exemptive power to the Secretary of the Treasury so that he may, in carrying out his functions, see that international commerce is not burdened.

At the outset of these hearings I want it made clear that those of us who sponsored this bill have no desire to influence in any way the relations this country has had with any other nation. However, when one mentions the problem of secret foreign bank accounts, the immediate reaction is the secret Swiss account. But Switzerland is not the only country which has these bank secrecy laws. Panama, Liechtenstein, the Bahamas, Luxembourg, West Germany and other countries have enacted laws which in one degree or another are somewhat from a secrecy standpoint more strict than American laws.

Switzerland, however, is most dominant in this field. Their bank secrecy tradition dates back almost to the middle ages. Their current secrecy laws are a direct outgrowth of some horrible German gestapo activities in that country shortly before the outbreak of World War II. Moreover, the banking expertise of the Swiss is world renowned. Neither I nor the members of this committee have any desire to cast the slightest aspersion on the very fine relationships that this Nation has enjoyed with Switzerland over the years. We do not hold the Swiss Government responsible where Americans or those subject to our laws participate in illegal schemes through the use of financial facilities in that country.

It has been reported in the press that the United States is now negotiating with the Swiss Government seeking to achieve better cooperation with American law enforcement authorities through a meaningful treaty. I am sure that this committee wholeheartedly endorses these negotiations and it is our fervent hope that such a treaty can be brought about. If this happens, the legislation before us would permit the Secretary to exempt those persons or corporations dealing with Swiss financial institutions from its provisions. But, such a treaty does not mean that our legislation is less needful. We want to be sure that the resolution of any problems with Swiss bank accounts does not merely divert illegal money from Switzerland to some other country with similar secrecy laws. The negotiations of treaties with nations with secrecy laws or even an international convention which would cover all nations with secrecy laws would at the very least be most time consuming, taking years, if not decades. Therefore, while we encourage such treaties, Congress must exercise its responsibility and act now.

This legislation and these hearings are a direct result of a 1-day investigative hearing held by this committee on December 9, 1968. On that day, the committee heard from witnesses from the Justice Department and the Securities and Exchange Commission. Our general inquiry was limited to the legal and economic impact of foreign banking procedures on the United States. At the conclusion of those hearings it became clear that the use of these secret foreign bank accounts and foreign financial institutions as part of illegal schemes by American citizens and others created a tremendous and grave problem of law enforcement in the United States. Secret foreign bank accounts are the underpinning of organized crime in this country. They are a haven for the unreported income of Americans. They can

be used to buy gold in violation of American law. They can be used to buy stock in our market or in the acquisition of substantial interests in American corporations by unidentified persons under sinister circumstances.

Mr. Morgenthau, who appeared before us last year and who is with us today, has estimated the loss of tax revenues to this Government in hundreds of millions.

On this very day the Senate of the United States is debating a tax reform measure. The hue and cry for tax reform by the American public has led the Congress to act. The American people in my judgment are fed up with the inequities that exist in our present tax structure. They feel that many persons and big corporations in the country are not paying their fair share. By the same token, I feel there is a deep-seated resentment by the ordinary citizen who must pay his taxes and has neither the resources, ingenuity nor criminal intent to use these secret accounts to avoid paying his legitimate taxes. Today we will hear from the primary law enforcement agency of the U.S. Government-the Justice Department. Mr. Will Wilson, the Assistant Attorney General in charge of the Criminal Division, and Mr. Robert Morgenthau, U.S. Attorney for the Southern District of New York, will appear today. Later we will hear witnesses from other agencies of Government who have had difficulties with foreign_bank secrecy. These include the Treasury Department, the Internal Revenue Service, the Agency for International Development, the Defense Department and the Securities and Exchange Commission.

Before hearing from our witnesses from the Justice Department, we will now hear from Mr. Pierre Leval.

Mr. Leval, a New York attorney, is a former chief attorney in the Appellate Division in the Southern District of New York and has had extensive experience with foreign bank secrecy. Initially, Mr. Leval was employed in a Swiss bank for a year. He has volunteered his services to the committee as a nonpaid consultant. Mr. Leval will outline the variety of ways in which foreign bank facilities are used to avoid responsibilities under American law. He will also give us a brief review of the general ideas which may be developed in these hearings. With that understanding, Mr. Leval, you are recognized first. Mr. WIDNALL. Mr. Chairman.

