1. Foreign account disclosure requirement

Each U.S. taxpayer will, with respect to taxable years beginning on or after January 1, 1970, be required to disclose his interests at any time during the taxable year in foreign bank, brokerage, and similar accounts on his tax return. This requirement will be imposed under section 6011(a) of the Internal Revenue Code. We may also recommend to the House Ways and Means Committee and the Senate Finance Committee a special penalty for failure to furnish this information.

In connection with this disclosure requirement, we have under consideration a proposal to issue regulations, pursuant to existing statutory authority, requiring taxpayers with such interests to maintain specified records of transactions they have with these accounts. These records would correspond to the type of evidence taxpayers are now expected to produce when their returns are audited.

We believe that this disclosure requirement will constitute a significant deterrent to the use of foreign accounts for tax evasion and other illegal purposes while in no way affecting the legitimate use of such facilities.

2. International transactions recordkeeping by banks and other financial institutions

The extent to which our financial institutions have been keeping records of domestic and international transactions has undergone considerable change in the last few years as a result of technological advancements in the industry. The multiplication of transactions in the banking industry has only been made possible through the extensive use of electrical office machinery and computers. All of us have noticed how our own monthly bank statements have changed in format and procedures in the last few years, reflecting at a personal level the changes that have taken place in the industry. With these changes, the traditional copies and forms which the banks have retained in their own files have been reduced primarily for reasons of operating efficiency. This has occurred at the same time the public has focused on the use of international banking transactions to disguise criminal acts.

Since bank records can help in dealing with such crime, the Treasury recommends that banks and other financial institutions located in the United States be required to maintain certain minimum records of foreign transactions.

This would assist our law enforcement agencies to trace transfers of funds across our borders by U.S. citizens and residents and help investigation of foreign accounts subject to the foreign account disclosure requirement. In many cases, these requirements would codify present practices. Primarily, we seek improved availability of records.

The legislation could establish requirements for record-keeping with respect to international transactions by authorizing the Secretary of the Treasury to prescribe particular records which must be maintained. While we originally recommended this approach, it now seems to us that in addition the legislation can appropriately provide that banks and other financial institutions located in the United States be required to maintain six specific types of records as follows: (1) Records of foreign remittances transferring funds abroad. (2) Records of foreign remittances transferring funds to the United States. (3) Records of large checks negotiated abroad drawn on banks located in the United States and records of large foreign credit card purchases by U.S. citizens and residents.

(4) Records of foreign checks transmitted abroad for collection.

(5) Records of foreign drafts.

(6) Records of letters of credit and documentary collections.

As experience is gained and methods of business change, the Secretary would be authorized to issue regulations adding specific types of international records to those required or to suspend the requirement as to any type of record specified in the statute. With respect to retention period, we recommend that the statute prescribe a general six-year retention period with authority conferred on the Secretary to reduce the period where appropriate. The Secretary should have authority to establish the magnitude of transactions or documents subject to the requirements or to set exceptions on the basis of other criteria.

A further description of the international records we recommend and some details on the contemplated record-keeping requirements are set forth in Attachment A.

If the Internal Revenue Service could survey the foregoing records of international transactions, either by examining them on the premises of the bank or other financial institutions or by requiring information returns as to some of

the contents of the records, the usefulness of the records in providing initial leads to cases of possible tax evasion would be enhanced. Such surveys, however, would extend the utilization of the records beyond their traditional role as a source of information and evidence in an examination of a particular taxpayer. The Internal Revenue Code authorizes the Internal Revenue Service to obtain and examine records maintained by banks and others in connection with the determination of the tax liability of particular taxpayers. There is also a statutory basis for arguing that the Internal Revenue Code authorizes the use of compulsory process for a survey of the records of a financial institution located in the United States. Nevertheless, the Internal Revenue Service has not generally asserted such survey authority, the scope of which has not been reviewed by the courts.

