Senator PROXMIRE. How do American citizens place funds in secret foreign bank accounts? Are they solicited or do they take the initiative?

Mr. LEVAL. I think it happens both ways. Some Swiss banks, some more recently formed Swiss banks or newly acquired Swiss banks, have been very aggressive in gaining U.S. funds, and many of their representatives have come to the United States to solicit accounts actively.

Senator PROXMIRE. How do they solicit aggressively?

Mr. LEVAL. Through introductions from one person to another, in business connections; I suppose much the way that business is done by American brokers.

Senator PROXMIRE. Do they advertise?

Mr. LEVAL. I don't think there has been much public advertising by Swiss banks.

Senator PROXMIRE. How about telephone solicitation on a boilerroom basis?

Mr. LEVAL. I am not aware of any of this, Mr. Chairman.

Senator PROXMIRE. How easy it is for the average citizen to open up a Swiss numbered account?

Mr. LEVAL. If he knows how to go about it and he has enough money to justify the bank going to the trouble of opening the numbered account for him, it is very easy. You merely write to the bank or go to the bank and express your desires.

Senator PROXMIRE. Go to your own bank?

Mr. LEVAL. Go to the Swiss bank where you want to set up a numbered account.

Senator PROXMIRE. Would an American bank do it?

Mr. LEVAL. I would think it would depend on the bank. I know there are American banks which have furnished references which have told someone who wanted such a service performed that if he goes and sees Mr. so-and-so at such-and-such a bank, or writes to Mr. so-and-so at this address, it will be accomplished for him. But American banks generally avoid having on their records that they have participated in the setting up of secret accounts for Americans in foreign countries.

Senator PROXMIRE. What is the minimum deposit required for a numbered Swiss account?

Mr. LEVAL. I think this varies from bank to bank. This is a question of how anxious they are to get the business. I think large, well-established banks will not go to the trouble of opening a special numbered account unless the deposit is one that is significantly large, at least $10,000.

Senator PROXMIRE. Do the Swiss banks pay interest on these accounts?

Mr. LEVAL. In the past the Swiss banks paid interest on their accounts, on ordinary checking accounts, but in more recent years the Swiss banks stopped paying interest and in some cases they even charged interest on the opening of a new account.

Senator PROXMIRE. How thoroughly do the Swiss banks check out their depositors? Can anyone put money in a Swiss account, or must he first establish his reputability?

Mr. LEVAL. Some of the most undesirable depositors in the world have money in some Swiss banks. On the other hand, there are banks

which probably would be reluctant to take depositors whose reputations are bad. There are Swiss banks that are controlled by members of the Mafia and which are maintained for the purpose of being instrumental in the business of organized crime.

Senator PROXMIRE. Do Swiss banks send out monthly statements and, if so, how are they made?

Mr. LEVAL. Swiss banks do send out statements, but many depositors in Swiss banks make arrangements not to have their statements mailed to them. A service that Swiss banks offer to their customers is that all correspondence is maintained for the customer in a special file. When he visits the bank he sees all of his correspondence since his last visit and never receives anything in the mail.

Senator PROXMIRE. How does a depositor establish his identity in communication with his Swiss account? Does he only need his number, or are there other code devices?

Mr. LEVAL. The depositor can establish his identity by either signing his name to a letter or if provisions have been established for that, he can sign the number of his account or he can sign a code word. Any one such device is possible.

Senator PROXMIRE. When a U.S. resident uses a Swiss account for trading in securities, how does he initiate the transaction? Does he generally first contact the Swiss bank, or does he place the order directly with a U.S. broker?

Mr. LEVAL. Ordinarily, a U.S. citizen who had an account in Switzerland would have to place the order through the Swiss bank.

However, some U.S. brokers have arranged together with Swiss banks a mechanism whereby the broker will receive the U.S. citizen's order in New York without maintaining any record of that fact, will know the customer has an acocunt in a Swiss bank which maintains a general account with his firm and will execute the order as if he had received it from the Swiss bank. Since he would communicate many times a day with the Swiss banks, he can indicate on the telephone or on the Telex to the Swiss bank that such an order should be placed with the U.S. broker for the Swiss bank's customer.

Senator PROXMIRE. Is there anything illegal about a broker accepting an order by a U.S. resident on behalf of a Swiss bank?

Mr. LEVAL. There is nothing illegal about it, but if it is done in the manner I have just described, it may be illegal for the broker to accept orders from a person who is not authorized in documentary fashion to give those orders for the Swiss bank and it would be perfectly obvious to the brokers under those circumstances that he was participating in a concealment of an account used for violation of law. Senator PROXMIRE. When a broker accepts such an order, isn't it rather obvious that he has become a party to some potentially illegal scheme on the part of his customer?

Mr. LEVAL. If he has cooperated in fraud by accepting an order from somebody that is not technically authorized to give it, yes, I would think that would be so. If the arrangement were otherwise; if it were fully disclosed, there would be no reason to suspect it.

Senator PROXMIRE. Can you think of any legitimate reasons why U.S. residents would want to place stock orders through a Swiss account rather than directly through a U.S. broker?

