The Scandal of Secret Swiss Bank Accounts

AS the law now stands, a U.S. citizen who has a substantial amount of cash that he wants to hide from the Internal Revenue Service has no real problem. He can take it out of the country, entirely legally, deposit it in a secret Swiss bank account, then arrange to have the bank return it as a foreign "loan"--and defy the IRS to say it is not. That is only one of the milder variants of a sophisticated array of illegal ploys that have been made increasingly easier in recent years by the proliferation of Swiss banks in the U.S. and U.S. banks in Switzerland and the Bahamas. U.S. officials most intimately concerned with the problem conservatively estimate that the misuse of secret bank accounts may be draining the nation of hundreds of millions of dollars a year.

Last week Assistant Treasury Secretary Eugene T. Rossides gave the Nixon Administration's belated blessing to the means of crackdown proposed by Representative Wright Patman, in a bill designed to tighten the rules on foreign financial transactions. The measure, in its probable final form, will require U.S. banks to keep records of foreign transactions by their customers and to report unusually large withdrawals. Individuals will have to report all transfers of money exceeding $5,000 in or out of the country and open their own records of foreign bank accounts to Government inspection upon request.

The Treasury first promised its cooperation last July, then suddenly reversed itself after a delegation of bankers privately protested that a Patman proposal to allow the Treasury Secretary to require records of all domestic checks and deposits as well--some 40 billion a year in all--might impose an impossible paperwork burden. Now that the Administration has reversed itself again, Congress seems likely to adopt the Patman bill soon.

The bill will aid Government investigators in tracing the often devious routes by which money goes abroad and returns anonymously to the U.S. Robert M. Morgenthau, former U.S. Attorney for the New York area, asserts that some Swiss bank accounts are used to deposit the profits of heroin trafficking. Less often recognized is the dubious or downright illegal use of Swiss bank accounts by seemingly respectable businessmen.

Margins and Taxes. An increasing number of Swiss banks have established offices in New York and sent representatives to Las Vegas. They have standing accounts with Wall Street brokers, and do far more trading in bonds and securities than their domestic customers could possibly require. In fact, Americans dealing through the banks have been able to buy and sell on the stock exchanges, ignoring SEC requirements on margins, evading taxes on profits and indulging in forbidden insider trading.

At the same time, major U.S. banks --the Bank of America, Chase Manhattan and First National City--have set up shop in Switzerland, a move that entitles their Swiss branches to all the protection and secrecy of Swiss banking law. In several Swiss cities, the largest volume of business is done by the local branches of American banks. Americans now own or control several banks in Switzerland and in the Bahamas, which offers an equally attractive haven of secrecy and now has 52 banks for a population of 180,000.

The most persistent advocate of disclosure laws has been Morgenthau, who was abruptly fired by the Nixon Administration last December and replaced by a Republican. Democrat Morgenthau is now a deputy mayor of New York --and still convinced that his probing into bank records of foreign accounts "was making the Administration extremely nervous." Before he was fired, Morgenthau had persuaded federal grand juries to indict 75 persons for financial crimes involving secret bank accounts, and had referred dozens of other cases to the Internal Revenue Service. The cases demonstrate a variety of ways in which U.S. businessmen put their Swiss connections to illegal but profitable use. Items:

P: Two Manhattan men, Irving Braverman and Sydney Rosenstein, were indicted for tax evasion on a large scale. According to the indictment, they own 50% of Foremost Brands Inc. and McInerney Sales Inc., and also acted as sales representatives in Europe for several U.S. corporations, making their sales largely to American PXs. They are accused of diverting some $3 million in commissions to a secret bank account through a dummy trust registered in Liechtenstein.

P: The Houston Oil Field Materials Co., now International Systems & Controls, was indicted for violating margin requirements while making a takeover attempt through a foreign account. According to Government prosecutors, HOMCO transferred $300,000 to a Uruguay-based brokerage firm. The money was deposited in First Hanover Corp. as margin for purchase of $1 million worth of shares of Holly Sugar Corp., ostensibly for the Uruguay firm, but in fact for HOMCO. Next HOMCO made a public offer, which raised the price of Holly Sugar shares--and then dumped its holdings for about $1 million profit.

P: One taxpayer brashly claimed a bad-debt deduction because a foreign company had failed to repay a loan; in reality he owned the company, and the "loan" was a payment to himself from a secret foreign account.

The most interesting transaction through Swiss banks, however, bears no evidence of illegality. It involved Randolph H. Guthrie, a senior partner of Nixon's former law firm. Guthrie's firm, which represents the Banque de Paris et des Pays-Bas, last fall was instrumental in arranging a $40 million loan for the New York-based conglomerate Liquidonics Industries to gain control of UMC Industries, a St. Louis defense contracting firm. Had the deal been arranged through an American bank, it would have violated SEC margin requirements. Guthrie asserts--and he has not been disputed--that margin requirements do not apply to foreign banks. Liquidonics was unable to repay the $40 million, so the Swiss bank took over its stock and gave it to a subsidiary. The new chairman of UMC Industries: Randolph H. Guthrie.

Morgenthau's investigations raise serious questions about the ethical role of U.S. banks as conduits for illegal dealings. For instance, says Morgenthau, "the facilities of a California bank and a Midwestern bank were used, under circumstances that should have aroused suspicion, to transfer from an American company to a Swiss bank funds that were being used to pay kickbacks to employees of N.C.O. and officers' clubs overseas." One of the New York banks that Morgenthau was investigating was Manufacturers Hanover Trust, whose Wall Street branch handled millions skimmed from Saigon's black market in recent years. The money was deposited in an account designated Pry Sumeen 677, a cryptonym derived from the names of three Indian families involved in black-marketeering in Saigon. The Pry Sumeen account has recently been active again, according to Senator Abraham Ribicoff. Last week he charged that money from a U.S.-backed fund intended to stabilize the Laotian currency (whose basic unit is the kip) turned up in the same account.

Transfer from Saigon. Bankers maintain that they do not knowingly handle any illegal transactions, but the point can be a fine one. Can a corporation remain formally unaware even though some of its employees, in their official capacity, can hardly avoid knowing of illegal dealings? An estimated $1 billion to $2 billion has been siphoned from Viet Nam into U.S. and foreign banks by profiteering Americans, Vietnamese and their allies. Typically, black marketeers sell Americans their illegally obtained military scrip at discounts of up to 60%. The Americans then take the scrip to a bank and buy travelers' checks or a certified check.

The Patman bill will at least require U.S. banks to be as helpful to the Government as they have been unquestioning of their customers. This week a delegation from Zurich will arrive in Washington to discuss a treaty to curb the use of secret accounts for activities illegal under Swiss law. But in such matters as tax evasion, which is not considered a crime in Switzerland, the Swiss have given no indication that they are willing to help enforce U.S. tax laws. This makes even more urgent the Patman bill's provision to require disclosure before money bound for Switzerland or the Bahamas leaves U.S. shores.

This file is automatically generated by a robot program, so reader's discretion is required.