to report insider trading to the stock exchange or the Securities and Exchange Commission, take advantage of the secrecy afforded by foreign accounts to conceal their transactions.

Americans who wish to circumvent controls against stock market speculation can arrange for dealings through secret accounts to evade the Federal Reserve Board's margin requirements.

The classic use of secret accounts is, of course, for the evasion of income taxes. We have reason to believe that huge amounts, probably running into the many millions of dollars, find their way into secret foreign accounts each year for the purpose of evading U.S. taxes.

Some of this money is from proceeds of illegal transactions, some is from "skimming" of gambling profits, and some is the so-called legitimate businessman's concealment of capital gains or the diversion of funds for phoney sales.

Secret accounts are also used for bribery of public officials. Seven indictments returned in February 1970, in the southern district charge former employees of the military post exchanges with conspiring to subvert the honesty of the exchanges by accepting bribes. The indictments charge that the sales agency which paid the bribes handled part of the money through numbered secret Swiss accounts, with the added precaution of using a paper shredding machine to destroy records of specific transactions.

The indictments also charge that code names were used for the PX buyers to conceal their identities. Corporate financial transactions probably provide the greatest area of misuse of secret banking facilities. A secret foreign bank account provides an ideal vehicle for a corporate insider to buy and sell securities of corporations in which he holds a fiduciary position.

Our office currently has under active investigation the use of a series of secret foreign bank accounts for the illegal purchase of hundreds of thousands of dollars worth of securities of various corporations by an insider using information obtained in his capacity as an officer or director.

We also have evidence of the use of secret Swiss accounts in the allocation of new "hot issues" of stock. We are currently investigating several instances where corporate insiders and underwriters arranged for the sale of hot issues to Swiss banks which actually were acting as nominees for the very same people who had arranged the sales. These fraudulent transactions involve direct violations of the Federal Reserve Board's margin requirements.

A good illustration of the use of secret Swiss bank accounts to violate the margin requirements can be seen in a recent indictment now pending in the southern district of New York against the Weisscredit Bank of Chiasso, Switzerland. The indictment charges a conspiracy between the bank's chief executive officer and the first vice president of the New York brokerage firm of Shearson, Hammill & Co. under which American investors were permitted to purchase securities through the omnibus account of Weisscredit Bank at Shearson, Hammill by posting as little as 20 percent of the purchase price at a time when the Federal Reserve Board required the payment of between 70 percent and 80 percent cash on purchases.

The Weisscredit Bank arrangement was designed to conceal the identity of the American customers and also the margin violations.

The indictment charges that over $3 million of illegal credit was extended for the purchase of securities under this arrangement.

One of the more sophisticated financial intrigues made possible by the use of secret foreign accounts is the takeover of corporate ownership through dummy nominees.

Our office is currently investigating two separate situations involving the use of both Swiss and Bahamian banks for the accumulation of stock prior to a tender offer to avoid the reporting requirements of the securities laws. In one of these situations millions of dollars worth of securities were acquired through secret bank accounts and then used in a subsequent corporate takeover.

As you know, there are negotiations currently underway with the Swiss Government looking toward a treaty which would give limited disclosure of information in certain official investigations. We are hopeful that an agreement may be reached with the Swiss whereby more effective cooperation in criminal cases can be obtained.

But it is important to emphasize that greater assistance from the Swiss alone would not totally resolve the basic problem because of the availability of secret banking facilities in other jurisdictions. The need for further steps to deal with the problem would remain.

The legislation before your subcommittee deals with the need for adequate recordkeeping in domestic financial transactions as well as with the problem of foreign banking secrecy. Treasury witnesses can best advise this subcommittee on precisely what recordkeeping methods place a burden on banks and depositors not commensurate with the prospective benefits to law enforcement.

Even as a prosecutor seeking every iota of relevant information, I recognize that there is a point where too many records can be counterproductive. I would emphasize from my standpoint, however, that it is often only because of the availability of bank accounts that the perpetrators of crime can be identified. This includes not only financial crimes, but other crimes involving illegal businesses which generate cash.

In one case in our office involving illegal secret kickbacks on approximately $1 million of sales of pharmaceuticals financed by foreign aid funds, microfilms of American bank records were of critical importance in uncovering payments to secret accounts representing the kickbacks. (United States v. Olin Mathieson Chemical Corporation, 368 F.2d 525 (2d Cir. 1966).)

