be traced. The money itself has no value as simply a deposit in a Swiss bank account and so to be usable it must be in one way or another returned to our economy and to our business structure for investment purposes. That is particularly true of the organized crime money that flows out in such large amounts, and that all involves an intertwining of commercial and business relationships between these foreign banking institutions and our business and our economy. I think if the committee will diligently inquire into and develop the counterrelationship that there will become obvious ways of reaching the situation, and so I would encourage you to develop fully the relationship between the foreign bank handling these secret accounts and our business structure in this country. It is not an isolated thing. They are very active participants for these people in one way or another in American business affairs.

And so if the committee would go into that completely, I think there will be methods developed for reaching this situation in addition to the legislation which you have proposed here.

Chairman PATMAN. Thank you, sir. We will consult with and advise the Department of Justice from time to time. We shall be very glad to have any additional views or any suggestions that you have and we will carry out the suggestions that you have mentioned.

I will not go into the introduction of Mr. Morgenthau. He is well known. I have introduced him before this committee before. But we are delighted to have you, Mr. Morgenthau. You have given more study and thought, and intelligent thought, I will say, to this subject than I believe any other one man in the United States of America, and you have demonstrated your ability along that line in the many prosecutions that you have conducted. So we are delighted to have you, sir, as a witness.

Mr. HALPERN. Mr. Chairman.

Chairman PATMAN. Yes, sir, Mr. Halpern?
Mr. HALPERN. Will you yield to me?

Chairman PATMAN. Yes; I will yield to you.

Mr. HALPERN. Thank you.

Mr. Chairman, our committee is privileged by the personal appearance before it of the distinguished U.S. attorney for the southern district of New York. Mr. Morgenthau has earned an enviable reputation for his relentless dedication to the true principles of justice, and he has been doing a remarkable job in one of the Nation's most sensitive and vital offices of law enforcement. As our Federal prosecutor in the vast district of New York, Robert Morgenthau has administered a most efficient and effective office and he deserves the commendations of everyone concerned with the impartial application of our laws. He is a man of unquestioned integrity and of principle and courage, and he is serving the public interest well.

Mr. Morgenthau, you bear a proud name and New York has every reason to be proud of you and your outstanding work. We welcome you before this committee, and I am confident that we will find your testimony worthwhile and that you will contribute greatly in this effort to find the answers to eliminate once and for all these illegal activities in the foreign banking field.

Chairman PATMAN. Thank you, sir.

Mr. Morgenthau, you may proceed in your own way, sir.

STATEMENT OF ROBERT M. MORGENTHAU, U.S. ATTORNEY FOR THE SOUTHERN DISTRICT OF NEW YORK

Mr. MORGENTHAU. Thank you very much, Mr. Chairman, Mr. Halpern, members of the committee, I appreciate the opportunity to appear again here before your committee.

În the more than 8 years that I have been U.S. attorney for the southern district of New York, I have been increasingly concerned by the use of secret foreign bank accounts to conceal violations of American law by American citizens.

Although many abuses of secret foreign accounts have been by members of organized crime, it should be perfectly clear that to an even greater extent, they are also used by affluent members of society, including leaders of finance and industry, to cheat the Government of taxes and to further and conceal other criminal conduct. The foreign bank with its secret accounts is the place where the organized underworld and the purportedly respectable businessman meet.

I am happy to report some further progress since my testimony last year before this committee, and I will describe some of the blatant violations of our criminal laws which we have uncovered. In addition to cases where indictments have been returned, we now have pending at least a dozen other important investigations relating to the illegal use of foreign accounts which I hope to be able to bring to a successful conclusion.

Even with these prosecutions we have just begun to scratch the surface. For every case which we have prosecuted, there are roughly six where we have specific information that a crime has been committed, but we are unable to prosecute either because we lack the resources to complete the investigation or because the evidence we have is inadmissible in court. And we have reason to believe that there are thousands of other cases of criminal conduct cloaked by secret foreign accounts which have not even been touched by our investigations.

Based on all of the facts available to us, I estimate that deposits in secret foreign bank accounts held for illegal purposes have a value in the hundreds of millions of dollars.

