International, Inc., were purchased by a Panamanian company through several Swiss banks, including such giants as Credit Suisse. The defendant owned 48 percent of the Panamanian company, which was in fact a dummy corporation, similar to a Liechtenstein trust and to give you some idea of the amounts potentially involved in this sort of case, one of the stocks involved was sold to the Panamanian company at $11.25 per share, just prior to its market opening; its first public sale was for $36 per share, an increase of over 300 percent. The potential abuse is magnified by the fact that some Swiss banks willingly arrange for the purchase of "hot issues" on low or even no margin. They do this because during periods of market advance, "hot issues" are virtually a sure vehicle for quick, easy profit.

An area in which we have made extensive progress is in prosecuting Americans and foreigners for violating the Federal Reserve Board's margin requirements. Although the Federal Reserve Board has acted in July of this year to begin to close some of the loopholes in this area, the prosecutions brought in the southern district of New York nevertheless are illustrative of the enormous illegal profits that can be made through the use of secret foreign accounts.

Until the Federal Reserve Board acted, as you are aware, while Americans trading through U.S. broker dealers were required to put up approximately 80 percent of the cost of most stock purchases, a foreign bank or broker was allowed to open a special omnibus account at an American firm and trade on only 20 to 30 percent of the cost of the stock. To open a special omnibus account the foreign broker had only to promise in writing to comply with regulation T and American margin requirements. Our information and cases clearly demonstrated, however, that foreign firms frequently collaborated with Americans to abuse the special omnibus account privilege.

Last year, I told you of the criminal complaint we have filed against the Arzi Bank of Zurich, Switzerland, and one of its directors, charging them with violating the margin requirements through active solicitation of American customers, who were allowed to trade on as little as 10 percent margin. Subsequently, a grand jury returned an indictment against Arzi Bank, to which it plead guilty. This conviction represents the first time a Swiss bank was forced to answer criminal charges in this country. The conviction of the Arzi Bank has led and will lead to to many more cases.

One of the brokerage firms through which Arzi Bank dealt in America was Coggeshall & Hicks, a member firm of the New York and American Stock Exchanges. Our evidence showed that Coggeshall & Hicks and some of its partners and employees had knowingly engaged in margin violations along with Arzi. Indeed, some of the brokers at Coggeshall had accounts of their own at Arzi, through which they obtained illegal credit for themselves. Over $20 million in securities were illegally traded in this manner for which trades Coggeshall received $225,000 in commissions. In May of this year, a grand jury in the Southern District filed an indictment against Coggeshall & Hicks, its senior partner, the Swiss manager of its Geneva office, and three former registered representatives. Since then, all the defendants have plead guilty, and fines amounting to over $100,000 were imposed upon the defendants. The maximum fine was imposed upon the firm for encouraging and participating in these violations.

Under the new regulations, a foreign bank or brokerage firm will no longer be able to keep a special omnibus account through which only 20 to 30 percent of the cost of the stock must be provided. However, given the protection of secrecy, a foreign bank can participate in financing of securities transactions which violate the margin requirements and U.S. brokers can illegally arrange or secure such loans from foreign banks with little risk of detection. Thus, resourceful persons are still able to trade on impermissible credit with the added advantage of complete secrecy on their profits.

During the last year we also uncovered the use of foreign accounts in connection with corporate takeover attempts. The availability of credit unlawful under regulation T is instrumental in these takeovers. One indictment is this area was filed in July of 1969. According to the indictment, the following occurred:

The Houston Oil Field Material Co., known as HOMCO, an overthe-counter firm now known as International Systems and Controls, decided to attempt a takeover of the Holly Sugar Corp., a much larger firm, whose stock was traded on the New York Stock Exchange. HOMCO had far too little funds to purchase a controlling interest in Holly Sugar in the market. A member of HOMCO's board of directors, however, was president of First Hanover Corp., then a member of the New York Stock Exchange.

