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.

III. FOREIGN TRADING IN DOMESTIC SECURITIES

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 would 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 achieve the objective of Title IV.

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

For these reasons, which will now be spelled out more fully, ways must be found not to infringe for the sake of devising yet another means of combating criminal activity-the fundamental rights of individual privacy and freedom from search, seizure and self-incrimination. Such a course would be tantamount to throwing out the baby with bath water.

CONTROLS AS ENVISAGED

In the Senate, a subcommittee of the Banking and Currency Committee will hold hearings, beginning June 8, on a bill presented last April and containing provisions similar to those of the House bill but going beyond it in two major ways that will be summed up below. The Treasury believes that the proposed legislation can be improved to achieve its objectives without giving rise to undue cost and administrative burdens and without endangering the traditional freedoms of American life.

The House bill empowers the Treasury to require banks and certain other financial institutions and businesses to maintain records of checks and evidence of identity of individuals, other than the account holders, who make deposits and withdrawals. The Treasury could secure this information, for various law enforcement purposes, through existing legal processes.

Furthermore, the bill empowers the Treasury to obtain-without subpoena or other legal process or reference to any crime or investigation-a vast amount of private information now reflected in tens of billions of personal and business banking transactions. Domestically, the Treasury, and through the Treasury the various regulatory and other agencies, would obtain from banks and other financial institutions-and from persons dealing with them-reports of payment, receipt or transfer of U.S. currency and other monetary instruments. Internationally, reports would be required on all movements of U.S. and foreign currencies, or other monetary instruments, into or out of the country when they exceed $5,000 or equivalent on any one occasion, or $10,000 in any one year. The bill also requires disclosures of relationships and transactions with banks abroad.

The Senate bill adds new provisions applicable to securities transactions involving foreign financial agencies. First, it bars U.S. brokers, banks and others from effecting transactions in U.S. securities on behalf of a foreign bank or broker unless the foreign bank or broker discloses the person for whom it is acting, or certifies that it is not acting for a U.S. citizen or resident. Second, it requires U.S. citizens or residents who place stock orders through foreign banks or brokers to give the foreign bank or broker permission to disclose the person's identity to the U.S. broker or bank with whom the transaction is ultimately effected.

The Treasury proposes to amend the Internal Revenue Code to provide for "rebuttable presumptions" that U.S. citizens, residents and corporations engaging in certain international transactions would be deemed to receive untaxed income unless taxpayers provided sufficient information and records to the contrary. Under existing authority, the Treasury will, beginning with next year's tax returns, require all U.S. citizens, residents and certain other persons doing business in the United States to identify their direct and indirect interests in foreign bank accounts.

INFRINGEMENT OF INDIVIDUAL PRIVACY

The concern over violations of U.S. laws, including the tax laws, is justifiable. But inroads on the individual privacy of law-abiding citizens give rise to deep concern. Notwithstanding the widespread impression that the proposed controls would be applicable only to relationships and transactions with foreign banks, the truth of the matter is that they would cover a vast variety of domestic transactions.

In American society today, the right of individual privacy is by no means absolute. For example, we accept filing tax returns that contain private information. But it is one thing to pay taxes, and quite a different thing to report deposits to or withdrawals from demand and savings accounts. The Treasury recommended that the reporting requirements be limited to transactions likely to have “a high degree of usefulness in criminal, tax or regulatory investigations or proceedings"; this recommendation, however, was not wholly accepted by the House Committee on Banking and Currency and the bill, as it stands, makes it mandatory for reports to be submitted on any domestic currency transactions without limitation. Such a breach of respect for, or indifference to, individual privacy would threaten to undermine the right of property.

There is also much misunderstanding about the notion that bank records in the United States are "open" while those in a country like Switzerland are "secret." In the United States, as in all countries that respect individual freedom, bank records are private. U.S. banks, as a matter of common law, are liable to their customers for damages if, without consent or proper legal compulsion. they disclose information about the accounts of their customers.

The image of the Swiss banks as veiled in secrecy for the sake of criminals and tax evaders is strikingly lacking in objectivity. It overlooks the fact that, in Swiss criminal procedure, a bank cannot refuse to release information-a duty that also applies to third countries-provided the offense for which a foreign authority seeks Swiss legal assistance also punishable in Switzerland. This is no different than the situation in the United States, for any effort by foreign law enforcement agencies to obtain records in a U.S. bank would be rejected in the absence of a subpoena issued by a court of competent jurisdiction in the United States.

In the Swiss view, tax matters and currency controls of foreign countries are regarded as of no concern to Swiss justice. It is the task of each individual nation to create for itself the legal order, political institutions and fiscal and monetary conditions that will induce confidence in its citizens that their private property will not be eroded by inflation or expropriated without genuine compensation.

BURDENS ON THE PUBLIC

Currency controls would involve not only intangible costs but also many tangible burdens on the American public.

