banks who are no longer photocopying checks but are resorting to other type of machinery or data processing equipment for keeping these records.

Mr. WILLIFORD. No, sir. We know of no other method of storing check data.

Mr. MIZE. Now, you discussed retrieval costs and referred to a cost of 6 cents per hard copy. What do you mean by "hard copy" and what other type of copy would there be?

Mr. WILLIFORD. Hard copy would refer to a paper copy made from the microfilm record. The microfilm industry has developed what they call reader printers, and these machines can reproduce a paper copy of the microfilmed record, and this is what I meant when I referred to "hard copy."

Mr. MIZE. Would it be more or less expensive or about the same if we required microfilming at the place of deposit other than at the bank on which the check is drawn? About six of one, half dozen of the other, I suppose.

Mr. WILLIFORD. Yes, sir. It is. We were discussing this before the hearing, and the microfilming costs would remain the same, as near as we can tell. We can see no reason why it would change regardless of at which end it is microfilmed.

Mr. MIZE. I have no further questions, Mr. Chairman.
Chairman PATMAN. Mr. Annunzio.

Mr. ANNUNZIO. Thank you, Mr. Chairman.

I want to commend the representatives here this morning of the National Microfilm Association for their contribution, and I am sure that it will help us considerably in clearing up any misunderstandings under title I.

Thank you very much.

Mr. WILLIFORD. Thank you.

Chairman PATMAN. May I, speaking for the committee, welcome a new member this morning. He is a veteran in Congress of 10 years, but he has just been selected to be a member of this committee, the House Banking and Currency Committee, the Honorable Clark MacGregor of Minnesota.

Mr. MacGregor, we welcome you, sir. We are glad that you joined us. And you are recognized now to interrogate the witnesses, if you desire.

Mr. GETTYS. Mr. Chairman, I join you in welcoming Mr. MacGregor. He ought to make a speech now; he may not ever get another chance to make another one.

Mr. MACGREGOR. That most recent statement, Mr. Chairman, does not accord with the courtesy and the fairness which I have observed over the years to be the hallmark of the conduct of this committee by its chairman, Wright Patman.

I thank you, Mr. Chairman, for the welcome which you have extended to me as the newest member of the committee on Banking and Currency of the House of Representatives. I am delighted with this assignment. I trust that when I have had a little more time than I have had this morning I might be a constructive member of this committee. For this morning I have no questions of our witnesses, and I thank you, Mr. Chairman.

Chairman PATMAN. Thank you, sir. We are glad to have you.
Mr. Rees.

Mr. REES. Thank you, Mr. Chairman.

In this bill that we are considering now, H.R. 15073, in chapter I, page 1, it states each insured bank shall maintain such records and any other evidence, so that under this bill unless the Secretary changed the regulations it could be possible that there could be up to, say 40 million transactions that would be microfilmed. This will include all checks in the system.

It seems to me quite a cost to put on the consumer, for if their costs go up, they merely pass on the cost to those who write checks. And really the purpose of the bill is not to get at the consumer and the checks he writes; it is to get at those transactions that have to do with large funds, primarily large funds going to foreign banks. Chairman PATMAN. Would you yield there?

Mr. REES. Yes, Mr. Chairman.

Chairman PATMAN. It always has been my understanding that 20 billion checks are issued a year. Is that correct? Twenty billion checks a year. And considering the costs that we already know are being passed on to the taxpayers caused by these problems that we are endeavoring to correct by this law. The amount of money is very insignificant compared to what has been lost already.

For instance, even war contracts have been padded and bribe money has been paid, and many things just as bad as that that hoodlums engage in have been conducted at the expense of the taxpayer and innocent individuals. And I think, looking at the overall picture of harm, the cost contemplated here would be very small indeed. I believe it would, Mr. Rees. We must stop these practices.

Mr. REES. Well, I think the cost then would be about $180 to $200 million a year, if you are assuming 40 billion transactions to be microfilmed.

Chairman PATMAN. Twenty billion transactions, Mr. Rees.

Mr. REES. Twenty billion. I am just wondering with the technology that has been going on in the area of scanning devices that it might be possible to design this bill to actually pick out the type of transaction that this committee is looking at. They have devices in scanning which will be able to automatically and electronically read a good part of the material that is on a check, even that written by hand.

Also, there is the logistical problem of handling checks, there is always a point in the handling of every check where it must be handled by a human being. So that if a check comes in that fits certain criteria for instance, if it is drawn on a bank outside of the country or going to a bank, or to a payee outside of the country and is over $100, this could automatically be put into the automatic device at each bank and could be recorded.

What worries me, Mr. Chairman, is that we are trying to get at about one one-hundredth of 1 percent of the total checks that are written in the United States.

Chairman PATMAN. Well, I am not talking about $180 million. I do not see how you arrive at that figure.

