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75–473 DTP 2001

S. Hrg. 107–152

WHAT IS THE U.S. POSITION ON OFFSHORE

TAX HAVENS?

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON

INVESTIGATIONS

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JULY 18, 2001

Printed for the use of the Committee on Governmental Affairs

(

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

JOSEPH I. LIEBERMAN, Connecticut, Chairman

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

FRED THOMPSON, Tennessee

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

JOYCE A. RECHTSCHAFFEN, Staff Director and Counsel

HANNAH S. SISTARE, Minority Staff Director and Counsel

DARLA D. CASSELL, Chief Clerk

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

CARL LEVIN, Michigan, Chairman

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

MARK DAYTON, Minnesota

SUSAN M. COLLINS, Maine

TED STEVENS, Alaska

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ROBERT F. BENNETT, Utah

JIM BUNNING, Kentucky

LINDA J. GUSTITUS, Chief Counsel and Staff Director

CHRISTOPHER A. FORD, Minority Chief Counsel and Staff Director

ELISE J. BEAN, Deputy Chief Counsel

MARY D. ROBERTSON, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Levin .................................................................................................... 1

Senator Collins ................................................................................................. 5

Senator Carper ................................................................................................. 7

WITNESSES

WEDNESDAY, JULY 18, 2001

Hon. Paul H. O’Neill, Secretary of the U.S. Treasury .......................................... 8

Hon. Robert M. Morgenthau, Manhattan District Attorney, New York, New

York ....................................................................................................................... 26

Hon. Michael Chertoff, Assistant Attorney General for the Criminal Division,

U.S. Department of Justice ................................................................................. 29

Hon. Donald Alexander, former Commissioner, Internal Revenue Service

(President Ford) ................................................................................................... 37

Hon. Sheldon Cohen, Former Commissioner, Internal Revenue Service (President Johnson) ....................................................................................................... 38

ALPHABETICAL LIST OF WITNESSES

Alexander, Hon. Donald:

Testimony .......................................................................................................... 37

Prepared statement .......................................................................................... 77

Chertoff, Hon. Michael:

Testimony .......................................................................................................... 29

Prepared statement .......................................................................................... 68

Cohen, Hon. Sheldon:

Testimony .......................................................................................................... 38

Mongenthau, Hon. Robert M.:

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 56

O’Neill, Hon. Paul H.:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 45

EXHIBITS

1. Letter from U.S. Secretary of the Treasury Paul H. O’Neill, dated June

7, 2001, to G-7 Ministers Brown, Eichel, Fabius, Martin, Shiokawa, and

Visco, regarding the OECD tax haven initiative ........................................... 81

2. Department of Treasury News Release, dated May 10, 2001, Treasury

Secretary O’Neill Statement on OECD Tax Havens ....................................... 83

3. Department of Treasury News Release, dated February 17, 2001, Statement By Treasury Secretary Paul H. O’Neill At The Post G-7 Press Conference ................................................................................................................ 85

4. Letter from former Internal Revenue Service Commissioners Cohen, Alexander, Caplin, Kurtz, Richardson, Thrower and Walters, dated June 7,

2001, to Secretary of the Treasury Paul H. O’Neill, regarding his OpEd in the May 10, 2001, issue of The Washington Times ............................. 87

5. Chart: 2000 OECD List of Offshore Tax Havens ............................................ 91

6. Chart: Commitments Sought From Tax Havens ............................................ 92

7. Chart: Number of U.S. Taxpayers Reporting Foreign Accounts and Number of Offshore Banks and Companies in 35 OECD Tax Havens ................. 93

Page

IV

8. Chart: Out of approximately 2000 accounts open in 1985, 95% of Guardian Bank’s clients were U.S. citizens and virtually 100% were engaged

in tax evasion; testimony of John Mathewson, former owner of Guardian

Bank & Trust Ltd. in the Cayman Islands, March 1, 2001, hearing

before the Permanent Subcommittee on Investigations ................................ 96

9. Letter of Commitment of the Republic of Seychelles, February 13, 2001 .... 97

10. Letter from House Majority Whip Tom DeLay, dated June 20, 2001,

to Secretary O’Neill, regarding information exchange tax initiatives .......... 101

11. Memorandum from The Prosperity Institute, dated June 28, 2001, to

Secretary O’Neill, regarding request for meeting with Secretary O’Neill ... 102

12. Center for Freedom and Prosperity Special Alert, June 15, 2001 ................ 105

13. Center for Freedom and Prosperity Strategic Memo, June 16, 2001 ........... 106

14. Center for Freedom and Prosperity Press Statement, June 28, 2001 .......... 108

15. Center for Freedom and Prosperity Strategic Memo, July 5, 2001 .............. 109

16. The New York Times Editorial, ‘‘A Retreat on Tax Havens,’’ May 26,

2001 .................................................................................................................... 111

17. The Wall Street Journal, ‘‘U.S. Could Abandon Initiative To Crack Down

on Tax Havens,’’ February 22, 2001 ................................................................ 112

18. The Miami Herald, ‘‘U.S. Won’t Pressure Offshore Tax Havens, O’Neill

Says,’’ May 11, 2001 ......................................................................................... 114

19. The Washington Post Op-Ed by David Ignatius, ‘‘The Tax Cheats’

Friends,’’ April 29, 2001 ................................................................................... 116

20. Financial Times, ‘‘Avenue of the Americas: OECD Meets the XFL,’’ February 14, 2001 ................................................................................................... 117

21. The Washington Post Op-Ed by Robert D. Novak, ‘‘Global Tax Police,’’

April 19, 2001 .................................................................................................... 118

22. Letter from Internal Revenue Service Commissioner Charles O. Rossotti,

dated July 17, 2001, to Permanent Subcommittee on Investigations’

Chairman Carl Levin, regarding Subcommittee inquiry on whether offshore accounts reduce U.S. taxpayers’ tax liability ....................................... 119

23. Letter from Donald C. Alexander, dated June 15, 2001, to Treasury

Secretary Paul H. O’Neill, regarding ‘‘Tax Havens and Enforcement of

Our Tax Laws’’ .................................................................................................. 120

24. Supplemental questions and answers of Treasury Secretary Paul H.

O’Neill ................................................................................................................ 121

25. Towards Global Tax Co-operation, Report to the 2000 Ministerial Council

Meeting and Recommendations by the Committee on Fiscal Affairs,

Progress in Identifying and Eliminating Harmful Tax Practices, prepared

by the Organisation for Economic Co-operation and Development .............. 125

26. Statement for the record of John T. Lyons, former IRS Assistant Commissioner and former U.S. Competent Authority (USCA) responsible for administering tax treaties and agreements ........................................................ 153

27. Statement for the record of Robert S. McIntyre, Director, Citizens for

Tax Justice ........................................................................................................ 158

28. Statement for the record of Richard M. Hammer, International Tax Counsel, United States Council for International Business .................................. 163

29. a. ‘‘Current Status of OECD’s Harmful Tax Practices Initiative,’’ a statement by the Chairman of the OECD’s Committee on Fiscal Affairs,

Mr. Gabriel Makhlouf (November 14, 2001) .............................................. 166

b. The OECD’s Project on Harmful Tax Practices: The 2001 Progress

Report, OECD (November 14, 2001) ........................................................... 168

30. ‘‘Stepping Up the Pressure on Tax Havens,’’ by David E. Spencer, Journal

of International Taxation (April 2001) ............................................................ 181

(1)

WHAT IS THE U.S. POSITION ON OFFSHORE

TAX HAVENS?

WEDNESDAY, JULY 18, 2001

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Subcommittee met, pursuant to notice, at 2:30 p.m., in room

SD–628, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding.

Present: Senators Levin, Carper, Stevens, and Collins.

Staff Present: Linda Gustitus, Chief Counsel and Staff Director;

Mary D. Robertson, Chief Clerk; Elise Bean, Deputy Chief Counsel;

Ken Saccoccia, Congressional Fellow; Greg Heath, Intern; Christopher A. Ford, Minority Chief Counsel; Alec Rogers, Counsel to

the Minority; Eileen Fisher, Investigator to the Minority; Gary

Mitchell, Detailee/Department of Education; Bos Smith, Intern;

Cecily Cutbill (Senator Carper); Tara Andringa (Senator Levin);

Jim Williams (Senator Durbin); Janet Sinclair (Senator Thompson);

and Ann Fisher (Senator Cochran).

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Good afternoon, everybody. Over 15 years ago,

this Subcommittee began a series of groundbreaking hearings on

the problems created by the use of offshore banks and offshore corporations. Entitled ‘‘Crime and Secrecy,’’ these hearings and related staff reports presented a detailed yet sweeping picture of how

U.S. citizens were using offshore banks and businesses to launder

criminal proceeds and evade taxes using offshore secrecy laws to

hide their assets from U.S. law enforcement. The investigation recounted over 150 American prosecutions of crimes using offshore

bank accounts, corporations or trusts to hide funds related to drug

trafficking, financial fraud, bribery, tax evasion or other crimes.

One staff report included an IRS-prepared list of 29 offshore tax

havens—17 of which are on the tax haven list being discussed

today.

The Subcommittee did this work in full cooperation with the

Reagan Administration, which was deeply concerned about criminal activity using offshore tax havens. High-level Reagan Administration officials testified at the Subcommittee hearings, worked

with Congress to pass legislation, launched new initiatives to

pierce offshore bank and corporate secrecy laws, increase information exchange, and imposed sanctions on tax havens that refused

to cooperate with our law-enforcement efforts.

2

The Reagan Administration officials recognized that the problem

with offshore tax havens is not some abstract issue, but at its core

affects all American taxpayers. In a 1983 radio address, President

Reagan said this about tax evasion, ‘‘I agree with what one editorial writer said about those who cheat. ‘When they do not pay

their taxes, someone else does—you and me’.’’ The first Bush and the Clinton Administrations were just as concerned and just as active. In 1989, the first Bush Administration

helped establish the Financial Action Task Force on Money Laundering, and this has become the leading international body fighting

money laundering, and has spent countless hours wrestling with

money laundering problems in offshore havens. The Clinton Administration worked with Congress to write the first nationwide

anti-money laundering strategy and worked internationally to

strengthen other countries’ anti-money laundering laws.

Offshore tax havens are countries that allow corporations, trusts

and other businesses to be established within their territory on the

condition that any business they conduct is only with persons who

are offshore, meaning with persons who are not citizens or domestic businesses operating inside the country.

Offshore tax havens charge hefty fees for establishing and maintaining an offshore business. The offshore businesses are often

shell operations, established by attorneys, trust companies or

banks within the offshore jurisdiction, and operate under corporate

secrecy laws that make it difficult to learn the true owner of a

business. These offshore businesses also usually open accounts at

banks licensed by the offshore jurisdiction and conduct financial

transactions under bank secrecy laws that make it difficult to trace

transactions or identify bank account owners.

The money deposited in these banks is usually held in correspondent accounts that the banks have opened at larger banks

in the United States or other countries. Many of the offshore corporations and trusts serve as mere place holders for individuals

who want to hide their identity and their activities.

The questions that we hope to answer today are how this administration views offshore tax havens, and whether it plans to continue the efforts of the United States and other countries to convince offshore tax havens to cooperate with efforts to detect and

stop tax evasion and the criminal activity that is associated with

it.

Since the 1980’s, the list of offshore havens has doubled, from

about 30 to 60. The number of offshore companies has exploded,

with one country alone responsible for incorporating over 350,000

of those offshore companies. Assets in these offshore entities have

climbed from an estimated $200 billion in 1983 to an estimated $5

trillion today, including $3 trillion in offshore bank accounts. That

is a 25-fold increase. While some offshore tax havens have

strengthened their bank regulations, anti-money laundering controls, and cooperation with international criminal and tax investigations, others have strengthened their secrecy laws, kept their

regulatory agencies starved for resources, and refused any cooperation for tax collection purposes.

In 1999, this Subcommittee took a renewed look at offshore havens in connection with an examination of money laundering using

3

1See Exhibit 5, which appears in the Appendix on page 91.

2See Exhibit 6, which appears in the Appendix on page 92.

U.S. private and correspondent banking services. The evidence was

similar to the 1980’s, with offshore banks and businesses being

used to launder illegal proceeds related to drug trafficking, financial fraud, tax evasion and other crimes. We will hear today that

despite significant advances, U.S. law enforcement officials continue to be stymied in their efforts to pierce bank and corporate secrecy laws in many offshore tax havens.

As the size of the offshore problem has increased, so has international concern.

Offshore havens, by their nature, are dependent upon the goodwill of other countries to operate. Offshore banks use correspondent

accounts with banks in leading financial centers around the world

to move, protect and invest their clients’ money. Offshore brokers

have to obtain access to other countries’ capital markets since they

are barred from the domestic markets of the countries that created

them, and offshore businesses must have clients from other countries as their customers since, by definition, offshore businesses are

prohibited from doing business in the country in which they are licensed.

During the 1990’s, the United States and other G–7 countries

used the Financial Action Task Force on Money Laundering, or

FATF, to urge countries around the world to strengthen their antimoney laundering efforts. Then, in June 2000, for the first time,

FATF members drew up a list of countries that were not cooperating with anti-money laundering efforts and threatened them with

sanctions if they did not improve. That listing had a remarkable effect on a number of countries, convincing them to improve their

anti-money laundering laws to get off or stay off the list.

Some of the listed countries have still failed to act and they are

scheduled to become subject to the first round of FATF sanctions

later this year. FATF sanctions reportedly include warning international corporations to not do business in these countries and requiring banks to collect detailed information from customers before

conducting transactions in these countries.

A parallel effort was undertaken to increase international cooperation on tax enforcement. This effort was undertaken by the

Organization for Economic Cooperation Development, or OECD,

which in 1996, with strong U.S. support, initiated a tax haven

project.

Like the FATF listing, the project issued a preliminary list of 35

tax havens in June of 2000,1 and asked the listed countries to improve their cooperation on tax matters or become subject to sanctions in 2001. Tax haven countries were asked to make written

commitments in three areas: to provide effective information exchange on criminal tax matters by the end of 2003 and on civil tax

matters by the end of 2005; to revise their secrecy laws to increase

transparency, especially disclosure of ownership of bank accounts

and business structures; and to end any tax preferences given to

offshore entities.2 The listed countries were given until July 2001,

this month, to make the commitments or be included in a list of

uncooperative tax havens that would be subject to sanctions.

4

1See, for example, Exhibit 9, which appears in the Appendix on page 97.

2See Exhibit 2, which appears in the Appendix on page 83.

3See Exhibits 16, 17 and 18, which appear in the Appendix on pages 111, 112, and 114 respectively. 4See Exhibit 29, which appears in the Appendix on page 166.

At first, just like the FATF effort, the OECD tax haven effort

made progress. For example, last year, to avoid being listed and

sanctioned, the Cayman Islands issued a letter making the desired

commitments and agreeing to tax information exchange provisions

that it had flatly rejected for years. It was a surprising and welcome turnaround. The Cayman Islands was not alone. Nine other

jurisdictions: Aruba, Bermuda, Cyprus, the Isle of Man, Netherlands Antilles, Malta, Mauritius, San Marino and the Seychelles

made similar commitments.1 Almost all the other countries on the

year 2000 tax havens list began dialogues with the OECD about

changing their ways. That is the power of a concerted international

effort.

