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The margin requirements of the Federal Reserve Board have created additional inducements to market traders to operate through foreign banks. In order to protect the stability of the market from excessive gyrations produced by speculation on credit, the Federal Reserve Board has tightly restricted the amount of money which banks and brokers may loan for stock purchases. Were it not for these restrictions brokers would often be willing to make considerably larger loans, particularly if by doing so they would increase their immediate commission business. Many brokers have therefore illegally arranged for their customers to open accounts in foreign banks so as to be provided with loans in excess of the margin requirements.
The fast profits to be made in hot issues of new securities have caused abuses of foreign accounts. A broker could open his own secret account in a foreign bank and cause that bank to request allotments of issues which his house brought out. If the issue sold well with a premium in the after-market, he would allot a generous share to the foreign bank. Less successful issues would go to other customers.
The list of laws and regulations which can be circumvented by acting through a secret foreign bank account is extremely long, and grows longer with each new prohibition, obligation, or tax. Many Americans have illegally purchased gold through Swiss banks. The promulgation of the Interest Equalization Tax placed a substantial cost on investments by Americans in foreign securities, which could be avoided if the securities were purchased through a foreign bank. A few years ago some imaginative traders used the Interest Equalization Tax, then at 15%, as a device to earn millions of dollars in fraudulent profits. Through a foreign bank they would purchase foreign securities which were also traded on American exchanges. Such shares were quoted on U.S. markets at two prices—one price for foreign owned shares free of Interest Equalization Tax, and a different price (usually nearly 15% higher) for shares as to which it was certified that the tax had been paid. They would then cause the foreign bank to sell the shares through a V.S. broker, furnishing a false certificate to the effect that the tax on such shares had been paid. The shares would therefore be sold to U.S. persons at a price nearly 15% higher than their purchase price. In effect, they were collecting the Interest Equalization Tax in place of the Government.
Foreign secret bank accounts have also served as a safe haven for money stolen or earned through some illegal activity. A case was discovered recently in which hundreds of thousands of dollars of embezzled welfare funds were diverted to a Swiss bank. Huge profits from narcotics traffic have been hidden in secret bank accounts in many different countries. Illegal kickbacks from exports financed by AID programs have been placed by American manufacturer in Swiss banks for the benefit of corrupt foreign purchasing agents. Corrupt American government officials also have received payoffs in foreign accounts.
Prosecution and prevention of such illegal dealings has been extremely difficult. The wall of secrecy surrounding Swiss banks is practically impenetrable. It is true that Swiss law provides for the disclosure of a bank account where it has been used in furtherance of a crime, but the definition of crime for this purpose does not include violations of tax laws or securities regulations; it is limited to the universally recognized common crimes. Furthermore, the use of the secret bank account will often conceal the occurrence of the crime, or at least the identity of the criminal.
The success which Mr. Morgenthau's office achieved in its investigations of criminal misuse of foreign banks resulted in many instances from the discovery of traces left among the records of American banks and brokerage offices. For this reason, I believe that certain provisions of the bill which is before this Committee will serve a useful purpose in the detection of criminal misuse of foreign banks, especially the provisions of Title I.
On the other hand, I respectfully call to the attention of the Committee certain provisions which, in my opinion, go far beyond the need of law enforcement, create administrative obligations on individuals which will be burdensome and unproductive, and delegate a confiscatory power to the Secretary of the Treasury which is so broad that it probably conflicts with the Constitution. These provisions occur primarily in Chapters 3 and 4 of Title II.
Chapter 3 entitled Reports of Exports and Imports of Monetary Instruments, creates very substantial risks of injustice. First, the forfeiture provision of Section 232 seems unduly severe when taken together with reporting requirements which are so broad that countless violations will occur by oversight without intent to break the law. To provide for forfeiture in such instances, if constitutional, will at least cause many harsh injustices. This risks furthermore to encourage corruption in government officials. Nor are these dangers cured by the authorization to the Secretary in Section 234 to remit forfeitures where he deems just. No standards for remission are provided and there is no assurance that the Secretary's discretion will be wisely or justly administered. The discretion conferred by this Section is so extensive, especially in the context of confiscation of property, as to raise serious doubts of its constitutional validity.