The president of First Hanover arranged with American Securities Co., a brokerage firm in Montevideo, Uruguay, for the foreign firm to open a special omnibus account at First Hanover, which thereby entitled First Hanover to lend up to 80 percent of the cost of stock purchases. An arrangement was then worked out between HOMCO and American Securities which consisted of two agreements. A formal, nonsecret agreement provided for a loan of about $300,000 from HOMCO to American Securities, secured by the Holly Sugar shares to be purchased. HOMCO then sent the money directly to First Hanover, which acted as custodian under the agreement. An informal and secret agreement entered into between First Hanover, HOMCO and American Securities made clear that, while the Holly Sugar stock was being purchased for the account of American Securities, the true, beneficial owner of the stock was HOMCO. Thus, HOMCO, with the aid of First Hanover and American Securities, was able to purchase over $1 million worth of Holly Sugar with only about $300,000 in cash. HOMCO later made a public offer to purchase additional Holly Sugar shares, which caused the market of the stock to rise, and although HOMCO did not obtain control of Holly Sugar, it did secure a profit of several million dollars on its sale of Holly stock at the higher price.

Now, HOMCO has already plead guilty to conspiring to violate the margin requirements in connection with this scheme. The other defendants have not yet been tried.

The Holly Sugar story is far from an isolated instance of Americans using foreign institutions to attempt corporate takeovers in a manner which may be illegal. We presently have under investigation a number of other cases where Swiss and Bahamian banks were used in connection with attempted corporate takeovers. In these cases, not only

do Americans secretly accumulate stock which they later use for their own advantage as in Holly Sugar but, if they acquire more than 10 percent of a company's stock, they fail to report as insiders, thus frustrating the reporting requirement of the Securities Act as well.

Our investigations into the importation and sale of heroin have revealed that accounts in foreign banks are frequently depositories for the proceeds of heroin transactions. Because those accounts are secret, attempts to uncover persons directing the international dope traffic frequently end up in complete frustration. Generally, money received for the sale of heroin in the United States is either carried to Europe by courier or hand carried to a local money exchange or bank where it is forwarded to an account in a Swiss bank. This account is often in the name of a paper corporation with an office in Switzerland. From that account, the money is transferred to an account in a European country under the direct control of the initial supplier of the heroin. Alternately, the money may be given directly to the supplier from the Swiss account.

A series of cases prosecuted this past year illustrate these operations. Indicted and convicted in two separate cases were members of a heroin importation conspiracy from which over 200 kilograms of heroin, worth $60 million on the retail level, were seized during the past 3 years. Their methods of smuggling the heroin into the United States were varied. In one instance heroin was packaged into small sausagelike bags in lavatories of planes on international flights and to be removed on the domestic leg of the flights after an initial arrival in the United States.

In another instance, the cans and labels of the European exporter of food to the United States were obtained, the cans filled with heroin, labeled and then shipped as food to the United States. Ski poles and the technical components of oscilloscopes were also used as hiding places for heroin.

One of these cases ended in a conviction of both defendants charged just last week. The facts in that case revealed that as part of the payments for smuggling heroin during a 3-week period in June of 1968, $950,000 was sent to a Swiss bank account of a Panamanian corporation with offices in Geneva known as the "Me Too Corporation." Couriers delivered $800,000 in cash to two money exchange houses in New York city.

From there, the money was forwarded to the secret Swiss account of the "Me Too Corporation." While the appearance of unknown persons with large sums of money might have been questioned by the money exchanges, an official of the Swiss bank had previously advised them about the expected delivery of funds. Thus, because of their substantial business connection with the bank, the exchanges accepted these transactions as a professional courtesy.

The other $150,000 in currency was deposited in the account of a South American brokerage firm with the First National City Bank in New York City. On the instructions of an authorized signatory of the account, a check for $150,000 was drawn on the First National City Bank and mailed to the Swiss bank for the account of "Me Too Corporation." Although there was no evidence in either of these cases

that the money exchanges, or the New York bank or the Swiss bank had any knowledge of the underlying narcotics transactions, the vital part they played in the heroin traffic is unmistakable.

Obviously the ways in which secret foreign bank accounts are instrumental in avoiding payment of income taxes are almost as varied as the ways of earning the income in the first place. Our investigations have uncovered numerous instances where persons with very large incomes have almost completely avoided the payment of income tax through the use of secret foreign accounts.

In my testimony last year I adverted to the various means available to avoid payment of taxes. Investigations since then have confirmed the use of several of these devices. For example, in one case, a taxpayer claimed as a bad debt deduction the failure of a foreign company to repay a loan. In fact, the company was owned by him and the transaction called a "loan" was nothing other than a payment to himself in a secret foreign account.