However, instead of issuing a final list of uncooperative tax havens this month and initiating sanctions, the OECD’s effort faltered when in May, U.S. Treasury Secretary Paul O’Neill announced that he had ‘‘serious concerns’’ about the project. Secretary

O’Neill said it could be seen as suggesting that, ‘‘low tax rates are

somehow suspect,’’ and as trying to ‘‘dictate’’ higher tax rates in

low-tax jurisdictions.2 Now, that criticism was made even though

the project had accepted commitments from the Cayman Islands

and then exempted it from the tax havens list, all the while the

Cayman Islands maintained a zero income tax rate.

Secretary O’Neill’s actions were viewed by the international community and the media as a major retreat by the United States.

Headlines read as follows: The Wall Street Journal, ‘‘U.S. Could

Abandon Initiative To Crack Down On Tax Havens’’; the Miami

Herald, ‘‘U.S. Won’t Pressure Offshore Tax Havens, O’Neill Says’’;

the New York Times, ‘‘A Retreat On Tax Havens.’’ 3

Frankly, many of us in Congress who worked on tax haven issues

over the years were stunned. Today’s hearing was called so that

Secretary O’Neill could explain the position of the administration

with respect to tax havens and to clear up any confusion.

We understand that the United States and its OECD allies have

successfully concluded negotiations on a proposal that is agreeable

to all parties.4 While press reports suggest that the United States

will support the revised OECD tax havens project, opponents of

international efforts to crack down on tax havens still claim the opposite.

For years now, offshore tax havens have damaged U.S. interests

by facilitating crime, money laundering and tax evasion. An estimated $70 billion in U.S. tax revenue is lost each year to assets

hidden offshore, a figure so huge that if even half that amount

were collected, it would pay for a Medicare prescription drug program without raising anyone’s taxes or cutting anyone’s budget.

Besides robbing U.S. taxpayers of this revenue, uncooperative

offshore tax havens are an ongoing affront to honest taxpayers.

U.S. citizens have one of the best records of voluntary payment of

tax in the world today, because they are willing to pay their fair

share to keep this country great and enjoy the benefits of a strong

5

1See Exhibit 8, which appears in the Appendix on page 96.

defense, safe food, clean water, good roads and the other advantages that this country offers. Tax evasion is a crime in this country. It is a serious crime because it undermines overall confidence

in the tax system and it deals a terrible blow to the basic fairness

that makes our democracy work.

Too many offshore tax havens continue to play host to crime and

tax evasion. It is in the national interest of this country to respond,

as it has been since the Reagan Administration took on this issue.

Tax evasion means higher taxes for honest taxpayers, and it is a

problem that deserves immediate attention and tough action. We

have tried going after tax havens on our own, but they pose an

international problem requiring an international solution.

Our hope in this hearing today is to find out whether the United

States will continue its efforts to detect and stop tax evasion in offshore tax havens, whether it will continue to play a constructive

role in the international effort to detect and stop tax evasion, and

whether the United States is still committed to both tax information exchange, that is the core of the project, and to sanctions for

offshore tax havens that refuse to change their ways.

Senator LEVIN. Senator Collins.

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. Thank you, Mr. Chairman, and I want to

thank you for convening this hearing. You have been the Senate’s

leader in the effort to crack down on money laundering and I look

forward to hearing from our witnesses today. Much of our discussion today will focus upon a framework for collective multinational

action proposed by the Organization for Economic Cooperation and

Development (OECD). The OECD’s goal of eliminating what it has

called harmful tax practices has focused upon developing a framework whereby OECD-member countries, including the United

States, Japan and most of the nations of Western Europe, would

use financial pressure in order to force offshore tax havens to

change some of the practices that make them notorious jurisdictions of choice for tax cheats.

For the countries of the OECD, this has been a high priority because many billions of dollars are believed to be lost each year in

foregone tax revenue from citizens who hide income from domestic

tax authorities by concealing it in bank accounts in jurisdictions

with strict bank secrecy rules, but little or no income tax of their

own. The OECD has proposed a mechanism by which countries

with particularly egregious practices would be designated as harmful tax havens and pressured to reform.

As Senator Levin indicated, this Subcommittee is very familiar

with the practices of offshore jurisdictions with strict bank secrecy

rules. The Chairman’s previous hearings on money laundering

demonstrated that such jurisdictions are, indeed, popular banking

locations for those seeking to hide illicit funds or simply unreported

income from law-enforcement authorities in their home countries.

One witness at our March hearing, for example, testified that he

believed the vast majority of his clients at his offshore bank were

American citizens engaged in tax evasion.1 It is obviously imposVerDate 11-MAY-2000 12:59 Dec 04, 2001 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 75473.TXT SAFFAIRS PsN: SAFFAIRS
6

1See Exhibit 2, which appears in the Appendix on page 83.

sible to know with any certainty exactly how much money is concealed in this fashion, but some estimates of lost U.S. tax revenues

are as high as $70 billion a year.

This clearly is no small problem and it is easy to see why OECD

governments would want to reduce the number of jurisdictions that

offer themselves as safe havens to such tax scofflaws. As it was

originally proposed, however, the OECD’s framework raised some

significant and legitimate concerns, particularly with regard to that

organization’s broad definition of a tax haven that might ultimately

be subject to financial sanctions by OECD governments, and with

regard to its general thrust against what has become known as tax

harmonization.

According to the organization’s 1998 report on this subject, for

example, simply having no or nominal taxation might alone be sufficient to identify a tax haven if that country offered or was merely

perceived to offer itself as a place where nonresidents could escape

taxes in their home country. Particularly, given the OECD’s talk of

the damaging effect that countries with low tax rates had in attracting capital from other higher tax countries, it is not difficult

to understand why some critics feared that this program, which

had the support of the Clinton Administration, sounded less like an

initiative for fighting tax evasion than a program for encouraging

low-tax jurisdictions to raise their taxes so as to provide less economic competition for the generally higher-tax countries of the

OECD.

The current administration has raised some legitimate questions

about the specter of imposing multinational sanctions upon countries, simply because they had adopted certain low-tax economic

policies. At the same time, however, the Bush Administration has

supported measures that would target the real problem the OECD

framework is designed to fight, and that is tax evasion. Secretary

O’Neill has called for improved case-by-case information sharing

between government tax authorities to help make it harder to conceal income unlawfully in a secrecy jurisdiction. This, after all, is

something our government already does with many countries, with

a number of safeguards intended to prevent the abuse of personal

financial information given to other governments in connection

with civil or criminal tax enforcement proceedings.

The United States has an extensive network of bilateral tax treaties and other intergovernmental information sharing agreements.

Reaching similar arrangements with today’s tax havens under the

OECD framework would be an important step toward ensuring not

only the improved enforcement of U.S. tax laws, but also more effective U.S. prosecution of money launderers, drug smugglers, and

other criminals who may seek to hide their elicit gains in overseas

bank secrecy jurisdictions. As Secretary O’Neill put it in a letter

published in May of this year, ‘‘the United States needs information from offshore tax havens in order to prosecute tax evaders.’’ 1

An international organization such as the OECD ‘‘can be used to

build a framework for exchanging specific and limited information

necessary for the prosecution of illegal activity.’’

7

Mindful of the potential dangers of opening the door to tax harmonization, the Secretary called for the OECD effort to be, ‘‘refocused on the core element that is our common goal: the need for

countries to be able to obtain specific information from other countries upon request in order to prevent the illegal evasion of their

tax laws by the dishonest few.’’ Thanks in large measure to Secretary O’Neill’s efforts, I understand that the OECD is now on the

verge of agreeing to focus upon information exchange and transparency and to lessen its previous focus on tax harmonization.

I also understand that Secretary O’Neill has asked his staff to

carefully assess the range of anti-money laundering programs now

underway at the Treasury Department. As I understand it, he inherited a department unable to even tell how much it spends to

fight money laundering. The Treasury Department itself apparently has come up with estimates that differ by more than $300

million, and there does not seem to be any clear idea of exactly

what should be counted as an anti-money laundering program in

the first place.

I support Secretary O’Neill’s efforts. I believe it is high time for

the department to figure out not only how much is being spent, but

also which programs are effective in the important fight against

money laundering. We in Congress, and on this Committee, in particular, spend a great deal of time trying to get government agencies to identify meaningful criteria by which they and we can judge

their effectiveness.

I hope that Secretary O’Neill will use this opportunity to identify

what works best in fighting against money laundering, so that the

department can use its limited resources more effectively. We will

accomplish more in the fight against such crime if we focus our attention upon those programs that work best in eradicating it.

Again, Mr. Chairman, I look forward to hearing from our witnesses

today and I appreciate your efforts in this regard.

Senator STEVENS. Excuse me, I have to leave to attend another

hearing.

Senator LEVIN. Thank you, Senator Stevens.

Senator Carper.

OPENING STATEMENT OF SENATOR CARPER

Senator CARPER. Mr. Secretary, how are you doing? You look like

you are holding up well. Thank you for being with us today and

for sharing your input. How is John Duncan doing? John was the

chief of staff to Bill Roth, my predecessor, and as a Senator for

some 30 years, Senator Roth was Chairman of the Governmental

Affairs Committee, and as I recall, back in the mid-1980’s, he held

hearings as a Member of the Committee, maybe even Committee

Chairman at the time, to highlight offshore tax havens. It is kind

of ironic given his history and seeing John out here and having you

before us today and sitting in this seat. Somehow it seems appropriate.

There is one thing I want to add to the comments we have heard

from Senator Levin and from Senator Collins. We are experiencing

a drop-off in revenues into the Treasury, and as we debate the appropriation bills in the Senate this week, today, next week, the

next couple of weeks, I am reminded that the revenues are dropVerDate 11-MAY-2000 12:59 Dec 04, 2001 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 75473.TXT SAFFAIRS PsN: SAFFAIRS
8

1The prepared statement of Secretary O’Neill appears in the Appendix on page 45.

ping and the appetite for spending is still pretty robust. We need

to find wherever there is a dollar or two that is owed to the Treasury, we need to find it and get our hands on it. If you ask most

people if they want to pay more taxes, they say no, thank you, but

they still want their favorite program to be funded. People do not

like the idea that they pay their fair share of taxes and somebody

else does not. This is just one that we take seriously in Delaware

and have for a long time, and we look forward to hearing from you

and to working with you to make sure that all of us are paying our

fair share. Thank you.

Senator LEVIN. Thank you, Senator Carper. Our first witness

this afternoon is the distinguished Secretary of the Treasury, Paul

O’Neill, and we are really very pleased to have you with us, Mr.

Secretary. I particularly appreciate the fact that you were so responsive to my request to testify before this Subcommittee. We appreciate the cooperation that you and your staff have shown to this

Subcommittee, and we look forward to hearing what you have to

say this afternoon.

We have a rule here called Rule 6, which requires all witnesses

to take an oath to testify before this Subcommittee, and at this

time I would ask that you please stand and raise your right hand.

Do you swear that the testimony you are about to give to this Subcommittee will be the truth, the whole truth, and nothing but the

truth, so help you, God?

Secretary O’NEILL. I do.

Senator LEVIN. Mr. Secretary, we have a timing system here

which we use, and we would ask that you take a look once in

awhile, and when the green turns to yellow, that you conclude your

remarks. All of your prepared statement will, of course, be printed

in the record. We are going to try to limit testimony of all of our

witnesses to 10 minutes and ask that you try to stick to that if you

possibly can, and then we will have more time for questions. Thank

you again for joining us.

TESTIMONY OF HON. PAUL H. O’NEILL,1 SECRETARY OF THE

U.S. TREASURY

Secretary O’NEILL. Thank you, Mr. Chairman, for arranging this

hearing and inviting me to be the lead witness. It is nice to be here

with you and with Senator Collins. Thanks very much for your

comments, and for the question about how John is doing. I tell you

what, I am going to give him a passing grade as soon as he gets

all of my nominees released. Until then, he is on probation.

Mr. Chairman, with your permission, I will simply introduce for

the record my prepared statement and maybe make just a few introductory remarks and then open myself for your questions, so I

do not take too much time, because I do know you have a full group

of interesting witnesses that you need to hear from.

Let me do this as simply as I know how. I was fascinated by your

introductory statement and your citation of the Wall Street Journal

and the Miami Herald, and there are other newspaper accounts

that are in the book. One of the things I find fascinating, frankly,

coming back to Washington after being away for awhile, is to find

9

the degree, in this case in every specific instance, where the things

that you cited are really editorial comment masquerading as news,

and I would make that distinction in this sense.

I do not think that there is anything I have said, either on the

record or off the record, about the OECD project or money laundering, that anyone I know would disagree with. What people seem

to disagree with is the representations that have been made about

what I may have meant or what I may have inferred. No one has

challenged me on the principles, which I believe are the right principles with regard to the OECD project, which are namely these:

That we in the United States—as a matter of fact, I took a sworn

oath to pursue the absolute, 100-percent fulfillment of the law, executing and pursuing the law as it has been written and enacted by

the Congress and signed by the President of the United States over

a period of 225 years, and take that obligation very seriously. Part

of that obligation, in this case, is, as I understand it, to pursue to

the ends of the earth those people who have tax obligations to the

United States, which they seek to avoid or evade.

In that regard, there is no doubt, as you know very well, because

you have been, as Senator Collins said, a leader on this subject— there are people in our midst who are citizens of the United States

who choose to and try to use every means that they can to avoid

paying their fair share of taxes, and as you said, that means the

rest of us are—quoting President Reagan—‘‘the rest of us pay the

taxes of those who choose not to do so.’’ I find no one who disagrees

with me that we should pursue every legitimate way that we can

to ensure that people pay their exact, correct amount of taxes, and

that necessitates, because there are lots of global dealings now,

that we have arrangements to collect and be able to use information from jurisdictions all around the world to fulfill that responsibility.

The second principle that I have laid down and have been very

clear about is that I do not think it is appropriate—perhaps I am

wrong on this—I do not think it is appropriate for the United

States or the OECD, for that matter, to tell any sovereign Nation

what the structure of its tax code should be, period. We may not

like what other countries do, but I do not think it is our right to

tell other countries what their tax structure should be.

I would say to you I found no one who disagrees with these two

principles. When I got the reaction, indirectly, I must say, from

some of the people who are involved in the OECD project, that,

‘‘Well, for goodness sake, we agree with these principles, and we

are not trying to do anything else,’’ I said, ‘‘Wonderful, then we

have no disagreement. Let’s go on with our work.’’

So, I must tell you I am really quite surprised, in a way, to see

the flurry of concern and activity, that somehow stating what

seemed to me to be clear principles creates in the minds of people

who buy their ink by the barrel, the suspicion somehow that there

is a bad motive in laying down principles which everyone says they

agree with. I am really quite surprised.