Microfilmed bank records have proven equally indispensable in numerous other cases involving the most variegated types of illegal activity, including consumer fraud, false financial statements, and income tax evasion. (For example, United States v. Armantrout, 411 F.2d 60 (2d Cir. 1969), consumer fraud similar to chain letter in which customers were told they could obtain rugs at no cost but ended up with large payments due to bank; United States v. Cohen, 37 F.R.D. 26, S.D.N.Y. 1965, fraudulent financial statements proved in part by microfilms maintained by factoring agency; United States v. Campbell, 351 F.2d 336 2d Cir. 1965, certiorari denied, 383 U.S. 907 (1966), evasion of income taxes on $1 million in unreported capital gains in Canadian mining stocks proved chiefly through bank records.)

As an assistant U.S. attorney in the mid-1950's, I was a member of the prosecution team that successfully convicted Frank Costello, one of the first organized crime figures sent to jail for income tax evasion.

This conviction, based on the net worth theory, would have been impossible without microfilmed bank records of checks to prove payment.

Mr. Chairman, we are most anxious to cooperate with you in dealing with the constantly expanding threat to the integrity of the enforcement of our laws by the continued shroud of secrecy surrounding foreign bank transactions.

In this modern age of rapid communications, universal air travel, and complex financial relationships, the white-collar criminal has all the advantages. He can conduct operations outside the territorial limits of the United States, can cover his tracks with a maze of legal devices, and can conveniently conceal the fruits of his crimes through secret foreign bank accounts.

The fiber of the Nation depends on equal enforcement of our criminal laws against those who wear the guise of respectablility, while they cheat their fellow countrymen who are conscientiously paying their taxes and conducting themselves as honest citizens. We must have sophisticated laws equal to the challenge of uncovering sophisticated crimes. We cannot settle for less.

Then, Mr. Chairman, let me make a few informal comments, if I may. My testimony today should be in the context of the testimony from the southern district of New York which has previously been submitted by my predecessor, Robert Morgenthau, before the House committee. I think it might be useful if I just remind the committee that Mr. Morgenthau in December of 1968 identified a number of cases that were then pending or under investigation in our district, and then similarly last December, December of 1969, identified such matters. And I have in my statement today tried to bring up to date some of the current activities in our office which were part of that same trend.

Let me just list for you very briefly what the nature of some of those cases are because I think they give the setting of what the committee is considering today.

Among the cases that Mr. Morgenthau identified was one that involved the use of a Lichtenstein trust company in combination with Swiss banks to market a quarter of a million shares of unregistered stock and permitted an escalation in the price of the stock to something like $16 a share, and finally after the profits had been taken it dropped down to a dollar a share.

Another case in which a corporate insider used a Swiss bank account to deal in a quarter of a million dollars in stock in his own company is the Arzi Bank case in which the Arzi Bank became a vehicle for a margin of only 10 percent at the time the Federal Reserve Board was requiring between 70 percent and 80 percent in stock purchases.

Another indictment charges the use of a combination of a Lichtenstein trust company and a Swiss bank account to receive some $3 million in commissions on sales which then became unreported income for tax evasion.

Another example from our district involved the sale of a piece of real property to a Swiss trust, actually by the vendor selling to himself as the vehicle for getting some millions of dollars in clean money which was actually his own money, and then arranging to have the property managed by a Swiss bank and thereby collecting the proceeds on the vendor's own behalf.

Last December my predecessor gave some additional examples which are prelude to my testimony today. He referred to another instance of the use of the Swiss bank for sale of unregistered stock: The Realty Equities Case where a corporate insider took advantage of a corporate opportunity through a Swiss account realizing a profit of almost half a million dollars in a quick turnover because of that vehicle. He referred to insider sales of General Development Corporation convertible bonds.

He referred to the conviction of the brokerage firm of Coggeshall and Hicks for participating in margin violations. He also referred to the First Hanover Case in which the use of an American brokerage firm became the vehicle for a margin violation as a prelude to a corporate takeover attempt which also provided some very substantial profits. I think one of the significant cases he referred to from our district probably of major significance was the use of a Swiss bank account as the vehicle for conveying proceeds of illegal heroin traffic. He referred to one case in our district in which $950,000 had been funneled through a Swiss bank account in connection with illegal narcotics traffic.