In another case, a taxpayer claimed as a deduction interest payments he made on a loan from a foreign corporation. This was also a sham, since the corporation was created by him solely to appear as the lender and then act as a recipient, in a secret foreign account, of the phony interest payment. Other cases also involve false expense deductions, the falsity of which was concealed by a secret foreign

account.

In numerous instances, reputable Swiss banks have loaned their depositor his own money so as to provide him with an explanation of his spending money. Similarly, depositors have used their accounts to buy their own assets, typically real estate or mortgages. Ownership of the "transferred asset then appears in the bank's name. In this fashion, the depositors have recaptured the use of their foreign secret cash and have sheltered from U.S. taxation the annual income on the real estate, as well as any eventual gain on its sale.

As a result of the investigation into the Arzi Bank as its accounts, as well as other matters, dozens of cases have been referred to the Internal Revenue Service as potential criminal tax cases. Many of these involve the nonreporting of stock transactions and capital gains. Since, however, the process of criminal tax investigations takes the case out of the U.S. attorney's office and is therefore slower than investigations into other areas of criminal conduct, no indictments have recently been filed in this area though we fully expect such indictments in the future.

One indictment which was returned about a year ago clearly reveals the potential for tax fraud in the use of secret foreign accounts. According to the indictment, two salesmen directed about 75 percent of the commissions earned by them to the Swiss account of a foreign corporation, wholly controlled by themselves, on the false pretext that the corporation had earned these commissions. They thereby attempted to evade payment of taxes on about 75 percent of their income which, incidentally, came to a million dollars a year.

It will be no surprise to any member of this committee that Swiss banks have been used integrally in the irregular financial transactions surrounding our Military Establishment in Vietnam. We have learned

that a bank account in Switzerland was opened in 1966 by an American with strong underworld connections who was acting as a representative of several U.S. suppliers of service clubs and of a U.S. Government hotel and recreation center maintained primarily for Americans in Saigon.

Since that time, on a regular basis, the American suppliers have caused varying amounts to be deposited in this account. From time to time withdrawals were made by checks signed with a code name in favor of certain noncommissioned officers who were responsible for the purchases of the service clubs and in favor of the American civilian manager of the Government operated recreation center. The account was used as a kind of clearing house for funds being paid by the suppliers to the clubs' buyers. It is believed that hundreds of thousands of dollars have passed through this and similar related Swiss accounts. Also, we have reason to believe that corporations controlled by American citizens have engaged in extensive illegal trading in gold and have concealed transactions in secret foreign accounts.

Possible fraud on creditors in bankruptcy proceedings can also be perpetrated through the use of secret foreign accounts. Almost 3 months ago, an indictment was filed in the southern district of New York charging the president of a movie production concern with perjury when he testified, at a bankruptcy proceeding involving his company, that he did not have a Swiss account.

Another example of the enormous advantages to criminals in secret foreign accounts can be seen in an indictment filed this year which charges a number of bank employees with attempting to steal almost $12 million from the Chase Manhattan Bank by sending false authorizations to a Swiss bank to transfer the funds to another Swiss bank where the funds were to be picked up. Only because the recipient of the wire became suspicious did the scheme fail.

Each of these cases has involved countless man-hours spent piecing together thousands of documents and other disjointed sources of information: in short, proportionately far more investigative work than virtually every other type of prosecution.

This is so because in addition to the usual difficulties attending the detection of criminal conduct in financial transactions, we have here as well the added obstacle of the use of secret foreign accounts to avoid discovery of the underlying transactions by the U.S. Government.

I feel that where criminals have made such extraordinary efforts to cover their tracks, we must respond with equal vogor to uncover them. Nevertheless, it is self-evident that the ever increasing use of secret foreign accounts is proving a formidable obstacle to law enforcement. The cases I have referred to are but a small fraction of the crimes committed by persons through the use of secret foreign accounts. With the law as it now stands we cannot attack these law violators as systematically and successfully as those whose unlawful schemes take place exclusively in the United States.

The need for such an attack is compelling. The cases I have discussed demonstrate that secret foreign accounts are now available and are widely used by those who are in positions to cause grave