We decided against seeking specific statutory authority extending the rights of the Internal Revenue Service to survey the records of international transactions in banks and other financial institutions. In deciding this, we considered the constitutional prohibition against unreasonable searches and seizures and the need to avoid unnecessary incursions against the right of privacy. While it is clear that obtaining records by establshed discovery procedures from the banks and other institutions in connection with the examination of a particular taxpayer would not violate these rights, provision for a survey of such records raises a much more serious questions. We are also concerned that surveys or information returns could have an adverse effect on legitimate foreign investment in the United States. It has been the tradition overseas to place great emphasis on the privacy of financial transactions and a breach of this tradition could adversely affect the flow of foreign funds to the United States.

Balancing these factors, we concluded that it would not be appropriate for us to suggest legislation extending the rights of the Internal Revenue Service to survey the records of banks and other institutions.

Next we considered the approach taken in sections 241 and 242 of S. 3678 and H.R. 15073 which could be used to accomplish the same result by requiring banks and other financial institutions to file information returns setting forth the information contained in the international records. For the same reasons that we have concluded that we cannot support new legislative authority for the survey of records not tied to a particular taxpayer investigation, we believe it inappropriate to support legislation requiring reports of information obtained from the records of international transactions. Since sections 241 and 242 of the bills authorize such reports, we cannot support their inclusion unless they are substantially amended.

This is a very delicate area which requires full consideration of the constitutional prohibition against unreasonable searches and seizures, the need to avoid unnecessary incursions against the right of privacy, the international reaction, and the needs of the Internal Revenue Service for information. We intend to do additional work in this area with the thought that if a sound proposal can be developed, it will be presented to the Congress.

3. Reports of Exports and Imports of Currency

In addition to international transfers through banks and other financial institutions, funds can be transferred directly by the physical movement of U.S. currency or its equivalent.

In order to make sure that records of such direct transfers are available for the purpose of verifying income tax returns and for criminal law enforcement, the Treasury proposes that persons importing or exporting on one occasion $5,000 or more of U.S. currency or its equivalent be required to file an information return prior to the importation or exportation.

There would be no restrictions on exporting and importing currency or the equivalent in any amount, and no return would be required of those exports or imports under the $5,000 level. The average international traveller would not be affected by this requirement. Those who reach this level could comply with this requirement by simply completing or turning in the report form which would' be provided.

Enforcement of this provision, which would include a forfeiture provision, would require substantial additional manpower in the Bureau of Customs. 4. Rebuttable presumptions that U.S. citizens and residents engaging in certain foreign transactions are dealing with their own untaxed income

By means of the disclosure of foreign accounts, the required international records, reports of exports or imports of currency and, to a certain extent, Treas

ury Currency Reports, the Internal Revenue Service will be in a much better position to identify instances of tax evasion by U.S. taxpayers involving foreign accounts and international transactions than now. While such information would certainly be of use in reducing such evasion, there are limits to the benefits of the proposals so far made. We believe our effectiveness in law enforcement would be enhanced if the Internal Revenue Code were amended to provide rebuttable presumptions that persons who engage in certain international transactions and who do not furnish satisfactory information with respect thereto are dealing with their own untaxed income.

Legislative implementation of the presumptions would be through amendment to the Internal Revenue Code. The Treasury has discussed these matters with the staff of the Joint Committee on Internal Revenue Taxation and is developing proposals for submission to the House Ways and Means Committee and the Senate Finance Committee.

5. Administrative measures

The previous four parts of the Treasury's program to deal with tax evasion and other crimes facilitated by the use of foreign bank accounts have involved rules which would be applicable to taxpayers or financial institutions. There is, however, an important additional element that is necessary to make any law enforcement system work-adequate numbers of informed personnel and vigorous and comprehensive enforcement. The measures made available by the new legislation would require additional manpower.

A number of new approaches are being considered, including the establishment of a specialized group in the National Office of the Internal Revenue Service, with expertise in foreign banking and international transactions and the various possibilities for obtaining information. This group would be immediately available to field agents for consultation and guidance in cases which involve or might involve an undisclosed foreign account or international transaction. In addition, new instructions are being prepared for use by field agents which would require informing the National Office at an early stage about cases involving foreign banks for possible requests for information to foreign governments under treaty provisions.

The Internal Revenue Service also is evaluating whether it has in the past fully used the information which it has been able to obtain to draw inferences as to untaxed income. This is closely related to the statutory presumptions discussed above. While statutory presumptions will add strength to the inferences that are appropriate, even without these presumptions we believe that inferences can be properly drawn and tax liability established based on information which heretofore has not been considered sufficient to support a claim.