First of all, the contemplated legislation would impose record-keeping requirements-including massive photocopying of checks-substantially beyond existing banking practice. The numbers of checks flowing through the banking system is projected to reach about 23 billion this year. It is true that the House Committee bill (but not the Committee's Chairman) would exclude from the photocopying requirements domestic (but not foreign) financial transactions involving less than $500; but, even so, the end-result would be mounds of microfilm and paper. The specific records buried in these mounds would have to be retrieved whenever needed; and the systems of retrieval suitable for currency-control purposes would have to cut through the present systems geared to the requirements of the banks' own business and that of their customers. All of this would result in sizable increases in banking costs and charges to individuals and businesses engaged in legitimate trade.

Furthermore, the photocopying, record-keeping and reporting requirements— superimposed upon the tightly scheduled and highly automated check collection processes would inevitably slow down the flow of funds. The controls would thus run counter to current persistent efforts to make funds available to the payee at the earliest possible moment.

It may be argued that these technical difficulties, inconveniences and costs would be quite acceptable if currency controls could effectively help in detecting and prosecuting criminals and tax evaders. The difficulty with this contention is. of course, that dishonest people are masters in avoiding or circumventing regulatory procedures or in conducting transactions in ways that leave no trail.

WEAKENING CONFIDENCE ABROAD

At stake is not only the right of Americans to conduct their business and monetary affairs in privacy but also the future of the dollar as the major currency in which businessmen, investors and bankers outside the United States effect payments and keep parts of their working balances, reserves and savings.

Banking is increasingly international and mobile. The flow of funds is influenced by the legal and regulatory climate in various centers. It is possible that foreigners would hesitate to keep deposits or securities in a country that fails to provide reasonable protection against indiscriminate disclosure of private information. They know from experience that controls, more often than not, beget more controls, and might regard the type of currency surveillance envisaged by the bills now pending in Congress as a beginning of exchange restrictions. Furthermore, the proposed legislation would remain on the books permanently-not just provide a framework for emergency measures that could be lifted by administrative action when they became unnecessary. All this could induce individuals and corporations abroad to consider alternative methods of holding working balances, reserves and savings, including portfolio investments in the United States.

Private individuals, banks and other businesses outside the United States maintain close to $30 billion of deposits and other short-term assets in U.S. banks. This figure includes accounts owned by U.S. citizens and corporations residing or doing business abroad. Other accounts are held by foreign nationals and corporations. If only a part of this $30 billion pool of dollar funds were to be transferred from banks in the United States to banks abroad-banks able to provide comparable services under conditions assuring better security against indiscriminate disclosure of private banking transactions to government agencies the result might well be a reshuffling of funds that would disturb sensitive money and capital markets.

Sooner or later, a lessening of confidence might well induce private holders to convert some of their short-term dollars into other currencies. In addition, foreign nations are also holding some $30 billion in U.S. corporate stocks and long-term securities. If only a part of the $60 billion total of foreign-held shortand long-term assets were withdrawn, such conversions would lead to a buildup of dollars in the hands of foreign governments and central banks, which already hold dollar reserves in excess of $13 billion. The use of the dollar as a reserve currency is predicated on its use as a vehicle for private transactions.

The ability to use and invest dollars freely is an essential and vital element in international trade and investment. As the U.S. Treasury has emphasized : The overwhelming bulk of the rapidly growing volume of international transactions by Americans and foreigners alike are not only legitimate business and personal transactions, but serve the larger interests of the United States in effective monetary arrangements and freely flowing trade and payments.

STATEMENT OF S. DAVIDSON HERRON, JR., FINANCIAL VICE PRESIDENT,
INA CORPORATION

The following is a brief statement of the position of INA Corporation on the subject of Senate Bill S. 3678, dealing with financial record keeping and reports of currency and foreign transactions.

INA Corporation is perhaps uniquely affected by this bill before your committee; while we are not a banking institution, our corporate family influences a number of the other financial institutions enumerated in the bill, and directly affected by its provisions. Our subsidiaries include a registered broker-dealer, an investment banker, several insurance companies, and other businesses performing related functions.

At the outset, I would like to state that INA Corporation concurs in the expressed purposes of this proposed legislation, and is anxious to cooperate in the formation of an efficient and effective process for the accomplishment of those purposes.

We fully appreciate the difficulty of structuring a mechanism which will facilitate the detection and prosecution of fraudulent and illegal use of financial institutions and which, at the same time, will not impose an impediment on the free flow of domestic and international commerce.

We concur in that testimony before the House Banking and Currency Committee, and other testimony before your committee, supporting the need for fairly broad discretionary powers for the Secretary of the Treasury in order to effect the purposes of such legislation. We also believe that these broad and extraordinary powers should be conferred with an explicit purpose, upon a showing of necessity, and with adequate guidelines to indicate the legislative intent in conferring such powers.

In the fields of investment banking and securities broker-dealerships, our views are substantially in accord with those of other institutions and regulatory associations and agencies in these fields. Testimony of other witnesses has illus trated that, under certain very special circumstances, such institutions may be used to execute and to conceal illegal and fraudulent monetary transactions. We presume that, in the execution of his extraordinary powers, the Secretary of the Treasury would confine himself to those specific practices and instances which are known to be used for such purposes, or which are likely to be used for such purposes, and where the ordinary record keeping and other business practices do not accommodate detection and prosecution

We are particularly concerned with the extension of this proposed legislation to include insurance companies. Throughout the testimony on the House side, and