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knows that the bank has many customers who are U.S. citizens or residents. Since the firm has no independent means of verifying the truthfulness of the certification, it is entirely at risk, under pain of penalty for violating the Securities Exchange Act, in making its own “good faith" determination. This was one of the considerations which led the Federal Reserve Board to delete the "good faith” requirement in the course of its revision of the Special Omnibus Account section of Regulation T last year. Since this provision makes the broker-dealer firm both an enforcement agency and at the same time subjects it to liability for any violation, we believe that it does not conform to concepts of fundamental fairness.

We also have strong reservations about the broad scope of authority granted to the Secretary of the Treasury to prescribe recordkeeping and reporting requirements under Chapters 3 and 4 of Title II of both bills, and specifically about Section 241 which would require broker-dealers, among others, to obtain detailed information regarding the identities and legal capacities of all parties to the transaction. Apart from the considerable paperwork burdens which these requirements might impose, that particular section is subject to many of the same practical and fairness objections raised in our earlier comments. U.S. broker-dealers already maintain voluminous customer records which are available to law enforcement officials in connection with specific investigations. In our view, it has not been demonstrated that such additional requirements would add significantly to the ability to trace illegal transactions of any sort. While we trust that the Secretary of the Treasury would use this broad grant of power selectively, it would seem appropriate for the Congress to lay down more precisely defined guidelines for its exercise now or in the future.

In summary, the Association recognizes the imperative of taking vigorous action against those who misuse the free channels of commerce to flout our domestic laws, and we would support any legislation reasonably designed to accomplish this objective. However, certain provisions of the pending bills. in particular the proposal in S. 3678 to add new Section 31 (a) to the Securities Exchange Act of 1934, would only impede the flow of legitimate foreign investment into U.S. equity markets. This would have most deleterious effects on the National economy by reversing the favorable impact of such investment on our international balance of payments. Moreover, those provisions are practically unworkable and, as they apply to U.S. broker-dealers, impose unfair burdens.

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On behalf of the Committee of Foreign-Owned Banks, which consists of the 21 member banks listed at the end of this statement, the following comments are made on S. 3678, pertaining to reports and records of bank and international transactions to aid law enforcement.

The Committee of Foreign-Owned Banks supports the objectives of S. 3678. Our main concern is that any legislation designed to make foreign or domestic bank records available to assist law enforcement in the United States not result in inadvertent, unwarranted or undesirable discrimination against banks or financial transactions because of their foreignness. Although we assume that the results of your Committee's work will provide Treasury with discretion broad enough to accommodate the fiduciary responsibilities of banks and the constitutional rights of those affected, certain comments on this subject are also included under the heading of "Privacy", in the belief that Congress should confine the regulatory authority of the Executive Branch within the bounds which it believes to be appropriate.

I. DISCRIMINATION S. 3678 authorizes three kinds of discriminatory regulation, each of which deserves close attention from your Committee. They are: (1) discrimination between banks and other financial institutions on the basis of nationality ; (2) discrimination between U.S. citizens making lawful use of foreign financial facilities and those using domestic financial facilities; and (3) discrimination be. tween domestic and international transactions. 1. The Nationality of Financial Institutions.

There are obvious difficulties resulting from any U.S. laws and regulations which classify foreign financial institutions according to the degree to which they comply with U.S. law enforcement and which distinguish between U.S. and foreign financial institutions in this regard. Although S. 3678 merely authorizes regulations which could make such distinctions, the issue arose more sharply before the House Banking and Currency Committee, because the bill before that Committee during its hearings, H.R. 15073, would have required U.S. citizens and corporations using any foreign bank, which the Treasury Department determines does not make records available to agents of the U.S. Government, to report to Treasury each transaction (presumably each deposit and withdrawal) involving that foreign bank. The Chairman of that Committee at the hearing revealed that the banks of 26 countries, in addition to Switzerland, might be so classified.