With regard, if I may, to the subject of money laundering for a

moment—and in this case I would say to you what I have been

doing in this area falls within the aim of what I think my responsibility is as Secretary of the Treasury, to be Secretary of the whole

10

Treasury. And by that, I mean something beyond working on the

fascinating subjects of international monetary policy and the IMF

and the World Bank and all the rest of those very exotic things.

I think I have a duty to ensure that the Treasury Department not

only executes the laws faithfully, but efficiently and effectively, and

so I have raised questions about every single thing within the

Treasury Department, to first of all understand what it is we are

supposed to be doing and then to raise questions about how we

could do it better.

For example, our laws that were written in 1934, and this was one that I was involved in yesterday, require us to collect $300 million from nonalcoholic users of—people who use alcohol for nonbeverage purposes—we collect $300 million from them and then

give it back to them in a so-called drawback process. Does that law

which requires the use of many intelligent people make any sense

removed from 1934? My answer to that is no. Why are we doing

it? Nobody seems to know.

In that same regard, I have said with regard to money laundering, which I first began to be interested in when I made my

courtesy call on you as a nominee, and you and the staff showed

me the report from last year on what the U.S. Government was

doing in money laundering and taught me how to use the tables

in the back of the book that showed that according to last year’s

report, we, the Federal Government—not just the Treasury—we,

the Federal Government, are spending a billion dollars a year on

money laundering. Having been here—I am dating myself now—I

was remembering this today—when Lyndon Johnson was strug- gling to keep the U.S. budget under $100 billion, a billion dollars

still seems like a lot of money to me. When you and your staff taught me that we are spending $1 billion on money laundering, I was really quite impressed. A few

weeks later, as I began my pursuit of administrative efficiency and

effectiveness and faithful pursuit of the laws, I got around to scheduling meetings to talk to the people who are responsible for money

laundering, and I said to them that I am fascinated by how much

money we are spending. What are we getting? Show me some indication of how big is this problem and how much progress have we

made on it and how good are we at anticipating measures and

countermeasures to outfox the people who are guilty of doing all

this.

They said, ‘‘Well, here is a new report for this year, Mr. Secretary,’’ and having learned from you where to look in the book, I

looked at the back of the book, and I was astounded to find that

from 1 year to the next our spending on money laundering went

down from $1 billion to $650 million. Having been in the budget

director’s or deputy director’s job for some years, I said to them the

only other program I can remember going down was a $16 million

program for Adis egypti, which was to kill mosquitoes with DDT

in the South, which eventually went away because it was environmentally unsound.

I said I just cannot believe we have got a $350 million year-toyear decrease, and they said, ‘‘Well, we don’t.’’ I said that is what

this report shows, because Senator Levin showed me one that said

we are spending $1 billion. They said, ‘‘Well, that is because a misVerDate 11-MAY-2000 12:59 Dec 04, 2001 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 75473.TXT SAFFAIRS PsN: SAFFAIRS
11

take was made in the way the report was compiled last year.’’ I

said—now, this is public and private sector experience—my experience is if you find one rotten apple in the barrel, there will probably be some more. I would like to know how much of all the rest

of this should I believe if I cannot believe the top-line figure, that

is a published figure from the Federal Government saying we are

doing this, when we are not doing it at all. We are only doing twothirds of it.

Now, in truth, I must tell you, I do not even believe the $650 million, because there are—how do I say this right? There are assumptions or inferences about levels of activity that are then multiplied

by the total spending of a department or agency that make up substantial parts of the $650 million.

My pursuit of this subject is not over, because I do believe, as

you have said, through the litany of history, that these are subjects

of great importance, that we should do everything we can to ensure

that every American pays every legitimate tax responsibility they

have. It is fairly clear, partly because of the enormous complexity

of our tax system, that is not happening today, in addition to the

reasons that are related to so-called tax havens.

I do believe that we can be and we will be much more efficient

in pursuing tax cheats, and bringing to justice those who launder

money, and hopefully getting at the activity behind the money

laundering in the first place. So, if you have a doubt, please have

no doubt about my determination that we will do a job that is better than anything you have ever seen before in chasing tax evaders

and in finding money launderers and doing something about it, because we will have a connected process to accomplish these purposes.

Senator LEVIN. Thank you very much, Mr. Secretary. We appreciate that commitment that you expressed there at the end of your

statement.

Would you agree that secrecy is at the heart of tax haven operations and abuses, our inability to get information from those tax

havens?

Secretary O’NEILL. Yes, I do.

Senator LEVIN. That is the way tax havens advertise themselves.

They promise and promote secrecy and that is what people pay for

when they use these tax havens, but that is the heart of the problem, you would agree; is that correct?

Secretary O’NEILL. Actually, I do not think so. I think the heart

of the problem may be a human characteristic that is pretty hard

for us to do anything about, which is to cheat. The whole problem

begins with the intent not to do what your role as a citizen is. That

is the nub of the problem. There are then organizations and individuals who facilitate human weakness, and indeed, that is really

a heck of a problem, but underneath it, there are still an awful lot

of people who obviously do not want to fulfill their obligations as

a citizen.

Senator LEVIN. But you would agree that the advantage that

these tax havens offer and why individuals and corporations and

companies open accounts in these offshore jurisdictions is usually

the promise of secrecy?

12

Secretary O’NEILL. Well, it is painting with a broad brush, but

all right. I suppose if we did a full listing of why are the reasons

that people would open accounts in different places, you can find

lots of different reasons. I puzzled myself about our own situation,

which I am sure you know, we do not tax investment interest income for foreign-based individuals in the United States. I wonder

what that looks like from the other side.

Senator LEVIN. I am talking about the secrecy aspect here, not

the tax aspect.

Secretary O’NEILL. I understand. Well, we, in this particular

case, we have a secrecy aspect. We do not notify their government

that they had—— Senator LEVIN. Upon request, we do not notify?

Secretary O’NEILL. Well, I suppose we would if we had a treaty

with them. I am not sure that we would otherwise.

Senator LEVIN. But upon request with those countries with

whom we have agreements——

Secretary O’NEILL. We would.

Senator LEVIN. And these tax haven countries, these offshore

countries will not enter into those kind of treaties with us; is that

not correct?

Secretary O’NEILL. I do not know. It looks to me like we are

making a fair degree of progress. If my memory serves me right,

we have got 66 treaties that provide for the free flow and exchange

of information, but with careful protection around the aspects of

privacy.

Senator LEVIN. How many of these tax havens countries do we

have treaties with?

Secretary O’NEILL. I do not honestly know, and when you say tax

havens countries——

Senator LEVIN. These offshore countries that have been listed either by the OECD or by FATF; how many of those countries?

Secretary O’NEILL. Five.

Senator LEVIN. Five, all right. So, then, most of the ones on the

list we do not have an agreement with to disclose to us upon request; is that correct?

Secretary O’NEILL. Yes, but, Senator, I think the work that is

going on with the FATF and with the OECD is moving us in a direction—it seems to me that we are making real progress with the

work that has gone on in the past and the work that is going on

now, to establish information treaties, because there does seem to

be a uniformity of agreement now, as Senator Collins indicated in

her opening statement, that we are all going to move ahead with

this together.

Part of what I heard about this subject early on, I heard at the

Hemisphere Summit of Finance Ministers, where the finance ministers from some of these small countries, from so-called tax havens

countries, were making a plea that they were being treated unfairly and with discrimination because the OECD was not applying

the same rules to itself that it was now going to impose on them.

When I was in the room last week at the G–7 meeting, Finance

Minister Trumanti, who is the new finance minister in Italy, who

is also a tax lawyer incidentally, one of the most respected tax lawyers in Italy—he said to me, ‘‘You know, if some of this OECD

13

1See Exhibit 8, which appears in the Appendix on page 96.

2See Exhibit 7, which appears in the Appendix on page 93.

work that was going on had continued the way it was, we would

have been found in Italy to be a tax haven by their definition,’’

which I found really fascinating from one of the world’s experts

about tax policy.

Senator LEVIN. Let me get back to the tax secrecy issue and the

countries that we do not have tax agreements with—these offshore

countries that have thousands and thousands and thousands of

these accounts where we cannot get information—to try to see if we

cannot see what we are going to do about it, because that is the

important thing.

This is the testimony that we had from John Mathewson, who

said that: ‘‘out of approximately 2,000 accounts opened in 1985 in

his bank, 95 percent of Guardian Bank’s clients were U.S. citizens

and virtually 100 percent were engaged in tax evasion.’’ 1 Do you

have any reason to differ with that?

Secretary O’NEILL. No. This is the case I keep seeing.

Senator LEVIN. He is the only one that has ever come forward.

Secretary O’NEILL. I know. I keep asking, though, how come

there is only one?

Senator LEVIN. Because he confessed to a crime, that is why.

Secretary O’NEILL. I know, but if we are spending $1 billion a

year on this subject, why is there only one case?

Senator LEVIN. Let’s take a look at the exhibit, then. Let’s take

a look at Exhibit 7.2 Let’s see how many of these accounts there

are, since you seem to think this is a rare case.

Secretary O’NEILL. No, Senator, I did not say this is a rare case.

I said why is there only one.

Senator LEVIN. Well, you seem to be dubious.

Secretary O’NEILL. No. I am wondering why, because I think we

share a view that this is a serious problem and we are spending

all this money. Why is there only one case?

Senator LEVIN. How do you know it is a serious problem if there

is only one case. You have concluded——

Secretary O’NEILL. I am following your lead, Senator.

Senator LEVIN. Other than that, you do not think it is a serious

problem?

Secretary O’NEILL. No, I do, indeed, think this is a very serious

problem. I think I am with you completely on that subject. I am

only questioning why, if we both agree—and most people would

agree this is really a serious problem—we have one person and one

case that everybody keeps citing. Why have we not brought more

fugitives to the bar of justice?

Senator LEVIN. I am trying to figure out if you think it is such

a serious problem, why you are emphasizing that there is only one

case where a guy who has committed a crime, has plead guilty and

has been willing to step forward—I do not understand why you

focus on that fact instead of focusing on what you agree is a serious

problem. Now let’s talk about the problem. We have got the OECD

list of offshore tax havens.

Secretary O’NEILL. Including the U.S. Virgin Islands.

Senator LEVIN. Right. Will you take a look at Exhibit 7, please?

14

Secretary O’NEILL. Yes, sir.

Senator LEVIN. And tell me whether or not you think that the

numbers on that exhibit do not reflect the problem that we have

a serious situation here with tax evasion at these offshore banks

and companies.

Just take a look at these numbers here. In Andorra we have 20

U.S. taxpayers—let me go down to where we have the actual numbers. In Anguilla, we have eight taxpayers who have said on their

tax return that they have foreign accounts of $10,000 or more, a

grand total of eight. We have 1,988 offshore companies. Antigua

and Barbuda, we have 87 taxpayers in the United States that

admit that they owe taxes in their tax returns. We have 12,000 offshore companies in Antigua and Barbuda.

Secretary O’NEILL. Senator, do you have any idea how many of

those are U.S. companies.?

Senator LEVIN. Nobody knows for sure except that the evidence

that we are able to collect when we go to those companies is that

a great proportion of these are American people. The assets that

are owned by Americans proportionally in the world is huge. You

have, here in Aruba, 37 accounts of $10,000 or more, yet there are

7,400 offshore companies in Aruba. In Belize, 81 Americans acknowledge that they owe income tax, and yet there are 16,000 offshore companies in Belize. In the British Virgin Islands, 185 tax

returns acknowledge that they own accounts, and yet 360,000 offshore companies were created by the British Virgin Islands. Do you

believe that reflects a problem?

Secretary O’NEILL. I have no idea. One thing, Senator—— Senator LEVIN. Why do you think there is a problem? Why do

you agree there is a problem?

Secretary O’NEILL. Senator, it does seem really clear that we

have people who are intentionally evading U.S. tax laws, that are

taking money out of the United States or out of other places where

it should be taxed under our tax regime. So, I have no doubt that

this is a serious problem. But one thing that I have learned both

in my public and private career is to know the difference between

what you know and what you do not know. By looking at these

numbers, I can see a bunch of numbers parading across the table,

and I can make inferences about it probably for the next 4 hours,

but they would all be inferences and I know the difference between

a fact and inference. So, I am amused by this data.

I saw the story about it in the Wall Street Journal this morning.

The reporter called us up yesterday afternoon and said that he

really did not know what to do with this, but do you have a comment? They wanted a comment before they even knew what to

write. It would suggest to me that it is not a wonderful way to do

business. Yes, I am interested in looking at this data. We will try

and pursue this data. I would be really interested to know, whoever compiled this, of the 360,000 accounts in the British Virgin Islands—it is an enormous number of accounts. What could they possibly be? Maybe there is some explanation. I do not know and I

would certainly be happy to dedicate some resources to figure out

what all of this stuff means, but looking at the numbers parading

across the table, I do not know anything except there are some interesting numbers that suggest a really strange pattern.

15

1See Exhibit 7, which appears in the Appendix on page 93.

Senator LEVIN. I am not amused by these numbers. I have got

to tell you, I am not amused at all, because I think it is very clear

what these numbers indicate. Although you cannot pin down with

precision what percentage of those accounts are U.S. accounts, we

know from experience and we know from the evidence that we do

have that a significant portion of the assets in this world and particularly in that part of the world are American assets. So, I do not

view this as amusing at all.

I want to just look at Antigua. We looked at an Antiguan bank

called the American International Bank. By the end of 1997, American International Bank had approximately 8,000 clients. The

owner of the bank estimated that about half of its client base

would be from the United States. That is the owner of the bank

who estimated that. That would be about 4,000 U.S. clients in that

one bank alone in Antigua—4,000. Now, the IRS has told us, and

we are very appreciative of the IRS effort on this, that a grand

total of 87 Americans disclosed Antiguan accounts on their income

tax. Yet, in one bank in Antigua, I emphasize, in one bank in Antigua you have an estimate by the owner of the bank that there are

4,000 U.S. clients. That is one of about 20 offshore banks, by the

way, that are licensed in Antigua.

Panama is another example. The chart shows that 342 U.S. taxpayers acknowledge having an account in Panama.1 Panama has

created 370,000 offshore companies. It has 34 offshore banks. We

have some information about the Mark Harris organization in Panama. The owner, Mark Harris, and companies he controls are

found to be behind a number of international bank investment

frauds. Recently, some of the clients of Harris have been indicted

in the United States for money laundering and tax evasion. This

is what a Business Week article said in 1998, ‘‘Sitting in his fifthfloor offices in a Panama City high-rise, Harris, an immaculately

groomed 33-year-old ex-American citizen, says that 80 percent of

his several thousand clients are Americans or Canadians.’’

Now, we can go down with the evidence that is there. These figures, it seems to me, just demonstrate dramatically—and the evidence that we have to support these figures—that tax evasion is

rampant in these tax haven countries and the current enforcement

policies over the IRS requirement to report a financial interest in

foreign accounts are ineffective or non-existent.