The Treasury recognizes that increased audit and enforcement activity will require additional manpower and perhaps data processing facilities in the Internal Revenue Service. Every attempt will be made to obtain sufficient funds for these needs and Bureau of Customs' needs in forthcoming Treasury appropriation requests.

III. THE ADMINISTRATION'S PROPOSAL FOR OBTAINING DOMESTIC INFORMATION

In addition to dealing with the problem of secret foreign bank accounts, S. 3678 and H.R. 15073 also deal with a basically separate problem area, law enforcement in a purely domestic context. Two provisions are involved: requirements for recordkeeping by banks and other financial institutions of records of domestic financial transactions, and Treasury Currency Reports.

1. Domestic Transaction Records of Banks and Other Institutions

While unlimited requirements for recordkeeping by banking institutions of all domestic transactions are undesirable and unnecessary, records of certain domestic transactions are often essential in the fight against tax evasion and other crime, especially organized crime.

Therefore, we recommend that the legislation provide discretionary authority in the Secretary of the Treasury to require that banks and other financial institutions maintain such records of domestic transactions as may be specified in regulations. Regulations would be developed to identify the types of documents subject to these requirements, specify the minimum amounts, establish the classification of documents (such as checks paid or checks deposited) and other classifications subject to these requirements and specify the retention periods.

2. Treasury currency reports

Turning to the second domestic requirement, financial institutions currently are required to file Treasury Currency Reports in cases where persons who use their facilities engage in "unusual" currency transactions. The present system has not been adequate because the concept of an "unusual" transaction has been subject to differing interpretations. Also, financial institutions may not have always sufficiently verified whether the person engaging in the transaction has furnished his correct name and address.

We support in general the concept of Sections 221 and 222 of H.R. 15073 and S. 3678 for a new statutory basis for Treasury Currency Reports, provided that these reports are limited by statute to those concerning transactions likely to have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.

The following summarizes the legislative aspects of the Treasury proposals: A bill (i) requiring U.S. banks and other financial institutions to maintain records of specified international transactions, (ii) requiring persons importing or exporting from the U.S. large amounts of currency or its equivalent to file reports, (iii) authorizing the Secretary of the Treasury to impose recordkeeping requirements on banks and other financial institutions with respect to domestic transactions, and (iv) ́requiring Treasury Currency Reports, to the extent it is found that such records and reports are likely to have a high degree of usefulness in criminal, tax and regulatory investigations and proceedings;

A bill amending the Internal Revenue Code to provide a specific penalty for failure to comply with the foreign account disclosure requirement and to provide statutory presumptions that U.S. taxpayers engaging in certain foreign transactions and not furnishing complete information with respect thereto are dealing with their own untaxed income.

H.R. 16444, prepared by the Treasury and introduced by Representative Widnall on March 12, 1970, would provide the legislative framework, other than the Internal Revenue Code amendments, for the enforcement system which we recommend. We would recommend amending H.R. 16444 to specify the required records of international transactions in a separate section. In addition, I am sure that Treasury and Congressional staffs could make a number of technical improvements.

IV. ADMINISTRATION POSITION ON EXTENDING MARGIN REQUIREMENTS TO BORROWERS AND RESTRICTING DEALINGS WITH FOREIGN FINANCIAL AGENCIES

1. Margin requirements

Section 301 of the bills would give the Federal Reserve Board clear authority to apply margin requirements not only to lenders but also to borrowers. This is an entirely new concept in the regulation of credit as margin rules have been only applied in the past to lenders.

The Administration supports the extension of the margin requirements to borrowers provided it is made clear that this is not intended to regulate the availability of credit abroad to foreigners. Therefore, Section 301 should be amended to provide that only borrowers who are American citizens or residents and foreign persons controlled by or acting for them are subject to these requirements. In addition, it should be made clear that the requirements are applicable only with respect to the purchase of United States securities, or of foreign securities where the transaction is executed in the United States.

