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its books. And that company also reported that it gave preferential treatment to some of its customers. The other one was a subsidiary of Walter Kidde and Company, United States Lines. They reported that, for the period from 1969 through 1973, they had paid about $1.5 million in rebates from off-book accounts, and they also disclosed that some members of top management knew of, and approved the use of, off-book accounts. If you want more details on that
The CHAIRMAN. Any shippers ? Mr. ROSENBLATT. Well, as we have it, there are 20. The CHAIRMAN. All right. Mr. CLARK. Twenty have made public disclosure thus far. The CHAIRMAN. Supply the names of those 20 for the record, please.
Mr. ROSENBLAT. Yes, we can do that promptly, Mr. Chairman. [The material was not received at time of printing.]
Mr. ROSENBLAT. The information that Reynolds provided was used by the Commission, and many companies responded to the Commission's inquiries by coming forward with public disclosures. The process of investigation, both formal and informal, and the process of public disclosure continues.
Commission enforcement action involving customers as well as carriers remains a distinct possibility.
As the foregoing discussion evidences, however, promises of immunity have not been necessary in order to promote public disclosure in this area, and the Commission's public files already contain a substantial amount of information about the kinds of practices of this nature that have been employed in the shipping industry. And, of course, our records and files are available to the Federal Maritime Commission.
In this context, therefore, we are concerned with the effect that section 3 of H.R. 9518 might have on our administration of the - Federal securities laws. That section, as presently drafted, would not permit criminal prosecution of individuals
for violation of United States laws, including, by implication, the Federal securities laws, where disclosure of the illegal payment activity is made to the Maritime Commission pursuant to the provision of the bill and prior to the time that those individuals had actual notice that they were subject of an investigation relating to the act disclosed.
Where potential violations of other United States laws are discovered in the course of a Commission investigation, we refer the matter to the appropriate law enforcement agency for action. Section 3 of the bill would effectively prevent the pursuit of criminal investigations by other agencies resulting from information discovered by our staff by removing the possibility of eventual prosecution in the area covered by the bill, including prosecutions by the Justice Department for violation of the Federal securities laws.
In that context, I should add that our Commission litigates its own civil injunctive actions, but with respect to criminal matters we must refer the matter to the Justice Department which handles criminal enforcement for us.
While we recognize the concerns that prompted section 3, as drafted, we believe that this provision could effectively deny public investors and shareholders material corporate information. In this
vein, I think it is important to note that claims of competitive disadvantage--the factor apparently motivating section 3 of the bill, which we recognize is a real concern-had been voiced by many American companies engaged in a variety of occupations, not just by those companies engaged in ocean shipping and related occupations. But improper rebates, kickbacks and bribes are unlawful, whether or not foreign companies also employ such tactics.
The answer to the competitive problems raised is not, in our view, to reduce all companies to the lowest common denominator, but rather is to utilize the legislative process as HR. 9518 otherwise seeks to do, to assert the full range of American jurisdiction to alleviate any competitive advantages foreign companies otherwise obtain as result of lax foreign legal standards.
On balance, we do not believe that the important purposes of the bill would be lost if this immunity provision were deleted.
H.R. 9518 might also have the effect of implying that once disclosure is made to the Federal Maritime Commission under this bill, a corporation may be relieved of its obligation to disclose the same information in public filings with the Commission. This should be clarified, and we would be glad to provide drafting assistance, if it is needed.
With respect to immunity from criminal prosecution, a case-bycase approach preserving prosecutorial discretion within the overall objectives of the bill, would achieve the desired result without the adverse consequences resulting from immunity. The same result might also be achieved by providing for increased penalties after the first year rather than the present grace period.
In any event, even if some immunity provision is retained, the present one would make criminal prosecution difficult, even where warranted and contemplated by the bill. Thus, the provision that actual notice of investigation have been received by would be defendants would create serious evidentiary problems, likely vitiating the capacity of the Government to prosecute criminally even in appropriate cases.
Moreover, the so-called requirement that actual notice be given to preclude immunity might prematurely prejudice the Government's ultimate prosecution of a criminal case, including a prosecution against persons not entitled to rely on section 3 of the bill.
Finally, the express preservation of civil liability provided by section 3, subparagraph 5, of the bill, for Maritime Commission agreements, creates an ambiguity concerning the Commission's capacity to continue to pursue violations of the Federal securities laws by civil injunctive actions.
At a minimum, therefore, we strongly urge that the bill make clear that the Commission may continue its important activities in the civil forum.
In summary, the Commission has been able to obtain adequate disclosure for investors and enforce the statutory provisions and rules prohibiting fraudulent or deceptive practices in connection with securities transactions in this important area. While we endorse the general thrust of the bill, we believe that the blanket immunity that would be granted in this bill could adversely affect the Commission's ability to carry out its congressional mandate, certainly a result not intended.