I must say, I am discouraged by what you have told us in your

responses to my questions today, when you use words like this kind

of a chart, Exhibit 7, is ‘‘laughable.’’ It is not ‘‘laughable.’’

You cannot prove exactly what percentage of 360,000 offshore

companies in the British Virgin Islands, or 100,000 companies in

the Bahamas are American owned. You cannot prove that precisely, but there is enough evidence, just in interviews with people,

that a significant percentage of those companies and accounts are

American. Yet we have peanuts. We have got in Antigua 87 accounts admitted. There are 12,000 offshore companies. So, I have

got to tell you, Mr. Secretary, I think you diminish the problem,

that you underestimate the problem, with your rhetoric.

16

Some of your rhetoric acknowledges that you say you believe

there is a problem, that there is a real tax evasion problem, and

I welcome that. I truly do. But when it comes to looking at the dimensions of the problem, the evidence that we have, it seems to me

that you minimize the problem by the way in which you respond

to the evidence that is available. Now, I want to give you a chance

to respond. My time is up, then I will turn it over to Senator Collins.

Secretary O’NEILL. Thank you. First, if you do not mind, and I

do this with all respect, please let me take away from you—you

characterized what I said about this as ‘‘laughable.’’ I did not say ‘‘laughable,’’ but I fear knowing how the media works, if you put ‘‘laughable’’ in my mouth, it will be in their pen. So I want to take ‘‘laughable’’ away from you. I did not say that.

Second, I want to see if we cannot be together, because I do think

we should be together on these issues. What this data says to me,

without knowing any more about it, and without making any inferences, is that we need a tax treaty with all of these jurisdictions

like the other 66 we have, so that we can pursue Americans who

are cheating their co-citizens by evading our tax laws through

these jurisdictions. I hope we can agree that is the right thing to

do. And then we will have an opportunity to find out whether these

are Americans who are cheating their co-citizens or not, and not

rely on appearances or inferences, but actually go after them.

Senator LEVIN. We have been seeking disclosure from these tax

havens for decades without success. We have had very little success

and only when—it is the threat of sanctions and it is the threat of

international action which has caused them to come through with

tax treaties or disclosure. So, we more than welcome tax treaties,

but we will come back on a second round to find out how long we

are going to standby without either tax treaties or disclosure before

we join in a sanctions regime.

Secretary O’NEILL. Senator, if I may say one thing about that,

I am looking at this list now and you are telling me for decades

that we have had this list and we have not done anything about

it?

Senator LEVIN. No, I am saying that we have been trying with

many of these tax havens to do something about it for decades, and

the only thing that has succeeded, I suggested, is when the international community took action, and then we got some of these tax

havens to sign treaties and end these offshore practices which have

cheated American taxpayers of the amount of money which other

taxpayers have owed. That is all I said.

Secretary O’NEILL. It is probably dangerous, but what I would do

with this, in my previous incarnation, which I am going to do for

you right now without consultation with my staff, I would say look,

how about if we make a deal? I will come back here a year from

now, and I will have worked out a tax treaty with what represents

more than 50 percent of all the offshore companies, which lets me

work with major jurisdictions instead of small ones, and demonstrate to you that we are serious about this and the problem you

have been haranguing people about for years and apparently have

not done a very good job of it. We are going to show you real

progress and we will show it to you fast enough that you will not

17

have to wait for a new Secretary to come around and you can talk

to them.

Senator LEVIN. We started with President Reagan doing the haranguing.

Secretary O’NEILL. I am going to go get something done for you.

Senator LEVIN. Good. I just want to let you know the Reagan Administration and the Bush Administration that came after that,

and the Clinton Administration, have been trying for decades. That

is the effort that has been made. I really hope you succeed where

they have failed and we have failed to do more than we have, and

we look forward to that report back in a year with your .500 batting average, and we turn this over to Susan Collins.

Senator COLLINS. Thank you, Mr. Chairman. Secretary O’Neill,

I want to go back to the infamous prosecution that started this dialogue between you and Senator Levin. Was the point that you were

trying to make in pointing to this single case that since the Federal

Government is spending between $650 million and $1 billion a year

in fighting money laundering, you would expect to see many more

high-profile prosecutions—and thus more convicted felons cooperating with law-enforcement authorities and with this Subcommittee? Was that the point you were trying to make?

Secretary O’NEILL. That is precisely right. I am sorry if I did it

badly.

Senator COLLINS. The question of the review that you are undertaking at the department has raised concerns about the administration’s commitment to money laundering. Would it be fair to say

that your review is motivated not by any desire to do less in fighting money laundering, but rather by a desire to ensure that we accomplish as much as possible with the resources that we are devoting to this important fight?

Secretary O’NEILL. Precisely right.

Senator COLLINS. Is this typical of the reviews you are doing

across the department as you are looking at all of the responsibilities?

Secretary O’NEILL. Absolutely, and it comes from, I must say, 25

years worth of demonstrating an ability to produce value, not rhetoric, but value. I believe these same ideas and persistence and consistency can produce value where people have hungered for it for

years and have been disappointed, dissatisfied, and unfulfilled.

Senator COLLINS. Indeed, as Secretary of the Treasury, you have

every motivation in the world to maximize the fair collection of tax

revenues, and to make sure that taxpayers are not evading their

responsibilities by secreting money in offshore accounts.

Secretary O’NEILL. Precisely right.

Senator COLLINS. I understand that the Treasury Department

and the Justice Department have not always coordinated their efforts against money launderers as well as they should have, and

I am wondering if that might be one of the reasons we have seen

relatively low prosecution rates and less of an emphasis placed on

money laundering investigations and convictions. Could you tell me

what the relationship is between your department and the Department of Justice Criminal Division, as far as making money laundering cases a priority?

18

1See Exhibit 29.b., which appears in the Appendix on page 166.

Secretary O’NEILL. I am glad you asked, and am sure you know

that Jimmy Gurule ́ is a distinguished American who has served in

the Justice Department and has recently been a chaired professor

at Notre Dame. He has given up his career at Notre Dame as a

professor at the law school and has agreed to come back to serve

the people. He has been nominated by the President, and he is

working as a consultant. It would help an awful lot if we could get

our nominees approved so that people like Jimmy Gurule ́ can lean

into these problems. We had a meeting yesterday to talk about coordination in our effort on money laundering with the Justice Department so that we can focus on cases where we can produce results.

One of the things you find when you begin to investigate how the

processes work is often times there has not been a prosecution because the Justice Department did not find some of these cases worthy in the context of all things that they saw that they needed to

do. So, after a case was made, there was not an attempt to prosecute, which is very discouraging to the whole process. I think with

Jimmy coming on board, it is going to be possible to break down

the bureaucratic barriers between the organizations of the Federal

Government who work on and focus on these problems. I believe

we can make, again, great progress, because I personally, and I am

sure this is true of Jimmy and the other people, we do not have

a stake in bureaucratic turf. We want to solve these problems.

Senator COLLINS. In your various comments on the OECD framework, you have repeatedly emphasized the importance of focusing

the project upon what you have called the core elements of transparency and information sharing. Just for the record, did the administration ever consider abandoning these core elements that underlie the fight against tax evasion and money laundering?

Secretary O’NEILL. Never.

Senator COLLINS. So, is it fair to say that the administration has

always been and remains committed to effective information sharing in order to facilitate the identification and prosecution of tax

cheats and money launderers?

Secretary O’NEILL. Absolutely.

Senator COLLINS. I have read that you have had considerable

success in persuading OECD to focus on the core elements and to

modify its approach, and according to some press reports, OECD

member governments are on the verge of agreeing to a 2001

progress report that will incorporate many of the changes that you

have suggested.1 Could you comment on that?

Secretary O’NEILL. It is being held up right now by a side issue.

It is much like the side issue that is holding up my nominees. I

am sorry to keep returning to this, but if you cannot tell, it is much

on my mind. I and my Under Secretary for International Affairs

are supposed to go to London and Moscow next week on an important follow-up visit to the meetings that the President had with

President Putin, and that means probably John Duncan, who is sitting over here, is going to be the acting Secretary in case Argentina

falls apart or something, which is not the most wonderful of situations.

19

1See Exhibit 4, which appears in the Appendix on page 87.

2See Exhibit 23, which appears in the Appendix on page 120.

In any event, we are dedicated and determined that we are going

to do a better job than has ever been done on the subject. We have

no intent of abandoning the pursuit of violators of our laws. But,

I might say one other word. There is a collateral consideration that

we all need to pay attention to and be mindful of, and that is that

we not violate one of the most important freedoms that we have

as Americans, and that is, within the right boundaries, a right to

privacy. So, I think we are dedicated to doing all these things in

a way that is still consistent with the rights of Americans as individuals.

Senator COLLINS. Mr. Secretary, it is my understanding that a

number of former IRS commissioners wrote to you in response to

some press reports that raised concerns about the administration’s

commitment to improved information sharing and the fight against

tax evasion and money laundering.1 I know that two of those officials will testify today, but I would like to give you the opportunity

to clarify or respond to the concerns that were raised by these commissioners. One of whom I understood wrote a follow-up letter to

you agreeing with many subsequent comments that you made.2

Secretary O’NEILL. Well, thank you. I was frankly thunderstruck

when I got the letter from these distinguished people, because I

could not believe that they had read what I said, and I think you

will hear today that they were responding to press accounts. As I

said before, they did not respond to what I said at all. They responded to misrepresentations in the media, and I am sorry to be

so blunt about it, but there is no other way to characterize it. If

you look at the pieces that are in this book, if you can find any connection between the representations that were made in these stories and what I have said on the record and off the record, there

is no connection whatsoever. But, intelligent people, including

these distinguished citizens who have served in their government,

took what they read at face value. Many of them know better, because they have been subjected to this, but they had forgotten.

So, when they read it in the newspaper, they filed—you would

not believe, I get 2,000 letters a week and many of them are responding to things that I never said, never imagined and never

would imagine, but I am still getting letters about it as though it

were the real stuff simply because it appears in print. These days,

with the wonderful technology we have with Lexis Nexis and all

the rest of that, once this stuff is on the record, it never goes away.

It is always a primary source. So, when I am 95, I am going to be

getting letters saying we cannot believe you did not want to prosecute money launderers. I will let them speak for themselves.

Senator COLLINS. Would you like to respond more specifically to

the concerns that they raised?

Secretary O’NEILL. I honestly believe that they will tell you, at

least I hope that they will tell you today, that they did not disagree

with what I said at all. They disagreed with what was represented

that I might have thought. So, I think we do not have a difference

of opinion. As far as I can tell, maybe Mr. Alexander would like to

nod his head that he agrees with me. We ought to pursue every tax

20

1See Exhibit 23, which appears in the Appendix on page 120.

cheat to the ends of the earth and we should not tell other nations

how to structure their tax systems. Don, do you agree with that?

Stand up and say yes, Don. [Laughter.]

Senator COLLINS. Mr. Chairman, I would ask—— Senator LEVIN. I think we will keep the gavel right where it is.

Secretary O’NEILL. I am sorry, sir.

Senator COLLINS. I would ask unanimous consent that the letter

from Donald Alexander, in which he salutes the Secretary and says

that he agrees with him on two very important points relevant to

this debate, be included in the record.1

Senator LEVIN. It will indeed be.

Senator COLLINS. Thank you, Mr. Chairman. Thank you, Mr.

Secretary.

Senator LEVIN. Thank you, Senator Collins. Mr. Secretary, in

your prepared statement you indicate on page 6 that the United

States argued for and strongly supports a delay of more than 2

years before any sanction can be applied to a tax haven. Then, on

page 10, you state that you are not ready to speculate as to what

measures, if any, the United States or other countries might consider applying in 2 years if it were to come to that. That is the tone

of your statement relative to tax havens.

I would like to contrast that with the much stronger tone that

the Treasury has taken in the money laundering field. FATF,

which is the leading international anti-money laundering organization and of which the United States is a member, has also put out

a list of countries and has threatened sanctions. It put out that list

in June 2000, the exact same month as the OECD list.

FATF warned the listed countries to strengthen their anti-money

laundering laws or become subject to sanctions by the FATF member countries. Last month, the FATF list was updated. Four countries had improved their laws so much that they were de-listed.

Three countries, Russia, Nauru, and the Philippines, had done so

little that they were told that they would become subject to sanctions on September 30 of this year unless they took significant action.

On June 22, the Treasury Department put out a press release

noting that sanctions will go into effect on September 30, 2001, and

clearly supported the imposition of sanctions. This is now the

FATF list we are talking about on money laundering. Here is what

the Treasury said, ‘‘The Treasury Department supports countermeasures against countries refusing to implement constructive

legal reforms to address ongoing money laundering concerns. The

Treasury Department, in conjunction with the Department of State

and the Department of Justice, remains firmly committed to this

global battle and we praise the steps that FATF has taken today.’’ That is plain language that clearly supports sanctions against

three listed countries and that relates to the money laundering

area.

Now, contrast this with the prepared statement relative to the

OECD tax haven project. On page 9, your statement says that the

threat of sanctions by a ‘‘group of 30 large, developed countries is,

by its nature, highly coercive and should be reserved only for jurisVerDate 11-MAY-2000 12:59 Dec 04, 2001 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 75473.TXT SAFFAIRS PsN: SAFFAIRS
21

dictions acting in bad faith whose practices demonstrably facilitate

the non-compliance by taxpayers with the tax laws of other countries.’’ I agree with you, coordinated actions or sanctions by 30

countries is coercive, but that is the point. That is exactly what

they are intended to do, to be coercive with those tax havens that

all 30 countries have agreed are outside of international norms and

to go after the tax evasion that costs the taxpayers so much.

Now, when you include this language about not wanting to impose sanctions on tax havens unless they act ‘‘in bad faith,’’ and

have practices that ‘‘demonstrably facilitate’’ tax evasion, are those

standards included in the tax haven project of OECD or is that a

whole new test for whether the United States is willing to impose

sanctions?

Secretary O’NEILL. Well, I think, as you know, Senator, because

you are an expert in these things, these are two separate cases.

The FATF process is a separate process from the OECD process.

I do not have any trouble with the idea of sanctions properly applied and fairly applied at all, but I did have trouble—now, I must

tell you I found it pretty compelling to listen to the finance ministers of people from countries as small as 4,500 people say, ‘‘Well,

if you are going to do this to us, is Switzerland going to comply?’’

I thought that was not a bad argument: ‘‘Well, if you are going to

do this to us and you are going to use the power of the 30, are you

going to do it to yourself or not?’’ I thought that was a pretty good

question.

Senator LEVIN. Well, now, the statements that you made in your

press release supporting the actions against those offshore countries in the area of money laundering did not make those qualifications. You did not have those qualifications.

Secretary O’NEILL. It is a completely different——

Senator LEVIN. Is it? They are linked to tax evasion.

Secretary O’NEILL. No, well, I think they are not completely unlinked. They obviously have a degree of linkage, but the OECD

process was different from the FATF process. Otherwise, why

would there be two? If we did—I think we are, with the FATF process, we are encompassing the world.

Senator LEVIN. Is tax evasion, in your judgment, less important

than money laundering?