Chairman PATMAN. Yes.

Mr. WIDNALL. Before you start off, Mr. Leval, may I ask this question: You have read a list of those who will be heard from or you hope to hear from during the course of these hearings. The bill encompasses more than just Swiss bank accounts. Is it contemplated that any banks will be invited to act as witnesses?

Chairman PATMAN. Yes. If they would like to appear, we will be glad to have them. Would you submit the names of any you want to testify?

Mr. WIDNALL. Nobody has asked me, but the question arose in my mind because there is in the bill some things that would involve banks.

Chairman PATMAN. Certainly we would hear from anyone who will be affected by the bill, Mr. Widnall.

Mr. WIDNALL. All right.

Chairman PATMAN. And if you have any names to submit, we will certainly consider calling them. Mr. WIDNALL. Thank you.

Mr. BARRETT. Mr. Chairman.

Chairman PATMAN. Mr. Barrett.

Mr. BARRETT. Do we have Mr. Leval's statement?

Chairman PATMAN. He is speaking from notes, as I understand it. Is that right, Mr. Leval?

Mr. LEVAL. I am sorry; I did not hear the question.

Chairman PATMAN. You do not have a prepared statement?
Mr. LEVAL. No.

CHAIRMAN PATMAN. You are speaking from notes?

Mr. LEVAL. Yes, Mr. Chairman.

Chairman PATMAN. You may proceed.

STATEMENT OF PIERRE LEVAL, FORMER CHIEF ATTORNEY, APPELLATE DIVISION, SOUTHERN DISTRICT OF NEW YORK

Mr. LEVAL. Members of the committee, it has been a great pleasure to be asked to assist your staff in the preparation of these hearings. There was a time when the foreign secret bank account was thought of by all of us as something distant, mysterious, perhaps even romantic, and certainly not our problem; part of my purpose is to emphasize to you today that however true that view may once have been, it most certainly today is not an accurate view; they are not distant. Foreign banks where accounts may be maintained in secrecy are not distant in that we can open such accounts from our own doorsteps. I could go today to a number of financial institutions in the financial districts of any of our major cities and be provided with the names or the forms necessary to open an account in a foreign country by correspondence. Emissaries come regularly from such foreign banks to this country to seek business to open such accounts. I could fly to Nassau, a few minutes from Florida, and open a Swiss account there. I could cable transfer money to foreign banks through the facilities of most of our major banks.

In short, it is very easy to open foreign bank accounts and to deal with them without even having to go abroad. And of course, as you know, going abroad is not much of a problem today, either.

They are not mysterious. We can do anything through a foreign bank account that we could do through our own bank accounts or brokerage accounts with the added convenience that no one can ever know what we have done.

And they most certainly are our problem, as they are commonly used to deprive our Treasury of its revenue and our regulation of their effectiveness.

Now, I have been asked to describe to you today some of the various mechanisms or schemes which are prevalent through which Americans can use and do use foreign banks for illegal purposes. I will not dwell very long on the cash business, where cash receipts are hidden, handed to a courier and sent over to Switzerland, for example; because that is

a very simple mechanism and it is well known. Everyone has read about gambling casino skimoffs, and about merchants, doctors, dentists, lawyers, all of whose cash receipts don't find their way into the till or onto the books, but which go to Switzerland.

I have been asked to concentrate on somewhat more complicated, and widely used but less widely familiar, methods of using these foreign bank accounts to do illegal business.

Now, let me start with an example of a business which either buys or sells in a foreign country. First, we will have a Swiss bank account, and then we will use a time-honored business device of double invoices. If my business sells a product in Europe, it is very easy for me to invoice on two bases; one will be a lower invoice, which will be shown to the internal revenue inspector; one will be a higher invoice which is the true invoice which tells my customer abroad how much he must pay. My understanding with him is such that he pays the lower invoice directly to me and the difference he takes and deposits to my account in Switzerland, where the Internal Revenue will never see it. If I am buying products abroad, it works in the opposite way. Instead of understating my revenue, I can overstate my costs and deductions. My seller will oblige me by sending me an exaggerated invoice. I will pay this overstated invoice with the understanding that the seller will take the difference and deposit it to an account for my benefit.

