Money: Banks and Secrecy

Davis Keeler | From the December 1973 issue

Due to America's traditional solicitude for her tax gatherers, the Internal Revenue Service has enjoyed ready access to the records of domestic financial institutions. It has correspondingly been piqued by the chilly reception it has received in certain foreign jurisdictions which maintain a banker-client privilege similar to our own attorney-client privilege. Chief among these affronts to the dignity of our revenuers has been Switzerland.

The United States has tried a number of ploys to overcome the Swiss reluctance to cooperate in tax matters. The Swiss are quite willing to be helpful in criminal investigations but do not consider common tax avoidance to be a crime. The United States, on the other hand, in its campaign against organized crime has often only been able to obtain successful prosecutions on tax charges. While the conduct of organized crime was also an offense under Swiss law, the fact that the United States used the material sought from the banks for tax prosecutions caused the Swiss to invoke the secrecy law and deny cooperation with the United States authorities.

After years of gnashing its teeth and shaking its sovereign fist outside the closed doors of Swiss banks, the United States has this past May signed a treaty with Switzerland which provides for assistance between the two countries in the investigation of conduct which is criminal under the laws of both countries. The treaty has yet to be ratified by the governments of the respective countries.

The NEW YORK TIMES reported the treaty under the heading, "Pact Would Let U.S. Check Swiss Banks in Tax Cases," which simply is not so. The treaty sets out the principle of specificity, whereby the information sought may not be used in any other prosecution. In other words, the United States may not use information disclosed in an extortion investigation in a subsequent tax case.

Negotiations leading up to this treaty extended over almost five years. The United States was particularly intransigent because it viewed this treaty as a model for future negotiations with other bank secrecy jurisdictions. In the face of Swiss firmness, the United States was forced to abandon its demands to conduct investigations on Swiss soil, use American procedural rules, investigate securities offenses, cross-examine witnesses and seek information involving political crimes. Investigations will be conducted by Swiss authorities (with American officials present only in the rarest circumstances) and only after the United States has shown the importance of obtaining the information and the inability to obtain it elsewhere. After making the investigation, the decision rests with the Swiss as to which of the information so obtained is to be turned over to the United States.

On this side of the Atlantic, the implications of the United States' Bank Secrecy Act of 1970 are beginning to sink in and the law, which was adopted with a minimum of controversy, is now meeting a growing storm of opposition. The American Civil Liberties Union is involved in at least two law suits attacking its constitutionality as an invasion of privacy and unreasonable search.

Political pressure is also in the wings. Democratic senator John Tunney of California and Republican senator Charles Mathias of Maryland are talking about legislation to amend the law.

In a bitter editorial, BARRON'S had this to say about the law:

For consider what Congress in its wisdom and the Treasury's regulations have made the law of the land. The Secretary of the Treasury "in his sole discretion may…make exceptions to, grant exemptions from, impose additional record keeping or reporting requirements. Such exceptions, exemptions, requirements or modifications may be conditional or unconditional, may apply to particular persons or to classes of persons and may apply to particular transactions or classes of transactions." The Treasury may compel a bank to hand over a depositor's records without either his knowledge or consent. And if such records appear to contain "a high degree of usefulness in criminal, tax or regulatory investigations or proceedings," the Treasury may make them available to any other Department or agency merely upon written request of the top man. (26 June 1972)

In a statement which was no doubt intended to be reassuring, William L. Dickey, deputy assistant Secretary of the Treasury, said: "Enforcement will be highly selective." WALL STREET JOURNAL (29 June 1972).

Since the government has chosen to use the banking system as the vehicle for financial surveillance, this will put a premium on the use of nonbank channels for moving wealth.

While reports must be made by banks on currency transactions of more than $10,000 (or a lesser amount, if the Secretary of the Treasury so decides), it will still be possible to accumulate currency in small transactions and export them (e.g., by mail) in amounts of $5,000 "on any one occasion" (once again, subject to the apparent power of the Secretary to require reports for lesser amounts) so as to avoid the need to report. However, in an inflationary economy, the loss in purchasing power of wealth held as currency exacts a premium on such an arrangement. Also, the money would have to be sent to someone other than a financial institution, as defined by the new law.

The export of wealth in forms other than monetary instruments is not covered by the Act. For example, a valuable painting, bullion, rare stamps, etc.…would not be covered, although there is always the need to be sure that there would be no duty charged in the receiving country.

The major nonmonetary instrument which is covered by the act are bearer securities, i.e., securities payable to the bearer rather than a named individual, which are transferable by delivery, and whose ownership is not a matter of record. While bearer securities (other than debt instruments) are uncommon in the United States, they are popular overseas for various reasons, including tax avoidance.

Harvard law professor Arthur R. Miller, author of the book THE ASSAULT ON PRIVACY, has this to say about the Bank Secrecy Act:

This legislation, in effect, creates a financial dossier on nearly all Americans and may well contribute to the widespread feeling of alienation, paranoia and mistrust that seems to exist.