Secretary O’NEILL. No.

Senator LEVIN. Let me ask you about the 2-year delay that the

United States argued for and strongly supports relative to sanctions. Again, I emphasize that we have been going after some of

these tax havens for decades, literally, but now you have urged a

2-year delay in the sanctions being applied. Can you tell us how

it is in our interest for the United States to delay the imposition

of sanctions on tax havens for failure to disclose for an additional

2 years now, where we have been trying to get disclosure and

transparency from those countries since the 1980’s?

Secretary O’NEILL. Actually, my memory is, what we have done

is we have linked the effective date to the effective date for the

OECD, which, again, seems not an unreasonable process. It seems

to me, if it is good enough for us, it is good enough for those we

are going to punish.

22

Senator LEVIN. Yes, but you are applying now a different standard. You are withholding sanctions in the area—I think you are

urging the delay of sanctions in the area of tax evasion. You did

not apply that same standard, I believe, in your press release relative to money laundering.

Secretary O’NEILL. This is not a delay. It is a delay in when we

should begin triggering so-called defensive actions, and it is triggered to when are we going to start doing this to Switzerland.

Senator LEVIN. Switzerland is hardly equivalent to Nauru.

Secretary O’NEILL. Really?

Senator LEVIN. Yes.

Secretary O’NEILL. I am not so sure.

Senator LEVIN. Nauru has very few people, has allowed $70 billion to go through 400 offshore banks that it set up and let loose

on the world. That is a tiny country causing major problems.

Secretary O’NEILL. I do not think we know how many blind accounts there are in Switzerland.

Senator LEVIN. Let me just finish. Switzerland has a highly developed regulatory regime. It already cooperates with international

criminal investigations and you are equating those two. We do not

have that kind of cooperation from Nauru, do we?

Secretary O’NEILL. I am saying that—at least my sense is that

Switzerland is a place that is still a mysterious place for bank accounts.

Senator LEVIN. I am sure it is a mysterious place in lots of ways,

but the question is whether or not you want to equate a country

which has 400 offshore banks—a little country, very few people,

$70 billion goes through those offshore banks, and you want to say

delay the sanctions regime on them for 2 more years. Let me ask

you, what is it in this 2 years that you want Nauru to do in order

to avoid sanctions? Give us the list of things that you would like

to see them do to avoid sanctions.

Secretary O’NEILL. We have specified within the work with the

OECD the conditions we would like to see people meet. I think that

list now, with the withdrawal of some very contentious definitional

issues, is pretty well agreed to, and it is agreed to by all the members of the OECD. So, I do not think this is a contentious issue.

It is a question of what is fair. And maybe what you are saying,

and maybe it is a point I should take in—but fine, we should say

we are going to apply these standards right now to everybody, and

we will do it in the next 6 months. It is a point worth considering,

but I am not so sure that some of the members of the OECD would

like to have this sanction on themselves against a tighter time

schedule, but it is something worth raising with them.

Senator LEVIN. Do you now support the tax haven project of the

OECD?

Secretary O’NEILL. I support, and the Bush Administration supports, the OECD agreement which is now waiting for a final ratification—as I said, there is a side issue holding it up. I think we are

in complete agreement among the participants in OECD about

what we should do and how we should do it.

Senator LEVIN. Do you support the imposition of sanctions on uncooperative tax havens?

23

Secretary O’NEILL. If there is no option, I would prefer that we

bring them all along and we get everyone to agree to the standards

that have been suggested, but at the end of the day, I think we

have to look at the prospect of sanctions in the event countries continue not to provide full information and transparency.

Senator LEVIN. I am just not clear on that answer. You say, ‘‘look

at the prospect of sanctions.’’ My question was whether you support

the imposition of sanctions on tax havens that do not cooperate.

Secretary O’NEILL. Yes, but I am saying something different to

you. Again, if something—maybe it is only a small sample, the reason I have this sense, but when I talked to them, the finance ministers at the Hemisphere Conference in Toronto in April, I did not

really find them saying we are not going to cooperate. They said

this process is not fair, and I think you know that there are several

of these countries that have now come forward and said they are

willing to do these things. Again, maybe this is a relapse to a habit

of mine that comes from 25 years outside of Washington. I found

that if you give people, that you are trying to do something with,

an opportunity to do the right thing, most of them will do it. So,

I do not begin with the notion that I have got to find a cannon and

blast the hell out of everybody in order to get them to do this.

Maybe we will, but I do not begin with that premise.

Senator LEVIN. We have been trying to gain that cooperation for

decades, without success. Now, maybe you are saying by not applying the threat of sanctions or by saying maybe we will or maybe

we will not, that they will come along and do something they have

not done for decades. I am dubious, but we welcome your bet of 500

percent compliance in 1 year. We look forward to that. However,

my question still remains, where you fail, where you’re continuing

to say come on along, we know you have not for the last couple decades, come along, despite all the efforts of all the administrations,

my question to you was actually a fairly direct question.

You just sort of say consider, or the prospect of, and my question

is, unless people believe that if they do not come along in the 2-

year grace period which you are now offering, that, in fact, sanctions are going to be applied, it seems to me there is less likelihood

that they will, in fact, come along. My question to you is, if at the

end of that period you find tax havens which are not cooperative,

are you then ready, willing and determined to apply sanctions?

That is my question.

Secretary O’NEILL. My answer to that is yes, but I would say

something else to you about this. The fact we have been working

on this for decades and as you say nothing much has happened—

I do not think we should do that, and in that regard, when I say

I am for sanctions in the event we cannot encourage or coddle people into doing the right thing, we should have sanctions that mean

something, not sanctions that are prefatory or suggestive or something. But, in saying that, I think we need to be careful that we

are willing to live with the consequences. So, yes, I am for sanctions. I am for sanctions that really do something, but with an understanding that when you take moves, you may start a process

that you do not completely like the results of. So, yes, I am for

sanctions.

24

Senator LEVIN. Good. I think you also point out finally in your

testimony that some of the proposed sanctions would require legislation. The prior administration has drafted legislation that would

enable the United States to join its colleagues in the OECD in imposing some of these key sanctions identified for coordinated action,

such as denying tax deductions or credits for transactions in the

listed uncooperative tax havens. Will you be supporting the enactment of that type of legislation this year?

Secretary O’NEILL. I am not sure we can get it done this year,

but, yes, as a general point, yes.

Senator LEVIN. When you say get it done, do you mean get us

your views on it or get the legislation passed?

Secretary O’NEILL. Get the legislation passed.

Senator LEVIN. But you do support it?

Secretary O’NEILL. Yes.

Senator LEVIN. I guess there was one other statement you made

that really troubled me, and that is on page 9 of your prepared

statement, ‘‘Drafting lists and devising defensive measures ultimately will not help countries curb noncompliance with their tax

laws.’’

It seems to me that implies, sort of challenges, the essence of the

tax haven effort, which is about listing countries and threatening

sanctions as a way to get tax havens ultimately to change their

ways, to increase disclosure, to cooperate with efforts to stop tax

evasion. By the way, the exercise is working. Drafting lists backed

by international sanctions is working.

You say frequently you can get people to do things they do not

want to do without threatening sanctions. Well, I hope you are

right. I hope your .500 batting average works without the sanctions, but we do know that the threat of sanctions with FATF

worked. We have a number of countries now that are coming along.

That is why the Cayman Islands changed its stance after years of

resistance to avoid being listed. Nine other countries have done the

same thing. So, your statement about drafting lists and devising

defensive measures ultimately will not help countries curb noncompliance with their tax laws—I am wondering if you could just

clarify?

Secretary O’NEILL. I thought I gave you the careful answer I did

about if I am for sanctions or not, and I will say again, in that regard, acting like you are going to do something without really accomplishing something seems to me to be a pretty poor bargain.

That is the intent of that language, to say we are really serious.

We are going to do something. Then we are going to have to devise

some things that really make a difference, that really hurt people

if they do not do what we want them to do, but we need to do that

with some caution and some understanding of the possible consequences of our actions.

Senator LEVIN. I fully agree with that. We have had decades of

that contemplation. We now finally have seen consolidated international action to go after both the money launderers and now,

after tax cheats, and I hope this administration is going to put its

shoulder to that wheel. We need disclosure. That is what you call

the core. We cannot get after the tax cheats without disclosure. We

are not going to get those disclosure agreements without sanctions

25

in at least many cases. That is what history proves. That is history

now speaking.

You can hold out the hope that you will, based on your hope and

your good faith and your good nature, but nonetheless history has

shown that it is the threat of sanctions, of being listed and ultimately sanctions being taken against countries, that have caused

them to come along. I am afraid that is what is going to be true

here, but we look forward to two things. One is your specific comment on the proposed legislation to allow us to participate in those

sanctions, so that we can try to get that legislation passed as soon

as we possibly can.

Second, we look forward to the box score a year from now and

we will see how many of these offshore tax havens have, indeed,

signed agreements with us, signed treaties and disclosed. And we

will bet a very full breakfast if that is agreeable with you.

Secretary O’NEILL. Senator, we are going to show you a performance that you wished and hoped for for decades and we are going

to turn it in for you.

Senator LEVIN. I cannot tell you how much I look forward to it

and we thank you for coming today.

Secretary O’NEILL. Thank you.

Senator LEVIN. We will now turn to our second panel. Let me

now call on our second panel. As I think both of you are aware,

under the rules of this Subcommittee, after I give you an introductory comment, we will require that you stand and take the oath

like all other witnesses. But first let me welcome Robert Morgenthau.

Mr. Morgenthau is a virtual institution in the city of New York.

He has served as Manhattan’s District Attorney for more years

then I can count and maybe more years than he wants to count,

although I am not sure about that. But I know it is not more years

than the people of New York want to count, because I have enough

relatives in New York to know just what a momentous career and

a wonderful contribution you have made in going after some of the

biggest international white-collar crime cases in this country, along

with a host of other types of crime. But you have been involved,

Mr. Morgenthau, in trying to get cooperation from offshore tax havens for decades. We are delighted to have you here.

Second, Michael Chertoff, Assistant Attorney General of the

Criminal Division, Department of Justice. Mr. Chertoff is new to

the position in the Department of Justice, but not new to the prosecutorial world. He served as Assistant U.S. Attorney for the

Southern District of New York from 1983 to 1987, First Assistant

U.S. Attorney for the District of New Jersey from 1987 to 1990,

and then U.S. Attorney in New Jersey from 1990 to 1994. We are

really delighted to have such a distinguished panel before us this

afternoon. You are two people who have dedicated your lives and

your professional careers to public service, and we look forward to

hearing your views on the current state of U.S. anti-money laundering efforts. As I indicated, pursuant to Rule 6, I will now swear

in our two witnesses. Do you swear or affirm that all the testimony

that you will give before this Subcommittee will be the truth, the

whole truth, and nothing but the truth, so help you, God?

Mr. MORGENTHAU. I do.

26

1The prepared statement of Mr. Morgenthau appears in the Appendix on page 56.

Mr. CHERTOFF. I do.

Senator LEVIN. Mr. Morgenthau, let me call on you first.

TESTIMONY OF HON. ROBERT M. MORGENTHAU,1 MANHATTAN

DISTRICT ATTORNEY, NEW YORK, NEW YORK

Mr. MORGENTHAU. Thank you, Senator. I appreciate that very

generous introduction. I want to say that in an earlier career, I had

the privilege of appearing before the most distinguished judge in

the U.S. District Court for the Eastern District of Michigan, namely Judge Theodore Levin.

Senator LEVIN. You might be proud to know that the courthouse

there is now named after him, and I must tell you it was not

through my doing, although I was absolutely delighted and should

have thought of it. It was John Dingell and his colleagues in the

House who thought about that. So, when you visit Detroit, you will

notice that it is the Theodore Levin Courthouse.

Mr. MORGENTHAU. He had a remarkable career, and he was an

outstanding judge. I am grateful for the opportunity of appearing

here today. I think the Chairman, in great detail, outlined the

problems that this country is facing under money laundering and

other criminal conduct through these very numerous tax havens. I

want to congratulate you on taking on this very difficult assignment of not only trying to expose what is going on, but trying to

figure out what can be done about it.

It is a huge problem, a gigantic problem. Increasingly, despite all

of the efforts, tax havens are becoming a magnet for U.S. dollars.

In the Cayman Islands alone, there are $800 billion U.S. dollars,

on deposit. In the last year, that amount has increased by $120 billion. It is more than twice the amount of the dollars on deposit in

all of the banks in New York City. Pretty soon, if this trend continues, New Yorkers are going to have to go to the Cayman Islands

to cash their paychecks. This amount is equivalent to 20 percent

of all the dollar deposits in the United States. It amounts to $3,000

for every man, woman and child in the United States, according to

the latest census. It is the equivalent of $20 million for every resident of the Cayman Islands.

I mention this because it is important to understand how big this

problem has become. Of nearly 600 banks that are chartered in the

Caymans, which include 47 of the world’s 50 largest banks, only

100 or so have a physical presence, according to the web site of the

Cayman Island Monetary Authority. Only 31 banks of that 600 are

currently licensed to do business with Cayman residents. Similarly,

there are 45,000 companies registered in the Caymans whose only

businesses is outside the country. They are not permitted to do

business in the country. Of course, Long Term Capital, the giant

hedge fund that collapsed 3 years ago, was chartered in the Caymans, but managed out of Greenwich, Connecticut.

While the Caymans have been particularly attractive to U.S.

residents, they certainly do not stand alone, and this Subcommittee

is familiar with the many other tax havens that are in existence.

Then we come to the question, what is all this money doing offshore? It is not there because of the sunshine and the beaches. The

27

money is there because the people who put it there want a free

ride. Depositors, investors, banks, businessmen want to avoid or

evade laws, regulations and taxes in their own countries, including

the United States. Some of this avoidance, of course, is legal under

present law, but much of it is not, and whether legal or not, the

presence of $800 billion in a single offshore jurisdiction, hidden

from the scrutiny of bank supervisors, securities regulators, tax collectors and law enforcement, is a gigantic problem.

Those of us in law-enforcement uncover only a very small percentage, a tiny percentage, of the criminal conduct that is done

through these tax shelters. Of that number that we identify, we are

successful in prosecuting only a small number, because of the difficulty in getting the evidence. So when we talk about the cases we

made, we have got to remember that is only just a tiny fraction.

I am going to discuss a few of them just to show the type of cases

that are involved, that are used in these jurisdictions.

In 1997–1998, my office convicted A.R. Baron and Company and

13 of its former officers and employees for running an organized

criminal enterprise. Baron was called a boiler room or a bucket

shop, pushing questionable stocks and specializing in market manipulation, unauthorized trading of customers’ accounts and countless other methods of taking advantage of innocent investors. Their

illegal activities cost investors over $75 million. The lead defendant

in the Baron case used a Liberian shell company and accounts in

the Isle of Jersey to trade in the stock the firm was underwriting,

a violation of U.S. securities laws.

