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that these problems can be worked out to preserve the objectives of the bill, provided Treasury has broad enough authority to make practical decisions after the banking industry has fully discovered and communicated its problems to Treasury. Ample notice and opportunity for banks to comment will be necessary. 2. Extraterritorial Effects
Section 203(f) of the bill identifies “domestic financial institutions” in such a manner as to cover any foreign bank doing business “in any place subject to the jurisdiction of the United States”. The hearings and the sponsors indicate an intent to avoid direct regulation of foreign banks. Whether intended or not, it should be readily apparent that any attempt to impose the reporting requirements of Section 221 on foreign banks in order to carry out domestic law enforcement objectives would be unenforceable, except by restricting their business in the United States, a result which would invite protest from abroad and a disturbance of international banking relations on which major U.S. banks depend in their growing overseas activities.
Whatever approach to Chapter 4 of Title II is finally approved by your Committee, reports of foreign accounts should be limited to U.S. citizens and corporations (Section 241 requires reports by foreign corporations doing business in the U.S. and foreigners residing in the U.S.). Foreign corporations doing business in (or resident in) the United States are a rapidly increasing proportion of all customers of foreign banks. Any attempt to bring their foreign activity under U.S. Government scrutiny would be unwise and difficult to enforce. The use of dummy foreign corporations owned by U.S. criminals or tax evaders should be dealt with through the U.S. stockholder. Furthermore, if the foreign corporation is set up for illegal purposes by a U.S. citizen, it may be assumed that it would not engage in business in the United States if the result were to cause its owner to file Treasury reports. There would be no assist to law enforcement to justify the obvious difficulties. Foreign individuals resident in the U.S. are predominantly aspiring immigrants who might be spared any new dimensions in red tape.
V. CONCLUSION For the reasons set forth above, it is respectfully requested that your Committee take the following steps :
1. Delete Chapter 4 of Title II (Sections 241 and 242) with the explanation that they are superfluous because the Treasury Department has ample authority under the Internal Revenue Code to require disclosure on income tax returns with regard to foreign accounts.
2. Include in your Committee's report on this bill a comment indicating that the objectives of Chapter 4 of Title II are satisfied by the announced plan of the Internal Revenue Service to require identification of foreign accounts on the income tax return forms, and caution against discriminatory recordkeeping requirements imposed on U.S. citizens and corporations owning foreign accounts beyond the requirements of existing regulations.
3. Caution in your Committee report that any reporting or recordkeeping requirements applicable to international transactions and not to domestic transactions be limited to cope with genuine law enforcement needs and not be allowed to develop into a comprehensive source of data on all private international transactions crossing U.S. boundaries.
4. Add a provision restricting access by the Treasury Department, or any other agency of the U.S. Government, to information derived from private accounts with domestic financial institutions to these specific purposes: law enforcement when authorized by a subpoena; regulation of the financial institution; and compilation of statistics when safeguards are provided against identification of private information.
5. Delete Title IV.
6. Remove institutions organized under foreign law from the definition of “domestic financial institution” in Section 203 (f).
7. In the event that Chapter 4 of Title II is retained, delete from Section 241 “or person in the United States and doing business therein” (which refers
to foreign citizens and foreign corporations). On behalf of each member of the committee, we wish to express our appreciation to your Committee and its staff for their courtesy in considering the above views. Respectfully submitted,
STEUART L. PITTMAN, Counsel for Committee of Foreign-Owned Banks.
MEMBERS OF FOREIGN-OWNED BANK COMMITTEE
Banque de Bruxelles, 1 Chase Manhattan Plaza, New York, N.Y. 10005. Bank of Nova Scotia, 37 Wall Street, New York, N.Y. 10005. Bank of Montreal, 2 Wall Street, New York, N.Y. 10005. Bank of China, 40 Wall Street, New York, N.Y. 10005. French-American Banking Corp. 120 Broadway, New York, N.Y. 10005. Société Générale, 66-68 Wall Street, New York, N.Y. 10005. Commerzbank A.G., 550 Broad Street, New York, N.Y. 10004. Israel Discount Bank Limited, 511 Fifth Avenue, New York, N.Y. 10017. The Hongkong & Shanghai Banking
Corp., .80 Pine Street, New York, N.Y. 10005. The Chartered Bank, 76 William Street, New York, N.Y. 10005. Skandinaviska Banken, 1 Wall Street, New York, N.Y. 10005.
Westminster Bank Ltd.,
[From the Monthly Economic Letter of the First City National Bank of New York.
WEIGHING THE CONSEQUENCES OF CURRENCY SURVEILLANCE
A bill passed by the House on May 25, after a brief floor debate, would impose controls on a vast variety of movements of funds at home and across national borders, as well as on transactions and relationships with banks abroad. The proposed legislation would have far-reaching consequences for U.S. citizens, foreigners residing in the United States and corporations doing business in the United States and for the standing of the U.S. dollar as the major transactions and reserve currency of the world.
The stated purpose of the proposed legislation is to prevent movements of money and the use of banking facilities, at home or abroad, by those engaged in organized crime, tax fraud and violation of margin requirement and other securities regulations. The aims are commendable. The banking community endorses them fully.
But the surveillance of monetary and banking transactions, at home and internationally, raises constitutional and ethical questions of the same order of gravity as if the Government were to be given the right, at random, to open mail or to listen to telephone conversations. Moreover, the legislation, if enacted, would involve sizable direct and indirect costs and serious inconveniences for the public. Abroad, the controls would, sooner or later, cause doubts among traders, investors and bankers about the attractiveness of the United States as a center to keep working balances, reserves and savings.
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
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 ahsolute. 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,
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