It is not our intention to engender direct jurisdictional conflicts with foreign countries which have sovereign authority to regulate the availability of their own domestic credit. Any problems that may be raised by foreign participation in our securities markets should be approached through international cooperation. 2. Restricting dealing with foreign financial agencies

A new section appears in S. 3678 which does not appear in H.R. 15073 which aims at identifying users of foreign financial facilities. The new provision, Title IV of S. 3678, would accomplish this objective by providing that no person may effect any transaction in a domestic security within the United States if such transaction was initiated by a foreign financial agency, unless such person either obtains from the foreign financial agency the identity of all persons having any beneficial interest in the transaction, or has in good faith accepted a certification from the foreign financial agency that no citizen or resident of the United States had any beneficial interest in the transaction. In addition, it provides that any

U.S. citizen or resident who purchases or sells domestic securities through a foreign financial agency must both authorize that foreign financial agency to disclose the citizen's or resident's identity to the U.S. broker or dealer executing the transaction and file periodic reports with the Securities and Exchange Commission disclosing details of purchases and sales as may be required by the SEC.

We must be careful to avoid provisions that are too stringent and which may have the effect of impeding the channels of trade and this defect exists in Title IV.

Moreover, I believe that foreign financial agencies might find it extremely difficult to comply with this provision. Even with the best of will, a foreign financial agency might be unaware of the real parties in interest in a transaction. Consequently, fear of the consequences of failure to comply with this section, particularly if criminal or other penalties were to attach to a false identification or certification, could have serious effects on the willingness of foreigners to invest in the United States. Thus, this provision is likely to produce little in the way of reliable information and could have limiting effects on investment in the U.S.

At the same time, Title IV would put a heavy administrative burden on those foreign securities dealers and banks seeking to make portfolio investments in the United States. Yet the information obtained under Title IV would in part duplicate information obtainable under other provisions of the bill which will achieve many of the same objectives as those sought to be accomplished by Title IV, but without the significant drawbacks of this provision.

For these important reasons, the Treasury recommends the deletion of this provision from S. 3678. In our view it does not meet the goals set by Senator Proxmire in introducing S. 3678 that, "Our law enforcement authorities need additional tools to trace the international flow of funds into and out of the United States without impairing the international mobility of capital of infringeing upon the sovereign rights of foreign countries.

V. PROPOSED AMENDMENTS TO H.R. 15073 AND S. 3678

While H.R. 15073 and S. 3678 incorporate a number of Treasury recommended improvements, further amendments are required to insure adequate enforcement authority and responsibility and eliminate provisions which would or could lead to unnecessary and counter-productive paper work and potentially unwarranted invasions of privacy. I will outline in this statement the principal amendments which the Treasury feels are necessary. These and other amendments which we urge are discussed in Attachment B. I have already stated our views on the margin requirements provision and on the provision restricting dealings with foreign financial agencies.

The major additional amendments which we suggest in S. 3678 and H.R. 15073 are as follows:

1. Purpose

As introduced, H.R. 15073 stated a number of purposes, including facilitating the supervision of the business of banking, the establishment of civil liabilities, the regulation of the value of money and the collection of statistics necessary for the formulation of monetary and economic policy. The Treasury argued that the only proper purpose of H.R. 15073 is to assist criminal, tax and regulatory investigations and proceedings. Title I of H.R. 15073 was amended in the House in conformity therewith and Title I of S. 3678 also reflects this view. However, the stated purposes of Title II, set forth in Section 202 of H.R. 15073 and S. 3678, have not been changed. Section 202 still provides, "The purposes of this title are (1) to facilitate the supervision of financial institutions properly subject to Federal supervision, (2) to aid duly constituted authorities in lawful investigations, and (3) to provide for the collection of statistics necessary for the formulation of monetary and economic policy."

The Treasury urges that Section 202 be amended to make it clear that the only purpose of Title II is to assist criminal, tax and regulatory investigations and proceedings. The need for such a change is especially great in view of the growing concern in America over possible incursions by Government into individual privacy.

Where reporting is recommended, as in the case of the Treasury Currency Reports, the purpose of the requirement should be appropriately limited. If such reporting requirements are limited to those transactions likely to have a high degree of usefulness in criminal, tax, or regulatory investigations or pro

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