Assistant Secretary of the Treasury Rossides, along with other witnesses, pointed to the immense difficulties of this indirect discrimination against foreign banks, which would result from so burdening U.S. citizens as to deter their use of foreign banks. Any uniform standard of non-availability of bank records to U.S officials (who are foreigners to the bank) apparently means that at least 27 countries and probably many more do not meet the test. In fact, the United States is probably a "secrecy" country in the sense that its banks, under principles of common law, may not lawfully divulge customer information without their consent or legal compulsion, and that subpoenas would not be issued for investigations of foreign crimes not recognized by the laws of the United States (as in the Swiss situation). It seems clear as a practical matter that any effort by foreign law enforcement agencies to reach records in a bank in the United States would be rejected by both the bank and government officials in the absence of a subpoena issued by a court of competent jurisdiction in the United States. There may well be no countries under which banks could legally disclose information about its accounts to an agent of a foreign country without a subpoena or some administrative act authorizing or directing the disclosure. The test is almost meaningless because accessibility will vary not only with applicable law but also with the nature of the request.

Presumably for these reasons, Chapter 4 of Title II of H.R. 15073 was modified in the House to broaden the authority of the Treasury Department so as to encompass the stated intentions of Secretary Rossides to do no more thin require identification of foreign accounts by U.S. citizens on individual and corporate income tax returns. This step has already been taken under existing authority in the Internal Revenue Code and such a box is being included on 1970 income tax return forms. This information identifying foreign accounts will provide law enforcement officials with important leads which will open up new opportunities for conventional and lawful investigatory methods. These opportunities would be amplified, under the Treasury plan, by a proposed statutory rebuttable presumption (requiring an amendment of the Internal Revenue Code) providing a strong incentive for the owner of the account to make full disclosure in connection with any lawful investigation of information in foreign records which might not otherwise be available.

Without knowledge of this history of Chapter 4 of Title II, the bare legislative language appears to authorize an alarming discrimination between foreign countries based on the U.S. Government's ideas of compliance with U.S. law enforcement activities.

The Treasury plan which seems to have been well received by the Banking and Currency Committees of both Houses, depends entirely upon existing authority in the Internal Revenue Code, making Chapter 4 of Title II superfluous. Accordingly, it is recommended that Chapter 4 (both sections 241 and 242) be deleted on the grounds that authority which neither Congress nor the Executive Branch at this time wishes to utilize unnecessarily abdicates the legislative role of the Cogress and may be misleading. 2. Burdening U.S. Customers of Foreign Banks.

The testimony of Secretary Rossides before the Senate Banking and Currency Committee went a step further than before the House Banking and Currency Committee with regard to disclosure requirements which might be imposed on U.S. citizens and corporations using foreign bank and brokerage accounts. He said Treasury is considering the possibility of recordkeeping requirements in addition to the mere disclosure on income tax returns of the existence of foreign accounts. Law enforcement and particularly tax collection might be greatly assisted by a general requirement that all taxpayers maintain specified records for a specified period of time. Such a requirement has never been imposed by regulation or statute for reasons which we assume are well considered and sound and probably have to do with the burdens involved and difficulties of enforcement. The question then arises as to whether it is desirable and fair to impose this requirement on one class of taxpayers, namely, those using foreign accounts. The justification can only be a dangerous and unfair presumption that those using foreign accounts are suspect and those using domestic accounts are not.

Having followed the hearings before your Committee, we feel that it is unnecessary to elaborate the statement which we have submitted to the House Banking and Currency Committee explaining that the use of foreign bank ac. counts by U.S. citizens, residing in the United States and abroad, and by U.S. corporations, doing business in the United States and abroad, is overwhelmingly lawful, proper and in pursuit of beneficial economic activities. It is just as unfair to burden these Americans with additional red tape and paperwork in the hope of catching criminals as it would be to impose such burdens on the customer of domestic banks for precisely the same reason.

Any unfairness to this class of U.S. citizen has a secondary discriminatory impact in that recordkeeping requirements not imposed on other taxpayers are likely to drive lawabiding Americans away from foreign financial institutions. The result is to discourage the grow of international banking and to isolate the U.S. economy thereby doing it great harm.

It is urged that S. 3678, or at least the report of your Committee, make it clear that Treasury's disclosure requirements pertaining to foreign accounts, presumably authorized by the Internal Revenue Code, should be limited to disclosure of the existence and identification of foreign accounts, that individual transactions need not be reported and that special records in connection with such accounts need not be kept except as required under existing laws and regulations. 3. Discrimination Between Domestic and International Transactions.