Mr. LEVAL. There might be many reasons why that would be desirable and perfectly innocent. It would really depend on the circum

stances.

Senator PROXMIRE. Don't you have a pay a double commission if you go through a Swiss bank?

Mr. LEVAL. You would have to pay a double commission.
Senator PROXMIRE. Why would he want to do that?

Mr. LEVAL. If you had an account which was in Switzerland for bona fide business reasons and you were investing funds temporarily, there might be reason why you would want to invest through the Swiss bank.

Senator PROXMIRE. If this were just a resident here

Mr. LEVAL. Such a transaction might be very suspicious, and if it were arranged wtih the secret provision for giving the order in an undisclosed fashion, it would be highly suspicious.

Senator PROXMIRE. Would it be fair to say that it is obvious to a Swiss bank that securities orders placed by U.S. residents are probably in connection with some illegal purpose?

Mr. LEVAL. I would think so under the circumstances that I described, yes.

Senator PROXMIRE. Doesn't this make a Swiss bank a knowing participant in an illegal endeavor and destroy the argument that the Swiss banks are merely acting as bankers and have no knowledge of any illegal activity?

Mr. LEVAL. I think it is difficult to generalize. I think there are circumstances in which Swiss banks are clearly on notice that their services are being used by persons in other countries to violate the laws of other countries. There are also circumstances in which the Swiss bank is merely considered a safe depository in countries where the currency is in danger of devaluation or where the possibility of nationalization or something else is feared. I think one would have to examine the circumstances rather closely before generalizing.

Senator PROXMIRE. In those cases would you necessarily get a numbered secret account if you were simply concerned with the devaluation of currency?

Would there be any motivation in doing so?

Mr. LEVAL. All accounts are secret. The number rather than the name is a kind of unusual security that preserves secrecy even from the employees of the bank. A numbered account is not more secret from the outside world than a named account. They are all secret. Senator PROXMIRE. Senator Bennett?

Senator BENNETT. No questions.

(The prepared statement of Mr. Leval follows:)

STATEMENT OF PIERRE N. LEVAL

Mr. Chairman, Members of the Committee: The last ten years of jet travel and continuously growing prosperity have produced many profound changes among the Amercian people. They have produced varieties of sophistication with both good and bad effects. Not long ago even relatively prosperous Americans based their wealth almost exclusively on their salaries, reported all their income (which in any event was withheld), had little experience with stock markets, saw their own country first, and imagined the Swiss banks as a strange and sinister, perhaps mythological, fraternity of international financiers, characterized by the image of the "gnomes of Zurich". Since then, many Americans have made money on the stock market free of withholding, have traveled to Europe, to the Bahamas and the Orient. Many have learned that the exclusive

ouble

club of foreign banking, like many exclusive clubs, is easy to enter if you have the price of admission.

I would guess that the number of Americans using secret numbered bank accounts in Switzerland, Nassau, Panama and Hong Kong has multiplied a hundredfold in 20 years, and this growth has been matched by a growing awareness of the varieties of ingenious ways to use such accounts to escape legal obligations. At the same time, the proliferation of legal obligations and restrictions, and of reporting and disclosure requirements, have multiplied the instances in which one can benefit from the practical exemption conferred by a foreign secret account.

There have been changes in the foreign banking community as well. Of course there remain in Switzerland many honest conservative bankers such as brought Switzerland world-wide trust as an international banking capital. Such bankers will not permit their institutions to be used for fraudulent schemes, although they may have little interest in whether or not their customers pay taxes at home. But new breeds of bankers have grown up in Switzerland, as well as in Nassau, Hong Kong and Panama, who are hungry for business and will be happy to perform, behind the protection of the banking secrecy laws, almost any service which their customers require. Some such bankers have developed extremely close ties with U.S. racketeers, loan sharks, bookies and with international narcotics traffic. In some instances small banks in Switzerland and elsewhere have even been purchased by U.S. racketeers to serve their requirements.

I would like to describe for you briefly this morning some of the many ways in which foreign bank accounts are currently used by American citizens to escape legal responsibilities.

The most widely resented legal obligation is payment of the income tax. The simplest tax evasion scheme is to receive income in cash without recording it on the books. As unreported cash accumulations grow large enough, they become difficult to hide. Foreign banks have furnished the best of hiding places. At one time Americans practicing this art had to get their cash to Switzerland on their own. But when the demand for some more convenient deposit service became widespread, a mechanism was supplied. Now well organized systems of couriers charging substantial fees regularly carry hundreds of thousands of dollars of unreported cash to foreign banks. Numerous insubstantial banks have grown up in the Bahamas, not because anyone wishes to keep balances there, but because it is easy to deposit cash in such banks only a half an hour from Florida. The deposit will immediately be credited to an account in a safe substantial bank in Switzerland. Via the Nassau route have traveled untold amounts of unreported profits diverted from under the noses of the Internal Revenue inspectors surveilling the take of the Las Vegas casinos.

