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Swer, but speaking from a law enforcement point of view, I can visualize that such requirements would both be of assistance to us in giving us information leading to violations of margin requirements, insider trading, that sort of thing, and also I would think I could conceive that would serve as a self-policing technique by discouraging the use of these foreign banks as hidden conduits and nominees for transactions which are in plain violation of our laws.
Senator PROXMIRE. Based upon your experience, would you estimate that there has been fairly widespread violation of the Federal Reserve Board's margin requirements through the use of foreign lenders?
Mr. SEYMOUR. I hesitate only on the word “widespread.” I don't think we have enough information to give you a solid estimate of the full strength of it, but I do know that we have seen enough, repeatedly, to be sure that there is a much larger iceberg beneath the surface than we have been able to find. It certainly is not isolated.
Senator PROXMIRE. Would you estimate that unrestrained margin trading through foreign lenders might have contributed to an unsustainable stock market boom and the subsequent sharp decline?
Mr. SEYMOUR. Again, I think you had better ask other experts, but it is certainly apparent
Senator PROXMIRE. We are all experts in the stock market as we are all experts on politics.
Mr. SEYMOUR. Clearly violations of the margin requirements constitute a factor in speculation on the market. The extent of that factor in light of other factors has to be appraised but plainly the Swiss and other foreign banks have been used for the purpose of speculation on the U.S. exchanges, and have plainly had a deleterious effect.
Senator PROXMIRE. Mr. Wilson, before you leave, I would like to say that I am deeply distressed about this Fitzgerald matter, not just simply because I happen to be involved in it, but because if we are going to get information from honorable and conscientious civil servants, it seems to me that we have to see that they are protected or at least action is taken against those who would persecute and intimidate them.
The law is on the books. This is an administration which has taken great pride in enforcing law and order, which it should, and every administration should. That is the function of the Department of Justice.
If we do not prosecute people in high places, especially in the Defense Department, when there is a prima facie violation, you delay and postpone and fail to bring justice there, I just wonder what confidence we can expect the American public to have in our system of justice.
Mr. Wilson. I can appreciate your concern for that, and I think it is a very valid concern. I can assure you that we will get all the facts in that matter and to the extent the laws permit and the rules and customs of the Justice Department permit, I would like to have a conference with you and discuss with you what I am permitted to discuss with you, and I will look forward to doing that.
Senator PROXMIRE. Thank you very much. I would appreciate that a great deal. I hope that we can make this matter public as soon as possible. I thank both of you gentlemen for very useful and helpful testimony.
(The full prepared statement of Mr. Seymour follows:)
STATEMENT OF WHITNEY NORTH SEYMOUR, JR., U.S. ATTORNEY,
SOUTHERN DISTRICT OF NEW YORK My name is Whitney North Seymour, Jr., United States Attorney for the Southern District of New York. I am extremely honored to appear before this Committee to share with you the experiences our office has had in attempting to deal with problems of banking secrecy.
Secrecy and subterfuge are the white collar criminal's best friends. The surest invitation to illegal conduct that man can devise is a hidden conduit for transmission of funds safe from the eyes of law enforcement officials. That is exactly what secret foreign bank accounts do. Although such accounts may be used with perfect innocence by some depositors, they are too tempting a lure for the tax evader, the securities swindler, the corrupter of public employees, the fraud and the cheat.
The "little tin box” of the 1930's has been replaced by the Swiss bank account of the 1970's.
Over the course of several years our office has found a large-scale pattern of evasion of federal criminal laws by cloaking financial transactions with the secrecy afforded by foreign law. The problem is far from confined to Switzerland. Similar secrecy obtains in Lichtenstein, Panama, the Bahamas and other jurisdictions, and has been successfully used to carry out numerous violations of law.
Secret foreign accounts have been used in connection with violations of many different federal statutes. For example, corporate insiders who do not wish to comply with the securities laws, and do not wish 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 United States 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” business man'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 securites 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 currenty 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 Shea rson, Hammill and Company 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% of the purchase price at a time when the Federal Reserve Board required the payment of between 70% and 80% (ash 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 three million dollars 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 under way 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 record-keeping 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 one million dollars 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.?
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.”
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 payments.
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 U.S., 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 respectability, 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.
