The CHAIRMAN. Thank you, gentlemen, very much. We appreciate your testimony and your cooperation. You may be excused.

Our next witness is Mr. Frank A. Bartimo who is Assistant General Counsel for Manpower and Reserve Affairs for the Department of Defense.

The testimony of the Department of Defense is quite timely in that I understand just this morning the defendants in one of the major cases involving Swiss banks and the Department of Defense are being sentenced in the U.S. district court. Mr. Bartimo's testimony will include reference to that case.

Mr. Bartimo is accompanied by various members of his staff, and I will ask him to introduce them to the committee at this time if he desires to use them as witnesses.

You may proceed in your own way, sir.

STATEMENT OF FRANK A. BARTIMO,

ASSISTANT GENERAL

COUNSEL, MANPOWER AND RESERVE AFFAIRS, DEPARTMENT OF DEFENSE

Mr. BARTIMO. Thank you, Mr. Chairman.

Mr. Chairman, I am Frank A. Bartimo, Assistant General Counsel, Manpower and Reserve Affairs, Department of Defense.

I appreciate the opportunity to appear before the committee today to discuss the experience of the Department of Defense in matters concerning secret foreign bank facilities used to further illegal schemes.

Since 1961, the Air Force has conducted a series of investigations involving bribes and kickbacks to Army and Air Force Exchange Service buyers in which Swiss bank accounts were used. Most of these related to the European section of the Exchange Service. These investigations disclosed that firms of manufacturers representatives, owned by U.S. businessmen, sold merchandise to the exchange for resale outside the United States and paid a percentage of their commissions to the exchange buyers both in the United States and Europe. The investigations revealed the use of certain numbered Swiss bank accounts, but investigative efforts with the Swiss authorities to establish ownership of the accounts and related transactions have so far proved unsuccessful.

The specific facts relating to the kickbacks in these cases have been furnished to the U.S. Department of Justice, which is currently coordinating investigative activity by the military and Federal agencies concerned. The Air Force investigations indicate that certain U.S. businessmen formed U.S. corporations which contracted to represent U.S. manufacturers in soliciting the business of the Army and Air Force Exchange Service for merchandise sold in the United States. These same individuals also formed foreign firms primarily in Liech tenstein, but with Swiss addresses, and purportedly conducted all business with the European section of the Exchange Service for merchandise to be sold in Europe. The U.S. manufacturers paid commissions ranging from 5 percent to 20 percent of the sales involved. and amounting to several million dollars, directly to Swiss bank accounts in the name of the Liechtenstein firms, but they paid no commissions at all to the U.S. firms, thus apparently circumventing the U.S. income tax laws. The U.S. businessmen thereafter either

withdrew from the Swiss bank accounts the amount of the kickbacks which was to be paid the exchange buyers in cash, or had the money transferred to a numbered Swiss bank account belonging to the exchange buyer. The investigations have also developed that the exchange buyers involved withdrew large amounts of cash in U.S. currency from the Swiss bank accounts. Some of this cash was thereafter brought back into the United States.

In the absence of a requirement to declare the amount of U.S. currency brought into this country there would appear to be no available record that such "income" exists. The use of Liechtenstein firms, Swiss bank accounts, and the courier or mail procedures for bringing currency into the United States enabled the U.S. businessmen and the exchange service buyers involved to have large amounts of income for which no record is available in the United States.

During the course of these investigations, at least 11 exchange employees assigned to procurement activities resigned from the exchange service while under investigation.

In another case, a pending investigation is based on an allegation that an officer of a military nonappropriated fund activity overseas solicited and received a check for $300 representing a kickback from an entertainment booking agent for entertainment in the nonappropriated fund activity. The check was payable to and deposited in a numbered bank account with the Atlantic Bank & Trust Co., Ltd., Guernsey, Channel Islands. Subsequent inquiries determined that this banking firm is largely owned by World Investments and Insurance, Ltd., P.O. Box 1186, Suite 505, International Centre, Hamilton, Bermuda. It appears that deposits in the Atlantic Bank & Trust Co. are paper transfers only as the money apparently stays in Bermuda for the use of World Investments and Insurance, Ltd. Attempts to review this numbered account to determine the identity of the person to whom it is registered and to obtain information regarding deposits and other financial transactions were not successful. The president of World Investments and Insurance, Ltd., who is also a director of the Atlantic Bank & Trust Co., Ltd., compared the operations of the bank with those of certain Swiss banks, and stated that advertisements are placed in well-known U.S. national weekly news magazines, and offer a confidential banking service, records of which are not examinable by any Government agency.

