash travelers checks. I think this goes too far.

I would like to address a few brief comments to chapter 4, title IV, section 401. I believe as that section is now drafted, it will create problems which were not intended and will cause very serious inconvenience.

purpose if The section prohibits a broker from accepting orders from a foreign financial institution unless that institution discloses the names of all persons having a beneficial interest or certifies that no Americans have a beneficial interest.

I believe that the effect of that provision, as it is now drafted, will be to prevent any U.S. broker from accepting any further orders from any kind of offshore or foreign fund, because such a fund could not possibly give either of those certificates.

In many cases, their shares are in bearer form. Even with registered shares, the foreign fund could not possibly know whether any of its shareholders were American residents. They would therefore be prevented from any further trading on U.S. markets.

The same observations would be true of a bank placing an order for its own account or for the account of another corporation. I think that this provision must be limited to deal with situations in which a bank places an order for individual account holders.

I think, furthermore, that some thought should be given to the serious time delay that would be required by the mailing of a certificate. Investors wish to have their orders executed promptly. Under this statute, the order could not be executed for several days until the broker received the certificate. Perhaps the required certification should be given by cable or verbally on the telephone. Otherwise, I think that this provision would effectively close the door on all further investments by Europeans or foreigners in the United States.

Thank you very much.

Senator PROXMIRE. Those are all very constructive suggestions, and I think some of them can be handled in the regulations and some, as you imply in your statement, perhaps should be written into the statute.

You do seem to imply that these changes can happen if the Secretary of the Treasury exercises his discretion without due regard or without any regard for the consequences.

Mr. LEVAL. I think that is right. I would like to point out in addition that the provisions of title IV, the amendment to the Securities and Exchange Act, as now drafted, do not provide for such regulations which could ameliorate the problems that now exist. The prohibition is outright. I think perhaps that might be cured if a provision were made for regulation by the Securities and Exchange Commission.

Senator PROXMIRE. Can you explain the significance of a Lichtenstein trust and describe how it operates?

Mr. LEVAL. A Lichtenstein trust, Mr. Chairman, is a form of a business entity or investment entity that can be set up under the laws of Lichtenstein where secrecy applies as well as it does in Switzerland. Lichtenstein trusts have been used by investors, both in the United States and in countries all over the world, to further insulate the secrecy of their bank accounts in Switzerland or elsewhere.

If I am not content simply to have a bank account which is secret in Switzerland, I can establish a secret trust in Lichtenstein and have

my money placed in a Swiss bank by the Lichtenstein trust.

Senator PROXNIRE. It is kind of a redundancy that way, like wearing a belt and suspenders both.

Mr. LEVAL. Yes; in case you are worried that the one won't do the job.

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