It is against this background that I report to you today that the Southern District of New York located in the financial center of the country continues to see a mushrooming of these practices. We have, as Mr. Wilson has indicated, increased the size of our fraud unit because of the expanded activities, investigating and prosecuting these cases, and we continue to find violations similar to and sometimes more sophisticated than those that have gone before.

My formal statement today refers to the use of Swiss bank accounts as conduits for bribes to government employees. I refer specifically to a recent indictment filed just a couple of months ago involving illegal payments to military post exchange personnel. We have investigations currently on even more elaborate schemes for insider trading in corporate securities. Several dealing by underwriters in hot issues of new stocks through Swiss accounts.

My statement refers to the Weisscredit Bank Case, a quite broad scheme in which an officer of a New York brokerage firm working in conjunction with an officer of the Swiss bank is alleged under the indictment to have set up a margin requirement violation with U.S. residents having accounts in the Swiss bank which then became the vehicle for making purchases on the New York market.

And then I have reference to a number of other current investigations involving both Swiss and Bahamian bank accounts. There is no question that the problem for the prosecutor operating in this area is really acute without adequate records. We depend almost entirely on informants who are very difficult to develop.

We believe very strongly that adequate records which are the objective of this legislation could do a great deal to strengthen our hand, and we are very enthusiastic about the purposes of this legislation.

Senator PROXMIRE. Thank you very much, Mr. Seymour, and thank you, Mr. Wilson. These are both fine statements, and I do appreciate the force with which you come down in behalf of legislation of this kind and the very constructive suggestions you make for improving the legislation.

Mr. Wilson, I wrote you a few days ago and told you when you came before us I was going to ask you questions on another matter.

I want to do that first and get those out of the way, and then we can proceed to questioning you and Mr. Seymour on this legislation.

Taking advantage of this situation, because I think it is one of the rare and unusual opportunities for me to do so, my questions, of course, relate to the Air Force's intimidation and firing of Ernest Fitzgerald and our correspondence over possible criminal prosecutions resulting from this.

In your letters, you indicate that until the proceedings now underway before the Civil Service Commission are complete, the Justice Department will take no action in this case. Just how are the Commission's proceedings relevant?

Senator BENNETT. Mr. Chairman, at this point, and I am not being arbitrary about it, I would like to know the jurisdiction of this committee over this case.

Senator PROXMIRE. Well, this committee doesn't have jurisdiction over this particular area.

The reason I ask these questions is that the case developed in the Joint Economic Committee, and this is one of the rare occasions where I have a chance to question Mr. Wilson, and Mr. Wilson is the man directly involved in this case, and I thought in the interest of public disclosure and public information, having given the Justice Department a chance to give their side of the case, that this was the best opportunity to do it.

Senator BENNETT. I think it should be outside of this record. I don't think it belongs in this particular record. It has nothing to do with Swiss bank accounts or foreign bank accounts. If you want to question him, I guess I have no right to object to that, but I respectfully suggest that the questions and the answers not be included in the record of this proposed legislation.

Senator PROXMIRE. Would the Senator have any objection if the record were kept but if the record were not put into the proceedings? Senator BENNETT. That is my point. This is a personal discussion between you and the witness on a subject that has nothing to do with today's record. If you want to carry on that discussion and develop a record, I suppose that is your right, but I submit, and I think you will agree, that it has no place in the record of today's hearing.

Senator PROXMIRE. It is certainly very important in my view of the public's business. I understand the Senator's position. In that event, the record will be kept but it won't be included in the record of this particular hearing.

(Off the record.)

Senator PROXMIRE. Thank you very much, Mr. Wilson.

Now let me get back to the bill that is before us.

You mentioned that several banks stopped microfilming checks drawn on them. Could you explain why copies of checks are very important in law enforcement activities?

Mr. WILSON. They are very important because they are frequently the direct evidence of the transaction itself as they are introduced in evidence to prove their element in the case.

Secondly, under the Best Evidence Rule they are frequently the best evidence of the writing and its contents and what it contains. Thirdly, they furnish impartial and virtually unimpeachable testimony to a transaction that would otherwise have to be proved by the verbal testimony of the parties.