Mr. REES. I would think if you have 20 billion transactions and the average cost of the transaction, I would say, would be around 80 cents per thousand, that you can easily get up to around $180 million, plus there is also the cost of the equipment. I do not know if you amortize your equipment costs or if that is basically labor costs.

Chairman PATMAN. May I suggest, though, Mr. Rees-I know you are a very fine member of this committee and we appreciate your presence on the committee because you have knowledge of things that many of us do not have, and I respect your knowledge and your information and your statements. But I invite your attention to the fact that what has been going on in the world, and the United States in particular. Our taxpayers have been taken advantage of, and I am not sure that the boys on the battlefield have not been taken advantage of. There is plenty of evidence that has disclosed that there has been so much graft and corruption in many of these contracts. It is reasonable to suppose that the actual manufacturer of munitions and supplies, that go to the battlefront, will do anything that is necessary to retrieve any part of this money they have to pay out for bribes and other things that are just as bad by making products that are inferior in quality. And we do not know but what we have much of that material in the pipeline now. Maybe it has not reached the boys on the battlefield, but it probably will reach them. And this involves the security of our Nation. And there are so many things that outweigh even any reasonable cost that would be necessary to make sure that these bad practices are dispensed with by adequate criminal law, with adequate penalties. We have people in the penitentiary right now committed from 5 to 10 years after being convicted of doing what we have discussed here this morning, convicted by juries of their peers and confirmed from the lower court to the highest court in our land.

There is no doubt about the existence of these problems and about the terrible conduct that has been carried on, and innocent people should no longer be required to be subjected to such things as that. And I know that you will take that into consideration in connection with cost. I hope you do.

Mr. REES. Well, Mr. Chairman, I spent 3 years as an infantryman, and I am very familiar with what you are talking about. All I was trying to do is to discuss the art of the technology the last few years

Chairman PATMAN. That is right.

Mr. REES. (continuing). One, the process by which a check is handled in a bank; and number two, what has been happening in the microfilming industry; and number three, what has been happening in the whole area of scanning devices.

Now, I see no reason that we should say every single check in the United States should be recorded when we know exactly the type of checks we are trying to get at.

Chairman PATMAN. I think that can be handled administratively. May I say that the Internal Revenue Service has testified before this committee that they desperately need this bill and the provisions that are in this bill. They are desperately needed to protect the welfare of the people of this Nation, including national security.

Mr. REES. Mr. Chairman, I do not want to in any way adversely effect the nature of our national security, and I will yield back my time.

Chairman PATMAN. Mr. Griffin.

Mr. GRIFFIN. No questions.

Chairman PATMAN. We have finished the interrogation. It will be all right with you, gentlemen, if we submit additional questions to you, any number, even the members who are not here, they may be allowed to do so. When you look over your transcript for correction will you answer those questions? Will that be satisfactory?

Mr. WILLIFORD. Yes, sir. It will.

Chairman PATMAN. We thank each one of you gentlemen very much for your attendance here. And it is, of course, in view of the war and the cheating that has been going on and the bad conduct generally over the world in which we are involved. I consider that you are rendering a great public service by coming here and testifying for the purpose of getting law that will adequately deal with these terrible problems.

We will not ask you to come back unless something comes up that we do not now know about, and if that were to happen we will contact you and agree on some mutually satisfactory time. Satisfactory?

Mr. WILLIFORD. Yes, sir.

Chairman PATMAN. Thank you for your attendance and you are excused for the present.

Dr. M. Magdalena Schoch1 has prepared a report for the committee which discusses Swiss banks, secrecy laws and a number of cases which she has been directly involved in pertaining to foreign bank secrecy. Without objection, I will place this report in the record.

SWISS BANKS AND SECRECY LAWS

(By Dr. M. Magdalena Schoch)

WHAT IS A SECRET SWISS BANK ACCOUNT?

I would like to begin with the question: What is this secret bank account in Switzerland which is being so widely discussed? The answer is quite simple: Every bank account in Switzerland is secret, i.e., protected by the secrecy provision of the Swiss Banking Act, whether it is an ordinary account or a numbered or coded account. The latter constitutes merely an added measure of precaution, so that only a few top officials know the name of the owner. The banker's duty of secrecy is a tradition in all countries, and was recognized in Switzerland as customary law or as a concomitant of the contract between the bank and the client. The Banking Act spelled out this duty in 1934, when Nazi Germany attempted to trace unreported assets held in Switzerland by Germans and particularly by Jews or so-called enemies of the State. It provided, in Article 47(b) that any officer or employee of a bank or any auditor or any officer or employee of the Banking Commission who violates his duty of secrecy, or any one who induces or attempts to induce such a person to commit any such offense shall be punished by a fine (maximum frs. 20,000) or imprisonment (maximum six months) or both; if the offender acted negligently he will be punished by a fine not exceeding frs. 10,000.