The hearings held last year by this committee on secret foreign bank accounts served as a warning light to the foreign and domestic financial communities. As a result, responsible bankers and brokers in this country and abroad are more concerned about the possible use of their facilities for illegal purposes. Nevertheless, this increased concern on their part has not substantially diminished the widespread use of secret foreign accounts to violate the law. Persons involved in shady market activities or illegal transactions have continued to recognize the chanceof getting caught are enormously reduced if payments anonymously emerge from and disappear behind the closed door of a foreign bank. Note that Nassau, which lies only half an hour off Florida, has recently become an extremely active banking center with many American controlled and branch banks. The explanation for this activity is obviously the convenience which its secret bank accounts offer to Americans to unload cash which they prefer not to deposit in their nonsecret American accounts.

Nor have foreign bankers been content to sit back and wait for the business to come to them. Many foreign banks have offices or

representatives in New York City. Other foreign bankers make frequent trips to the United States to solicit business-not only to the financial communities but often to the centers of professional gambling in Las Vegas and elsewhere.

Foreign bankers have organized a system of international couriers who carry large amounts of cash to Switzerland and Nassau for a fee. In one case, as I pointed out last year, the "finder" for a Swiss bank actually opened accounts at the bank for many of his friends. with an initial "Christmas present" deposit of $50. Only on receiving the bank's Christmas card did the friends learn of the existence of their new accounts.

In another instance, an agent for a Swiss bank arranged with an author of one of numerous books on the availability and advantages of a secret Swiss account for the author to supply him with the names of any persons requesting further information. He then called those persons. As a consequence, persons all over the country were placed in direct contact with a Swiss bank representative authorized to do business for it without even the effort of a long distance phone call. What has been perhaps the most galling development to the law enforcement officer, is that U.S. persons, even legitimate U.S. bankers, have become foreign bankers claiming the advantage of the secrecy of foreign banking laws. U.S. banks have opened branches in countries having bank secrecy laws. These foreign branches have been used directly to circumvent U.S. restrictions on U.S. banks and to facilitate illegal activities of American citizens. You will recall that until the Federal Reserve Board closed this loophole, U.S. banks, which were prohibited at home from paying more than a specified interest rate on their own borrowings, circumvented this restriction by having their own foreign branches issue certificates of deposit to lenders at uncontrolled rates.

And when the U.S. law enforcement agencies have sought to subpena U.S. banks to produce records of accounts maintained in a foreign branch in the belief that these accounts were being used to commit crimes in the United States, the banks on occasion have refused to produce such account records onth e ground that by so doing they would violate the bank secrecy law of the country where the branch is located. Their refusal to produce records on this ground has in some cases been sustained by the courts. I find it shocking that an American bank, by opening a branch abroad, can lend its facilities to citizens who are defrauding the revenue and violating our laws and then successfully deny its obligation to make account records available to the Department of Justice by claiming that the laws of a foreign country would be violated.

A startling development of recent years has been a significant change in the identity and ownership of foreign banks. Today, numerous banks in Switzerland and the Bahamas are owned and controlled not only by Americans, but in some cases by American hoodlums closely linked to loansharking, gambling rackets, and other illegal businesses. Such a bank does not need a large working capital to be a useful element of an illegal business. Its function is not to provide funds for the business so much as to provide an unreachable depository for illegal profits. Such a bank might not even keep its accumulated funds on deposit but might well redeposit them in a more substantial foreign bank or

even in a U.S. bank. An American criminal who is not content to simply accumulate wealth in a foreign bank can easily and safely cause the bank to "lend" it to him. These devices and many others are all at the disposal of this growing number of "foreign" banks controlled by or connected with Americans and the American underworld.

As you can well imagine, a secret foreign account is of great value to a law violator in virtually every type of criminal offense. If he is intent on evading taxes, he can hide his income. If he wishes to conceal the fruits of a crime, such as the proceeds from the sale of narcotics or unlawful kickbacks, he can channel those proceeds to a secret account immune from discovery by the Government. Thus, prosecutions and investigations into unlawful activities connected with the use of secret foreign accounts have been equally varied, coming under many different laws. These investigations and prosecutions have resulted in indictments and convictions. As a result we have acquired an idea of characteristic methods of criminal use of secret foreign accounts. I will illustrate as specifically as I am permitted to, especially where the facts have been made public in legal proceedings. As to many matters which are under investigation, I will have to speak more generally. First as to violations of the securities laws. Practically every Swiss bank, in addition to its deposit and credit banking activities may act as broker and dealer in securities for its customers. To deal in American securities, these banks maintain accounts in the Swiss bank's name at American brokerage houses. Through these it can trade the securities of all its customers without differentiation. Inspection of domestic records reveals only trades for the benefit of the foreign bank. The identity of the principal is not recorded domestically; indeed, no distinction is made between trades for one principal and another. All activity is lumped together under the name of the foreign bank. My office has worked closely with the Securities and Exchange Commission to investigate frauds and abuses which have grown out of this trading system.