Another instance involving numbered foreign accounts occurred in 1955 to in England. The U.S. Government was seeking to sell some surplus automotive parts and a number of prospective buyers arrived at the sales depot in England. Just before the surplus automotive parts were put up for sale, a U.S. Air Force sergeant directed that automobile differentials be removed from the sale. Disgruntled bidders reported this to Air Force officials indicating that in their judgment this was unfair to them and charged that some irregularities had occurred during the sale involving an Air Force sergeant and an industrial firm which had been successful in acquiring the differentials without a public bid. The Air Force investigation indicated that the firm that acquired the differentials later rewarded the sergeant through one of its agents. The evidence disclosed that the sergeant traveled with the firms' agent to Zurich, Switzerland, and that the agent paid all of the bills, including hotel, transportation, et cetera. Other evidence indicated that there was a transfer of $10,000 from the firm to the firm's

representative who traveled with the sergeant. A search by Air Force investigators disclosed that the sergeant had deposited during a 2month period approximately $16,000 in U.S. bank accounts. The source of these funds could not be ascertained.

It was also discovered that the sergeant possessed an active numbered account in AMEXCO, Zurich, the same facility in which the import-export firm's representative had shortly before deposited $10,000.

However, the evidence was not sufficient to initiate criminal prosecution. Further investigation was frustrated by the fact that investigators could not obtain access to the secret, foreign bank accounts involved. The matter was thereafter brought to the attention of responsible British officials with whom the Air Force investigators worked closely and to the Department of Justice. Our files indicate that the Department of Justice, in a civil action against the parties involved, obtained a court judgment in favor of the Government in the amount of $47,910. Further, the civilian principals were placed on the debarred bidders' list of the Department of Defense.

In 1959, a member of the service was involved in a money manipulation scheme in Turkey, for which he was subsequently tried and convicted in a Turkish court. This scheme involved the use of a secret Swiss bank account. After reaching his duty station in Izmir, the subject opened a numbered account in the Discount Bank (Overseas) Limited, 5 Quai de L'Aile, Geneva, Switzerland. He then purchased large sums of Turkish lira at rates of exchange considerably higher than the pegged-in country rate from sellers who were generally resident alien merchants or Turkish money changers. He paid for the Turkish lira by dollar instruments drawn on his Swiss bank account which he transmitted to persons in Europe and the United States designated by the sellers. On occasion he would additionally receive a Turkish lira commission based on the amount of the dollar instruments. He sold the Turkish lira that he acquired to American military personnel stationed in Turkey. These sales were at an illegal rate which was somewhere between the rate pegged by the Turkish Government and the rate at which they had been illegally acquired. The dollars or dollar instruments received by the manipulator from these sales to American military personnel were then deposited to his Swiss bank account and the cycle was completed.

Foreign numbered accounts pose a security threat to the Department of Defense in that they may be used to support foreign agents targeted against the military establishment or they may be used to conceal payments to U.S. personnel recruited by foreign intelligence services. A case in point is one of a U.S. Army sergeant convicted of espionage in 1967. Use was made of a numbered account in a foreign bank to deposit in excess of $25,000 he had received from Soviet intelligence for information provided to them. The sergeant later transferred this money to a U.S. bank and used the funds to purchase a house. The sergeant is presently serving an 8-year sentence in the U.S. Army Disciplinary Barracks, Fort Leavenwoth, Kans.

The Department of the Army has come up against the use of secret Swiss bank accounts during their present investigation of irregularities in noncommissioned officer clubs. From examination of bank accounts in the United States, several instances have been identified where

American-based commercial firms dealing with U.S. military establishments in overseas areas have maintained and paid considerable amounts of money into numbered Swiss bank accounts, and individuals who are presently the subjects of criminal investigations have received large payments from Swiss bank accounts. While it would be inappropriate to discuss these instances in detail, since the facts are currently being investigated for possible prosecution it can be stated that the existence of the secret bank accounts has complicated investigative efforts to determine the sources of income.

Finally, as you are aware, the Department of the Navy, during the period 1962 to 1967, was the victim of illegal diversions of funds through the use of a number of Swiss bank accounts, in conjunction with a series of Navy contracts totaling some $47 million for the purchase of 2.75 inch rocket launchers from Chromcraft Corp., and its successor Alsco, Inc.