S. 3678, taking all of its provisions together, sets up a system of actual and potential disclosure of international transactions involving money and financing. The purpose is to provide law enforcement agencies with leads to funds held abroad for purposes of crime and evasion of U.S. laws. Faced with a steadily growing internationalization of banking and economic growth, it may well turn out that the Treasury Department has been authorized to gain access to a vast amount of economic data justifiable for such purposes as instituting an exchange control system but totally out of proportion to the objective of enforcing criminal and tax laws. Foreign countries with advanced economies and sophisticated governmental controls have found it impractical and unduly burdensome to government and business to keep close track of all international transactions.

The authority in this bill is broad enough to enable the Treasury Department to limit its regulatory activities to a scope commensurate with the size of the law enforcement problem. It would be helpful if the report of your Committee encouraged them to do just that. Our concern is that pressures resulting from a few well publicized criminal investigations might lead to full utilization of the powers under this bill with the result that the disclosure requirements applied to international transactions would impose such recordkeeping and reporting burdens as to discourage large volumes of international transactions which could be avoided at acceptable cost to the principals by conducting their business along more nationalistic lines. To administer this bill without discouraging international commerce will require skill and restraint by the Treasury Department. Its task could be made easier by explicit recognition of this problem in the report of your Committee.


S. 3678 would authorize the Treasury Department to require an apparently unrestricted degree of disclosure by banks of information about their customers by means of access to records of banks (Sect. 101 and 122) and by means of reports (Sect. 221). These sections appear to be a complete abdication by Congress to the Executive Branch in a highly sensitive area of constitutional and polit. ical tradition. The fundamental question posed is whether the Treasury Department and, through the Treasury Department, the various law enforcement, reg. ulatory and national security agencies, should have access, without need for subpoenas, to vast amounts of personal information which is reflected in tens of millions of personal and business bank accounts.

Members of our committee are in constant touch with foreigners banking in the United States and, therefore, are particularly aware of the sensitivity of foreign bank customers to any change in the relative conditions of banking in the United States compared to banking at home or in other international financial centers. If the Federal Government is to have unrestricted and indiscriminate access to information about private affairs from bank records and bank

reports, there is little question, in our judgment, that substantial banking business in the United States which originates overseas would be transferred to foreign banks able to provide comparable service under conditions assuring better security against disclosure of private affairs to government agencies or others. We would expect American business and financial people to be concerned, but we speak with greater insight about foreign reaction. There is a historical habit of thought by law-abiding corporations and individuals, both in the economically developed and the underdeveloped countries of the free world, that distrusts indiscriminate disclosure of their affairs to public officials of their own or foreign governments. There is legitimate concern that information collected without their knowledge, frequently involving disclosure of other people's affairs as well as their own, may be misused merely because it is taken out of the context of related events.

As investment and trade move across international boundaries, even among the more economically advanced countries, a major influence on the location and flow of funds is the business "climate," as it has come to be called. A significant component of an inhospitable climate is the relative capacity and tendency of government agents to examine private affairs without safeguards for those affected. This is done in some foreign countries through extremes of regulation and through techniques which border on spying, including access to telephone conversations, to international cables and to international mail. Even certain of the economically advanced countries in recent years have seen a decline in their highly valued international centers of finance because their financial institutions have succumbed to the expanding power of a nationalistic central government. The point is not that the U.S. Government is presently in danger of being so characterized, but rather that banking is increasingly mobile and international, and that the security of private affairs is one influence directing the flow of funds.

As a practical matter, experience both here and abroad teaches that unnecessary disclosure can lead to expensive timeconsuming involvement with government agencies, even though the activity is entirely legal. This problem is more serious in some countries than others, but as the regulation of private affairs intensifies throughout the world, the idea that disclosure to governments should be limited to lawful investigations of specific matters is increasing, both in the United States and abroad. This is generally understood and accepted as a way of life by experienced regulatory and revenue-producing agencies in the economically advanced countries. They are not eager for a deluge of information for which they must be responsible.

We believe that the priority to be given to using bank records and reports as a tool of law enforcement must be balanced against the importance of a reasonable degree of protection of private information from disclosure to governments outside of well-established procedures for lawful investigations which are disciplined by the necessity for obtaining judicial or administrative subpoenas specifically authorized by law. The impression may be created by the proposed legislation that it is intended that the Federal Government have access to private information through the banking system in the United States which would greatly expand the fact-finding powers of the Federal Government.

