BANK RECORDS AND FOREIGN TRANSACTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP72-00337R000100060001-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 31
• Document Creation Date: December 12, 2016
• Document Release Date: November 15, 2001
• Sequence Number: 1
• Publication Date: March 28, 1970
• Content Type: OPEN

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91ST CONGRESS t HOUSE OF REPRESENTATIVES I REPORT
2d Session No. 91-975
BANK RECORDS AND FOREIGN TRANSACTIONS
MARCH 28, 1970.-Committed to the Committee of the whole House on the
State of the Union, and ordered to be printed
Mr. PATMAN, from the Committee on Banking and Currency,
submitted the following
REPORT
together with
ADDITIONAL VIEWS
[To accompany H.R. 15073]
The Committee on Banking and Currency, to whom was referred
the bill (H.R. 15073) to amend the Federal Deposit Insurance Act
to require insured banks to maintain certain records, to require that
certain transactions in United States currency be reported to the
Department of the Treasury, and for other purposes, having con-
sidered the same, report favorably thereon with amendments and
recommend that the bill as amended do pass.
COMMITTEE AMENDMENTS
The committee amendments are set forth below. Since in some
cases a single committee amendment changes words appearing in
more than one place in the same section, each committee amendment
is separated from the one which follows it by a dash beginning at the
left hand margin. Page and line numbers refer to the reported bill.
Page 1, strike line 3 and insert:
TITLE I-FINANCIAL RECORDKEEPING
Page 1, in the table of chapters after line 4:
After "INSURED BANKS" insert:
AND INSURED INSTITUTIONS
Strike "UNINSURED BANKS" and insert:
OTHER FINANCIAL INSTITUTIONS
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P?ege 2, line 1, after "CHAPTER 1--INSURED BANKS" insert:
AND INSURED INSTITUTIONS
Page 2, after line 2, at the end of the table of sections, insert:
102. Retention of records by :insured institutions.
Page 2, strike lines 8 through 13 and insert in lieu thereof the
foil owing:
"Sic. 21. (a) (1) The Congress finds that adequate records main-
tained by insured banks have a high degree of usefulness in criminal,
tax, and regulatory investigations and proceedings. The Congress
further finds that photocopies made by banks of checks, as well as
records kept by banks of the identity of persons maintaining or
authorized to act with respect to accounts therein, have been of
particular value in this respect.
"(2) It is the purpose of this section to require the maintenance of
appropriate types of records by insured banks where such records
may have a high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings.
Page 3, lines 4 and 5, strike "such" and "as he may deem
appropriate".
Page 3, line 8, strike "may" and insert:
shall
Page, 3; line 12, strike "in accordance with".
Page 3, line 13, immediately before "the regulations of the Secre-
tary" insert:
to the extent that
Page 3, line 13, immediately after "the regulations of the Secre-
tary" insert:
so requ ire
Page 3, line 20, immediately after "is to be deposited or collected"
insert:
, unless the bank has already made a record of the party's identity
pursuant to subsection (c)
Page 4, line 1, immediately after "required to be reported" insert:
or recorded
Page 4, line 8,.strike "additional".
Page 4, line 10, trike "other
Page 4, line 12, strike the closing quotation marks.
Page 4, immediately after line 12, insert the following:
"(h) The Secretary shall make an annual report to the Congress of
his implementation of the authority conferred by this section and any
similar authority with respect to recordkeeping or reporting require-
ments conferred by other provisions of law.
Page 4, immediately after line 17, insert the following:
"(i) Notwithstanding any other provisions of this section the record-
keeping requirements referred to in this section shall not apply to
domestic financial transactions involving less than 8500."
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Page 4, after line 21, insert the following:
Sec. 102. Retention of records by insured institutions
Title IV of the National Housing Act is amended by adding at the
end thereof the following new section:
"SEC. 411.. The Secretary of the Treasury shall prescribe such
regulations as may be appropriate to carry out, with respect to insured
institutions, the purposes set forth in section 21 of the Federal Deposit
Insurance Act with respect to insured banks." ,
Page 5, strike line 5 and insert:
CHAPTER 2-OTHER FINANCIAL INSTITUTIONS
Page 5, in the table of sections after line 6:
After "Congressional findings" insert:
and purpose
Strike "Authority of Secretary" and insert:
Ownership and control
Insert below "122. Ownership and control." the following:
123. Maintenance of records and evidence.
After "123. Maintenance of records and evidence.", change "123"
to "124", "124" to "125", "125" to `.`126", and "126" to "127".
Page 5, line 7, after "Congressional findings" insert:
and purpose
Page 5, strike line 8 and all that follows through page 6, line 4, and
insert:
(a) The Congress finds that adequate records maintained by
businesses engaged in the functions described in section 123(b) of
this Act have a high degree of usefulness in criminal, tax, and regula-
tory investigations and proceedings. The Congress further finds that
the power to require reports of changes in the ownership, control,
and management of types of financial institutions referred to in
section 122 of this Act may be necessary for the same purpose.
(b) It is the purpose of this chapter to require the maintenance of
appropriate types of records and the making of appropriate reports
by such businesses where such records or reports may have a high
degree of usefulness in criminal, tax, or regulatory investigations or
proceedings.
Page 6, line 18, strike "Authority of Secretary" and insert;
Ownership and control
Page 6, strike lines 20 through 23 and insert:
uninsured bank or uninsured institution to make such reports as the
Secretary may require in respect of its ownership, control, and manage-
ment and any changes therein:
Page 7, beginning with line 1, insert the following:
Sec. M. Maintenance of records and evidence'
(a) The Secretary may by regulation require any uninsured bank
or uninsured institution or any person engaging in the business of
carrying on any of the functions referred to in subsection (b) of this
section
Page 7, line 6, strike "(2) To" and insert:
(1) to
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Page 7, line 6, after "(1) to require, retain, or maintain," insert:
with respect to its functions as an uninsured bank or uninsured
institution or its functions referred to in subsection (b),
Page 7, line 9, strike "other".
Page 7, strike lines 13 through 15.
Page 7, line 16, strike "(4) To" and insert:
(2) to
Page 7, after line 22, insert:
(b) The authority of the Secretary under this section extends to any
person engaging in the business of carrying on any of the following
functions:
(1) Issuing; travelers' checks.
(2) Issuing: or redeeming checks, money orders, travelers' checks,
or similar instruments otherwise than as an incident to the
conduct of its own nonfinancial business.
(3) Transferring or transmitting funds or credits domestically
or internatiortally.
(4) Operating a currency exchange or otherwise dealing in
foreign currencies or credits.
(5) Operating a credit card system.
(6) Performing such similar, related, or substitute functions
for any of the foregoing or for banking as may be specified by the
Secretary in regulations.
Page 8, line 14, redesignate section 123 as section 124.
Page 9, line 3, redesignate section 124 as section 125.
Page 9, line 5, immediately after "may assess upon any" insert:
financial
Page 9, line 14, redesignate section 125 as section 126.
Page 9, line 18, redesignate section 126 as section 127
Page 9, line 20, insert a comma after "chapter", and strike "or".
Page 9, line 21, insert at the beginning of the line:
or section 411 of the National Housing Act,
Page 9, line 22, after "tion is" insert:
knowingly
Page 10, after line 2, in the table of chapters:
After "3." strike "DISCLOSURE" and insert:
REPORTS
Strike "CURRENCY AND COIN" and insert:
MONETARY INSTRUMENTS
After "4." strike "DISCLOSURE OF CERTAIN".
Page :11, strike lines 3 through 6 and insert:
(c) The term "person" includes natural persons, partnerships,
trusts, estates, associations, corporations, and all entities cognizable
as legal personalities. The term also includes any governmental depart-
ment or agency specified by the Secretary either for the purpose of this
title generally or any particular requirement thereunder.
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Page 11, after line 12, insert:
(d) The term "United States", used in a geographical sense, includes
the States and the District of Columbia, and to the extent the Secretary
shall by regulation specify, either for the purposes of this title generally
or any particular requirement thereunder, the Commonwealth of
Puerto Rico, the possessions of the United States, United States
military establishments, and United States diplomatic establishments.
