[Senate Hearing 107-152]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-152




                               before the

                       PERMANENT SUBCOMMITTEE ON

                                 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

75-473 DTP                  WASHINGTON : 2001

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               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
MAX CLELAND, Georgia                 PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware           THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri              ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota               JIM BUNNING, Kentucky
           Joyce A. Rechtschaffen, Staff Director and Counsel
         Hannah S. Sistare, Minority Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk



                     CARL LEVIN, Michigan, Chairman
DANIEL K. AKAKA, Hawaii              SUSAN M. COLLINS, Maine
RICHARD J. DURBIN, Illinois          TED STEVENS, Alaska
MAX CLELAND, Georgia                 PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware           THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri              ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota               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

                            C O N T E N T S

Opening statements:
    Senator Levin................................................     1
    Senator Collins..............................................     5
    Senator Carper...............................................     7

                        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


 1. GLetter 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. GDepartment of Treasury News Release, dated May 10, 2001, 
  Treasury Secretary O'Neill Statement on OECD Tax Havens........    83

 3. GDepartment 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. GLetter 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 Op-Ed in the May 10, 2001, issue of 
  The Washington Times...........................................    87

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

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

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

 8. GChart: 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. GLetter of Commitment of the Republic of Seychelles, February 
  13, 2001.......................................................    97

10. GLetter from House Majority Whip Tom DeLay, dated June 20, 
  2001, to Secretary O'Neill, regarding information exchange tax 
  initiatives....................................................   101

11. GMemorandum from The Prosperity Institute, dated June 28, 
  2001, to Secretary O'Neill, regarding request for meeting with 
  Secretary O'Neill..............................................   102

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

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

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

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

16. GThe New York Times Editorial, ``A Retreat on Tax Havens,'' 
  May 26, 2001...................................................   111

17. GThe Wall Street Journal, ``U.S. Could Abandon Initiative To 
  Crack Down on Tax Havens,'' February 22, 2001..................   112

18. GThe Miami Herald, ``U.S. Won't Pressure Offshore Tax Havens, 
  O'Neill Says,'' May 11, 2001...................................   114

19. GThe Washington Post Op-Ed by David Ignatius, ``The Tax 
  Cheats' Friends,'' April 29, 2001..............................   116

20. GFinancial Times, ``Avenue of the Americas: OECD Meets the 
  XFL,'' February 14, 2001.......................................   117

21. GThe Washington Post Op-Ed by Robert D. Novak, ``Global Tax 
  Police,'' April 19, 2001.......................................   118

22. GLetter 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. GLetter 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. GSupplemental questions and answers of Treasury Secretary 
  Paul H. O'Neill................................................   121

25. GTowards 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. GStatement 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. GStatement for the record of Robert S. McIntyre, Director, 
  Citizens for Tax Justice.......................................   158

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

29. a. G``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. GThe OECD's Project on Harmful Tax Practices: The 2001 
  Progress Report, OECD (November 14, 2001)......................   168

30. G``Stepping Up the Pressure on Tax Havens,'' by David E. 
  Spencer, Journal of International Taxation (April 2001)........   181



                        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).


    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 
    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 
    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 
    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 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 
    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 anti-money 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 
    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 
    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.
    \1\ See Exhibit 5, which appears in the Appendix on page 91.
    \2\ See Exhibit 6, which appears in the Appendix on page 92.
    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.
    \1\ See, for example, Exhibit 9, which appears in the Appendix on 
page 97.
    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.
    \2\ See Exhibit 2, which appears in the Appendix on page 83.
    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\
    \3\ See Exhibits 16, 17 and 18, which appear in the Appendix on 
pages 111, 112, and 114 respectively.
    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 
    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.
    \4\ See Exhibit 29, which appears in the Appendix on page 166.
    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 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.


    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 impossible 
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.
    \1\ See Exhibit 8, which appears in the Appendix on page 96.
    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 
    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 
    \1\ See Exhibit 2, which appears in the Appendix on page 83.
    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.


    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 dropping 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.


    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.
    \1\ The prepared statement of Secretary O'Neill appears in the 
Appendix on page 45.
    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 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 
    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 
    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 
    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 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 non-beverage 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 struggling to keep the U.S. budget under $100 
billion, a billion dollars still seems like a lot of money to 
    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-to-year 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 mistake 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 
two-thirds 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?
    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 
    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 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?
    \1\ See Exhibit 8, which appears in the Appendix on page 96.
    Secretary O'Neill. No. This is the case I keep seeing.
    Senator Levin. He is the only one that has ever come 
    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 
    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 
    \2\ See Exhibit 7, which appears in the Appendix on page 93.
    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, 
    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.
    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 fifth-floor 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.''
    \1\ See Exhibit 7, which appears in the Appendix on page 93.
    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-
    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 
    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.
    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 
    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 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 
    Secretary O'Neill. I am going to go get something done for 
    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 
    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?
    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 
    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?
    \1\ See Exhibit 29.b., which appears in the Appendix on page 166.
    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.
    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 
    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\
    \1\ See Exhibit 4, which appears in the Appendix on page 87.
    \2\ See Exhibit 23, which appears in the Appendix on page 120.
    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 
    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 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\
    \1\ See Exhibit 23, which appears in the Appendix on page 120.
    Senator Levin. It will indeed be.
    Senator Collins. Thank you, Mr. Chairman. Thank you, Mr. 
    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 
    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 jurisdictions 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 
    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.
    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 
    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 
    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?
    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.
    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 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.
    Mr. Chertoff. I do.
    Senator Levin. Mr. Morgenthau, let me call on you first.

                  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.
    \1\ The prepared statement of Mr. Morgenthau appears in the 
Appendix on page 56.
    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 
    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 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 
    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 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 
    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 
    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 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.


    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.
    \1\ The prepared statement of Mr. Chertoff appears in the Appendix 
on page 68.
    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 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 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.
    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.
    \1\ See Exhibit 7, which appears in the Appendix on page 93.
    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 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 
    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 
    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 
    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. 
    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 
    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. 
    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 benefits of law-enforcement efforts? How 
do you evaluate the benefits, for instance, of law-enforcement 
    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 
    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 
    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 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 
    Mr. Alexander.


    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.
    \1\ The prepared statement of Mr. Alexander appears in the Appendix 
on page 77.
    \2\ See Exhibit 4, which appears in the Appendix on page 87.
    \3\ See Exhibit 23, which appears in the Appendix on page 120.
    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.


    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 international 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 
    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.
    \1\ See Exhibit 4, which appears in the Appendix on page 87.
    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 
    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?
    \2\ See Exhibit 2, which appears in the Appendix on page 83.
    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 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 
    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 
    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 ownership 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 tax-
haven 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\
    \1\ See Exhibit 14, which appears in the Appendix on page 108.
    \2\ See Exhibit 10, which appears in the Appendix on page 101.
    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 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 
    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 
    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 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-
    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 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 
    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 
    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 
    [Whereupon, at 4:52 p.m., the Subcommittee was adjourned.]

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