The CHAIRMAN. May I say that the person who did that was sentenced this morning to 10 years in the penitentiary. Go ahead. Mr. BARTIMO. Thank you, Mr. Chairman.

The CHAIRMAN. His name was Frank Rosenbaum.
Mr. BARTIMO. Yes, sir; that is correct, sir.

The Swiss bank accounts were apparently used as conduits for the diversion of moneys obtained through dummy corporation subcontractors, fictitious invoices, and kickbacks. A special grand jury of the U.S. District Court for the District of Columbia sworn in on April 1, 1968, returned a criminal indictment against Chromcraft Corp., its successor, and four individuals. And as the chairman has just related, one of the principals has just been sentenced.

A copy of the 17-page indictment has been made available to the committee and more fully sets out the method of operation. As the committee is aware, both the company and the individuals involved in this case have pleaded guilty to one or more of the charges.

These service cases illustrate, Mr. Chairman, that secret foreign bank accounts may provide a safe haven for those who are involved in illegal schemes whether they be corporate firms or individuals. The Department of Defense is in complete accord with the objectives and purpose of the proposed legislation.

This legislation focuses on U.S. law violators and should act as a deterrent on others who might have such propensities. It could result in the tapping of vast sums of money otherwise subject to the U.S. tax laws which now escape to numbered foreign bank accounts. By requiring U.S. citizens to make records available in the area of foreign currency transactions, it will facilitate investigations such as described in my testimony.

The Department of Defense will cooperate with the Treasury Department in every way possible to insure the success of the proposed legislation once it is enacted.

This concludes my testimony, Mr. Chairman. Thank you.
Chairman PATMAN. Thank you very much, sir.

These service cases illustrate that secret foreign bank accounts may provide a safe haven for those who are involved in illegal schemes, whether they be corporate firms or individuals.

Did you ever hear of Resorts International, a gambling concern? Mr. BARTIMO. No, Mr. Chairman. I had not heard it until I heard it in testimony given before this committee.

Chairman PATMAN. Mentioned here today?

Mr. BARTIMO. Yes, sir.

Chairman PATMAN. In these PX cases where PX employees were being paid off by businessmen through secret Swiss bank accounts, have any steps been taken against these businessmen? If so, what were the steps?

Mr. BARITMO. As you know, Mr. Chairman, and as I have testified, these particular cases are under very active consideration. Some steps have been taken. We have worked very closely indeed with both the Department of Justice and the Internal Revenue Service.

Chairman PATMAN. Are you saying that they have not been finished and you would not like to testify about them?

Mr. BARTIMO. In effect, sir, that is what I am trying to say. Chairman PATMAN. That is all right. I wouldn't insist on it if it wouldn't be in the interest of the case.

Mr. BARTIMO. Thank you, sir.

Chairman PATMAN. In the next few hearings we will hear extensively from the Securities and Exchange Commission on the business of conglomerate takeovers with secret foreign financing. Could you explain the kind of measures taken by the Defense Department to make sure that this secret foreign financing does not involve a national security problem?

Mr. BARTIMO. Mr. Chairman, there is an area of my testimony, and I gave you one example, which deals with what we in the Department of Defense term extremely delicate and sensitive areas involving intelligence. I will be glad to further elaborate on that example, but I must ask you to go into executive session to do so.

Chairman PATMAN. All right, sir. We will consider that. We will excuse you for the present.

Mr. BARTIMO. Thank you, sir.

Chairman PATMAN. How is your industrial security program enforced to make sure that unauthorized information and unwarranted influence is not exerted by these secret foreign financiers?

Mr. BARTIMO. Yes, Mr. Chairman. We have in the Department of Defense what is termed "industrial security regulations." Part of those regulations focus on the question you have asked, "What assurance, in effect, do we in the U.S. Government have that a foreign corporation won't get into classified or sensitive-type contracts?" I can assure this committee that we do have procedures which are meticulously followed to prevent just such an occurrence. I have with me a set of detailed regulations which I can leave with the committee, or I could address the question specifically, if you so desire. Chairman PATMAN. Do you cooperate with the SEC in all these takeovers? In other words, the information SEC has that you are interested in, do they cooperate with you?

Mr. BARTIMO. Yes, sir. We cooperate with all other Federal executive agencies that have any interest or concern.

Chairman PATMAN. Yes, sir. Now, Mr. Reuss, would you like to ask some questions?

Mr. REUSS. Thank you, Mr. Chairman.