Page 11, line 25, after "a commercial bank" insert:
or trust company
Page 12, line 2, strike "a trust company" and insert:
a branch within the United States of any foreign bank
Page 12, at the beginning of line 7, insert:
credit union,
Page 12, strike lines 14 and 15 and insert:
(11) an issuer, redeemer, or casher of travelers' checks, checks,
money orders, or similar instruments.
(12) an operator of a credit card system.
(13) an insurance company.
(14) a dealer in precious metals, stones, or jewels.
(15) a pawnbroker.
(16) a finance or loan company.
(17) any other type of business or institution performing similar,
related, or substitute functions specified by the Secretary by
regulation for the purposes of the provision of this title to which}
the regulation relates.
Page 13, strike lines 1 through 3.
Page 13, line 4, redesignate subsection (g) as subsection (f).
Page 13, strike lines 12 through 14 and insert:
(g) The term "domestic", used with reference to institutions or
agencies, limits the applicability of the provision wherein it appears to
such institutions or agencies to the extent that they perform any
functions as such within the United States.
(h) The term "foreign", used with reference to institutions or
agencies, limits the applicability of the provision wherein it appears
to such institutions or agencies to the extent that they perform any
functions as such outside the United States.
Page 14, after line 10, insert:
(m) The term "monetary instruments" means coin and currency
of the United States, and in addition, such foreign coin and currencies,
and such types of checks, bills, notes, bonds, stock transferable by
delivery, or other obligations or instruments as the Secretary may by
regulation specify for the purposes of the provision of this title to
which the regulation relates.
Page 15, strike lines 6 through 9 and insert:
The Secretary may make such exemptions from any requirement
otherwise imposed under this title as lie may deem appropriate. Any
such exemption may be conditional or unconditional, by regulation,
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order, or licensing, or any combination thereof, and may relate to
any particular transaction, to the type or amount (whether or not
an amount is specified in this title) of the transaction, to the party or
parties or the classification of parties, or to any combination thereof.
The Secretary may in his discretion, in any manner giving actual or
constructive notice to the parties affected, revoke any exemption
made under this section. Any such revocation shall remain in effect
pending any judicial review.
Page 17, line 2, after "where the violation is" insert:
knowingly
Page 18, line 11, strike "Every transaction" and insert:
Transactions
Page 18, line 14, strike "the transaction involves" and insert:
they involve
age 18, line 15, after "United States currency," insert:
or such other monetary instruments as the Secretary may specify,
Page 18, line 20;, strike "Any" and insert:
The report of any
Page 18, line 21, strike "reported" and insert:
signed or otherwise made
Page 19, line 15, insert a comma after "Act" and strike "or".
Page 19, line 1.6, immediately after "Deposit Insurance Act"insert:
or section. 411 of the National Housing Act
Page 20, line 3, strike: "DISCLOSURE" and insert:
REPORTS
Page 20, line 4, strike "CURRENCY AND COIN" and insert:
MONETARY INSTRUMENTS
Page 20, lines 10 and 11, strike "currency or coin of the United
States" and insert:
monetary instruments
Page 20, lines 20 and 21, strike "currency or coin of the United
States" and insert:
monetary instruments
Page 20, line 21, strike "its" and insert:
their
Page 21, lines 12 and 13, strike "currency or coin" and insert:
monetary instruments
Page 21, lines 16 and 17, strike "currency or coin is" and insert:
monetary instruments are
Page 21, lines 21 and 22, strike "currency or coin is" and insert:
monetary instruments are
Page 21, line 22, strike "it is" and insert:
they are
Page 21, lines 24 and 25, strike "currency and coin" and insert:
monetary instruments
Page 22, lines 2 and 3, strike "coin or currency" and insert:
monetary instruments
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Page 22, lines 4 and 5, strike "coin or currency" and insert:
monetary instruments
Page 20, lines 12 and 13, strike "subject to the jurisdiction of" and
insert:
within
Page 20, line 14, strike "not subject to the jurisdiction of" and
insert:
outside
Page 20, lines 16 and 17, strike "subject to the jurisdiction of" and
insert:
within
Page 20, line 18, strike "not subject to the jurisdiction of" and
insert:
outside
Page 20, line 22, strike "any place subject to the jurisdiction of".
Page 21, lines 1 and 2, strike "not subject to the jurisdiction of"
and insert:
outside
Page 22, line 8, strike "coin or currency" and insert:
monetary instruments
Page 22, line 9, strike "is" and insert:
are
Page 22, line 12, strike "is" and insert:
are
Page 22, lines 14 and 15, strike "coin or currency" and insert:
monetary instruments
Page 22, line 16, strike "is" and insert:
are
Page 22, line 17, strike "it is" and insert:
they are
Page 22, line 19, strike "it is" and insert:
they are
Page 23, line 4, strike "coin and currency" and insert:
monetary instruments
Page 23, strike line 14 and all that follows through page 25, line 4
and insert:
CHAPTER 4.-FOREIGN TRANSACTIONS
S7.
241. Records and reports required.
242. Classification and requirements.
Sec. 241. Records and reports required
The Secretary of the Treasury shall by regulation require any
resident or citizen of the United States, or person in the United
States and doing business therein, who engages in any transaction or
maintains any relationship, directly or indirectly, on behalf of himself
or another, with a foreign financial agency to maintain records or to
file reports, or both, setting forth such of the following information,
in such form and in such detail, as the Secretary may require:
(1) The identities and addresses of the parties to the transac-
tion or relationship.
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(2,1 The legal capacities in which the parties to the transaction
or relationship are acting, and the identities of the real parties in
interest if one or more of the parties are not acting solely as
principals.
(3) A description of the transaction or relationship including
the amounts of money, credit, or other property involved.
Sec. 242. Classification and requirements
With respect to any requirement imposed under this chapter, the
Secretary may prescribe
(1) any reasonable classification of persons subject thereto or
t,xempt therefrom.
(2) the foreign country or countries as to which any require-
ment applies or does not apply if, in the judgment of the Secre-
lary, uniform applicability of any such requirement to all foreign
countries is unnecessary or undesirable.
(3) the form, frequency, and manner of filing of any required
reports.
(4) types of transactions or relationships subject to or exempt
from any such requirement.
(5) the magnitude of transactions or values involved in any
relationship subject to any such requirement.
(6) such other matters as he may deem necessary to the
application of this chapter.
Page 26, after line 19, insert:
TITLE III-MARGIN REQUIREMENTS
Sec. 301. Amendment of section 7(a) of the Securities Exchange
Act of 1934
(a) Section 7(a) of the Securities Exchange Act of 1934 (15 U.S.C.
78g(a)) is amended by striking the first sentence and inserting in lieu
thereof the following: "For the purpose of preventing the excessive
use of credit for the purchase or carrying ofdsecurities, the Board of
Governors of the Federal Reserve System shall from time to time
prescribe rules and regulations in accordance with this section. The
Board shall prescribe rules and regulations with respect to the amount
of credit. (regardless of who or where the lender may be) that any
person may initially obtain and subsequently retain on any security
(other than. an exempted security). The Board shall prescribe rules
and regulations with respect to the amount of credit (regardless of
who or where the borrower may be) that any person may initially
extend and subsequently maintain on any security (other than an
exempted security). It shall be unlawful for any person to obtain or
retain credit in willful and knowing violation of any rule or regulation
under this section. It shall be unlawful for any person to obtain or
retain credit in violation., whether or not willful or knowing, of any
rule or regulation under this section either on the basis of a material
misrepresentation made or participated in by him of the purpose for
which the credit is to be used, or in an aggregate amount exceeding
$1,000,000 at any one time."
(b) The amendment made by subsection (a) of this section does not
affect the continuing: validity of any rule or regulation under section 7
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of the Securities Exchange Act of 1934 in effect prior to the effective
date of the amendment.
