belief that we should follow the concept of presumptions in our study here. We have many presumptions in our law and in the Internal Revenue Code. Mr. GALIFIANAKIS. The presumption referred to in this bill is primarily an administrative presumption as opposed to a judicial presumption. Mr. ROSSIDES. Correct. And it would be tested in court. It is an evidentiary presumption which would be administered within the administrative procedures of trying a tax case. And then if the taxpayer still felt that there was not sufficient reason to have put the presumption forward, he could go to court to test the adequacy of the evidence. So then the courts will decide how much evidence the taxpayer has come forward with which rebuts the presumption. Mr. GALIFIANAKIS. Mr. Chairman, I think the overall objectives of the Treasury seem to coincide with the overall objectives of this committee, and I am hopeful that we can come through with fruitful legislation. Again, I commend the Secretary and his assistants for the excellent work. Chairman PATMAN. Yes, we all welcome the suggestions. Mr. GALIFIANAKIS. Thank you, Mr. Chairman. Chairman PATMAN. Mr. Williams. Mr. WILLIAMS. Thank you, Mr. Chairman. Mr. Rossides, I just want to congratulate you on an excellent statement and to compliment you on moving ahead so vigorously in this area which has been so long overlooked. Mr. ROSSIDES. Thank you, Congressman. Chairman PATMAN. Mrs. Heckler. Mrs. HECKLER. Mr. Chairman, I should also like to commend Mr. Rossides on his very forthright statement. Mr. ROSSIDES. Thank you, Mrs. Heckler. Mrs. HECKLER. I think that the Treasury Department deserves a great deal of commendation for the initiative that they displayed, as well as the administration, in pursuing this as vigorously and comprehensively as you have. Mr. ROSSIDES. Thank you. Mrs. HECKLER. I also would like to say personally that your obvious attitude of complete disclosure and forthrightness, and your desire not to be evasive on any of the questions asked, I think augurs well for future cooperation between your Department and this committee, in our drafting and reporting out a really constructive, effective bill. Mr. ROSSIDES. Thank you very much, Mrs. Heckler. Chairman PATMAN. We will have a session this afternoon, if we get permission. We will not have the proceedings in the House that we anticipated because of the passing of Congressman Utt of California, but there will be the question of passing the HEW bill up on the floor this afternoon. And we will meet at 2 o'clock if we get permission. Otherwise, we will meet after the session closes this evening. We only have one other witness this morning, the witness from the SEC. Will you have your proposals up and documented within the next few days, Mr. Rossides? Mr. ROSSIDES. Yes, Mr. Chairman, and if I may make a final comment, another person on our task force, the secretary of the task force was Mr. Ira Tannenbaum and with permission of the Chair I would like to submit for the record the names of the Treasury staff who worked on our task force. Chairman PATMAN. Yes, sir. We would be delighted to have them, sir. And we will excuse you with the understanding that we will want you back next Monday, unless we talk in the meantime and decide otherwise. Mr. ROSSIDES. A pleasure. Thank you very much, Mr. Chairman and members of the committee. Chairman PATMAN. Fine. Thank you, sir. Before proceeding with our next witness, I would like to introduce in the record a comparison of the Internal Revenue Service testimony prepared before Treasury's change of heart and the Internal Revenue Service actual testimony. This comparison is quite enlightening, As I have said in my opening statement, I do not want to belabor these hearings with political arguments over the last minute change in the Treasury Department's attitude. But, some of the statements which the Internal Revenue Service had intended to make do point out their grave concern and frustration in enforcing our tax laws against Americans who use these secret foreign bank accounts. STATEMENTS OF Randolph W. THROWER, COMMISSIONER, Internal Revenue SERVICE Excerpts of Formal Statement We feel confident that U.S. banks will cooperate with the Treasury Dept. in determining an effective but not unreasonably burdensome way to make the desired information available to the IRS. Theoretically, the retention of extensive records of banking transactions would meet our needs. Realistically, however, the creation of a mass of paper beyond our capacity to digest and utilize could have the effect of submerging and making unobtainable information of special interest to us. We recognize also that extensive recordkeeping and reporting requirements on domestic financial transactions could impose a burden on banks that might be out of proportion to the revenue and other benefits realized. We feel that the subject needs to be reviewed very carefully and in detail to assure a reasonable accommodation