FOLLOW THE LEADER

To date, Admiral, Motorola, Philco-Ford, Bendix, Arvin, RCA, Consolidated Electronics, Clinton, TRW, Texas Instruments, IBM, and Ampex among others have set up shop in Chiang Kai-Shek's refuge, following General Instrument Corp., the first big U.S. electronics company to build in Taiwan only six years ago. The island is far from being a pure gold mine for U.S. companies. For one thing, a state of war still exists between it and mainland China. Other drawbacks, for U.S. businessmen, range from dysentery to the beer (with a taste like fermented soy saauce) brewed by the government's Tobacco & Wine Monopoly.

What makes Taiwan the momentary mecca it has become is, of course, the cheap labor supply. Wages are half those in Hong Kong, a third of Japan's, a tenth of West Germany's, and a twentieth of those in the U.S. Unskilled Taiwan workers earn a piddling $30 per month, and skilled workers seldom top $50 a month. The thriving electronics plants rely on women, who earn even less. Per capita income in Taiwan is only $258.

There are drawbacks to cheap labor, however. Illiteracy is fairly high despite compulsory education through grade school. Over 22% of the population cannot read and write. And since Taiwan is still basically an agricultural country where the family unit is very strong, absenteeism and a high turnover rate are common.

WORKING FOR EXTRAS

"Last year it was textured stockings," complains the manager of one U.S. electronics plant. "The girls would quit as soon as they had enough extra money to afford them. As long as someone else in the family was working, that was considered okay." Unions offer little problem, since strikes are outlawed because of the state of war that exists. The war has resulted in another source of manpower: soldiers who came to the island with Chiang in 1949 and who are now retired from the army and looking for jobs.

Besides its labor pool, Taiwan offers foreign companies other bait: a five-year holiday from income tax and low taxes thereafter; unlimited remittance of earnings; 100% foreign ownership; and duty-free import of most material and machinery. The government offers other concessions such as low-interest loans for up to 70% of the value of a plant, and free transportation of goods to and from cargo ships. By 1972, the government expects that "Made in Taiwan" will be stamped on $600-million worth of electronics products, six times as much as today.

Senator PROXMIRE. The hearings are now adjourned. The record will remain open until June 19.

(Whereupon, at 11:40 a.m., the hearing was adjourned.)

APPENDIX

Additional Statements and Material Submitted for the Record

STATEMENT OF THE ASSOCIATION OF STOCK EXCHANGE FIRMS

The Subcommittee on Financial Institutions recently held hearings on two bills, S. 3678 and H.R. 15073, which while differing in detail are both intended to curtail the misuse by U.S. citizens of secret foreign bank accounts. The Association of Stock Exchange Firms agrees wholeheartedly with the basic purpose of these measures. Certainly we write no brief for those who invoke the cloak of secrecy to cover evasion of our tax or securities laws or to facilitate illegal activities in this country. However, the pending bills may unintentionally impede legitimate international financial dealings and burden the stock brokerage business in ways which are all out of proportion to any possible strengthening of the Government's ability to detect and prosecute criminal conduct.

During the course of the Subcommittee's hearings, testimony was received from representatives of the New York Stock Exchange and the National Association of Securities Dealers, Inc. Both of these agencies have major responsibilities for self-regulation of the securities industry under the Securities Exchange Act of 1934. As such, they are in a position to understand the unique problems of surveillance and enforcement within this industry, and we commend their testimonies to your most careful consideration.

While stating once again our support for the objective of such legislation, we are particularly concerned with Title IV of S. 3678 which would amend the Securities Exchange Act of 1934 by adding a new Section 31(a). This provides in substance that a U.S. broker-dealer may not effect any transaction in a domestic security initiated by a foreign financial agency unless (1) that agency has disclosed to the broker-dealer the identity of all persons having any beneficial interest in the transaction, or (2) the broker-dealer has accepted in good faith the agency's certification that no U.S. citizen or resident has any beneficial interest in the transaction.

We strongly endorse, but for the sake of brevity will not reiterate here, the comments of the Exchange and the NASD as to the potential adverse effect of those requirements on the Nation's international balance of payments, as well as the Exchange's more novel argument that they will spur the growth of foreign trading markets for U.S. securities. It is our belief, however, that this provision may both be unworkable from a practical standpoint and impose an unfair burden on securities firms.