Page 28, beginning on line 1, insert:
TITLE IV-EFFECTIVE DATES
Sec. 401. Effective dates
(a) Except as otherwise provided in this section, this Act and the
amendments made thereby take effect on the first day of the seventh
calendar month which begins after the date of enactment.
(b) The Secretary of the Treasury may by regulation provide that
any provision of title I or II or any amendment made thereby shall be
effective on any date not earlier than the publication of the regulation
in the Federal Register and not later than the first day of the thirteenth
calendar month which begins after the date of enactment.
(c) The Board of Governors of the Federal Reserve System may by
regulation provide that the amendment made by title III shall be
effective on any date not earlier than the publication of the regulation
in the Federal Register and not later than the first day of the thirteenth
calendar month which begins after the date of enactment.
[End of Committee Amendments]
11. Rept. 91-975-2
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NEED FOR THE LEGISLATION
GrENERAL DESCRIPTION OF THE BILL
The bill deals with two major problem areas in law enforcement.
The first is that of financial recordkeeping by domestic banks and
certain other domestic financial. institutions. The second is the use by
American residents of foreign financial facilities located in jurisdictions
with various types of secrecy laws.
The bill contains three substantive titles. Title I requires the Sec-
retary of the Treasury to prescribe regulations whereby insured. banks,
insured institutions, and other financial institutions must maintain
appropriate types of records which have, or may have, a high degree
of usefulness in criminal, tax or regulatory investigations or pro-
ceedings. Title II provides for records and reports of domestic currency
transactions, exports and imports of monetary instruments and records
and reports of foreign. transactions by residents or citizens of the
United States or persons doing business therein. Title III amends
Section 7(a) of the Securities and Exchange Act of 1934, to make it
unlawful for persons to obtain or retain credit in violation of rules or
regulations issued pursuant to that Section.
FINANCIAL RECORDKEEPING
During the last decade, law enforcement agencies have found that
the increasing growth of our financial institutions has been paralleled
by an increase in criminal activity utilizing these institutions. Petty
criminals, members of the underworld, those engaging in "white col-
lar" crime and income tax evaders use, in one way or another, financial
institutions in carrying on their affairs. According to law enforcement
officials, an effective fight on crime depends in large measure on the
maintenance of adequate and appropriate records by financial institu-
tions. H. R. 15073 deals with the problem by requiring the maintenance
of records by financial institutions in a manner designed to facilitate
criminal, tax and regulatory investigations and proceedings. Admin-
istrative agencies are given the flexibility to avoid the imposition of
unwarranted and burdensome reporting and recordkeeping require-
merits,. 1Vlost of the records required to be maintained under the bill
are already kept by most financial institutions, so the regulations
should impose almost no additional expense upon those affected.
It should be borne in mind that records to be maintained pursuant to
the regulations of the Secretary of the Treasury will not be made
automatically available for law enforcement purposes. They can only
be obtained through existing legal process.
1A)
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Types of Records To Be Kept
PHOTOCOPYING OF CHECKS AND IDENTIFICATION OF DEPOSITORS
In recent years a few sizable banks have abolished or limited the
practice of photocopying checks, drafts and similar instruments drawn
on them and presented to them for payment. This failure to maintain
photocopies of checks has frustrated, law enforcement personnel in
securing evidence necessary to criminal, tax and regulatory investiga-
tions and proceedings. Many cases have either been dropped or their
conclusion has been long delayed because of the difficulty or impossi-
bility of obtaining photocopies or records of essential checks, drafts or
similar instruments. The bill requires photocopying of checks, drafts
or similar instruments drawn and presented to a bank for payment.
Checks, drafts or similar instruments received by a bank for deposit and
collection need only be recorded. The recordkeeping requirements of
title I of the bill do not apply to domestic financial transactions in-
volving less than $500.
The photocopying requirements of the bill will. not significantly
increase the cost to the affected financial institutions. Most banks and
other financial institutions already maintain the types of records
contemplated by the bill. In addition, the cost of microfilming checks
and similar drafts is minimal. It has been estimated that the average
cost including labor and equipment for microfilming checks for banks
ranges from less than 1y, mils for small-scale operations down to 32 mil
or less for large-scale operations. By comparison with a 10 cent per
check service charge, the photocopying cost is negligible.
The identification of depositors and those authorized to deal with
respect to accounts presents a related law enforcement problem. Most
domestic financial institutions clearly identify their customers and
such identification is readily available.
However, the identity of persons who actually deal with accounts
cannot be ascertained in many cases. For example, a subpoena may
produce an accurate record of the activity in an account, but little
may be known about the individuals, other than the account holders,
who make deposits and withdrawals. In many cases the identity of
such individuals provides an important key in the investigation
and prosecution of criminal activity. Thus, the bill requires the
maintenance of records and evidence of the identity of each individual
authorized to act with respect to an account as well as the identity
of the account-holder.
DOMESTIC CURRENCY
Criminals deal in money-cash or its equivalent. The deposit and
withdrawal of large amounts of currency or its equivalent (monetary
instruments) under unusual circumstances may betray a criminal
activity. The money in many of these transactions may represent
anything from the proceeds of a lottery racket to money for the
bribery of public officials.
Law enforcement agency representatives have strongly urged
legislation which would require reports of such transactions by the
institution involved as well as the individuals concerned. Reports
along this line have been required by Treasury Department regula-
tions for a number of years (31 CFR 102). These regulations were
issued under the Trading with the Enemy Act (31 U.S.C. 427). II.R.
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15073, requires reports of cash transactions involving such amounts,
or taking place under such circumstances, as theecretary of the
Treasury shall be regulation prescribe. These reports must be signed
both by the domestic financial institution involved and by one or
more of the other parties thereto. These reports may be of consider-
able value to law enforcement agencies in criminal. investigations and
proseinations.
Foreign Transactions
Considerable testimony was received by the Committee fro;n the
Justice lOepartanen'>, the United States Attorney for the Southern Dis-
trict of New York, the Treasury Department, the Internal Revenue
Service, the Securities and Exchange Commission, the Defense Depart-
ment and the Agency for International Development about serious
and widespread use of foreign financial facilities located in secrecy
.jurisdictions for the purpose of violating American law. Secret foreign
bank accounts acid secret foreign financial institutions have permitted
proliferation of "white collar" crime; have served as the financial
undermining of organized criminal operations in the United States;
have been utilized by Americans to evade income taxes, conceal assets
illegally and purchase gold; have allowed Americans and others to
avoid the law and regulations governing securities and exchanges; have
served as essential ingredients in frauds including schemes to defraud
the United States; have served as the ultimate depository of black
market proceeds from Vietnam; have served as a source of questionable
financing for conglomerate and other corporate stock acquisitions,
mergers and takeovers; have covered conspiracies to steal from U.S.
defense anti foreign aid funds; and have served as the cleansing; agent
for "hot,''' or illegally obtained monies.
Case after case illustrating the foregoing were brought before the
Committee. Many of the cases have been in the investigative stage for
years. United States law enforcement agencies are often delayed or
totally frustrated when wrongdoers cloak their activities in the shield
of foreign financial secrecy. =
The debilitating effects of the use of these secret institutions on
Americans and the American economy are vast. It has been estimated
that hundreds of millions in tax revenues have been lost. Unwarranted
and unwanted credit is being pumped into our markets. There have
been some cases of corporation directors, officers and employees who,
through deceit and violation of law, enriched themselves or endan-
gered the financial soundness of their companies to the detriment of
their stockholders. Criminals engaged in illegal gambling, skimming,
and narcotics traffic are operating their financial affairs with an
impunity that approaches statutory exemption.
When law enforcement personnel are confronted with the secret
foreign bank account or the secret financial institution they are dlaced
in an impossible position. In order to receive evidence and testimony
regarding activities in the secrecy jurisdiction they must subject
themselves to a time consuming and ofttimes fruitless foreign legal
process. Even when procedural obstacles are overcome, the foreign
jurisdictions rigidly enforce their secrecy laws against their own
domestic institutions and employees.
