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The executive committee of the board of directors of Northrop has only recently delivered that final report to the board. But, as yet, the Department of Defense has not received any such petition for review.
The fourth paragraph of your letter asks what actions have been taken by the Department of Defense to ascertain whether consultants and agents fees paid by Northrop were regained by Northrop by overcharges in U.S. contracts with that company.
As a preliminary matter, it should first be noted that the information which has come to light thus far indicates that consultant and agent fees were paid by Northrop on two different kinds of overseas business; namely, (1) direct commercial sales by Northrop to foreign governments, and (2) indirect sales by Northrop to foreign governments through the foreign military sales program.
In the case of foreign military sales, any charges for consultants and agents fees determined by the Department of Defense contracting officers to be reasonable and allowable are passed on by the Department of Defense to the foreign governments as part of the contract price, as required by the Foreign Military Sales Act.
Accordingly, any questions as to U.S. taxpayers funding of such agents fees would arise only: (1) to the extent that such fees were disallowed, or for some reason were not charged by Northrop as direct costs, in particular foreign military sales case transactions, and (2) Northrop attempted to prorate the disallowed portion or noncharged amounts, as overhead expenses, to procurement contracts placed by the Department of Defense with Northrop to meet the requirements of the U.S. Armed Forces or the requirements of foreign countries under the grant military assistance program.
Insofar as concerns the consultants and agents fees paid, or payable, by Northrop in connection with its direct commercial sales, here again it may be presumed that such fees were in general directly passed on to the foreign governments purchasing Northrop products on a commercial basis.
The question of possible overcharges on Department of Defense contracts with Northrop for the use of the U.S. Armed Forces or the grant military assistance program would arise only to the extent that such fees were not fully included in the prices charged by Northrop in those direct commercial sales.
The Defense Contract Audit Agency is currently conducting an audit of our contracts with Northrop, and with certain other defense suppliers who have pleaded guilty to making illegal corporate campaign contributions, to ascertain whether unallowable consultants and agents fees have been improperly pro rated as overhead costs on DOD contracts for the use of the U.S. Armed Forces and for the grant military assistance program, and, if so, then to recoup such improper pavments.
To date, our auditors' actions have resulted in recoupment by our Air Force totaling $370,927 from Northrop.
Insofar as concerns taxpayer funds, the rules which govern our contracting officers and auditors are set forth in detail in the Armed Services Procurement Regulations (ASPR). Extracts of the pertinent provisions of the ASPR are appended to my statement for inclusion in the record.
APR 7-103.20, which is required to be included in every contract, is a Covenant Against Contingent Fees, wherein the contractor warrants that no one has been employed or retained to secure the contract on a contingent fee basis, "excepting bona fide employees or bona fide established commercial or selling agencies.'
The procedures to be followed, the form to be used for obtaining information, and the principles and standards to be used as a guide in the negotiations, award, administration or enforcement of contracts with respect to contingent fees are set forth in section 1, part V, of the ASPR.1
With respect to reasonableness, ASPR 1-505.4 (a) states as follows:
(a) The fees charged should not be inequitable and exorbitant in relation to the services actually rendered. That is, the compensation should be commensurate with the nature and extent of the services and should not be excessive as compared with the fees customarily allowed in the trade concerned for similar services related to commercial (non-Government) business. In evaluating reasonableness of the fee, there should be considered services of the agent other than actual solicitation as, for example, technical consultant, or managerial services, and assistance in the procurement of essential personnel, facilities, equipment, materials, or subcontractors for performance of the contract.
Of particular significance to this hearing is ASPR 1-505.4(e), which declares that:
any agency or agent is not "bona fide" which seeks to obtain any Government contract or contracts for its principals through the use of improper influence or which holds itself out as being able to obtain any Government contract or contracts through improper influence.
Also pertinent is section XV of the ASPR, which is entitled "Contract Cost Principles and Procedures." The applicable provisions are ASPR 15-205.37, ASPR 15-107, ASPR 15-201.4, ASPR 15-203, and ASPR 15-205.31.
ASPR 15-205.37, which deals with "Selling Costs." states that selling costs are "allowable to the extent they are reasonable and are allocable to Government business." ASPR 15-201.4 defines allocability. ASPR 15-203 defines "Indirect Costs" and provides how indirect costs are to be allocated. ASPR 15-107 deals with advance agreements for allocating certain indirect costs such as selling costs. ASPR 15– 205.31 concerns the allowability of consultant fees.