Proposed Section 31 (a) may be unworkable because certain foreign financial agencies may refuse (and may, in fact, be required under local law to refuse) to divulge the identities of persons having beneficial interests in such transactions. In addition, the institution itself may not know the identiies of all persons having such a "beneficial interest." As can be appreciated, the quoted phrase is very broad in its legal import, and there is no requirement, even under our own industry's admonition to "know your customer," which would necessitate the identification of every person having such an interest. Such an inquiry would sometimes be impossible and often onerous and time-consuming. The requirement of Section 31(a)(1) might, therefore, impose such severe administrative and legal burdens on foreign financial institutions that they would simply prefer to take their business elsewhere.

In some respects, this reasoning also applies to the alternative proviso of proposed Section 31 (a) (2). Here, however, the onus falls on the U.S. broker-dealer. and we suggest that it is essentially an unfair one. It has been suggested, and we think rightly so, that it is questionable whether a U.S. securities firm could ever accept such a certification, whether on a blanket or transaction-by-transaction basis, in "good faith" from, for example, a Swiss bank because the firm

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knows that the bank has many customers who are U.S. citizens or residents. Since the firm has no independent means of verifying the truthfulness of the certification, it is entirely at risk, under pain of penalty for violating the Securities Exchange Act, in making its own "good faith" determination. This was one of the considerations which led the Federal Reserve Board to delete the "good faith" requirement in the course of its revision of the Special Omnibus Account section of Regulation T last year. Since this provision makes the broker-dealer firm both an enforcement agency and at the same time subjects it to liability for any violation, we believe that it does not conform to concepts of fundamental fairness.

We also have strong reservations about the broad scope of authority granted to the Secretary of the Treasury to prescribe recordkeeping and reporting requirements under Chapters 3 and 4 of Title II of both bills, and specifically about Section 241 which would require broker-dealers, among others, to obtain detailed information regarding the identities and legal capacities of all parties to the transaction. Apart from the considerable paperwork burdens which these requirements might impose, that particular section is subject to many of the same practical and fairness objections raised in our earlier comments. U.S. broker-dealers already maintain voluminous customer records which are available to law enforcement officials in connection with specific investigations. In our view, it has not been demonstrated that such additional requirements would add significantly to the ability to trace illegal transactions of any sort. While we trust that the Secretary of the Treasury would use this broad grant of power selectively, it would seem appropriate for the Congress to lay down more precisely defined guidelines for its exercise now or in the future.

In summary, the Association recognizes the imperative of taking vigorous action against those who misuse the free channels of commerce to flout our domestic laws, and we would support any legislation reasonably designed to accomplish this objective. However, certain provisions of the pending bills, in particular the proposal in S. 3678 to add new Section 31 (a) to the Securities Exchange Act of 1934, would only impede the flow of legitimate foreign investment into U.S. equity markets. This would have most deleterious effects on the National economy by reversing the favorable impact of such investment on our international balance of payments. Moreover, those provisions are practically unworkable and, as they apply to U.S. broker-dealers, impose unfair burdens.

STATEMENT OF THE COMMITTEE OF FOREIGN-OWNED BANKS

BANK SECRECY LEGISLATION

On behalf of the Committee of Foreign-Owned Banks, which consists of the 21 member banks listed at the end of this statement, the following comments are made on S. 3678, pertaining to reports and records of bank and international transactions to aid law enforcement.

The Committee of Foreign-Owned Banks supports the objectives of S. 3678. Our main concern is that any legislation designed to make foreign or domestic bank records available to assist law enforcement in the United States not result in inadvertent, unwarranted or undesirable discrimination against banks or financial transactions because of their foreignness. Although we assume that the results of your Committee's work will provide Treasury with discretion broad enough to accommodate the fiduciary responsibilities of banks and the constitutional rights of those affected, certain comments on this subject are also included under the heading of "Privacy", in the belief that Congress should confine the regulatory authority of the Executive Branch within the bounds which it believes to be appropriate.