One of the most damaging effects of an American's use of secret
foreign financial facilities is its undermining of the fairness of our
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tax laws. Secret foreign financial facilities, particularly in Switzerland,
are available only to the wealthy. To open a secret Swiss account
normally requires a substantial deposit, but such an account offers a
convenient means of evading U.S. taxes. In these days when the
citizens of this country are crying out for tax reform and relief,
it is grossly unfair to leave the secret foreign bank account open as a
convenient avenue of tax evasion. The former U.S. Attorney for the
Southern District of New York has characterized the secret foreign
bank account as the largest single tax loophole permitted by American
law.
In devising legislation to repair this huge gap in law enforcement,
your committee considered it of high importance not to unduly
interfere with the domestic law of any other nation, not to create
obstacles to the free flow of legitimate international trade and com-
merce. Thus, the legislation was directed toward Americans and those
doing business in the United States, and the administrative agency
selected, the Treasury Department, was given wide flexibility to
assure the uninterrupted flow of international commerce and trade.
Most of the knowledgeable witnesses before the Committee urged
that the legislation be directed toward Americans and those subject
to United States jurisdictions in order to avoid claims of undue
interference with foreign law. This comports with the Committee's
general purpose-to put an American or person doing business in the
United States in the same position with regard to his secret foreign
transactions as he would be if he were dealing with a domestic United
States institution.
Hence, the bill requires that any resident or citizen of the United
States or person doing business therein who engages in any transaction
or maintains any relationship with a foreign financial agency to
maintain records or to file reports setting forth pertinent information.
Again, it must be emphasized that the records required to be main-
tained are accessible only through legal process.
Obviously, the Secretary could impose recordkeeping and reporting
requirements which would create a substantial and harmful burden
on the free flow of legitimate international commerce or could result
in a requirement of much valueless paperwork, but your committee
has every confidence that he will not, especially in view of his broad
powers of exemption.
Exports of Monetary Instruments
The bill imposes no legal limitation on the export of U.S. currency
from the United States to foreign jurisdictions. Those leaving the
United States have always been free to take with them such amounts
of cash or other forms of money as they choose. For years American
criminal elements have been taking or sending currency out of the
United States either in furtherance of a criminal activity or for deposit
in a secret foreign haven. The money may come from criminal activi-
ties, skim money from gambling operations and the like. Moreover,
many Americans have used couriers to send money to foreign juris-
dictions with secrecy laws for the purpose of evading taxes and other-
wise hiding assets. There is a courier or "hand payment" system which
provides this service for fees ranging from 2 per cent to.5 per cent of the
funds carried out. The reporting procedure required by the bill will
close a serious investigative loophole.
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Margin Requirements
Forei n investment in the American market has assumed vast
proportions. In 1968, foreign purchases of U.S. corporate stock
totalrod $13 billion with a' net investment of approximately $2.3
billion. It is estimated that in 1969 such stock purchases were more than
$9 billion with a net investment of approximately $1 billion. In addi-
tion, over $2 billion worth of securities were issued in 1969 by sub-
sidiaries of American corporations in Eurodollar financing. Since the
enactment of Public Law 90-439 in 1968 requiring the disclosure of
info rinaation with regard to certain stock acquisitions, there have been
91 cash tender offer filings,!, 13 of which involved foreign financing.
A substantial part of this foreign-based investment comes from
jurisdictions with financial secrecy laws.
According to the Securities and Exchange Commission, this growth
of foreign investment has given rise to a number of questionable
practices. Americans and others, using the facade of secret foreign
banks, can .purchase securities in our market ignoring the Federal
Reserve Board's regulations on margin requirements and for the pur-
pose of evading income takes. American companies are subject to
takeovers or the acquisition of substantial interests by those about
whom. little or nothing is known. Criminal elements infiltrate and con-
trol substantial segments of American businesses through securities
purch ases and financing by secret foreign sources. Several of the recent
corporate takeovers and acquisitions have involved security considera-
tions in that defense contractors or other sensitive American industries
became the target.
When foreign financial secrecy is imposed upon the natural com-
plexity of some of these transactions, it is virtually impossible for the
Securities and Exchange Commission to know whether any laws are
being violated. Moreover, the Securities Exchange Act of 1934 is
primarily a disclosure act and with foreign financial secrecy, there can
be no full disclosure. This legislation will remedy much of this problem
by extending the applicability of margin requirements under section 7
of the Securities Exchange Art to the purchasers of stock as well as to
broker-dealers and financial ! institutions who lend money for that
purpose.
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SECTION-BY-SECTION EXPLANATION OF PURPOSES
AND LEGAL EFFECT OF THE BILL
Bank Recordkeeping
The first section of the bill (section 101, beginning at line 3 of page 2)
amends the Federal Deposit Insurance Act by adding a new section 21
which imposes certain recordkeeping requirements on all insured
banks. Before discussing the purpose and nature of these requirements,
the reason for incorporating them into the Federal Deposit Insurance
Act should be explained.
Section 8 of the Federal Deposit Insurance Act sets up a comprehen-
sive procedure for the enforcement of certain types of legal require-
ments imposed on insured banks. Moreover, such banks are in all
cases examined by a Federal bank supervisory agency. Part of the
purpose of the examination, again, is to insure compliance with
applicable law. The recordkeeping requirements of this bill have been
incorporated into the Federal Deposit Insurance Act first, to make
clear that the Federal examiners and supervisory agencies are re-
sponsible for enforcing compliance, and second, to make clear that
the enforcement machinery set up in section 8 of the Federal Deposit
Insurance Act will be available to those agencies if needed.
CONGRESSIONAL FINDINGS
Section 21(a)(1) sets forth the finding by Congress-that
adequate records maintained by insured banks have a high
degree of usefulness in criminal, tax, and regulatory in-
vestigations and proceedings. The Congress further finds
that photocopies made by banks of checks, as well as records
kept by banks of the identity of persons maintaining or
authorized to act with respect to accounts therein, have
been of particular value in this respect.
The foregoing findings appear to be amply supported by the record
of hearings before your committee. As introduced, H.R. 15073 would
have required the photocopying of all checks by the bank on which
drawn. This requirement was very plainly set forth in a number of pre-
liminary drafts which were submitted to both the Department of the
Treasury and the Department of Justice. In some of the earlier drafts,
the photocopying requirement extended to checks deposited as well as
those finally paid or returned by the drawee bank. At the suggestion of
the Treasury Department, the final version of the bill as introduced
included only a requirement of photocopying by the drawee bank.
The Department of Justice unequivocally supported the bill as
introduced. The reasons are obvious. The cost is minimal, ranging
from 132 down to 32 mil per check. Moreover, even this minimal cost
would not ordinarily represent a net cost to the bank, since most
banks already photocopy all such items.
(15)
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Thor, importance of photocopies of checks to effective law enforce-
ment, especially where white-collar crimes are concerned, simply
cannot be overestimated. The recipient of a direct or indirect bribe,
for example, will make no record of his receipt of the money, and the
person who wrote the check will take pains to see that it is totally
destroyed after cancellation. In many instances, payments by check
which are not necessarily illegal in and of themselves may constitute
the only way that the prosecution can establish the existence of a
relationship or pattern of conduct which may be essential to making
its case.
Finally, the maintenance of check photocopy records by banks
raises no constitutional issues and poses no threat to individual
liberty. As has been pointed out, banks have wide experience with
maintaining these records, and the banking industry has a creditable
record of maintaining their confidentiality. There is nothing in this
bill which would make such records any more accessible to law en-
forcement officers, much less anyone else, than they now are. At a
time when other agencies of the Government are engaged in strenuous
efforts to fashion now weapons in the war on crime, it would be most
surprising if informed and responsible elements of the banking com-
munity were to oppose the retention of check photocopying, a law
enforcement aid of minimal cost, proven value, and undoubted
constitutionality.
STATEMENT OF PURPOSE
Section 21(a) (2) states-
It is the purpose of this section to require the maintenance
Of appropriate types of records by insured banks where such
records may have a high degree of usefulness in criminal,
tax, or regulatory investigations or proceedings.