I appreciate the opportunity to participate in these hearings and, of course, I shall be happy to respond to any questions the members of the subcommittee might have.
The CHAIRMAN. Mr. Hufbauer, if you would identify the gentlemen with you for the record.
Mr. HUFBAUER. Thank you, Mr. Chairman.
The gentleman on my far right is Mr. William Anawaty of the General Counsel's Office in the Treasury, and the gentleman on my immediate right is Mr. Henry Berghoef of the Office of International Trade in the Treasury.
The CHAIRMAN. Your full statement will be printed in the record at this point, and if you would proceed.
Mr. HUFBAUER. Thank you, Mr. Chairman.
I am pleased to be here today to discuss H.R. 9518. I know you are very busy, and the Congress is nearing the end of its session.
The CHAIRMAN. We are busy with 9518.
Mr. HUFBAUER. And since you will be printing my full statement in the record, I would just like to summarize my remarks.
The CHAIRMAN. Please.
STATEMENT OF GARY C. HUFBAUER, DEPUTY ASSISTANT SECRETARY OF THE
TREASURY FOR INTERNATIONAL TRADE AND INVESTMENT POLICY Mr. Chairman, I am pleased to be here today to discuss with you the Treasury Department's views on the Shipping Act Amendments of 1977.
Before presenting the substance of my testimony, I would like to point out that the Treasury Department plays a limited role in formulating maritime policy. However, the Department is responsible for the broad dimensions of economic policy. The Treasury seeks to assure that general economic policies are properly considered in the design of measures aimed at the problems of a particular sector. This approach is carried over into our analysis of international trade and commercial issues.
In addition to this concern for general economic policy, the Treasury also plays a part in the enforcement of laws affecting international commerce through two of its operating arms, the U.S. Customs Service and the Internal Revenue Service. The Customs Service clears vessels and export cargo, supervises the unloading of imported merchandise, and collects duties. The Service also has enforcement responsibilities for the cabotage laws of the United States, contained in Section 27 of what is commonly known as the Jones Act (Merchant Marine Act of 1920). The Treasury through the Internal Revenue Service, also administers the U.S. tax laws, whether those laws specifically affect the maritime industry or apply to industry and individuals in general.
Therefore, in evaluating the legislation before your Subcommittee, the Treasury has applied the twin touchstones of how the proposal coincides or conflicts with our general economic policy principles, and how the proposal would affect our statutory enforcement responsibilities. I would like to review the proposed legislation in the framework of Treasury's areas of concern as I have just outlined them.
First, in terms of general economic policy, the Treasury takes a dim view of price maintenance or price-fixing arrangements in any sector of the economy. Liner conferences clearly represent an effort to place a floor under ocean shipping rates. Sections 16 and 18(b) of the Shipping Act of 1916 prohibit common carriers by water in our ocean trades from allowing any person to obtain transportation or related services for property at less than the published rates in their tariffs on file with the Federal Maritime Commission. These tariffs are in turn specifically agreed upon by the liner conferences. The liner conference arrangement represents an exception to the general prohibition against price fixing schemes contained in the Sherman Anti-Trust Act as interpreted by the courts.
We do not claim to be experts on maritime affairs, but we believe that the national economic interest is best served when the market system is allowed to operate with as few constraints as possible. Attempts to reduce or restrict competition inevitably lower national welfare in the aggregate and contribute to wasteful inefficiencies in our economy.
We are familiar, Mr. Chairman, with the arguments that transportation is a unique sector, a quasi-governmental service that needs special protection or regulation by the government. However, the Treasury is not convinced of the merits of this argument. Evidence is beginning to show that regulated industries are less efficient than they would be otherwise, Businessmen, economists, and government leaders alike are increasingly advocating that we experiment with expanded competition and less regulation in transportation.
As economists, we are not surprised that illegal rebates, in effect a black market for shipping, have sprung up in response to liner conference agreements, which often result in higher prices than the market will support. If prices are artificially high, someone will try to undercut them, either through legal or il. legal actions. This is not an apology for rebates, but an attempt to explain why they occur.
Mr. Chairman, let me hasten to add that I realize these hearings are not designed to consider whether or not we should abolish liner conferences, but in fact how the government can strengthen them. But the Treasury Department thinks it important to point out that liner conferences are in fact a sanctioned cartel and therefore probably impose additional economic costs on the Nation. More effective enforcement of conference agreements would perhaps even increase these costs. We believe this consideration has a bearing on the legislation before your Subcommittee.
I would now like to turn to specifics involving enforcement of the legislation under consideration. The language of the bill leaves unclear whether an offending vessel is to be physically denied entry into a port by the Coast Guard, or whether its offloading would be prohibited by the Customs Service.