With respect to Foreign Military Sales, the pertinent provision of the ASPR is Section 6-705.3. In relevant part, paragraph (c) of this ASPR provision states that:
Recogniton should be given to reasonable and allocable costs even though they might not be recognized in the same amounts in pricing normal Defense contracts. Examples of such costs include, but are not limited to, the following: selling costs, including maintenance of international sales and service organizations and sales commissions and fees (except as limited by 15-205.37 (c) ;.
The provision of ASPR 6-705.3 are further amplified in Defense Procurement Circular 74-1 (August 26, 1974), Item IX, a copy of which is also appended to this statement for insertion in the record."
DPC 74-1 requires the contractor to submit, as is the case in nonFMS DOD contracts, a "contractor's statement of contingent or other fees." (SF 119) Upon submission of the form, it is the responsibility of the contracting officer to determine whether a bona fide agency relationship exists and to allow the fee only to the extent reasonable.
1 See appendix 2, p. 198.
2 See appendix 4, p. 215.
The contracting officer is enjoined to compare the proposed fee with recent payment for comparable services under non-FMS, commercial sales of the same or similar items, or agents fees allowed on previous FMS sales of comparable scope and dollar amounts.
The fifth pararaph of your letter of June 9 asks whether the Department of Defense has advised American industry on the subject of the payment of gratuities or fees to foreign officials in order to obtain arms. business.
The ASPR provisions I have just referred to constitute the official advice of the Department of Defense to American industry on this subject. Indeed, these ASPR provisions are more than merely "advice," they are the regulations which have the force of law.
Further, as I have indicated, a selling agency which engages in "improper influence" is not a bona fide selling agency within the meaning of the ASPR.
It may be that this paragraph of your letter was prompted by some newspaper articles several weeks ago of a speech made by a member of the Defense Security Assistance Agency, Mr. Joseph Hoenig, before an industry trade association a year ago, which was subsequently released by him to the association for such distribution as it thought appropriate.
Unfortunately, brief accounts give a distorted impression to the public of Mr. Hoenig's speech. In his speech, Mr. Hoenig did not urge U.S. contractors to resort to bribery in their marketing activities.
On the contrary, the speech called attention to the current trend by foreign governments toward purchasing defense items through Foreign Military Sales Act procedures in preference to direct commercial transactions.
It was pointed out that this trend is a direct outgrowth of the desire by foreign countries to attempt to eliminate or reduce the payment of large fees to agents and thus the potential use of influence in the equipment selection process.
The thrust of Mr. Hoenig's speech is that contractors who have been doing business overseas through agents, or are contemplating arrangements with agents for such business, should be aware of this trend by foreign governments and be guided accordingly.
The final question I was asked by your letter to address is whether these recent disclosures as to the agents fees have had an adverse impact on our relations with other countries in the military field. Insofar as I am aware, any possible adverse impact has either been nonexistent or minimal.
Mr. Chairman, this concludes my statement. I would be happy to answer any questions you have to the extent of my knowledge in cooperation with my backup witnesses. Thank you, sir.
Mr. Nix. General, in your position as Director of the Defense Security Assistance Agency, I understand that over the past year you have had supervision over, and have been charged with the responsibility of approval of amounts totaling $5 billion a year in these contracts. Is that correct?
General FISH. Sir, it is true that I supervise the government-togovernment agreements, which are in the form of letters of offer and acceptance. The amount for the last year is some $7 billion of such letters of offer and acceptance, and an additional $2 billion-plus of an
agreement made with four countries in Europe: Holland, Belgium, The Netherlands, and Norway, on a lightweight fighter sale which has not yet been formalized by letter of offer. So the total would be in the order of $9 to $10 billion.
Now these are not contracts between the U.S. Government and the industry, but these are contract agreements between the U.S. Government and another government. The actual contracting with industry, therefore, is to take place over a period of years. On some of them, the actual contract and deliveries would take place as much as 6 or 7 years downstream.