Now, you have all heard of the Liechtenstein business trust. If I form for such an establishment or company in Liechtenstein-the form is not really significant-and that company in Liechtenstein opens a bank account in Switzerland, all manners of benefits can flow from this arrangement. If I sell abroad or if I purchase abroad, I don't have to get involved in the complication of double sets of invoices to cheat the Revenue. I can very simply attribute to this Liechtenstein Co., a service performed in the sale or purchase, either an introduction or a sales letter or something which entitles it to receive a deductible commission; a commission will be paid to this Liechtenstein trust whose ownership can never be disclosed, and its manager in Liechtenstein will deposit the commission to the bank account in Switzerland where the money will remain for my personal use.

If I am in a service business abroad, such as commission selling, some performance, some partial performance of that service can be attributed to the Liechtenstein Co., so that a portion of my fee can then be paid over to the Liechtenstein Co., which on a nontax-paying basis shares in my receipts-the trust of course, being me in my alter form.

But that's talking about business which is conducted in large part abroad, and I would like to concentrate a little more on activities that are purely domestic, that are right here at home and among the most familiar of them is simple trading on the stock exchange, trading in securities for profit.

Now, many traders have made great profits in the years in which the market has gone constantly upward. It is very easy to be a brilliant trader in rising markets, but traders have often found when they have to pay both commissions to the broker on the buy and on the sell and taxes to the Government on the profits that it is too hard to trade

profitably. And so some brokers and some foreign bankers have devised a method which, by adding a little bit to the commissions, can eliminate the taxes altogether.

Now, this is not a difficult thing to do. Most Swiss banks have very large, very active accounts with brokers in New York. Those accounts are maintained in the name of the Swiss bank. The securities of all the bank's customers may be lumped in together and there is no record at the New York broker of the identities of the bank's customers, the true owners of the securities. My broker can simply introduce me to a Swiss bank that does business with him. I will open an account with them. Thereafter, my broker will call me as he always did, or I him, to suggest that I should buy such and such a stock. But instead of the order being entered on his books in my name, he will simply in the course of his daily telephone or Telex communications with the Swiss bank advise them that this transaction is to be performed for me. For form's sake the bank will Telex an order to the broker. The Swiss bank will enter the transaction on it's books as my transaction. The New York broker will enter it on his books as the Swiss bank's transactions, and the Government will know nothing about it.

The New York broker will make a commission. The Swiss bank will make a commission. I hopefully will make a profit. And the only one to be left out all together is the Treasury.

Now, the area of trading in securities is an area that is covered with regulation, and most of these regulations, or many of them, can be circumvented by the use of foreign banks. I suppose the most basic provision of this regulatory scheme is that which prevents persons who control a corporation from selling its securities to the public without first registering with the SEC and without filing and distributing a prospectus which fully describes the affairs of the company to the public.

Such a prospectus can be both expensive and very embarrassing, especially if the reason that the controlling person wants to sell his stock is that the information which a prospectus would contain would make the stock go down. So a simple way to avoid this embarrassment is to sell the stock through a Swiss bank without a prospectus so that no one can know who is selling it.

Now, trading by insiders in the stock of their corporations is an area that is fraught with difficulty because when insiders trade they characteristically possess important information about the corporation that is not available to the public. By "insiders" I mean officers or directors or persons close to the corporation. Courts have repeatedly found, particularly in the last few years, that trades by insiders in the shares of their own company were taking advantage of inside information fraudulent or at least unfair to the public and stockholders and therefore subject to rescission. Now if I were an officer of a company and I knew that tomorrow my company was going to announce a huge oil discovery, or a disastrous and unexpected loss, I could avoid all the difficulties of dealing with courts by simply buying the stock or selling it short through a Swiss bank account. In one day, I could make a big profit, and no one would know. If it were even more unscrupulous and alert to the possibilities of profit through this device, I could even manipulate the news about my corporation so as to make the market in the stock fluctuate and thereby create my own occasions to make secret profits.