Imaginative businessmen, particularly those whose businesses involve transactions abroad, have found numerous more sophisticated devices for concealing their income. A recent investigation concerned some American manufacturers' representatives who had an extremely lucrative business selling on commission the products of American manufacturers to foreign department stores and military PXs. They formed a company in Lichtenstein, where the laws preserve the secrecy of stockholdings, caused a trustworthy Lichtenstein lawyer to be named managing director of the company, and advised all of their U.S. manufacturers that they had subcontracted much of their selling effort to the Lichtenstein company which thereafter was to receive the major share of the selling commissions to which they were entitled. As the Lichtenstein company received its commissions, its managing director and sole employee, who from his law office was simultaneously performing a like service for dozens of other tax evaders, would promptly deposit the commission checks into a coded bank account in Zurich belonging to the American salesmen. In this manner, hundreds of thousands of dollars escaped taxation.

Businesses which buy or sell abroad can escape taxation by opening a foreign bank account and developing with their foreign correspondents a system of double invoicing A United States importer will work out an understanding with his foreign supplier that the supplier's invoices will be overstated by some agreed percentage; the U.S. importer will pay the invoice price, thus overstating his costs for tax purposes, and the foreign supplier will immediately remit the excess to the importer's foreign bank account. A United States exporter will work the same device in reverse. He will be paid in the United States by his foreign purchaser on the basis of an understated invoice which is kept for show to the revenue officials. A true invoice will reflect the additional payments which the foreign purchaser will deposit in the American's foreign bank. Such devices

have been developed with refinement in countries which have severe exchange control restrictions.

Stock market traders often feel that with the brokerage commissions they must pay on the buy and the sell, it is hard enough to make a profit without having to pay taxes as well. An account in a foreign bank offers an ideal solution to the tax problem. It creates some administrative difficulties for day-to-day traders since communications with Europe are slow and expensive and since the foreign bank in a different time zone will be closed during a part of the U.S. trading day.

In recent years many accommodating U.S. brokers have worked out with the Swiss bankers a device for servicing the needs of such a customer. The customer will close his brokeragce house account and open an account in the Swiss bank. The Swiss bank will open a special sub-account in its name with the broker. The customer will continue to call the broker as before to place his market orders, and the broker will execute them. But the brokerage house will not retain any records showing that the transaction is executed for the customers account. The transactions will be entered in the account of the Swiss bank. Since the American broker maintains constant contact with the Swiss banking client either by telex or by telephone, it will be easy to make the customer's order appear to have originated in Switzerland. The customer will then have to pay two commissions, one in the United States and one in Switzerland; but he will have no taxes.

The proliferation of regulations surrounding trading in securities has given rise to many other uses of foreign banks. Among the most familiar of the regulations affecting the securities market is the prohibition of sales of stocks owned by controlling persons of corporations without a prospectus and registration statement filed with the SEC. Registration can be inconvenient, first because it is expensive and second because it may require the public disclosure of facts which the insiders would prefer not to disclose, such as excessive underwriting commissions to a broker, the bad financial condition of the company or even simply the fact that the insiders are dumping the stock of the company.

In several prosecutions brought in recent years by Mr. Morgenthau's office it was found that foreign bank accounts had been used by fraudulent boiler-room operations to pump out worthless stocks to the public without revealing circumstances which would have required registration and would have made the sales impossible. In several instances such operators had purchased the shells of defunct companies, placing the stock in foreign bank accounts; they caused traders to place unreal bids in the "pink sheets" of over-the-counter stock quotations. Salesmen then sold the stock over the telephone to an unsophisticated public at a price based on the "market value" reflected by the "bid" in the pink sheets. The salesmen often promised their customers that the investment would triple within six months. It is not unusual for the boiler room salesmen to receive a one dollar per share commission for sales of worthless shares of stock at $4 or $5. In some instances groups of controlling persons of listed but failing companies have sought to unload their stock in similar fashion. Foreign banks have been used to manipulate the price of the stock traded on the stock market. While selling thousands of shares through boiler rooms over the telephone in a manner that would not immediately affect the price of the shares quoted on the stock exchange, insiders could keep the quoted price high by causing the foreign bank to buy only a few hundred shares on the market. By buying four or five hundred shares a day on the exchange just before the close, the insiders could maintain an artificial price at which to sell many thousands of shares.

In recent years the Securities Exchange Commission and our courts have developed increasingly stringent rules covering stock trading by insiders. It is deemed unfair, and in some cases fraudulent, for an insider to a corporation to buy or sell his company's stock on the basis of information which is not available to the other stockholders or to the public at large. Section 16(b) of the Securities Exchange Act of 1934 prohibits an insider from making any profit from a purchase and sale of the stock of his corporation within a six month period; this rule is designed to prevent unfair profits from use of secret inside information. These restrictions vanish when the insider does his trading through a foreign secret bank account. The bank will place the order in its own name, leaving no record in the United States identifying the holder of the account. The dangers of this device go further than merely permitting an insider to earn illegal profits. For if the insider is in a position of absolute power in the corporation, he can manipulate corporate news and corporate actions so as to create for himself and other directors opprtunities for quick trading profits. He can sell short the day before the Board announces a passed dividend. He can buy before announcing important mineral discoveries. He can almost manufacture at will occasions for trading profits.