Read in conjunction with the findings set forth in section 21(a)(1)
and the requirement in section 21(b) that the Secretary "shall pre-
scribe regulations to carry out the purposes of this section," this
statement of purpose leaves the Secretary little choice but to require,
upon the effective date of the legislation, that banks photocopy all
checks except for those exempt under subsection (i), discussed below.
It should be made clear, however, that the Secretary's duty to
impose such a requirement is neither absolute nor permanent. The
actual photocopying requirement, as set forth in section 21(d) (a), is
that each insured bank "shall make, to the extent that the regulations of
the Secretary so require, a photocopy or other copy of each check, draft,
or similar instrument drawn on it and presented to it for payment
[emphasis supplied]." Likewise, section 21(f) provides that "in addi-
tion to or in lieu of the records and evidence otherwise referred to in
this section, each insured bank shall maintain such records and evi-
dence as the Secretary may prescribe to carry out the purposes of
this section [emphasis supplied]."
In other words, if the Secretary finds that other kinds of records of
demand deposit activity would be just as useful or more useful from
a law enforcement standpoint, he would be legally empowered to make
appropriate changes in the regulations.
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EXCLUSIONS OF DOMESTIC TRANSACTIONS LESS THAN $500
The committee adopted an amendment adding a new subsection (i)
to section 21 as follows:
(i) Notwithstanding any other provision of this section
the recordkeeping requirements referred to in this section
shall not apply to domestic financial transactions involving
less than $500.
This amendment would appear to be of interest primarily to those
banks which are so small that they conduct all their bookkeeping
operations manually. There is no way to tell whether any given
check has cleared through a foreign bank except by a careful inspection
of the endorsements. It is far cheaper to make a photocopy than. it is
to make such an inspection.
THE "KNOW YOUR CUSTOMER" PROVISION
Section 21(c) reads as follows:
(c) Each insured bank shall maintain such records and
other evidence as the Secretary shall require of the identity
of each person having an account with the bank and of each
individual authorized to sign checks, make withdrawals, or
otherwise act with respect to any such account.
Most banks, for their own protection, already make some check
on the identity of their customers. This provision of the bill would
require the Secretary to set minimum standards in this regard. These
would in no way preclude any bank from going beyond the minimum
requirements. These records would, of course, be confidential.
RELATIONSHIP TO TITLE II
Section 21(e) makes a cross reference to title II of the bill, which
has the short title of the Currency and Foreign Transactions Reporting
Act. Section 21(e) provides that where an individual engages in a
transaction with an insured bank which is required to be reported or
recorded under that Act, the bank must require and retain such
evidence of the identity of that individual as the Secretary may
prescribe as appropriate under the circumstances. Here, again., the
bill prescribes no more than what most bankers would regard as
prudent practice. Law enforcement officials have, however, en-
countered difficulties as a result of the lax practices of some institu-
tions, and this provision of the bill is designed to remedy this
condition.
RECORDS OF CHECKS RECEIVED
Section 21(d) (2) requires each insured bank to "make, to the
extent that the regulations of the Secretary so require, a record of
each check, draft, or similar instrument received by it for deposit or
collection. ." It is contemplated that normally, all that would be
required under this provision is the deposit slip. However, the Secre-
tary could require photocopying of checks received under certain
circumstances, as for example in cash letters from foreign countries.
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Conservative Approach of Section 21
Although. section 21 provides reasonable latitude for the exercise of
administrative discretion, as well as the flexibility to adjust to changing
conditions, its basic thrust is simple and easy to understand. It pro-
vides that insured banks shall make and retain adequate records of
deposit account activity, in particular, photocopies of checks, it type of
record which has already been proven to be of great value in law en-
forcement. Beyond that, it enjoins upon banks the requirement that
they maintain prudent practices in identifying those with whom they
deal. By no stretch of the imagination can any of these requirements be
considered novel, far reaching, or onerous. On the contrary, they are
traditional, conservative, and economical.
Your committee considered and rejected an alternative proposal
to grant the Treasury an almost unlimited administrative authority to
require banks to keep any type of records determined by the Secre-
tary to be "likely to have a high degree of usefulness in criminal, tax,
or regulatory investigations or proceedings." It would not even be
necessary for the Secretary to determine that any new recordkeeping
requirements he might impose had been shown to be of value in cases
where they had been kept voluntarily. All he need make is his own
determination that the records would be likely to have a high degree
of usefulness for the stated purposes.
It was never made clear exactly how the authority would be used,
but there were suggestions of selective requirements. The whole con-
cept of selective reccrdkeeping requirements raises disturbing ques-
tions. How much discretion would be confided to the financial institu-
tion? Would it be obligated to tell a customer when his transactions
were of such a nature as to call into play special recordkeeping require-
ments? A majority of your committee was of the opinion that with
such questions scarcely raised,'; much less answered, by the Treasury
testimony, it would be tantamount to an abdication of legislative
responsibility to grant to the Treasury such sweeping administrative
authority.
INSURED INSTITUTIONS
Section [02 of the bill adds a new section 411 to title IV of the
National Housing Act. This section provides as follows:
Sec. 411. The Secretary of the Treasury shall prescribe
such regulations as may be appropriate to carry out, with
respect to insured institutions, the purposes set forth in sec-
tion 21 of the Federal. Deposit Insurance Act with respect
to insured banks.
The "insured institutions" referred to above are savings and loan
associations insured by the Federal Savings and Loan Insurance
Corporation. The recordkeepin requirements with respect to demand
deposit account activity would have little or no application to such
institutions, as they do not offer demand deposit services. To the
extent, however, that such services might be or become available, they
should be covered. Also, records of the identity of customers of these
institutions are desirable to virtually the same extent as records of
the identity of bank customers.
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OTHER FINANCIAL INSTITUTIONS
As introduced, chapter 2 of title I of the bill dealt only with un-
insured banks, that is, banks not insured by the Federal Deposit
Insurance Corporation. At the request of the Treasury, coverage of the
chapter was broadened to make it apply to any business which supplies
a means for transferring or transmitting funds or credits domestically
or internationally. Included would be issuers of travelers checks and
operators of credit card systems. The specific functions are set forth at
page 8 of the bill, lines 1 through 13. The bill also imposes on unin-
sured banks and uninsured institutions a requirement to report changes
in ownership, control, or management to the Treasury. This is similar
to the requirement already Federal imposed Dundee Inexistin suragclawct on insured
banks by section 7(j) the
ADMINISTRATION AND ENFORCEMENT
No specific provision is made in the bill for the enforcement of its
requirements with respect to insured banks and insured institutions.
This is because the necessary legal and administrative machinery is
already in existence. Such is not the case, however, with respect to
other institutions. For that reason, chapter 2 contains such provisions.
Section 124 authorizes injunctive relief, and section 125 permits the
imposition of a civil penalty not exceeding $1,000 for each violation.
PROCEDURE FOR RECOVERY FOR CIVIL PENALTY
The civil penalty provisions in sections 125 and 207 of the bill, as
well as the forfeiture provision in section 232 would all be governed
by chapter 163 (sections 2461 through 2465) of title 28, United States
Code. These provisions established a five-year statute of limitations,
put the burden of proof on the Government, and require proof by a
preponderance of the evidence. This burden is less strict than the
"beyond a reasonable doubt" test applied in criminal actions.
CRIMINAL PENALTIES
Section 126 makes violation of any regulation of the Secretary a
misdemeanor punishable by a fine not exceeding $1,000 or imprison-
ment for not more than one year. Section 127 provides that where a
violation is knowingly committed in furtherance of the commission
of a Federal felony, it is punishable by a fine of $10,000 or imprison-
ment for not more than five years.
Title II-Reports of Currency and Foreign Transactions
The principal purpose of title II of the bill is to furnish American
law enforcement authorities with the tools necessary to cope with the
problems created by so called secrecy jurisdictions. Some of these
jurisdictions simply do not recognize cheating on taxes, violations of
securities laws, and many other acts as criminal. Neither their law
enforcement authorities nor their banking institutions will afford
the slightest cooperation to American authorities. It is not feasible
and it is not the purpose of this bill to attempt to apply American
law in foreign countries. But it is feasible, and it is the purpose of the
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bill, to authorize the imposition of recordkeeping and reporting
requirements on those in the United States who deal with foreign
financial agencies.