An illustrative case, now a matter of public record, is the "Gulf coast Leaseholds case," certiorari denied by the Supreme Court in

1966.

In this case, four "Liechtenstein trusts" holding Swiss bank accounts, operating under secrecy laws, were instrumental in a scheme by American promoters to sell 750,000 shares of unregistered overthe-counter stock to the American public at prices manipulated to over $16 a share. Once the promoters had taken their profits, the stock dropped to under a dollar. Although in each case the titular head of the trusts was a Swiss lawyer, each of the trusts used in that case was American-owned. Both the identity of the American principals of the trusts and the trusts' ownership of the Swiss bank accounts were concealed under Swiss law.

The trusts were used as follows: One of the American promoters, a man with a criminal record, who had been enjoined from trading stock in his own name, bought 750,000 shares of worthless stock from an American company at a nominal price in the name of his Liechtenstein trust. At the time, the trust had assets of $20.80. The promoter then caused the trust to sell the shares through American brokerage firms, which transmitted the proceeds of the sale to Swiss banks at which the trusts had accounts. More than $4 million was realized by the American promoter, through his trust, on his original investment of

$20.80. Part of the proceeds of the sale of the stock was passed from this trust to another, also operating under Swiss secrecy laws, which served as the pocketbook for an investment advisory firm which touted the stock in its market letter. Now, all of these transactions between conspirators in Switzerland had the benefit of maximum secrecy; only when insiders to the scheme finally divulged its workings was the fraud exposed and its participants prosecuted.

Another use of the secret foreign account is the "Allied Entertainment case," in which the Supreme Court denied certiorari last year. This case also was successfully prosecuted because insiders to the scheme finally told the whole story.

To circumvent the prohibitions on the sale of unregistered stock, the insiders of the corporation arranged to have the shares delivered to a bank in Munich, Bankhaus Schneider & Munzing. Schneider & Munzing in turn sold the stock to the American public through brokerage firms where it had accounts. The proceeds of the sales were then mailed to insiders in the United States in $5,000 to $10,000 sums in envelopes falsely marked "securities."

The Allied case also offers an example of the use of accounts with foreign branches of American banks. Part of the scheme was for brokers to be given unlawful cash payments for selling Allied shares to their customers. These payments were to come from the proceeds of the sales made for the insiders. To eliminate a paper trail between the proceeds of the sales and the payments to the brokers, the insiders simply took the proceeds and deposited them in an account of the Frankfurt branch of the Chase Manhattan Bank. From there the moneys were sent to Schneider & Munzing from where they were withdrawn and put to their unlawful use.

More recently, in March of 1969, we obtained a 66-count indictment against six persons, including the principal officers of VTR Inc., a firm whose stock is traded on the American Stock Exchange.

That indictment charged a scheme in which the individuals involved used several Swiss and German banks, as well as a Liechtenstein trust to distribute illegally 85,000 shares of unregistered stock of VTR. The scheme was alleged to have worked as follows: First defendant placed the stock in the banks, all of which were bound by secrecy laws. Second, they then touted the stock by traveling through the United States, Europe and the Far East, disseminating phony "inside" information about important contracts and mergers for VTR and saying that the stock would "triple" in 6 months. Third, at the same time, the price of the stock was artificially run up through purchases of a coconspirator. Fourth, prior to sale, the stock was transferred from Swiss banks to the account of a Liechtenstein trust opened for this purpose at a German bank. Fifth, the German bank then delivered the stock to the Swiss bank's New York correspondent bank which, in turn, delivered the stock to unknowing customers. Now, virtually all of the 85,000 shares were sold within a period of 6 months, resulting in an enormous but illegal profit to the insiders.

The VTR case is one in which the Swiss courts ordered the bank involved to testify. This came about, however, because even without the bank's records, the Securities and Exchange Commission was able to make an exceptionally strong factual showing that conduct also unlawful under Swiss law was involved. As I am sure you understand, cases where we can make such a showing are very rare.