Switzerland is one of the few countries which have made violation of bank secrecy a criminal offense.

1 Dr. Schoch is an expert on foreign and international law. She holds a doctor of laws degree from the University of Wurzburg. She has taught international and comparative law at the University of Hamburg. She has served as a research assistant at Harvard Law School and taught graduate courses. She was a consultant on foreign law by the U.S. Office of Economic Warfare.

In 1946 she was appointed Foreign Law Expert of the Claims Division of the U.S. Department of Justice and later in the Office of Alien Property. In this capacity she advised the Department on questions of Swiss law.

She has testified as an expert on Swiss law in a number of cases in district courts. She has also served as a consultant in the capacity of an expert on Swiss law for the Securities and Exchange Commission, Treasury Department, and Internal Revenue Service. She has published numerous articles on Swiss and international law.

Bank secrecy is not, and cannot be, absolute. First of all, the client for whose protection secrecy is enforced, can waive it and authorize the bank to give information on his dealings with the bank to outsiders. Second, Swiss law provides for exceptions. For instance, in cases of attachment and bankruptcy a bank must report to the authorities any assets of the debtor which it holds. Upon the death of a client it must give information to his heirs. These exceptions apply to numbered or coded accounts as well as ordinary accounts. The same is true where a banker is compelled to testify in court. Since practically all cases are tried in cantonal (state) courts, the duty to testify is governed by the procedural codes of the 26 cantons, which override the Banking Act. Briefly, it can be said that in a number of cantons the banks are not exempted from the duty to testify on affairs of their clients in a civil proceeding, and there are just a few cantons which grant bankers a privileged position in criminal proceedings.

THE INTERHANDEL CASE: BANK SECRECY AND ECONOMIC ESPIONAGE

Swiss banking secrecy was dramatized in the famous Interhandel case, in which a Swiss holding company sued the United States in 1948 for the return of assets which the Alien Property Custodian had vested as enemy-owned property. Interhandel was ordered by the American court to produce, in addition to records of its own, the records of its house bank, the Sturzenegger Bank, which the court had found to be in the plaintiff's possession, custody and control. Interhandel resisted the order, relying on the penal provisions for breach of bank secrecy and, in addition, on Article 273 of the Swiss Penal Code, which made it a crime to "elicit a manufacturing or business secret in order to make it available to any foreign official agency or to a foreign organization or private enterprise" either directly or through an agent, and to make such secrets available to such foreign authorities or organization (so-called “economic espionage").

Interhandel's opposition to the court order was re-enforced by an unprecedented action of the Swiss Federal Prosecutor, who in the exercise of his police power impounded the Sturzenegger records in order to prevent the commission of the crimes of economic espionage and breach of bank secrecy. After extensive hearings before a Master and prolonged litigation, the parties, with the consent of the Swiss government, stipulated a method of limited production of the bank records. (The Swiss government had previously consented to the production of the Interhandel books and papers.) A team of Justice Department lawyers went to Basel, Switzerland, where they were permitted to examine and photostat those pages of the bank books which the bank was willing to show, always under strict supervision of a representative of the Federal Prosecutor. Correspondence and other files selected by the bank were sent to Washington for inspection. This happened in the years 1960 to 1962. Finally, the case was settled in 1963. The proceeds of the sale of the shares which had been vested as enemy property were divided under a formula which gave the Government over 218 million dollars and Interhandel over 120 million dollars.

THE I.O.S. CASE

Another leading case in which arguments of bank secrecy and economic espionage were used to avoid the production of documents in an American court is Fontaine and I.O.S., Ltd. (Investors Overseas Services) v. Securities and Exchange Commission. I.Ó.S., a large investment holding corporation and sponsor of the Fund of Funds among others, is a Panamanian corporation which was registered with the SEC as a broker-dealer. The SEC initiated an administrative proceeding against I.O.S. for various violations of the Exchange Act, and ordered it to produce certain records, which were at its headquarters in Switzerland. I.O.S. opposed the order on the ground that compliance would render it punishable in Switzerland for violation of bank secrecy and for economic espionage.

On the basis of expert testimony the District Court for Puerto Rico held that (a) I.O.S. was not a bank under Swiss law, and (b) that in the light of Swiss precedents the provisions of the Swiss Penal Code on economic espionage would not apply to the production of books and records relating to transactions with or for U.S. citizens in accordance with I.O.S.' express undertaking to do so, which was a condition of regustration. (decision of October 3, 1966, 259 Fed. Supp. 880, 889).

In fact the reported cases, leaving aside those in which the Swiss Supreme Court found industrial espionage committed for the benefit of foreign private parties, had all to do with informers who, either directly or through a foreign agent, procured information which they turned over to customs authorities or exchangecontrol offices of a foreign country.