The reporting provisions of Section 231 are so broadly inclusive that they will place unrealistic burdens on private individuals and businesses in a context in which they will serve no law enforcement purpose. As originally conceived in the early drafts of the House Bill (H.R. 15073), this provision was conceived as a weapon against couriers who rendered a service to U.S. tax evaders by transporting large amounts of currency out of the country to tax safety in a foreign secret bank account. The early versions of the bill properly focused on currency since it can be transported without leaving any documentary trace in C.S. banking institutions. Furthermore, a provision requiring a traveller to declare large amounts of currency on his person on leaving the country will not carry a high risk of unintentional violations by innocent persons since his obligation can be easily called to his attention at the border crossing or customs. But the draft passed by the House and proposed in the Senate has gone far beyond this simple early conception. The substitution for "currency” of “monetary instrument” (including checks, notes, bonds and stock), and the inclusion of items sent and received in the mail, will require recurring reports of every kind of innocent everyday international transaction which is fully documented in the books and bank records of American individuals and businesses. Importers buying abroad, manufacturers selling abroad, a father sending money to a son studying abroad, an investor receiving dividends from abroad, all must file reports setting forth the origin, destination and route of the transportation” of the monetary instrument, and they will be subject to forfeiture as well as jail if they forget to do so.
I would suggest that the provision be limited to deal with the evil for which it was conceived, the transportation out of the country of (currency. The concern for bearer instruments is not warranted since the purchase of such instruments creates bank records which will be preserved. The forfeiture provision might either be deleted or limited to circumstances in which the failure to disclose is proven to have been in knowing furtherance of a felony. A tax lien might be more appropriate.
Similar comments are applicable to Chapter 4, Section 241 which requires an individual to file a complete report on the occasion of any transaction with any foreign financial agency. This Section was originally designed to require the disclosure of a foreign bank account. Such a requirement would be desirable for the enforcement of tax laws and other laws and would not be unreasonably burdensome, particularly if the disclosure were to be made annually on the income tax return. As passed by the House, however, this Section requires the individual on pain of jail to maintain records or file reports, or both, of every transaction with a foreign financial institution, unless exempted by the Secretary. A family on a summer vacation abroad may be obliged to file such reports every few days, each time they stop at a bank to change travellers checks. An importer may have daily reportable letter-of-credit transactions with foreign banks.
I do not believe that this Section serves any useful law enforcement purpose beyond the requirement of disclosure of a foreign bank account. It creates unrealistic and unreasonable reporting burdens. The authority of the Secretary to make exemptions is not a sufficient protection. The Secretary should not be granted a regulatory authority which goes far beyond desirable limits.
I think an important distinction should be drawn between the imposition of elaborate record-keeping requirements on banks (as under Title I of the Bill) and the imposition of similar requirements on individuals and non-fiduciary businesses. Banks are equipped to record such information ; much of their business consists of keeping extensive records, and many banks keep such records as would be required under Title I without even being obligated to do so. To impose such requirements on banks seems neither overburdensome nor unreasonable.
On the other hand, individuals and non-fiduciary businesses cannot reasonably or realistically be required to keep records and file reports of countless innocent meaningless transactions. Reporting and recordkeeping obligations should be imposed on them only where important and carefully tailored to serve their purposes in a reasonable way.
May I offer a further comment with respect to the proposed Section 31(a) of the Securities Exchange Act of 1934 as contained in Title IV, Section 101 of the Bill. This Section is designed to require foreign banks which place orders with U.S. brokers to certify either the name of the person for whom the order is placed (if it is an American) or that the bank is not acting for a U.S. person. This requirement is appropriate where the foreign bank is acting for an individual account holder. The Bill, however, goes much further in a manner that would effectively paralyze important legitimate areas of commerce. A broker could not accept an order from an offshore investment fund unless each order was accompanied by a list of the investment fund's thousands of shareholders or by a certification that no U.S. citizen or resident had a beneficial interest in the funda certification which the fund would be unable to give. Thus, if the Bill were passed in its present form, foreign funds would be unable to invest in U.S. securities through U.S. brokers and, to the extent that such foreign funds had already acquired positions in U.S. securities, they would be unable to sell them.