Title .II is divided into four chapters. The most important of these
is chapter 4, which authorizes recordkeeping and reporting require-
ments with respect to relationships and transactions with foreign
financial agencies. Chapter 2 provides a clear statutory basis for the
type of reporting requirements which the Treasury has already
imposed under the Trading With the Enemy Act with respect to
domestic currency transactions. Chapter 3 requires reports of exports
and imports of monetary instruments, and chapter 1 sets out the
general ].)revisions applicable to the entire title.
Sec. 201. Short title
The short title of this title is the Currency and Foreign Transactions
Reporting Act.
Sec. 202. Purposes
The purposes of title II are intentionally stated in much. broader
terms than those of title I. They 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.
Sec. 203. Definitions and rules; of construction
These are generally self-explanatory and appear in the bill begin-
ning at line 14 of page 10.
Sec. 204. Regulations
This section authorizes the' Secretary to prescribe such regulations
as he may deem appropriate to carry out the purposes of the title.
Sec. 205. Compliance procedures
This section authorizes the Secretary to require any class of domestic
financial institutions to maintain appropriate procedures to assure
compliance with the requirements imposed under the title. This section
is of vital importance. In most instances of noncompliance, it would
be difficult or impossible to show a willful intent to violate the law
or regulations, but more isolated lapses ought not ordinarily be the
occasion for the imposition of heavy penalties. On the other hand,
where a financial institution fails to properly train or supervise its
employees, recurrent violations can be expected. This section attacks
the problem directly and in a Way which is more likely to be fair and
effective than the imposition of civil or criminal penalties for partic-
ular violations.
Sec. 206. Exemptions
This section confers on the Secretary an exemptive power. The
practical effect of this section, coupled with the structure of the provi-
sions conferring regulatory authority, is that a regulatory scheme can
be fashioned which is as broad or as narrow, as general or as selective,
as the situation requires. For example, the Secretary might exempt
whole classes of financial institutions from the reporting requirements
otherwise imposed under chapter 3, but this exemption could be so
designed. as to be revocable with respect to any particular institution
that might appear to be abusing the privilege.
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Sec. 207. Civil penalty
This section authorizes a civil penalty not exceeding $1,000 for will-
ful violations. The availability of relatively modest sanctions is of great
importance in assuring compliance with regulations of the type con-
templated by this bill. A few years ago, your committee, at the request
of the Commerce Department, made civil monetary penalties available
for the enforcement of the Export Control Act. When this Act was
superseded by the Export Administration Act of 1969, the penalty
structure was carried forward without change, and its availability is
believed to contribute to the successful administration of the Act. The
procedure for the collection of such penalties has been discussed in
connection with it similar provision in title I.
Sec. 208. Injunctions
This section authorizes the Secretary to obtain injunctive relief
against actual or threatened violations of the Act.
Sec. 209. Criminal penalty
This section makes willful violation a misdemeanor punishable by
a fine of up to $1,000 or imprisonment for not more than a year.
Sec. 210. Additional criminal penalty in certain cases
Where a violation is knowingly committed in furtherance of the
commission of any other violation of Federal law or as part of a
pattern of illegal activity involving transactions exceeding $100,000
in any twelve month period, the violation is made a felony punishable
by it fine not exceeding $500,000 or imprisonment for not more than
five years. It should be noted that serious violations under this title
may involve very large sums of money, and fines of as much as
$10,000 or more might be shrugged off as a mere cost of doing business.
To have any real deterrent effect, the potential fine must be large
enough to have some real economic impact on potential violators.
Sec. 211. Immunity of witnesses
This section authorizes the granting of immunity from prosecution
to a witness who claims the Fifth Amendment privilege against self-
incrimination. It is traditional in structure, both procedurally and sub-
stantively. The immunity is granted by the court upon the application
of the district attorney with the approval of the Attorney General.
Substantively, the immunity covers ` any transaction, matter, or thing
concerning which he is compelled . . . to testify or produce evidence".
Such a provision is particularly important in connection with legisla-
tion such as this, where there may be a heavy involvement of organized
crime or at least cooperation if not conspiracy on the part of a number
of persons. The power to grant immunity from prosecution under these
circumstances can be a crucial factor in unravelling a pattern of
criminal activity.
It was suggested to your committee that this provision be dropped
from the bill on the grounds that the same subject matter is covered
in S. 30, the Organized Crime Control Act of 1969, which has passed
the Senate and is now pending before the House of Representatives.
Several observations are in order. First and most obvious, there
can be no certainty that S. 30 will I)ass, or that if passed, the immunity
provisions will remain in the final version. Second, and perhaps even
more importantly, the immunity provisions of S. 30 are constructed
on the basis of a constitutional theory which has yet to be put to a
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definitive test in the Supreme Court. The witness is not granted
immunity from prosecution. Rather, it is provided that neither the
testimony he is compelled to give, nor any "evidence or other in-
formation which is obtained by the exploitation of such testimony"
may be used against him in any criminal case. Such an immunity
arguably meets the literal requirements of the Fifth Amendment, but
it cannot be said with assurance that the Supreme Court will hold
that the immunity under this approach is coextensive with the
privilege as that Court has heretofore interpreted it. If the immunity
provisions of S. 30 are enacted and upheld, the enactment of section
211 of this bill would do no harm. If, on the other hand, the immunity
provisions of S. 30 do not become and remain effective, thou the
absence of section 211 would constitute a serious handicap to law
enforcement.
Chapter 2-Domestic Currency Transactions
Sec. 221. Reports of currency transactions required
This section requires that transaction with any domestic financial
institution involving; the payment, receipt, or transfer of monetary
instruments be reported in accordance with the regulations of the
Secretary if they are in such amounts, denominations, or both, were
under such circumstances, as he shall by regulation prescribe. As
introduced, the bill covered only United States currency, that is,
paper currency such as Federal Reserve notes and United States
notes. At the suggestion of the Treasury, the provisions were broadened
to cover monetary instruments, which is a defined term theoretically
reaching as far as personal hecks. It is not the intention of your
committee, however, that this broadened authority be expanded any
further than necessary to cover those types of bearer instruments
which may substitute for currency.
Sec. 222. Persons required to, file reports
The bill requires that reports be filed both by the financial institution
involved and by one or more of the other parties to or participants in
the transaction, as the Secretary may require. The purpose of this is
twofold. First, it permits the prosecution of a person who supplies
false information for such a report and signs it. Secondly, it relieves
the institution of any pressure the Secretary of the Treasury might
otherwise be inclined to exert to require it to submit reports of this
type without notifying the customer. The latter procedure raises
serious questions in respect of the fiduciary duty of financial institu-
tions to their customers, not to mention the right of privacy or
simple, fairness.
Sec. 223. Reporting procedure
This section permits the reports to be filed through the financial
institutions involved.
Chapter 3-Reports of Exports and Imports of Monetary
Sec. 231. Reports required
This section requires reports of transportation of currency or its
equivalent into or out of the United States by any person in an
amount exceeding $5,000 on any one occasion or in an aggregate
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amount exceeding $10,000 in any one calendar year. As previously
noted, the Secretary has ample authority under section 206 to limit
the reporting requirements to the extent that they will actually be
useful in accomplishing one or more of the purposes of the title. The
Secretary may require that there be reported the legal capacity in
which the person filing the report is acting, the route by which the
currency is transported, the identities of the real parties in interest,
and the amounts and types of monetary instruments transported.
Sec. 232. Forfeiture
Under this section, monetary instruments may be forfeited to the
United States if a required report is not filed.
Sec. 233. Civil liability
This section imposes a civil liability for unreported transportation
of monetary instruments in an amount not exceeding their value, less
any amount actually forfeited under the preceding section.
Sec. 234. Remission by the Secretary
This section allows the Secretary to remit any forfeiture or penalty
under this chapter. In the absence of such a provision, the Secretary
would be unable to correct an injustice if evidence came to light that
a penalty which had been paid had been unjustly imposed.