Senator PROXMIRE. Our next witness is the Chairman of the Securities and Exchange Commission, the Honorable Hamer H. Budge, accompanied by Irving M. Pollack, Director, Division of Trading and Markets.
Mr. Chairman, we are delighted and honored to have you with us. You are an old friend of the committee.
1 United States v. Olin Mathieson Chemical Corporation, 368 F. 2d 525 (2d Cir. 1966).
2 E.g., 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), cert. denied, 383 U.S. 907 (1966) (evasion of income taxes on one million dollars in unreported capital gains in Canadian mining stocks proved chiefly through bank records).
STATEMENT OF HAMER H BUDGE, CHAIRMAN, SECURITIES AND
EXCHANGE COMMISSION, ACCOMPANIED BY IRVING M. POLLACK, DIRECTOR, DIVISION OF TRADING AND MARKETS; STANLEY SPORKIN, ASSOCIATE DIRECTOR (ENFORCEMENT), DIVISION OF TRADING AND MARKETS; PHILIP A. LOOMIS, JR., GENERAL COUNSEL; IRA H. PEARCE, SPECIAL COUNSEL Mr. BUDGE. Thank you very much, Mr. Chairman. Mr. Chairman, Mr. Pollack is seated at my right, to his right is Mr. Sporkin, also of the Division of Trading and Markets, and to my left is Philip Loomis, Jr., who is General Counsel of the Commission, and to his left, Mr. Ira Pearce, who has had a special background with reference to this legislation in that he has not only worked in the Division of Trading and Markets, but he has served as the Commission representative on the treaty team which has been working with the Swiss.
Senator PROXMIRE. Any part of your statement that you omit in the course of presentation will be printed in full in the record. (See p. 86.)
Mr. BUDGE. We are pleased to have been invited to participate here today in the matter before this committee. We hope that our testimony will be of assistance to it in considering proposals to require that certain records be kept by banks, that certain transactions in U.S. currency be reported, that the margin provisions be broadened and that certain disclosure or certification be made as to transactions involving foreign financial agencies.
Since the bill concerning which we have been asked to testify, S. 3678, is quite similar to H.R. 15073, which was recently passed by the House of Representatives, our testimony before this committee will necessarily be quite similar to that which we have given previously before the House Committee on Banking and Currency.
Since this proposed legislation will impose certain reporting requirements on Americans engaging in foreign financial transactions, we wish to clearly emphasize at the outset, as we did before the House Committee on Banking and Currency, that the Commisison welcomes participation in the American economy by legitimate foreign investors. The Commission well realizes the benefits to the economy from the inflow of capital from abroad.
At the same time, we feel a responsibility to such foreign investors to enforce high standards of conduct in our securities markets so that they, as well as American investors, may invest their funds in an informed manner and with confidence in the integrity of our markets.
By way of background, we should first point out that many brokerage firms in the United States number among their clients foreign banks, as well as trusts and other financial agencies, formed in a number of the smaller countries in Western Europe and even closer to home, in the Caribbean area and elsewhere in North America.
These entities engage in transactions in the United States, on our exchanges and in the over-the-counter market, in securities of U.S. corporations through American broker-dealers registered as such with the Commission and, to a lesser extent, through American banks.
The volume of securities business done in this country by foreigners, including foreign banks and other financial agencies, is quite large. In the calendar year 1969, on all markets in the United States, foreigners made total purchases of nearly $12.5 billion of common stock and total sales of just under $11 billion, with a total net investment of almost $1.5 billion.
Such purchases and sales were equivalent to almost 9 percent of comparable New York Stock Exchange volume for 1969. In the first quarter of 1970, there were total purchases of $2.4 billion and total sales of $2.5 billion with sales of common stocks by foreigners exceeding their pruchase by $98 million.
Unlike other customers of American brokerage firms or banks, however, it is usually not possible to find out the names and addresses of the persons for whose beneficial interests transactions have been effected by foreign banks and other financial institutions.
Nevertheless, on occasion, as the result of imaginative investigative work and fortuitous circumstances, we have been able to obtain sufficient evidence to establish the identity of such persons. Not surprisingly, in a number of these situations, the persons involved in the questionable activities have turned out to be Americans.
We understand that it is not even necessary for an American citizen to actually go to certain foreign countries to establish an account with a bank or other financial agency in those countries.
(Reprint of an advertisement from the Wall Street Journal follows:)