Under present law, government access to information from banks is generally believed to be confined to the purpose of regulating banks and perhaps to developing statistically information which does not disclose private affairs. An anomalous exception is the 1917 Trading With the Enemy Act, which has been relied upon for the largely unsuccessful experiment in obtaining reports (so-called “TCR” reports) of "unusual” transactions from banks, which, as explained by a memorandum to all banks from Secretary Anderson, dated August 3, 1959, are for use in law enforcement. The bill under consideration would frankly identify the purpose of these reports as law enforcement, thereby placing banks in the position of exercising a necessarily poorly informed judgment as to what is “unusual,” in the sense of cause for suspecting crime, and of volunteering information about customers with whom they have a fiduciary relationship. The fact that something like this has been going on in a desultory fashion under a statutory authority which obscures the purpose of the TCR reports should not deter a careful look at whether the practice is good for the banking system, fair to the law-abiding, fair to the suspect, consistent with existing law, and sufficiently useful to law enforcement.

To make the privacy point entirely clear, it may reasonably be asked how a public figure would feel about a knock-down drag-out public fight with a hostile administration equipped with easy access to each of the deposits and withdrawals

from the bank (and brokerage firm) of that public figure, or anyone associated with him, over the last 6 years or longer. This use of “information power,” enhanced by modern retrieval methods, would be obviously improper, but the invitation implicit in the proposed legislation might overcome any inhibitions in the heat of political battles. The disclosed transactions, it may be assumed, are entirely above criticism when put into context, but the explanations of complex matters have a way of never catching up with the initial publicity. It is respectfully submitted that a loose assumption that future governments will always play fair in crime, politics, national security, business regulation should not be the basis for legislation which puts private bank records into government hands. The complex balance between law enforcement and individual rights is directly raised by this bill and your Committee's intentions should be made clear.

Accordingly, it is suggested that the bill include a clear restriction on Treasury's access to information about private accounts with domestic financial institutions to the following circumstances :

If your Committee decides that access should be less restricted, the bill should extinguish claims against banks arising from disclosures pursuant to this legislation and define the relevant responsibilities of banks to those using their services.


Section 31 (a) of Title IV would impose a certification procedure on foreign financial agencies placing orders in the United States for the purchase and sale of domestic securities in transactions which come under the jurisdiction of the Securities and Exchange Act of 1934. In the opinion of those members of our committee who have had an opportunity to comment to the undersigned, the result of this restriction would be to eliminate most of the orders placed through foreign financial agencies to buy or sell domestic securities. Various witnesses at the hearings before your Committee have represented the volume of such transactions in the billions of dollars. To disturb participation of this magnitude in the securities markets of the United States at any time, but particularly at this time, would obviously have an unsettling and perhaps dangerous impact. It rould have equally profound long-term adverse effects on the growth of international investment and financing activities in that part of the world which depends on capital markets.

The reason for this general opinion from those who are close to foreign financial institutions which are vehicles for foreign trading in the United States securities markets is simple: these transactions must be conducted with extreme rapidity and at very low cost. The requirement for certification of any fact, much less facts about the principal behind a particular transaction, would require some degree of investigation and would take some time before a certification could be made in good faith. The compensation to the foreign financial institution handling the transaction would not begin to cover the costs involved in ascertaining the facts and the less tangible cost of taking legal responsibility on such subjects.

The result is likely to be the discouragement of the use of foreign financial facilities not only by U.S. citizens but also by foreign traders in the American securities markets. Coupled with the comparable potential for indirect discrimination against foreign financial institutions contained in Chapter 4 of Title II of this same bill, Title IV greatly increases prospects for this legislation to be interpreted abroad as protection for U.S. financial institutions. If it is impractical because of U.S. regulations for foreign banks and brokers to handle trading orders in U.S. securities markets, it can be anticipated that it will be made impractical for U.S. financial agencies to handle trading orders to be executed on the foreign exchanges. The problem is further compounded by the uncertainties resulting from the inherent inability to enforce reliability on any foreign certification procedure.

It is hoped that less disturbing and more effective ways can be found to achiere the objective of Title IV.



1. Compliance Cost to Banks

The Treasury proposals identify substantial new record-keeping requirements and suggest amplified TCR reports. The impact may be greater on foreign-owned banks in the United States than other banks, because the former are primarily concerned with international transactions. The problems posed by a full and literal implementation of the recordkeeping proposals would create a significant increase in the costs of banking, largely in additional recordkeeping. We believe

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