Chapter 4-Foreign Transactions
Sec. 241. Records and reports required
This section directs the Secretary of the Treasury to require "any
resident or citizen of the United States, or person in the United States
and doing business therein, who engages in any transaction or main-
tains any relationship with a foreign financial agency to maintain
records or to file reports, or both, containing such of the types of in-
formation specified in the section as the Secretary may require." The
information which may be required is limited to the following:
(1) The identities and addresses of the parties to the
transaction or relationship.
(2) The legal capacities in which the parties to the trans-
action or relationship are acting, and the identities of the
real parties in interest if one or more of the parties are not
acting solely as principals.
(3) A description of the transaction or relationship in-
cluding the amounts of money, credit, or other property
involved.
It should be noted that the Secretary has ample authority to limit
recordkeeping and reporting requirements to those which will be
useful to carry out the purposes of the Act and not unduly burden-
some to legitimate business. The initial implementation of this
chapter may very possibly be limited to a requirement that those under
a duty to file Federal income tax returns include in the return in-
formation as to the existence of any relationship which the taxpayer
has with a foreign financial agency.
The Treasury announced to your committee that it intended to
impose such a requirement with respect to returns filed in 1971 and
thereafter. The Treasury failed, however, to cite any legal authority
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in the, Secretary for the imposition of any such requirement. The
enactment of chapter 4 would remedy this deficiency by clearly
providing such authority.
See. 242. Classificat~on and requirements
This section clarifies the authority of the Secretary to make any
reporting; or recordkeeping requirements under this chapter as broad
or as narrow as conditions may require.
Title III-Margin Requirements
Title III of the bill amends section 7 of the Securities Exchange
Act of 11:334. That section confers on the Federal Reserve Board its
authority to regulate the extension of credit collateralized by securi-
ties. This is an extremely important power, and its effective exercise
has it major bearing on the stability of our securities markets and the
administration of many of our most important securities laws.
The bill does not in any way change the applicability of the Securi-
ties Exchange Act of 1.934 with respect to foreign transactions. There
is no intention, and there: is nothing in the bill remotely suggestive of
an intention, to surnersede or circumvent the customary principles
circumscribing the applicability of any statute to the territorial and
special jurisdiction of the sovereign authority under which it is
enacted.
As presently in effect, However, it is unclear whether the authority
of the Federal Reserve Board under section 7 extends to borrowers
as well as lenders. The significance of this question is obvious. The
infusion of unregulated foreign credit into American securities markets
can have a perniciously destabilizing effect on the market as a whole.
In particular instances, its easy availability may tempt the manage-
ment of it company to embark on a speculative takeover operation
whose outcome leaves the American shareholder with an empty
corporate shell and the foreign creditor in control of the real assets.
Part of the reason why section 7 was originally enacted in its present
form may have been a concern over putting the small investor at
risk as to whether his broker or lender was complying with the regu-
lations. The amendment has been carefully drawn to avoid this result.
Although the Board is given clear authority to prescribe regulations
applicable to borrowers, any 'borrower of less than $1 million would
not be criminally liable unless: he obtained the credit by a false repre-
sentation with respect to its purpose, or acted with actual knowledge
that the credit was in violation of the regulations. As to those borrow-
ing sums in excess of $1 million, it seems fair to charge them with the
same legal responsibility to know and act in compliance with the law
that is imposed with respect to most legal requirements applicable to
business generally.
The provision of the bill conferring authority on the Board to regu-
late borrowing is contained in a separate sentence from that which
confers the authority to regulate lending. This is not a mandate for
separate sets of regulations, but it is intended to make clear the
authority of the Board to reflect differences in size, expertise, or either
circumstances which may exist among various classes of borrowers
and lenders. The percentage requirements would presumably remain
the same regardless of whether any given transaction is viewed from
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the perspective of the borrower or the lender. The Board should, how-
ever, have the administrative flexibility to fashion requirements and
conditions with which compliance can reasonably be expected as well
as practicably be enforced.
Title IV-Effective Dates
This title provides that the other provisions of the bill will take
effect on the first day of the seventh month beginning after the date
of enactment, but allows the Treasury, with respect to titles I and
II, and the Federal Reserve Board, with respect to title III, to
postpone or advance the effective date by as much as six months.
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CHANGES IN TEXT OF' EXISTING STATUTES
Irr compliance with clause 3 of rule XIII of the Rules of the House
of Representatives, the text of existing Federal statutes or parts
thereof which the bill, as reported, would amend or repeal is printed
below, with the proposed changes shown (a) by enclosing in black
brackets material to be omitted, (b) by printing the new matter in
italic type, and (c) by printing in roman type those provisions in
which no change is to be made.
FEDERAL DEPOSIT INSURANCE ACT
SEc. 21. (a) (1) The Congress finds that adequate records maintained by
insured banks have a high degree of usefulness in criminal, tax, and regila-
tory investigations and proceedings. The Congress further finds that photo-
copies made by banks of checks, as well as records kept by banks of the
identity of persons maintaining or authorized to act with respect to accounts
therein, have been of particular value in this respect.
(2) It is the purpose of this section to require the maintenance of ap-
propriate types of records by insured banks where such records may have
a high degree of usefulness in criminal, tax, or regulatory investigations or
proceedings.
(b) The Secretary of the Treasury (referred to in this section as the
"Secretary") shall prescribe regulations to carry out the purposes of this
section.
(c) Each insured bank shall maintain such records and other evidence
as the Secretary shall require of the identity of each person having an ac-
count with the bank and of each individual authorized to sign checks, make
withdrawals, or otherwise act with respect to any such account.
(d) Each insured bank shall make, to the extent that the regulations of
the Secretary so require,
(1) a photocopy or other copy of each check, draft, or similar in-
strument drawn on it and presented to it for payment.
(2) a record of each check, draft, or similar instrument received by
it for deposit or collection, together with an identification of the party
for whose account it is to be deposited or collected, unless the bank has
already made a record of the party's identity pursuant to subsection
(c).
(e) Whenever any individual engages (whether as principal, agent, or
bailee) in any transaction with an insured bank which is required to be
reported or recorded under the Currency and Foreign Transactions Report-
ing Act, the bank shall require and retain such evidence of the identity of
that individual as the Secretary may prescribe as appropriate under the
circumstances.
(f) In addition to or in lieu of the records and evidence otherwise
referred to in this section, each insured bank shall maintain such records
and evidence as the Secretary may prescribe to carry out the purposes of
this section..
(26)
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(g) Any type of record or evidence required under this section shall
be retained for such period as the Secretary may prescribe for the type in
question.
(h) The Secretary shall make an annual report to the Congress of his
implementation of the authority conferred by this section and any similar
authority with respect to recordkeeping or reporting requirements con-
ferred by other provisions of law.
(i) Notwithstanding any other provisions of this section the record-
keeping requirements referred to in this section shall not apply to domestic
financial transactions involving less than $500.
SEC. E21] 22. * * *
SEC. [22] 23. * * *
TITLE IV OF THE NATIONAL HOUSING ACT
TITLE IV-INSURANCE OF SAVINGS AND LOAN ACCOUNTS
SEC. 411. The Secretary of the Treasury shall prescribe such regulations
as may be appropriate to carry out, with respect to insured institutions,
the purposes set forth in section 21 of the Federal Deposit Insurance Act
with respect to insured banks.