of conflicting interests. Excerpts of Draft Statement It does not seem unreasonable to expect U.S. banks to join with the Revenue Service in indentifying these records and reports which will provide the required information. Thereafter, the submission of information and reports could be required by regulations issued under authority of the proposed legislation. We desperately need information with respect to international transfers of funds, not only relative to foreign banks involved but also with regard to nominees and agents. ***In each of the above cases there were indications that the money allegedly borrowed was the subject's own money of that of his associates. If the reporting requirements of the bill had been in effect, we would have learned of the initial transfer of funds overseas and would have obtained current knowledge of the alleged bank loans. Currency Dealings-* * * Had the reporting requirements of the bill been in effect, we would have had immediate identification of the agents involved in the transactions and report from them identifying the principals. 41-642 0-70- -12 Regarding the proposed requirement that domestic banks maintain specific records, I want to emphasize that most banks cooperate with the Internal Revenue Service by producing upon request records that are retained. However, many domestic banks follow a practice of destroying records at the earliest possible date after they have met the needs of the bank and the bank's customers. The Treasury Task Force described by Mr. Rossides will be considering possible approaches to obtaining information needed by the Internal Revenue Service. *** I can assure this committee of a great interest on our part in the subject matter and the objectives sought by the Committee, and our desire to cooperate fully in a continuing examination of the area. We have experienced problems in conducting income tax examinations and investigations as a result of many domestic banks following the practice of early destruction of their records. Many banks are adopting the practice of returning original deposit tickets to their customers. In some instances, a microfilm record of the deposit slip is not made and in some cases the microfilm record is retained for a much shorter period than is necessary for our examinations. Some banks microfilm all checks drawn on accounts of their customers as well as all checks on other banks cleared as transit items. Other banks microfilm only transit items. Present bank practices regarding the retention of microfilm records vary from a retention period of less than one year to more than six years. With the introduction of data processing, the maintenance of individual account ledgers is being discontinued by some banks. The abbreviated retention periods that are being adopted by banks for teller's proof tapes, bookkeeper's journals, daily trial balance printouts, and microfilm records of customers' statements make it difficult to trace and identify deposit or withdrawal items. Some banks make it a practice to dispose of installment loan ledgers and loan applications and financial statements as soon as the account is paid in full. Others dispose of these records whenever the account become inactive or within one or two years after it becomes inactive. Banks that have voluminous records usually also have batch registers or similar indices. Their early disposal practices with respect to these indices make it difficult to locate desired information. In concluding my statement, I firmly believe that the proposed legislation for this committee would go a long way toward remedying the shortcomings presently hampering our enforcement activities. Our next witness this morning will be Mr. Irving Pollack, Director, Division of Trading and Markets, Securities and Exchange Commission. The members may recall that Mr. Pollack appeared before the committee in December 1969, at our preliminary hearings on foreign banking secrecy. It was in large part due to Mr. Pollack's testimony about this serious problem that led to the introduction of the legislation now before us. In his December 1969 testimony, Mr. Pollack and Mr. Morganthau complained about the use of the special omnibus act provisions of regulation "T" by foreign banks to buy securities in our market for Americans and others in violation of the margin requirements and for the purpose of tax evasion. As a result of this testimony, we were able to persuade the Federal Reserve System to amend regulation “T” in a manner which effectively closed the special omnibus account to secret foreign banks. So, Mr. Pollack, at least we have done some good so far. We welcome you to the committee and ask that you identify the staff members accompanying you and proceed with your testimony in your own way, sir. Mr. POLLACK. Thank you, Mr. Chairman. STATEMENT OF IRVING M. POLLACK, DIRECTOR, DIVISION OF TRADING AND MARKETS, SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY STANLEY SPORKIN, ASSOCIATE DIRECTOR; IRA H. PEARCE, SPECIAL COUNSEL; AND ALLAN S. MOSTOFF, ASSOCIATE DIRECTOR, DIVISION OF CORPORATE REGULATION Mr. POLLACK. On my far right is Ira Pearce, who is a special counsel in the Division of Trading and Markets. On my right is Stanley Sporkin, Associate Director of the same Division. On my left is Allan Mostoff, Associate Director of the Commission's Division of Corporate Regulation. Mr. Chairman and members of the committee, we are pleased to participate again before this committee in considering the problems presented by the activities of certain foreign financial entities in our securities markets. We appreciate the opportunity to supply information to the committee in connection with its study of the means for the prevention of illegal use of secret foreign financial facilities by citizens and residents of the United States and by other persons doing business in this country. As you know, we have broad responsibility with regard to the protection of investors and the prevention of fraud and manipulation in the American securities markets. Hardly a week goes by when our attempts to fulfill this responsibility are not made more difficult or frustrated by the veil of secrecy drawn across financial transactions in foreign countries. Our activities are undercut more and more each day as foreign financial entities are used in connection with various illicit or improper securities market activities. These activities may include unlawful attempts to take over American companies, manipulative purchases and sales of securities, securities transactions based on the illegal use of inside information, and the arrangement of financings which would not be permitted under the rules regarding the purchase of securities on credit. At the outset, we wish to emphsize that we welcome participation by foreign investors in the American economy. We well realize the benefits conferred upon American companies by the inflow of capital from abroad. And, we feel a responsibility to such foreign parties to enforce our high standards of conduct in our securities marketplaces so that they, as well as American investors, may invest their resources in an informed manner and with confidence. You may have previously heard testimony from the Department of of Justice, and from the U.S. Attorney for the Southern District of New York, who discussed certain completed cases where the Government was successful in overcoming the barrier presented by foreign secrecy laws. Today, I would like to relate to you some specific cases and furnish some information we have gathered on the extent of the problems we are currently encountering in the foreign sector. First, I should like to discuss the subject of takeover attempts financed with foreign funds. Under the Williams bill, the Commission was given authority to require disclosure of information with regard to the acquisition of over 10 percent of a corporation's stock by a person or group, and with regard to the making of a cash tender offer for corporation's stock. Since the Williams bill became effective in July 1968, there have been 91 cash tender offer filings and 13 of these have involved foreign financing. Some of these takeover attempts have been in the news recently, including the contests for MGM, UMC Industries, Roosevelt Raceway and Bath Industries. The MGM case illustrates the advantageous use of foreign financing in a takeover attempt. When the financing arranged in this country was blocked by a Federal court on antitrust grounds, foreign funds were immediately secured in the amount of $32 million. After the initial borrowing was exhausted, an additional $30 million as obtained. These funds were not collateralized to the extent which would have been required by the margin rules had the funds been put up by domestic institutions. As security for the loan, stock with a value of 150 percent of the loan was pledged; in contrast, a U.S. lender under margin rules would have had to require the pledge of stock with a value of 500 percent of the loan. One of the problems that is presented by such activities is the possibility that control of some of our major corporations could shift to interests whose identity may more easily be masked by foreign secrecy laws. If there is a default on the $62 million in loans made to obtain control of MGM, undisclosed interests may acquire the control stock, which was put up as collateral. A similar situation exists with regard to the takeover of UMC Industries by Liquidonics Industries. The controlling interest in UMC was purchased with a loan of $40 million from the Banque de Paris at des Pays-Bas (Suisse). Liquidonics, which received only $36.9 million net proceeds from the loan, quickly went into arrears and was forced to sell out. The majority stock interest in UMC is now owned by a Luxembourg banking subsidiary of the Swiss bank, and plans for the company have not yet been announced by the new owners. |