Under the present draft, furthermore a foreign bank could never place an order for the account of any corporation, including itself, since it would be unable to give either of the required certifications. There is a further difficulty resulting from the delay necessary for a foreign bank to furnish a certificate to the U.S. broker. Foreign investors, like U.S. investors, want their orders promptly executed. As the Bill is presently drafted a European investor could not have his order executed for four or five days until the U.S. broker received the certificate. As drafted, this provision would terminate all foreign investment in the United States.
I appreciate your invitation to testify before this Committee. I hope that you will find these views helpful. Thank you.
Senator PROXMIRE. Thank you very much, Mr. Leval. You did a fine job. You have certainly given us very useful documentation.
Our last witness is Mr. Anatole G. Richman of Newark, N.J. You have a rather concise statement. You can proceed in any way you wish. If you skip any part of your statement, it will be printed in the record in full.
STATEMENT OF ANATOLE G. RICHMAN, NEWARK, N.J. Mr. RICHMAN. Mr. Chairman, I am pleased to be here to give testimony regarding the use of foreign banking facilities by certain taxpayers to evade taxes based on my experiences with the Internal Revenue Service. During my 11 years employment with the Internal Revenue Service, I encountered certain situations which indicate that the secret numbered account poses a serious threat to our self-assessing system.
A tax evader or a major racketeer who has understated his income is forced to resolve several immediate problems. First, he must carefully cover his tracks to avoid detection. This is not a simple task, as under normal circumstances his attempt to evade taxes would be uncovered by the Internal Revenue Service. Also, if the tax evader or major racketeer is hiding currency, he runs the risk of having the currency (decompose. 2
If he attempts to have the decomposed currency redeemed by the Treasury Department, he will be required to give a full explanation regarding its source to the Internal Revenue Service before the Treasury Department will provide him with new money. Perhaps the most difficult task facing the evader is to determine a method which will enable him to reinvest his untaxed receipts.
Foreign agents who solicit banking business in the United States boast that their secrecy laws solve all of the tax evader's problems. It has been my experience that the foreign secrecy laws severely impede effective enforcement of our tax laws and, when used, make the collection of our revenues impossible. I specifically remember the case of Ingemar Johansson, former world heavyweight champion, who had
his share of the purse and television rights forwarded directly to an account in a Swiss bank. Johansson failed to pay taxes on a substantial amount of income which was subject to U.S. taxes, and the Internal Revenue Service was unable to collect the amount determined to be due. In addition to the loss of revenue, our Government was required to spend a considerable amount of time and money in unsuccessful investigations and litigation.
Requests through the State Department and Interpol for information regarding numbered accounts maintained by U.S. taxpayers at Swiss banks produced negative results. I only know of two cases where information was obtained regarding foreign bank accounts. One case involved a manufacturer who concealed his untaxed receipts in a numbered account in a Swiss bank. He subsequently used these receipts to make very substantial investments throughout the United States. The untaxed funds came back into the United States as fictitious loans which the taxpayer made to himself. In addition to having his corporations repay these loans, the taxpayer had his corporations pay interest on the balance, thus creating an illegal interest deduction. The information developed during the investigation of this case was not obtained from the Swiss bank, as they refused to cooperate, always stating that they were prohibited by Swiss law from cooperating. I mention this case as it is an excellent example as to how a tax evader or major racketeer can invest untaxed receipts through the use of a secret account.
A Swiss bank did provide some information in the Edward Gilbert case. You may recall that Mr. Gilbert received widespread publicity when he fled to Brazil with $1 million. The bank only cooperated after the Internal Revenue placed a lien on a substantial amount of assets which the bank alleged were assets of the bank. In an attempt to prove that the assets in question did not belong to Gilbert, the bank provided the Internal Revenue Service with Gilbert's records.