Mr. Nix. What specifically is your authority as to these contracts? Let me say this first. I understand that your agency, and you are Director of the agency, is charged with directing, administering, supervising approved security assistance plans and programs. Is that correct?
General FISH. That is correct.
Mr. Nix. These transactions would not go forward without your approval; would they?
General FISH. Sir, the chairman is using the word "contracts," when you speak of contracts I believe you are talking a contracting activity that is the subject of this hearing. That is the contracting which would engage in the approval or disapproval of agents fees that takes place, as I said in my statement, in the procurement activity.
On an individual letter of offer, you could have many individual contracts. In fact, I have made an estimate that maybe it is in the order of 80,000 to 100,000 contracts over the last year in the Foreign Military Sales with individual U.S. vendors.
The supervision of those is the responsibility of the military departments, the contracting officers, and the contracting agencies, further supervised by audit agencies of the services, and the audit agency of the Department of Defense.
Mr. Nix. Let me confine myself to those arrangements. Whether they result in the formal contract, or whether some other arrangement was made for trade between the U.S. Government and any other government, what I want to know is the number of those transactions that required your study, evaluation, and approval in the last year?
General FISH. I would have to supply that for the record. Not every letter of offer comes originally to my attention.
Mr. Nix. Would you approximate the number in the last year? General FISH. There was about a total of 8,000. If they are $5 million or less, I would not review them. The cooperative logistics arrangements of a continuing nature that have been set up over the years, I would not review those. So the number that my agency would specifically review is a much lower number, which is the number that I would have to supply for the record.
Mr. Nix. Using the approximate figure of 8,000, what would you say the approximate amount of money involved is in this 8,000?
General FISH. About $7 billion.
Mr. Nix. Now, could you specifically furnish to the committee the information covering the number and the amount of money involved that you just mentioned?
General FISH. Would you restate your request, sir?
Mr. Nix. Would you furnish to the committee, as nearly as you can, information concerning the 8,000 instances mentioned by you as well as the use of the amount of money estimated by you?
General FISH. Yes. We would have much of this on computers. I can provide a detailed machine listing of each one of the foreign military sales cases and their dollar value. We do, of course, as the chairman remembers, provide, under section 36 (b) of the Foreign Military Sales Act, notification to Congress of all sales of $25 million or larger.
We can provide a machine run of all cases, if the chairman desires. Mr. Nix, General Fish, what I am getting at
General FISH. We do furnish to your staff now a machine run of all the cases. That information is furnished quarterly to the committee under section 36 (b) of the Foreign Military Sales Act.
Mr. Nix. What I am seeking to secure, certainly among these great numbers, 8,000 cases, the questions have been raised about the legality of the activities involved. Do you follow me?
General FISH. Each case, first of all, is reviewed by the State Department for whether or not there will be a sale or a program.
Now we have divided the countries into category A and category B countries. The category A countries are generally NATO, and there the sale can be approved by the Department. For the category B countries, which are other than NATO countries, we could provide listing of the two types.
Mr. Nix. What I am seeking to do, General Fish, is to isolate those cases with which you have been directly concerned, where the question has arisen of some illegality being present.
General FISH. I cannot remember any cases where the question of illegality has been raised. Let me ask my counsel if he remembers any. Mr. Nix. Now you mention the Northrop case. What was your connection with that?
General FISH. The Northrop case, the only one I have been involved with in my current assignment has been the extension of the service contract for Northrop to maintain and train the Saudi Arabian Air Force.
In addition, there was a case that had started before my tenure which was consummated during my tenure, a letter of offer to provide some 60 aircraft, F-5 aircraft, to Saudi Arabia along with additional services and space parts, and things of that nature.
Notification of that particular letter of offer was furnished to the committee.
Mr. Nix. On page 3 of your statement, you say that the Defense Contract Audit Agency is currently conducting an audit of contracts with Northrop and with certain other defense suppliers who are pleading guilty to making illegal campaign contributions. You did state that, did you not?
General FISH. Yes, sir.
Mr. Nix. Then, it is true that someone did plead guilty to a violation of the law?
General FISH. Yes, sir.
Mr. Nix. So what you said a moment ago that you knew nothing of any cases while you have been involved, that was not accurate.
General FISH. Yes, sir, it was accurate. What I am referring to here in my statement is that the Defense Contract Audit Agency is looking