SECURITIES EXCHANGE ACT OF 1934
* * * * * * *
TITLE I-REGULATION OF SECURITIES EXCHANGES
* * * * * * *
MARGIN REQUIREMENTS
SEC. 7. (a) [For the purpose of preventing the excessive use of
credit for the purchase or carrying of securities, the Board of Governors
of the Federal Reserve System shall, prior to the effective date of this
section and from time to time thereafter, prescribe rules and regula-
tions with respect to the amount of credit that may be initially ex-
tended and subsequently maintained on any security (other than an
exempted security).] For the purpose of preventing the excessive use of
credit for the purchase or carrying of securities, the Board of Governors of
the Federal Reserve System shall from time to time prescribe rules and regu-
lations in accordance with this section. The Board shall prescribe rules
and regulations with respect to the amount of credit (regardless of who or
where the lender may be) that any person may initially obtain and subse-
quently retain on any security (other than an exempted security). The
Board shall prescribe rules and regulations with respect to the amount of
credit (regardless of who or where the borrower may be) that any person
may initially extend and subsequently maintain on any security (other
than an exempted security). It shall be unlawful for any person to obtain
or retain credit in willful and knowing violation of any rule or regulation
under this section. It shall be unlawful for any person to obtain or retain
credit in violation, whether or not willful or knowing, of any rule or regula-
tion under this section either on the basis of a material misrepresentation
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made or participated in by him of the purpose for which the credit is to
be used, or in an aggregate amount exceeding $1,000,000 at any one time.
For the initial extension of credit, such rules and regulations shall be
based upon the following standard: An amount not greater than which-
ever is the higher of-
(1) 55 per centum of the current market price of the security, or
(2) 100 per centum of the lowest market price of the security
during the preceding thirty-six calendar months, but not more
than 75 per centum of the current market price.
Such rules and regulations may make appropriate provision with
respect to the carrying of under-margined accounts for limited periods
an under specified conditions;. the withdrawal of funds or securities;
the substitution or additional purchases of securities; the transfer of
accounts from. one tender to another; special or different margin re-
quirements for delayed deliveries, short sales, arbitrage transactions,
and securities to which paragraph (2) of this subsection does not apply;
the bases and the methods to be used in calculating loans, and margins
and market prices; and similar administrative adjustments and de-
tails. For the purposes of paragraph (2) of this subsection, until July 1,
1936, the lowest price at which it security has sold on or after July 1,
1933, shall be considered as the lowest price at which such security
has sold during the preceding thirty-six calendar months.
(b) Notwithstanding the provisions of subsection (a) of this section,
the Board of Governors of the Federal Reserve System may, from time
to time, with respect to all or specified securities or transactions. or
classes of securities, or classes of transactions, by such rules and regula-
tions (1) prescribe such lower margin requirements for the initial ex-
tension or maintenance of credit as it deems necessary or appropriate
for the accommodation of commerce and industry, having due regard
to the general credit situation of the country, and (2) prescribe such
higher margin requirements for the initial extension or maintenance of
credit as it may deem necessary or appropriate to prevent the excessive
use of credit to finance transactions in securities.
(c) It shall. be unlawful for any member of a national securi-des
exchange or any broker or dealer, directly or indirectly, to extend or
maintain credit or arrange for the extension or maintenance of credit
to or for any customer-
(1) on any security (other than an exempted security), in contra-
vention of the rules and regulations which the Board of Governors of
the Federal Reserve System shall prescribe under subsections (a)
and (b) of this section;
(2) without collateral or on any collateral other than securities,
except in accordance with such rules and regulations as the Board of
Governors of the Federal Reserve System may prescribe (A) to
permit under specified conditions and for a limited period any such
member, broker, or dealer to maintain a credit initially extended. in.
conformity with the rules and regulations of the Board of Gov-
ernors of the Federal Reserve System, and (B) to permit the extension
or maintenance of credit in cases where the extensions or maintenance
of credit is not for the purpose of purchasing or carrying securities
or of evading or circumventing the provisions of paragraph (1) of
this subsection.
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(d) It shall be unlawful for any person not subject to subsection
(c) to extend or maintain credit or to arrange for the extension or
maintenance of credit for the purpose of purchasing or carrying any
security, in contravention of such rules and regulations as the Federal
Reserve Board shall prescribe to prevent the excessive use of credit
for the purchasing or carrying of or trading in securities in circumven-
tion of the other provisions of this section. Such rules and regulations
may impose upon all loans made for the purpose of purchasing or
carrying securities limitations similar to those imposed upon members,
brokers, or dealers by subsection (c) of this section and the rules and
regulations thereunder. This subsection and the rules and regulations
thereunder shall not apply (A) to a loan made by a person not in the
ordinary course of his business, (B) to a loan on an exempted security,
(C) to a loan to a dealer to aid in the financing of the distribution of
securities to customers not through the medium of a national securities
exchange, (D) to a loan by a bank on a security other than an equity
security, or (E) to such other loans as the Board of Governors of the
Federal Reserve System shall, by such rules and regulations as it may
deem necessary or appropriate in the public interest or for the pro-
tection of investors, exempt, either unconditionally or upon specified
terms and conditions or for stated periods, from the operation of this
subsection and the rules and regulations thereunder.
(e) The provisions of this section or the rules and regulations there-
under shalnot apply on or before July 1, 1937, to any loan or extension
of credit made prior to the enactment of this title or to the maintenance
renewal, or extension of any such loan or credit, except to the extent
that the Board of Governors of the Federal Reserve System may by
rules and regulations prescribe as necessary to prevent the circum-
vention of the provisions of this section or the rules and regulations
thereunder by means of withdrawals of funds or securities, substitu-
tions of securities, or additional purchases or by any other device.
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ADDITIONAL VIEWS OF THE HONORABLE
J. WILLIAM STANTON
It is obvious from a comparison of the bill we are reporting out and
the bill as introduced that considerable progress and improvement
have been made, largely as it result of the views expressed by the
'T'reasury Department in its testimony of March 2, 1970, and of
informal exchanges with the Treasury staff.
Nevertheless, the Committee has failed to adopt a number of
desirable suggestions made by the Treasury which are needed to
assure adequate authority in1,he Treasury to carry out the purposes
of the bill and to limit the scope of the bill to its intended purpose-
to assist. criminal, tax, and regulatory investigations and proceedings.
I believe that such amendments should be made before the bill is
finally enacted.
U. WILLIAM STANT0111.
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ADDITIONAL VIEWS OF THE HONORABLE
WRIGHT PATMAN
The bill as reported has one serious flaw. An amendment adopted in
committee, section 21(i), exempts domestic financial transactions
which involve less than $500 from the recordkeeping requirements. In
practical terms the amendment means that no photocopies or other
records of domestic checks under $500 need be maintained.
This amendment is unwise and could operate as a serious roadblock
to the legislative purpose of improving criminal, tax, and regulatory
investigations and proceedings.
Those who supported this amendment in committee had no intention
of relaxing law enforcement or creating loopholes. Their general
motivation was undoubtedly to relieve smaller banks who do not have
the photocopying equipment of any expense.
Cost is not a significant factor in microfilming of checks. Uncontro-
verted testimony from two of the largest manufacturers of such equip-
ment and from trade associations representing all of the major
manufacturers shows that cost of photocopying of checks, including
labor and equipment, ranges from less than 1j2 mils per check for
small bank operations down to Y mil or less for large bank operations.
the intended savings are negligible. These microfilming costs should
be borne willingly by the banking community as part of their civic
responsibility to combat crime. The effectiveness of this bill in reducing
the magnitude of the drain placed on our resources by criminal
activity could well result in substantial savings to insured banks.
The damage done by this amendment could be brutal. Many cases
involving thousands of dollars have been made on the basis of single
checks for small amounts. One income tax case involving thousands of
dollars was successfully prosecuted based on the photocopy of a check
for less than $5.
The range of the use of checks under $500 by criminal elements
is limitless. Graft, corruption and payoffs are many times in such
amounts. It is not inconceivable that criminals will adopt the $499.99
check as their standard monetary instrument. There is no limit to the
number of checks a single individual can negotiate.
The amendment also weakens the recordkeeping requirements for
foreign transactions. In order to discover whether a particular check
involves the type of foreign transaction covered by the bill its endorse-
ments must be examined. There is no better record of the endorsements
than a microfilm copy. Manual examination of endorsements by the
large banks which do a heavy foreign business will increase their costs
20 times over microfilming.
Finally, the high sophistication of modern photocopying equipment
makes it cheaper for a bank to photocopy all checks rather than less
than all.
The amendment should be defeated.
WRIGHT PATMAN, Chairman.
0
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