An examination of Gilbert's records disclosed how an individual could raid and get control of legitimate business in the United States. The bank lent Mr. Gilbert the initial capital to acquire Bruce shares. For the use of this money, Mr. Gilbert was required to pay 9 percent interest, an interest rate that was far greater than the amount charged by the U.S. banks at that time. As needed, the bank provided Mr. Gilbert with additional funds to acquire the shares necessary to gain control. All of the securities acquired by Mr. Gilbert were purchased in the name of the Swiss bank so that no one knew who was raiding the corporation. For this service Mr. Gilbert was required to pay a Swiss as well as a U.S. brokerage fee. He was also required to pay 25 percent of his paper profits to the Swiss bank on a quarterly basis. The amount due on the paper profits was added to Mr. Gilbert's loan, and interest was charged on the additional amount due. It is my understanding that all Mr. Gilbert's financial activity, as you know, was in flagrant violation of our margin requirements.
The investigation of a doctor who claimed to have developed a drug to cure cancer is another example of how the Swiss bank secrecy laws impede our tax enforcement efforts. The Food and Drug Administration found that the cure was valueless and stopped the doctor from dispensing the drug in the United States. Investigation disclosed that the huge profits earned by the doctor from his so-called cancer cure were deposited to a numbered account in a Swiss bank. I recall visiting a friend in New York in an attempt to obtain additional informa
tion regarding the doctor's numbered account. My friend was unable to assist us in our efforts and all other investigative procedures failed to develop the desired information. It is my understanding that the Government was unable to successfully prosecute this tax case and the doctor's untaxed receipts were not subject to the Internal Revenue Service's collection procedures.
In the course of my employment with the Internal Revenue Seryice I met an informant who claimed that he could obtain information concerning Americans who had accounts in Swiss banks. To test the informant's ability to provide reliable information, I decided to open a numbered account in a Swiss bank. I had another reason for opening the account. On many occasions, Swiss bankers visiting the United States, when interviewed, claimed that the use of numbered accounts by U.S. citizens was not widespread.
They also contended that an account could not be opened in the United States; that it required a visit to Switzerland and a meeting with an official of the Swiss bank. They further stated that it would require at least a deposit of $100 or more as an initial deposit to open the account. I wanted to find out whether the statements made by the bankers were correct, and to learn how the system worked.
Using an assumed name I visited New York and entered the New York office of a Swiss bank. When I told the guard that I wanted to open an account, he directed me to an office several floors above street level. There I was required to fill out a card with my name, address, occupation, and business address. Shortly thereafter, I was directed to a private room and spoke with an official of the bank. I told him that I had some money to hide and that I wanted to open a numbered account. The bank official insisted that I could not open such an account in the United States and that I would have to visit Switzerland and contact the bank directly. He maintained this position throughout the interview and by the time I decided to leave I was convinced that I would not be able to open the account in the United States. As I was leaving the bank, the official handed me a brochure which contained information regarding the Swiss bank. He then stated that if I corresponded with the right bank perhaps they could help me. Underlined in red was the address of the Swiss bank.
I wrote to the bank in Switzerland and, shortly thereafter, via airmail, I received an application and the conditions set forth by the bank. It was interesting to note that the bank charged a fee of 114 percent for handling my money. This fee was charged against withdrawals; therefore, as long as I kept my money at the bank, I would not be charged a fee. I opened the account with a deposit of $250 and subsequently effected a series of transactions in an attempt to learn how the system worked. I would purchase money orders in blank from banks in the United States. Then I would make them payable to the Swiss bank, and instruct the Swiss bank to deposit the money orders to my numbered account. I would mail the instructions and the money orders to the bank in Switzerland. It would have been very easy for me to send large sums of money out of the country each day by using this method.
The bank advised me that I could make withdrawals by having checks made payable to any payee I designated. Also, I could have these checks drawn on any bank I named. I always had the checks