I. DISCRIMINATION

S. 3678 authorizes three kinds of discriminatory regulation, each of which deserves close attention from your Committee. They are: (1) discrimination between banks and other financial institutions on the basis of nationality; (2) discrimination between U.S. citizens making lawful use of foreign financial facilities and those using domestic financial facilities; and (3) discrimination be tween domestic and international transactions.

1. The Nationality of Financial Institutions.

There are obvious difficulties resulting from any U.S. laws and regulations which classify foreign financial institutions according to the degree to which they

comply with U.S. law enforcement and which distinguish between U.S. and foreign financial institutions in this regard. Although S. 3678 merely authorizes regulations which could make such distinctions, the issue arose more sharply before the House Banking and Currency Committee, because the bill before that Committee during its hearings, H.R. 15073, would have required U.S. citizens and corporations using any foreign bank, which the Treasury Department determines does not make records available to agents of the U.S. Government, to report to Treasury each transaction (presumably each deposit and withdrawal) involving that foreign bank. The Chairman of that Committee at the hearing revealed that the banks of 26 countries, in addition to Switzerland, might be so classified. Assistant Secretary of the Treasury Rossides, along with other witnesses, pointed to the immense difficulties of this indirect discrimination against foreign banks, which would result from so burdening U.S. citizens as to deter their use of foreign banks. Any uniform standard of non-availability of bank records to U.S officials (who are foreigners to the bank) apparently means that at least 27 countries and probably many more do not meet the test. In fact, the United States is probably a "secrecy" country in the sense that its banks, under principles of common law, may not lawfully divulge customer information without their consent or legal compulsion, and that subpoenas would not be issued for investigations of foreign crimes not recognized by the laws of the United States (as in the Swiss situation). It seems clear as a practical matter that any effort by foreign law enforcement agencies to reach records in a bank in the United States would be rejected by both the bank and government officials in the absence of a subpoena issued by a court of competent jurisdiction in the United States. There may well be no countries under which banks could legally disclose information about its accounts to an agent of a foreign country without a subpoena or some administrative act authorizing or directing the disclosure. The test is almost meaningless because accessibility will vary not only with applicable law but also with the nature of the request.

Presumably for these reasons, Chapter 4 of Title II of H.R. 15073 was modified in the House to broaden the authority of the Treasury Department so as to encompass the stated intentions of Secretary Rossides to do no more than require identification of foreign accounts by U.S. citizens on individual and corporate income tax returns. This step has already been taken under existing authority in the Internal Revenue Code and such a box is being included on 1970 income tax return forms. This information identifying foreign accounts will provide law enforcement officials with important leads which will open up new opportunities for conventional and lawful investigatory methods. These opportunities would be amplified, under the Treasury plan, by a proposed statutory rebuttable presumption (requiring an amendment of the Internal Revenue Code) providing a strong incentive for the owner of the account to make full disclosure in connection with any lawful investigation of information in foreign records which might not otherwise be available.

Without knowledge of this history of Chapter 4 of Title II, the bare legislative language appears to authorize an alarming discrimination between foreign countries based on the U.S. Government's ideas of compliance with U.S. law enforcement activities.

The Treasury plan which seems to have been well received by the Banking and Currency Committees of both Houses, depends entirely upon existing authority in the Internal Revenue Code, making Chapter 4 of Title II superfluous. Accordingly, it is recommended that Chapter 4 (both sections 241 and 242) be deleted on the grounds that authority which neither Congress nor the Executive Branch at this time wishes to utilize unnecessarily abdicates the legislative role of the Cogress and may be misleading.

2. Burdening U.S. Customers of Foreign Banks.

The testimony of Secretary Rossides before the Senate Banking and Currency Committee went a step further than before the House Banking and Currency Committee with regard to disclosure requirements which might be imposed on U.S. citizens and corporations using foreign bank and brokerage accounts. He said Treasury is considering the possibility of recordkeeping requirements in addition to the mere disclosure on income tax returns of the existence of foreign accounts. Law enforcement and particularly tax collection might be greatly assisted by a general requirement that all taxpayers maintain specified records for a specified period of time. Such a requirement has never been imposed by regulation or statute for reasons which we assume are well considered and sound and probably have to do with the burdens involved and difficulties of enforcement. The question then arises as to whether it is desirable and fair to impose this re