He also sheltered his illegal profits or some of them in a Cook

Island trust. You know the Cook Islands are a New Zealand-protectorate in the South Pacific. A New York lawyer drew up the papers

for Mid-Ocean Trust Company in Rarotonga, the Cook Islands, to

act as the trustee. The affairs of the trust were managed here in

New York by the so-called protector of the trust, who happened to

be the lead defendant’s father. Mid-Ocean Trust did business in

New York through one of the largest banks in Australia, which had

branches in Rarotonga and New York, and which refused to honor

a New York subpoena on the grounds that to do so would violate

Cook Islands secrecy laws.

We only solved that case when we had enough other evidence.

This defendant plead guilty and was facing a sentence of 50 years.

At that point, he told us about his assets in the Cook Island trust.

Another case which is still going on involves the brokerage firm

Meyers Pollock. So far, we have convicted 37 defendants for enterprise corruption and securities fund. Again, they used shell companies and offshore bank accounts to paint the tape, as it is known,

to generate fictitious trades, drive up the prices and, of course, to

cheat on their taxes. The losses in Meyers Pollock are somewhere

between $100 million and $200 million.

Securities fraud is not the only area we found. We found bribery

of bank officers to sell Third World debt at below fair value. The

scheme was an extremely intricate one involving companies in Antigua and the British Virgin Islands, payments to a vice president

of a prominent U.S. bank, the vice president of the second biggest

bank in the Netherlands, two other banks, all of this routed

through offshore entities. This was a case where we got lucky. We

28

were able to solve it, and the principal defendants have all pled

guilty. But, again, I give this as an example, not to show what a

good job we are doing, but to show you the kind of activity that is

involved.

A year ago, in a different sort of case, a Manhattan jury convicted Sanif and Kenneth Kimes, a mother-son team of so-called

drifters, for murdering an elderly Manhattan widow to gain control

of her expensive townhouse. In our investigation of the case, we

found that to arrange the payment of filing fees and taxes on a

forged deed to the townhouse, the pair drew on funds held in a brokerage account in Bermuda in the name of the Atlantis Group, a

shell company. The money, which was part of the proceeds of a separate fraud committed in Las Vegas, came to Bermuda by the way

of an account established by the defendants at Swiss American

Bank in Antigua, a Swiss American bank that was neither Swiss,

nor American, that helped finance the crime and set up the

Atlantis Group shell company in Antigua. Incidentally, the people

who established the Swiss American Bank were Marc Rich, former

Governor Marvin Warner of Ohio, and Bruce Rappaport. I mentioned that case to show you how intricate these dealings are and

how difficult they are to solve.

For all of these defendants, the principal attraction of doing business in offshore havens was not the lower or non-existent tax rates.

They sought to take advantage of other benefits that are almost invariably provided in tax haven jurisdictions which provide strict

bank and corporate secrecy, lack of transparency in financial dealings and the lack of any meaningful law-enforcement or supervision in the financial area. For white-collar criminals, the lack of

transparency and the code of strict secrecy is particularly useful because it prevents law enforcement from following the money,

breaks the trail of dirty money, often leaving investigators at a

dead end.

There are two major problems that arise from these transactions.

One is the fact that you do not have a level playing field for taxpayers. You have some taxpayers paying their full taxes that are

owed, and you have others paying none. As Justice Holmes said

back in 1927, ‘‘Taxes are what we pay for a civilized society.’’ Well,

the tax cheats are not paying their share, and that is a significant

problem, because people have to believe that the tax system is fair.

It has to be perceived to be fair, or more and more people are not

going to pay their taxes. It is going to be a growing problem. It is

going to snowball, and the same way with unregulated business.

The securities transactions, financial dealings, are going through

a jurisdiction without any supervision. They have a major, unfair

advantage over companies that are regulated, and it is also extremely dangerous, dangerous because they can result in financial

disaster, as it almost did in the Long Term Capital, with the collapse of those partnerships that had assets of $1.8 trillion. Only a

few days ago, the Financial Times reported a complaint by the deputy speaker of the assembly in the Caymans, that said, ‘‘It is the

poor who pay taxes in this country.’’ All the rich foreigners pay no

taxes, but the local poor are the people who pay the taxes, and that

is because they have no income and no capital gains tax. The tax

is on food. Some years ago, a notorious New York tax delinquent

29

1The prepared statement of Mr. Chertoff appears in the Appendix on page 68.

who was convicted in the Federal court observed, ‘‘It is only the little people who pay taxes.’’ We cannot afford to allow that cynical

view of the tax system to become accepted wisdom of this country.

Tax havens which rely on bank and corporate secrecy are knowingly assisting customers to commit tax fraud. Lawful tax shelters

do not need to be kept secret. I am not advocating the indiscriminate disclosure of financial discrimination on a wholesale basis, but

rather the disclosure of specified information to appropriate tax

and prosecuting authorities where they have reason to request on

the same basis on which disclosure of bank information is made to

tax authorities and criminal investigations in the United States.

Let me emphasize the unfairness of allowing some citizens to

avoid paying their fair share of taxes—it erodes confidence in the

tax system and the voluntary compliance in which the system is

based. In a democracy, you have to have voluntary compliance by

virtually everybody. You cannot have a system where people are

running around checking up on every taxpayer, and you are not

going to have voluntary compliance unless people believe the system is fair. There is a lot of work to be done here. I wish I could

say that I thought things were getting better. I do not think that

they are. Some steps have been taken in the right direction, but

the fact that offshore deposits in the Cayman Islands have gone up

by $120 billion in the last year indicates that some people have not

gotten the message yet.

So I think that everybody has to work together to solve this problem. We have to work with the Justice Department and we will do

that. I met with Secretary O’Neill this morning, and we are going

to work with the Treasury Department. We are going to work with

the Federal Reserve. We will work with this Committee, and it is

only by everybody working together that we can solve this very

complicated, huge, difficult problem—but not intractable if everybody cooperates.

Thank you for the opportunity of testifying.

Senator LEVIN. Thank you, Mr. Morgenthau.

Mr. Chertoff.

TESTIMONY OF HON. MICHAEL CHERTOFF,1 ASSISTANT ATTORNEY GENERAL FOR THE CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

Mr. CHERTOFF. Thank you, Mr. Chairman, and again let me

thank you for that kind introduction. Also, I just want to express

my pleasure at the opportunity to sit with Bob Morgenthau on this

panel. Back some years when I was the U.S. Attorney in New Jersey and an assistant in the Southern District, we worked together

on cases. He has really been a role model for prosecutors in the

New York metropolitan area and throughout the country and the

world, in his tenacious pursuit of very complicated international

criminal cases.

I am very pleased, Mr. Chairman, to be invited here to testify before the Subcommittee in support of Secretary O’Neill’s position in

favor of international cooperation and transparency with respect to

tax havens. We are dealing with the same entities in the money

30

laundering context, the area with which I tend to deal in my current job. Also, if I can just take the opportunity to request that my

written statement be included in the record, and I will briefly address some of the points here.

Senator LEVIN. Both of the statements will be included in the

record in full, as all other statements will.

Mr. CHERTOFF. Obviously, I am not here as a tax expert or a tax

lawyer. I am neither. I am here as a prosecutor looking at the issue

of money laundering, which is clearly emerging as one of the most

important global criminal issues that we face. Before I talk very

briefly about the challenge in dealing with money laundering, I

want to make a comment that arises from some of the discussion

with Secretary O’Neill related to the issue of cooperation. Because

I think in this area, certainly as much as in any other and maybe

more than in most, the key to successful enforcement is cooperation

between agencies, Federal, State and local officials, as well as

internationally.

I can tell you, for example, that although we do not work tax

cases in the Criminal Division, as soon as she is confirmed, I intend to sit down with the new head of the Tax Division and talk

to her about ways in which we can cooperate in mutual cases of

criminal investigation. Likewise, one of the things I did very early

on in my still-brief tenure was to sit down with Jimmy Gurule,

whom I have known for years, and talk about how we can approach

and work together on the issue of money laundering from both a

Treasury and the Justice perspective. Finally, I am looking forward

to the opportunity to work with Mr. Morgenthau and others in a

variety of jurisdictions to pursue these cases.

We need to look at good-quality cases, cases that are not only

well put together in terms of proof, but deal with the institutional

structures that promote money laundering. This way we will not

only deal with the low-level money launderers, but with those entities that allow money laundering to progress on an ongoing basis.

I know the Members of the Subcommittee are aware that money

laundering has become one of the biggest threats to our national

and financial security, with hundreds of millions of dollars in criminal proceeds moving through our financial system in and out of the

United States and abroad.

I do not know if there is a definitive figure on the volume of illegal proceeds, but I have heard estimates that range from 2 to 5

percent of global GDP, which would put the figure between $800

billion and $2 trillion per year. In this country, obviously, we have

addressed part of the problem with the Bank Secrecy Act. We are

also working through the G–7 Financial Action Task Force to try

to bring the rest of the world up to a standard that allows us to

work cooperatively on money laundering. Generally this has been

a very successful effort and a good example of how multilateral

processes can work to motivate countries to address these deficiencies.

The critical thing about money laundering is this: Contrary to

the public perception that money laundering simply consists of

drug dealers moving money back and forth in and out of the country, though it certainly includes that, money laundering is actually

a part of all kinds of international criminal activity, whether it be

31

international business fraud or international political corruption.

In cases like Ferdinand Marcos or Noriega, Lazarenko or Montecinos, the ability to follow the proceeds of the crime has been a critical element in identifying criminal perpetrators and holding them

accountable for their actions.

So, where are we today with money laundering? Our ability to

detect, investigate, and prosecute these kinds of international and

domestic financial crimes, is only as strong as our anti-money laundering laws and regulations and enforcement efforts. When these

laws were first passed years ago, the United States led the world

in adopting and implementing an anti-money laundering regime.

To their credit, other nations, building upon our experience, have

recently enacted and implemented their own laws and regulations,

in some ways surpassing what we have in our own body of laws.

In particular, other countries have adopted a more inclusive understanding of what constitutes a predicate offense to trigger money

laundering under their domestic and foreign law. Some countries

have adopted mandatory reporting by a wider array of reporting

entities than we have in the United States.

So our money laundering laws, which were certainly cutting edge

in the 1970’s and 1980’s need to be revisited. When we first enacted them in the mid-1980’s, I think they were designed to primarily address the domestic narcotics problem. Since that time,

technological developments and the globalization of commerce have

overtaken those laws, and we need to look at how we can keep pace

and move ahead. We can only now begin to envision now how important it is going to be to identify and halt the looming convergence of international organized crime, international corruption

and cyber technology. We in law-enforcement, whether it be Federal, State or local, have to be ready for today’s and tomorrow’s

threats to our national and financial security.

With that, I want to say that I look forward to working with the

Subcommittee and with Bob Morgenthau and others in trying to

put together a package of tools and authorities that will allow us

to strike at the 21st Century of money laundering. Thank you

again for the privilege of appearing, and I look forward to answering your questions.

Senator LEVIN. Thank you very much, Mr. Chertoff. While we

are focusing on tax evasion today and the offshore tax havens

which help assist its occurrence and its frequency, tax evasion is

not always just about nonpayment of tax. As we saw and some of

us remember either reading or hearing about the Al Capone conviction, as someone who was convicted of tax evasion, but who had

been suspected of murder, extortion and a bunch of other violent

crimes. But this is an example of how tax crimes can be used to

stop other, more violent crimes. Do U.S. law enforcement personnel

still use tax violations to put violent, dangerous criminals behind

bars?

Mr. CHERTOFF. Absolutely. I can tell you from my personal experience that we often marry a substantive case involving violent

crime, organized crime, or narcotics trafficking with tax counts, because the tax counts do give you an extra punch in law enforcement.

Senator LEVIN. Mr. Morgenthau.

32

1See Exhibit 7, which appears in the Appendix on page 93.

Mr. MORGENTHAU. We use narcotics laws to put away a lot of

murderers. It is easier to get a narcotics conviction when making

an undercover buy than it is to prove a murder. So those kinds of

things are still done and done effectively.

Senator LEVIN. Including using tax laws for that purpose?

Mr. MORGENTHAU. Well, we do not have as strong tax laws as

the Federal Government does, but—— Senator LEVIN. So you are using that as an analogy?

Mr. MORGENTHAU. We do it from time to time.

Senator LEVIN. Both of you have offered powerful testimony

about misconduct and offshore tax havens and why it is in the national interest of the United States to convince those jurisdictions

to cooperate with U.S. law enforcement efforts. Given your experience, will the hard-core tax havens on the OECD list be likely to

agree to cooperate unless they believe that we are willing to impose

sanctions?

Mr. CHERTOFF. Well, I do not think I can identify the location of

many of these places on the list. Based on my own experience,

there was a time 10 or 15 years ago when we could not have envisioned getting even the cooperation we are getting now. I think the

Cayman Islands is a very good example. I think carrot is great;

sometimes stick is important, too.

Mr. MORGENTHAU. I think it varies. The Channel Islands, the

Isle of Man, Guernsey and Jersey are now very cooperative, but

they are the only ones that I can look at and say that there has

been a significant change. There has been talk from the Caymans,

but I am still from Missouri as far as the Caymans. We have not

seen any tangible evidence they are going to be helpful. They are

moving the players around a little bit, and I am hopeful, but the

amount of dollars going down there is not going down. It is increasing.

Senator LEVIN. On the Caymans issue, the Caymans avoided

going on the list of OECD tax havens, and so it does not show up

on the chart, which is Exhibit 7 in your book.1 You have pointed

out, Mr. Morgenthau, that the amount of money in the Caymans

has gone up. It is almost $1 trillion, it sounds like now. The disclosure agreement that the Caymans have made takes effect in the

year 2003. So that will be the year when we will begin to get the

information about U.S. taxpayers’ money that is placed in the Cayman Islands. That is what we have fought so hard to get with

these other jurisdictions—disclosure and transparency, so that

upon request, when a law-enforcement person asks the Caymans

for information about an account in one of those banks, that you

will then be able to get it.

Mr. MORGENTHAU. Let me just say this, kind of the reverse of

time is money, even where, under the Mutual Assistance Treaty,

a country like Switzerland says we will disclose, but they may take

a couple of years to do it, and by that time the horse is not only

stolen, but the barn has burned down. I am reading a book by one

of the lawyers who says how the rich grow richer. He said you can

set up an asset protection trust and if somebody goes after you,

then you move it to another jurisdiction. So just the fact that they

33

are going to disclose is important, but it is important that it be

done promptly.

Senator LEVIN. Right, I think that is a really significant point.

There were less than 1,000 taxpayers of the United States that disclosed that they have an account in the Cayman Islands, and yet

your data is that there is how much American money?

Mr. MORGENTHAU. $800 billion.

Senator LEVIN. Almost $1 trillion.

Mr. MORGENTHAU. Yes, and growing at the rate of about $120

billion a year in the last several years.

Senator LEVIN. If you look now on Chart 7, given the amount of

money that we know is in the Caymans that is American money

and the relatively few taxpayers who admit it on their income tax

forms, 999, to be precise, in the year 2000, there sure seems to be

a similar disconnect with some of these other tax havens. Do you

have Chart 7 in the book in front of you there? Look at the taxpayer filings, for instance, Isle of Jersey, which has 868 taxpayers

saying they have an account, and there are 20,000 offshore companies. We do not know how many of those are American, by the way,

and we will not know that until we get disclosure.