Assuming that enforcement is assigned to the Customs Service, we do not anticipate that unusual enforcement problems would result from the proposal to close our ports to specific vessels whose owners refuse to cooperate with Federal Maritime Commission investigations. From a policy point of view, however, we are concerned about the possible repercussions of such draconian actions on our international trade. Summarily closing our ports to foreign liners could result in retaliation against U.S. flag liners. We do not believe such actions would further the interests of the United States or its trading partners. Therefore, we concur with the Department of State's recommendation that concerned agencies should attempt to work with the Congress to devise alternative procedures to facilitate foreign compliance with the FMC's requirements for information. Finally, we note that the legislation could produce the result of closing U.S. ports to U.S. flag vessels, thereby creating the anomaly of "stateless" vessels.
The proposed bill also has an impact on enforcement of tax laws by the Internal Revenue Service. Three tax aspects of the bill are of concern to the Treasury.
First, Section 3(d) (1) of the bill would confer immunity from criminal prosecution under the laws of the United States arising from any illegal rebate voluntarily disclosed to the Federal Maritime Commission within one year of the bill's date of enactment. As we interpret this provision, Mr. Chairman, it is intended to confer immunity for violations of any federal law, including tax or foreign currency movement reporting laws, related to or arising from rebate violations under the Shipping Act. We believe complete immunity is far too broad. We support the Justice Department in favoring a more limited grant of immunity and are consulting with Justice on appropriate statutory language to accomplish that end.
Second, we would want to assure that, even if persons giving or receiving illegal rebates were granted immunity from prosecution under the Shipping Act, they would have to pay any taxes and related civil penalties otherwise due. The recipient of a rebate must declare it as income or reflect the amount of the rebate in a lower cost under Section 61 of the Internal Revenue Code. Any person failing to report rebate as income or failing to reduce costs commensurately is liable for payment of taxes due. Similarly, the payer of a rebate may not deduct the payment as an ordinary and necessary business expense or list it as a cost that reduces its gross receipts (under Section 162 (c) (2) of the Code) if such payment subjects the payer to criminal penalties or the loss of a license or privilege to do business. Since Section 16 of the Shipping Act provides that person paying illegal rebates may be charged with a misdemeanor and fined, and since the proposed bill would authorize the suspension of the right of liners to use U.S. ports, payment of a rebate will not be allowed as a deductible expense of the liner or a cost that reduces its gross receipts. If a liner violated these provisions, the IRS should be able to collect any taxes and penalties due.
1 See for example, U.S. Department of Justice, The Regulated Ocean Shipping In. duitry, January 1977, pp. 230--236.
Third, we want to remind the Committee that Section 6103 of the Internal Revenue Code imposes statutory limitations on the Internal Revenue Service's ability to assist the Federal Maritime Commission in ferreting out illegal rebates. Under that provision, an IRS auditor who discovers an illegal rebate through studying a tax return or the taxpayer's books and records cannot report that information to the FMC. With an ex parte court order, however, the FMC would be able to obtain such information for nontax criminal purposes. On the other hand, the IRS could report to the FMC information bearing on the violation of a criminal statute learned by an auditor from third parties in the course of investigating a taxpayer. Further, the FMC could request third party information from the Internal Revenue Service bearing on a criminal investigation.
As you know, the Shipping Act of 1916 provides that civil penalties may be imposed. The bill under consideration also proposes civil sanctions. This feature limits the extent of feasible cooperation between the IRS and the FMC under established-and I would add, well thought out-procedures. If these procedures do not seem reasonable, Mr. Chairman, you may want to consider additional legislation. However, as a general policy matter, the Treasury does not favor the use of tax investigations or tax return information to advance the prosecution of non-tax offenses.
Mr. HUFBAUER. Mr. Chairman, as you know, the Treasury plays a rather limited role in formulating maritime policy.
The CHAIRMAN. It played a pretty big role in the last maritime legislation we had before the House. Mr. HUFBAUER. Yes. That came as a surprise to some of us.
The CHAIRMAN. I would be happy to yield to the gentleman from California at this point.
Mr. McCLOSKEY. Not as much of a an impact as if we had Mr. Hufbauer's three prepared statements on the legislation during the debates.
Mr. HUFBAUER. Well, through your assiduous investigation, I think you managed to obtain them. They are available under the Freedom of Information Act, and I am just sorry I cannot copyright them and get the royalties.
The Treasury seeks to assure that general economic policies are properly considered in the design of measures aimed at the problems of a particular sector. In addition to this concern for general economic policy, we do play a role in the enforcement of laws affecting international commerce through two of our operating arms, the United States Customs Service and the Internal Revenue Service. Therefore, Mr. Chairman, in evaluating this testimony-this legislation before you, we have applied the two touchstones of how the proposal coincides or conflicts with our general economic policy principles, and how the proposal would affect our statutory enforcement responsibilities.