Mr. MORGENTHAU. I know. Well, we know quite a few of those

are British; quite a few of them are Russian. We have indicted two

British lawyers, one of them a magistrate and a Canadian lawyer,

for setting up Jersey companies. Some of this was used to facilitate

the moving of money out of Russia.

Senator LEVIN. In Antigua, you have 87 U.S. taxpayers saying on

their returns that they have accounts in Antigua of $10,000 or

more, and yet we have 12,000 companies. There is nobody who is

going to tell us how many of those are American companies and

how many of those are deposits until we get disclosure, if we ever

do. But just looking down this disconnect between the relatively

few disclosures that we have and the incredible number of offshore

companies that have been opened up—Bahamas, we have a total

of 786 U.S. taxpayers saying that they have accounts there of

$10,000 or more. We have 100,000 offshore companies in the Bahamas.

From your experience in law enforcement, would you expect that

there would be a larger number than 786 taxpayers from the

United States in the Bahamas when there is 100,000 offshore companies there, Mr. Morgenthau?

Mr. MORGENTHAU. In the case that we have now, we know of 980

Americans who have accounts there.

Senator LEVIN. In one bank or one person who opened it?

Mr. MORGENTHAU. With one investment called Evergreen. They

will regret that now, because Evergreen is in bankruptcy, and the

2,000 investors in Evergreen have lost $212 million. So they are

paying.

Senator LEVIN. That was one investment.

Mr. MORGENTHAU. One enterprise, yes.

Senator LEVIN. With that many American investors, equal to the

total of all the American investors.

Mr. MORGENTHAU. They set up a separate trust for each one, so

I think there was something like 900 trusts set up in the Bahamas.

34

Senator LEVIN. And that is just with one person setting up one

investment for that many Americans.

Mr. MORGENTHAU. The company said each one of you has your

own trust——

Senator LEVIN. But one company.

Mr. MORGENTHAU [continuing]. To their regret. Because they

have been wiped out.

Senator LEVIN. Right. I understand that, but with one company.

Mr. MORGENTHAU. One company.

Senator LEVIN. They may regret it, because they have been

wiped out, but they have to disclose it, whether they are wiped out

or not or whether it is a good investment or bad, they have to disclose that investment.

Mr. MORGENTHAU. Of course, one of the attractions to these poor

suckers was the, ‘‘You will not pay any American taxes.’’

Senator LEVIN. And that it will be hidden; is that correct?

Mr. MORGENTHAU. Yes.

Senator LEVIN. Do you have anything to add on that, Mr.

Chertoff?

Mr. CHERTOFF. I do not know that I am in a position to speculate

about the number of accounts, but I do think something that Mr.

Morgenthau pointed out is worth noting in terms of money laundering. We are dealing not only with the issue of Americans who

put money in these banks, we are talking about foreign criminals

who put money in these banks and then move the funds into the

United States.

Senator LEVIN. This international tax haven project, which we

have made reference to this afternoon, is asking offshore tax havens to agree to cooperate with both criminal and civil tax inquiries, with criminal tax inquiries by the year 2003 and with civil tax

inquiries by the year 2005. That is what this OECD project is asking the tax havens to do. What is the difference between the two?

How do you know which one to ask for at the outset of a tax investigation?

Mr. CHERTOFF. Well, again, I do not want to get outside my expertise as that is a Tax Division matter. I can just tell you from

my experience back when I was U.S. Attorney, that if you are dealing with a ‘‘naked tax case,’’ a tax case not a part of an organized

crime or drug case, the IRS and the Tax Division have sets of procedures that they use to evaluate whether a case ought to be treated as civil or criminal. I do not know that, in my experience, there

was a precise line. It has the character of, ‘‘I know it when I see

it.’’ But there are generally a set of characteristics that define

whether a case is serious enough in terms of mental state and pattern to warrant criminal prosecution.

Mr. MORGENTHAU. We have no civil jurisdiction, so we would

only be interested in criminal tax investigations.

Senator LEVIN. The tax haven project has succeeded in obtaining

written commitments from 10 jurisdictions, including Bermuda and

the Caymans, to begin cooperating with civil and criminal tax

investigations. So there is an agreement to cooperate there. What

impact do you believe those commitments are going to have on law

enforcement? Are you familiar with the details?

35

Mr. MORGENTHAU. I hope they are going to be helpful, but I

think the proof of the pudding is in the eating. We are going to

have to wait and see.

Senator LEVIN. Would you take a look at those commitments for

us and give us your critique or your commentary or your reaction

to the commitments, so you could tell us where we should look for

loopholes?

Mr. MORGENTHAU. I would be glad to.

Senator LEVIN. That would be very helpful. Mr. Chertoff, if you

would do the same, we would appreciate that.

Mr. CHERTOFF. Yes.

Mr. MORGENTHAU. If I may say one thing.

Senator LEVIN. Please.

Mr. MORGENTHAU. In the past, where there has been a mutual

legal assistance treaty in effect, like in the Caymans, for instance,

they have taken the position that we will give this information only

to the Justice Department, and the Justice Department is not permitted to give it to State prosecutors. So that is something you

have to be on the lookout for, also.

Senator LEVIN. All right. We are going to get you both the copies

of those commitments, so you can tell us where you believe they

are strong and where you believe that they are weak. Some opponents of the international tax haven project want to require the

United States law enforcement to have to establish probable cause

that a tax violation has taken place before asking a tax haven to

provide information to the U.S. Government. Now, as I understand

it, that would be a reversal of a long-standing policy and a U.S. Supreme Court decision which has held that you can obtain information for a tax investigation, provided the investigation is for a ‘‘legitimate purpose,’’ without a prior establishing of ‘‘probable cause.’’

Mr. MORGENTHAU. What we would want to see would be the

same standard for getting records offshore as apply in the United

States. In other words, the same reasonable basis, but not probable

cause.

Senator LEVIN. Do you have anything to add to that, Mr.

Chertoff?

Mr. CHERTOFF. I have nothing in particular.

Senator LEVIN. Mr. Chertoff, finally, with your reference to the

money laundering laws and the efforts to strengthen them, we are

going to be introducing bipartisan legislation, again to strengthen

our hand against money laundering, and we would very much like

to work with you on that legislation, and I hope we can get your

support, get your commentary, and get something passed in this

Congress.

Mr. CHERTOFF. I would very much like to work on that, too, Mr.

Chairman.

Senator LEVIN. I guess there is one final one that we would like

to ask, and this is also for you, Mr. Chertoff. The Treasury Department is conducting an internal review of money laundering programs to ensure that the American people are getting the best possible return on the investment. When that is applied to money

laundering investigations and prosecutions in the Justice Department, the question arises as to how do you evaluate the costs and

36

benefits of law-enforcement efforts? How do you evaluate the benefits, for instance, of law-enforcement efforts?

Mr. CHERTOFF. I cannot speak to what Treasury is doing, obviously. I can just tell you that generally in my own experience it is

always worth asking yourself the question of what is effective. In

my experience, we have looked at a large number of factors, both

quantitive and qualitative. A large case, which may involve only a

certain number of defendants, but ones that may be high-ranking

or pose a particularly serious danger, can have a much more positive effect than 5 or 15 or 25 lower-level cases. So basically we try

to use our judgment. There is neither a magic number nor a magic

rule. I think we try to use experience and judgment in evaluating

the effectiveness of these programs.

Senator LEVIN. But how do you prove the return on that investment? How do you assess the benefits of a law-enforcement action?

Mr. CHERTOFF. All I can tell you, Mr. Chairman, is from my own

experience years ago at the organized crime program that the Department of Justice runs. But in the period from 1980 to 1990, if

you wanted to evaluate the success of that program, you would

have looked at the fact that most of the organized crime families

in this country had their leadership dismantled and sent to jail.

You had numerous legitimate businesses taken out of the hands of

organized crime. At the end of the day, someone could probably

compute the millions of dollars saved for the American public

through that effort. But, by evaluating, again, the people who were

convicted, the entities which are freed from the grip of organized

crime, and the number of victims whose crimes ultimately resulted

in a successful prosecution, you can get a good picture of what an

effective program is.

Mr. MORGENTHAU. If I may just say one thing.

Senator LEVIN. Sure. You also then would have to evaluate the

benefits, look at the number of people who were not victimized because of what you did; would that be fair?

Mr. CHERTOFF. That would be fair. It is a little harder sometimes.

Senator LEVIN. It gets harder, but is that all necessary in terms

of evaluating benefits?

Mr. CHERTOFF. Absolutely. It is a complicated process.

Senator LEVIN. Mr. Morgenthau.

Mr. MORGENTHAU. As you know, the FBI historically has put a

great deal of emphasis on bank robberies, and it has been very effective, but how many bank robberies are prevented because bank

robbers know that they are going to be investigated by the FBI?

There is no way that you can really compute that cost/benefit. The

fact that the FBI committed resources—will commit resources to

any significant bank robbery—has got to be a major deterrent effect. So the fact that they do not prosecute a lot of cases does not

mean that that money supporting the FBI’s effort in bank robberies

is not very significant.

Senator LEVIN. That is very helpful, both of you. We thank you

for your testimony and very much appreciate your attendance here

today.

Our third panel is also a very distinguished panel. First, Sheldon

Cohen. Mr. Cohen served as Commissioner of the Internal Revenue

37

1The prepared statement of Mr. Alexander appears in the Appendix on page 77.

2See Exhibit 4, which appears in the Appendix on page 87.

3See Exhibit 23, which appears in the Appendix on page 120.

Service under President Lyndon Johnson and is a leading tax practitioner; and Donald Alexander served from 1973 to 1977 as Commissioner of the Internal Revenue Service under Presidents Nixon

and Ford. Mr. Alexander is also a leading expert in the area of tax,

and I believe it is the area of international tax where you have the

most expertise, or in any event spend most of your time. It is another very distinguished panel. We look forward to hearing your

views on the current state of our tax enforcement efforts, and like

our other witnesses, I would ask you to stand and be sworn in. Do

you swear that the testimony that you will give before the Subcommittee will be the truth, the whole truth, and nothing but the

truth, so help you, God?

Mr. COHEN. I do.

Mr. ALEXANDER. I do.

Senator LEVIN. Well, I guess we did not flip a coin, so we do not

know who to call on first. I think we will go alphabetically.

Mr. Alexander.

TESTIMONY OF HON. DONALD ALEXANDER,1 FORMER COMMISSIONER, INTERNAL REVENUE SERVICE (PRESIDENTS

NIXON AND FORD)

Mr. ALEXANDER. Thank you, Mr. Chairman. I am glad to be here

and I am glad to try to clear up something. I signed the letter that

Sheldon wrote and I thought that it was a good letter.2 Looking

back on it, I probably should have raised an objection to one particular sentence, but it is not significant and I did not. I also signed

a later letter to the Secretary that he mentioned today.3 That letter

had two aspects to it. The first was approval of the Secretary’s concerns about part of the OECD effort, the part that your Subcommittee is not focusing on, that is dealing with harmful tax regimes. I was uncertain about whether the OECD should tell a

country that its tax regime is harmful or tell a country that a particular aspect of its tax regime is harmful, and your Subcommittee

is not focusing on that, and that is fine.

You are focusing on the tax-haven project and properly so. It is

a very important and helpful project to try to make our tax laws

work better, to try to make sure that the people who should be paying taxes are being called on to pay their fair share. I am glad you

are looking into it and I am glad you are keeping Treasury’s feet

to the fire. I remember a lot of fires that my feet were kept to when

I was back in IRS, and I was delighted to hear the commitment

that the Secretary made. I think that will be very constructive.

In my statement, which is part of the record, as you pointed out,

I make a number of specific suggestions and points. Given the lateness of the hour, I do not think I have anything more to add right

now, Mr. Chairman.

Senator LEVIN. We welcome that. We will be asking you some

questions, though, to try to bring some of that out.

Mr. Cohen.

38

TESTIMONY OF SHELDON S. COHEN, FORMER COMMISSIONER,

INTERNAL REVENUE SERVICE (PRESIDENT JOHNSON)

Mr. COHEN. Mr. Chairman, I am pleased to be before you today

at your request. I should add that I appear in my individual capacity. I do not represent anybody other than myself. I have practiced

tax law a long time in this city, 49 years to be exact, in the government, out of the government, teaching. I was fortunate to be the

chair of the group of commissioners, seven of us, three former Republican commissioners, four Democrats, that wrote the letter to

the Secretary to try to clarify his statement in the May issue of the

Washington Times.

As our letter says in the very first sentence of the second paragraph, after the introduction, it says, ‘‘That statement,’’ meaning

the Secretary’s statement in the May letter, suggests that the

OECD project in its current form runs counter to the administration’s efforts. We were addressing the inferences of what the Secretary said in his unfortunately inexact language he has now clarified. In his inexact language, he seemed to be backing off of the position that the United States has taken consistently for the last 12,

15 years, and probably, if you go back, 40 or 50 years.

So I am happy to hear that he did back off of that position. I

should give you a few of my views on the OECD project. I have

worked with Jeffrey Owens, who is the head of the OECD project’s

tax group on several international projects. He is one of the outstanding international civil servants doing a terrific job for all of

us, because the United States is a member of OECD, in trying to

bring the tax systems of the world in some kind of working order

so they work, and that requires some pressure on countries that

would have wild-cards, if you will. They will do what they will with

the system.

We were talking about the Cayman Islands and other places like

that. Many years ago, I had to open a bank account for a client who

needed a transaction to occur abroad for entirely legitimate reasons, and which they intended to report on their U.S. return and

did report on their U.S. return, but, for a variety of reasons, the

account had to be abroad. I wrote an instrument. It was a trust instrument, and we opened the account in the trust’s name in the

Cayman Islands—in one of the British banks in the Cayman Islands, because I wanted a bank that I could trust.

The banker immediately asked me where was my ‘‘letter of instructions.’’ That is the under-the-table instructions of what I really

meant to do. I said, ‘‘No, I mean for you to do exactly what the

trust says, no more and no less. That trust instrument will be attached to a tax return.’’

Now, a friend of mine opened an account in the Cayman Islands

for a completely legitimate reason just a few months ago, and he

told me that when he opened the account, the banker did not know

him and the banker asked for a certification from the U.S. bank

that this person was a real person. That is typically what a U.S.

bank would do with a customer who came in to open a large deposit and they did not know him, under the money laundering

rules. So somebody down there at some banks—I cannot say as to

all of them—is paying attention to Jeffrey Owens and the interVerDate 11-MAY-2000 12:59 Dec 04, 2001 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 75473.TXT SAFFAIRS PsN: SAFFAIRS
39

1See Exhibit 4, which appears in the Appendix on page 87.

2See Exhibit 2, which appears in the Appendix on page 83.

national efforts to bring them into line with an organized, orderly

system.

I have had experience with developing countries which negotiate

tax treaties with the United States, and many of them want banking secrecy. They have banking secrecy or they have something like

bank secrecy.

In each instance, you have to explain to the high officials of that

government that the United States will not ratify a treaty that

does not require mutual exchanges of information. In most of those

instances, they will comply because they want the relationship with

the United States. In a few instances, I have seen them delay and,

in fact, in one country I know of, the delay was many years, until

they realized in their country that many of their people were hiding money in New York banks or Miami banks, and they wanted

an exchange of information and they ratified the treaty and we

have a treaty with that country.

So this is a system that has been going on. The problem has existed for years. It has gotten better. It is not nearly as good as it

ought to be.

I am pleased to hear that the Secretary is on board; that is, his

statements were interpreted by people as being more radical than

he intended them to be. If I were the Secretary’s close personal

friend, I would advise him to be more careful with his language,

because the inference that one picks up from a statement is just

as important as the actual words, and the inference that everybody

picked up from the Secretary’s statement, perhaps because of the

juxtaposition of the lobbying effort by some groups to get the

United States to abandon its OECD cooperation, and the Secretary’s statement caused us all to have that inference. I do not

blame the Secretary for that, but I do blame somebody on his staff

for not calling that to his attention.

Senator LEVIN. Thank you. Mr. Cohen, I want to go to that letter, because there has been, as you say, inferences drawn from it,

and this is Exhibit 4 1 in that book, which I believe you made reference to.

Mr. COHEN. I will take full blame for most of the letter. There

were a number of my conferees did make substantial suggestions

and substantial improvements. The first draft was mine.

Senator LEVIN. But what I am interested in is the inexact language that the Secretary used that led to the inference, could you

go through that with us?

Mr. COHEN. Exhibit 4 is my letter to him.

Senator LEVIN. Yes, I think it also makes reference, I believe, in

your letter, although I may be wrong, to the—I think it is Exhibit

2 2 is his statement that you made reference to, I believe, in your

letter. But in any event, if you look at Exhibit 2, if you could share

with us what do you believe in his statement is the inexact language?

Mr. COHEN. Partially, Senator, it was the fact that just days before his letter, there was published in the tax press and certainly

in the general media, a lobbying effort by several groups to get the

40

Secretary to back—to get the U.S. Treasury to back out of its support for OECD.

Senator LEVIN. So the timing——

Mr. COHEN. The timing—that happening, then the next thing is

the Secretary’s statement of May 10, I think it was.

Mr. ALEXANDER. Mr. Chairman, if I could add a little to that,

there was one item for which Secretary O’Neill is surely not responsible, and that was the headline that the Washington Times

used, that confronting OECD’s, ‘‘harmful,’’ tax approach. Well, that

headline is hardly a helpful or constructive one. Second, the particular part of the Secretary’s statement to which we responded,

that I was concerned about, is the last sentence in the last paragraph, ‘‘In its current form, the project,’’ that is the OECD project,

‘‘is too broad and is not in line with this administration’s tax and

economic priorities.’’

I think that particular sentence was directed at the harmful tax

regimes part of the project, but it did not say so. It said ‘‘the

project.’’ That was the reason, that very sentence, was the reason

why I was willing to sign on to the letter drafted by former Commissioner Cohen.

Mr. COHEN. If the Secretary had said in his article what he attempted to say today, and then he tried to get too precise with his

language, then he seems to be backing off.

Mr. ALEXANDER. I think the Secretary has got it just about

squarely right now. I would be concerned about one thing, though.

When we have these agreements, these exchange agreements with

some of these tax-haven countries, I certainly hope that they do not

all provide, as some of them do now, that the agreement will be

subject to all the laws of the tax-haven country, because some of

those laws of the tax-haven country exacerbate the very problem

that you heard about this afternoon.

What we have to do if we are going to pursue tax evasion effectively under this new approach, and I surely hope we do, is make

sure that some law in Antigua, a country that I like, except for the

fact that they usually have at least three banks on every corner,

does not limit Antigua’s now new duty, if they cooperate with us,

to share information with us. They may say, ‘‘Hey, we are going to

give you the information we can legally give you, but we cannot legally tell you whether the particular tax evader you are talking

about in the United States actually has an account with that

bank.’’

Mr. COHEN. One of the things in our system is a treaty of the

United States is a law of the United States, and all of these countries do not have quite the same rule.

Senator LEVIN. I think this is really very helpful. I think the bet

that I had with the Secretary had to do with disclosure, not with

whether he would just get agreements, but whether he would get

agreements which would lead to, in fact, the sharing of information. I am going to go back and make sure that it was clear what

the bet was that I had with him, on a 500-percent achievement

rate within 1 year. But it is clear that the whole spirit of what this

effort, this tax haven effort is, is that we want these tax havens

to share the information requested of them relative to the ownerVerDate 11-MAY-2000 12:59 Dec 04, 2001 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 75473.TXT SAFFAIRS PsN: SAFFAIRS
41

1See Exhibit 14, which appears in the Appendix on page 108.

2See Exhibit 10, which appears in the Appendix on page 101.

ship of these accounts and the monies that flow through these accounts.

So if, in fact, as you say, Mr. Alexander, there is a tautology in

here, a circle in here where the tax agreement is that they would

do what is permitted by their laws, then that is absolutely nothing.

That is not worth the paper it is written on, as far as I am concerned, if all they are going to do is agree to share whatever information their laws allow them to share, and their laws do not allow

them to share any information. It is a wasted effort. So I am glad

you point that out. It is a very valuable caution to just saying how

many treaties will be signed. We want treaties that are relevant,

worthwhile and effective.

Mr. Cohen.

Mr. COHEN. In one country, and because of diplomatic niceties,

I ought not mention it, when I was commissioner we had an agreement with this country to share information. They agreed only to

share information on criminal cases, not on civil cases. They had

been very uncooperative in the past. They always said they would

cooperate. Whenever you asked them for anything, it just never arrived. They never said, ‘‘No, we will not give it to you.’’ It just

never arrived. So I asked the staff to find the worst criminal case

they could find in which there were no redeeming characteristics

about the person, and we had pretty good proof, but the case could

use some strengthening, and give me the facts of that case and we

would test them on that. We were pretty sure this person had a

bank account in that country. Bingo, no information. We waited for

a year-and-a-half and nothing happened.

Senator LEVIN. You made reference to opponents of the taxhaven project of the OECD, and they continue to object to the information exchange very vehemently. The Center for Freedom and

Prosperity, one of these organizations, has stated that ‘‘Information

exchange for tax purposes, even when limited to specific cases, is

inconsistent with sound tax policy, respect for privacy, and international comity.’’ 1 So they flat-out oppose information exchange for

tax purposes. Congressman DeLay has characterized the contemplated information exchange proposals as ‘‘assaults on financial

privacy.’’ 2

So there are very strong opponents here and very vocal opponents against information exchange in order to counter tax evasion.

What is your reaction, both of you, to the arguments that the sharing of information in response to a law-enforcement request in

order to get to the tax evasion issue, that somehow or other is an

assault on financial privacy and due process?

Mr. Cohen.

Mr. COHEN. Their fathers argued that when we introduced

1099s. I happened to be the draftsman of the section that provides

for 1099s when I was a kid right out of law school. But we have

had that kind of reporting. It is kept confidential in the United

States. It is between the Internal Revenue Service and the taxpayers. It is a crime for anybody at the Internal Revenue Service

level to disclose that information except as provided by law, in

42

which case if there is a court case, they have to, but otherwise they

do not reveal it. It is what makes our system work.

The first year we put in computers, you remember we did not introduce the Social Security number as the identifying number until

the early 1960’s—the first year we put in computers, dividends reporting went up 26 percent. I think interest went up 40-some percent in 1 year.

That did not happen because there was a gigantic jump in the

economy. It happened because people who had not been reporting

were suddenly reminded, if you will, that they better report because the Internal Revenue Service had the information.

There is an old Yiddish adage which, converted to English, says, ‘‘He thinks he is an honest man who is not given the opportunity

to steal.’’ When you think about it, it is why we put locks on our

doors and windows. We keep locks on our doors and windows to

keep amateurs from becoming thieves. A real thief can get in anyway. And that is why we build all these systems to keep all of us— me, you, all the rest of us—honest, and that is the way we deal

with each other, and therefore we ought to be square, and the only

way we can be square is if the government has some way to check

us if we are not. If the government has no way to check us, then

it is a license to steal. That is what is happening in these tax havens. It is a license to steal.

Senator LEVIN. Mr. Alexander, would you want to comment on

that?

Mr. ALEXANDER. Yes, building on what my distinguished colleague had to say, first as to computers. When we required Social

Security numbers for children down to the age of five, we discovered that we had 6 million fewer children in this country than we

had the year before, and I am not totally sure we had a plague in

that particular year. But this notion that there is an overriding

right of privacy is something that I frankly do not understand. I

think there is a duty on the part of every American, as you mentioned in your opening statement, Mr. Chairman, to pay his or her

taxes, and that duty overrides any notion that the payment is an

exaction forbidden by the Constitution or that the duty to pay taxes

is overridden by the notion that one’s privacy is invaded, one, by

the payment of taxes and, two, by Internal Revenue’s investigation

of the nonpayment of taxes.

There is no constitutional right of privacy that states that tax

evasion through an offshore account is somehow permitted because

one’s privacy as to that account would be invaded by the intrusive

IRS if, indeed, the Cayman Islands were to have to tell the IRS in

response to a lawful and reasonable question whether a U.S. citizen had an account like those thousands and thousands of companies and accounts that were in your chart.

Senator LEVIN. That chart is Exhibit 7, by the way. It indicates

how many taxpayers have admitted in the year 2000 to having an

account in one of the 35 tax havens identified by the OECD, and

then we have looked at how many offshore banks and offshore companies were in those tax havens in the year 2000, giving a rough

indicator of the extent of offshore activity in that country.

It shows 1.1 million corporations, but less than 6,000 taxpayers

in the United States, acknowledging having a financial account in

43

one of those 35 tax havens. Does that give you a feeling of the

scope of this problem, Mr. Cohen?

Mr. COHEN. Certainly if you just look at economic activity worldwide, the United States’ percentage of that economic activity is

greater than that. You cannot say for sure. I think the Secretary

said that. But we surely can draw pretty good inferences and we

ought to be curious and pursue our inferences, and indeed Mr.

Morgenthau did indicate several instances where he knew of specific instances where there were—he could prove almost the numbers here—well, he did not know of every case. So it is clear that

they are vastly under-reported.

Senator LEVIN. I am doing some quick math here. Did you want

to comment to any further on that chart, Mr. Alexander?

Mr. ALEXANDER. Yes, I would. I would have to make two qualifications. First, I am very skeptical about the accuracy of the reporting anyway on the question in Schedule B—I think that is

where it is now—on foreign bank accounts. When I was working for

IRS, I discovered that people generally ignored that particular

question and that if the IRS obtained information based on that

question, IRS totally disregarded the information. So I worried

about the question.

Second, while I do not think the question was probably answered

accurately, I am not sure about the relationship of an accurate answer to the number of offshore companies, as opposed to offshore

deposits and offshore trusts of the kind that Mr. Cohen mentioned.

Senator LEVIN. The total number of offshore companies that we

have in these jurisdictions is 1,126,000, and I want to see if I understand your answer. The total number of U.S. taxpayer filings

acknowledging accounts is 6,000.

Mr. ALEXANDER. Right, but an account may not be a company.

Senator LEVIN. We have the companies, as well.

Mr. ALEXANDER. So that was my concern. I agree with you that

the gross disparity between the tiny number on one hand and the

enormous number on the other, and what Mr. Morgenthau testified

to, shows that there are a lot more offshore accounts than are reported by taxpayers.

Senator LEVIN. Finally, I want to ask you both about sanctions.

You have seen tax havens from several perspectives, as tax regulators, tax advisers, taxpayers, and I may have left off one of your

hats, but I think I got them all. You heard the discussion about the

possibility of sanctions and the OECD saying that we need to have

sanctions that will apply to those tax havens, that will not cooperate in this venture. Do you feel the OECD is correct in saying that

the threat of sanctions is necessary to achieve the openness and

the disclosure which is so essential if we are going to get at the

tax evasions that we are trying to get at, so that honest taxpayers

are not losing their taxes to people who refuse to pay those that

are honestly owned? Mr. Cohen.

Mr. COHEN. I have always said before a number of congressional

committees ‘‘law is that which you will enforce.’’ It is not that

which is written on the books, it is that which you are willing to

enforce. So the same thing is true here. If the international community wants some rule of reason, that is, everybody has to meet

these minimum standards, then you have to set some target date

44

and then you have to set some sanctions if you do not meet that

target date.

That is a question of judgment and feel and touch and taste as

to whether you set that target date as a year from now or 2 years

or 3 years from now, but you cannot set it so far in advance that

it becomes meaningless, and you cannot keep deferring it, because

if you keep deferring it, you lose any push that you have got. As

soon as they see that you are willing to back off for a year or 2,

they are willing to come at you again to find another reason to

have you back off a year or 2.

Mr. ALEXANDER. I think that the threat of actual and effective

sanctions is necessary to the achievement of this goal.

Senator LEVIN. Well, we thank you for your testimony, and it is

based on a very important experience that you have both had, and

actually, as I said, it is not just as commissioners, but also as taxpayers and advisers. You are very practical. You, I think, know

human nature from all sides of the various desks that you have sat

on, and your appearance here today is going to be very helpful to

us in trying to close down these tax havens, if they do not comply

with reasonable disclosure requirements.

They have been a threat to the international community for

many decades. They become magnets for drug trafficking, for government corruption, for financial fraud, for other crime, in addition

to the tax evasion that they have fostered. The last three administrations, from President Reagan to President Bush Senior to President Clinton, and the administrations, as you know from personal

knowledge, before them, have devoted resources to addressing the

offshore problem and have been bedeviled by that problem and

have been determined, along with many other countries now, to

band together to try to convince uncooperative tax havens to

change their ways. And we were seeing some results.

We saw results in the Cayman Islands after 15 years of refusal,

to the fact that a total now of 10 jurisdictions have agreed to

change, and many more are apparently on the brink of change. The

initial appearance of this administration to throw some cold water

on that OECD project was disappointing. I think it allowed its critics to characterize or mischaracterize what the project did, and

sanctions have now been delayed for 2 years. However, Mr.

O’Neill’s testimony here today suggests that the United States

seems to be back in alignment or moving back in alignment with

our allies and colleagues in the OECD, and that is where we

should be.

As I think both of you have just stated, these offshore tax havens

are not going to change their ways if they think they can keep the

status quo. Change does not come easily. But if we do not obtain

change in this area, the American taxpayer is going to continue to

be cheated of huge amounts of tax revenues, which in fairness

should be paid by people who owe those taxes and not by the honest taxpayers of the United States. So we will be working with both

the Treasury and the Justice Departments on this. We value your

testimony greatly. We value your service to this Nation, and we

will stand adjourned.

[Whereupon, at 4:52 p.m., the Subcommittee was adjourned.]

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