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at all Department of Defense contracts totally, not only for foreign military sales but the contracts that we have with Defense suppliers of any nature, to see if the Defense suppliers have prorated their administrative overhead improperly to cover some illegal contributions that they have made.
Mr. Nix. What you seek to do is to find out whether or not they have complied with the regulations. If they have not complied with the regulations, the question arises of whether or not that noncompliance is an innocent mistake or whether it was criminal. That is what you seek to determine, is it not?
General FISH. That is what the Defense Contract Audit Agency would be looking to; yes, sir.
Mr. Nix. That is what they found in Northrop.
General FISH. I am not cognizant of the details of what they found in Northrop except that in preparation to answer your questions I did find out that Northrop has refunded to the Air Force some $370,927 as improper charges.
If you will note, my statement does categorize those as being improper. If they are legal or illegal, I think that it is for a court of law to determine, and I am in no position to determine that.
Mr. Nix. I can refer you to your statement where you say that they pleaded guilty to illegal corporate campaign contributions. You did state that.
General FISH. Yes, sir. This was in direct response to your earlier reference to the Watergate investigation. Since that occurred, we did ask the Defense Contract Audit Agency to check their accounts to see if they had to pass any of those illegal payments through to the U.S. taxpayers through our defense contracts. That is what we are trying to determine.
Mr. Nix. At this time, you have no definitive information to offer, other than that which you have submitted in reference to Northrop. General FISH. No, sir. This is all we have at the present time, but the audit is ongoing.
I would like to emphasize that I am not in a position to say that the Defense Contract Audit Agency is getting into illegality. We are looking for our money back, if they made improper charges.
Now, it will be up to counsel to decide to conduct an investigation. Mr. Nix. I understand that you are not looking for illegality solely, but you are not going to overlook that.
General FISH. No, sir. If any of our audits reveal the possibility of a violation of law, it will be forwarded to the proper authorities for execution.
Mr. WHALEN. General, what in your opinion is a reasonable fee, or conversely, to quote your ASPR, what is an inequitable or exorbitant fee?
General FISH. I don't think, sir, that it is possible to put a dollar amount on that, and that is why, in the ASPR that you have in front of you, it is expressed as subjective guidelines for the contracting officer.
Mr. WHALEN. You don't think that it would be proper to put in a dollar figure inasmuch as the sizes of the contracts vary, but what about a percentage of the total value of the contract?
General FISH. Again, sir, I would say that the general guidelines that we have in the ASPR are subjective because of the commercial practice in the countries in which they are doing business. So that would vary greatly.
Mr. WHALEN. Let me ask you. Would 15.9 percent grab your attention?
General FISH. It would depend on the circumstances.
I hasten to say that we don't even know what the percentage is in a specific contract, unless the contracting officer and the contracting agency, in doing their job and with their knowledge of what is reasonable, and within those guidelines cannot determine whether it is reasonable, and then they would bring it to me. However, I would not be concerned otherwise.
Mr. WHALEN. Who obtains the information in the Defense Department regarding the contract?
General FISH. The contracting officer, sir.
Mr. WHALEN. He would be with a particular service which is arranging or providing for that particular piece of equipment? General FISH. Yes, sir.
Mr. WHALEN. You would in no way know, then, in terms of the total dollar value of the contract, what percentage of that represented a fee, or if, indeed, there were any fee involved in it at all?
General FISH. I would only know it on an exceptional basis, if someone brought it to my attention, and said: "We cannot determine whether this is reasonable or not." I attempt to determine whether it is reasonable by referring the matter to the country concerned, as I testified earlier.
Mr. Whalen, we are involved here, maybe, in 100,000 different contracts over a year's time.
Mr. WHALEN. Does DOD require that these commissions or fees be entered as a line item in the contract?
General FISH. In order for them to be reimbursed, they have to be listed on standard form 119, and specifically approved by the contracting officer.
Mr. WHALEN. The answer to my question is "Yes?"
General FISH. This is required to be listed on the standard form 119.1
Mr. WHALEN. Is this a separate form?
General FISH. Yes, it is a separate form.
Mr. WHALEN. You have overwhelmed us with ASPR's.
General FISH. I don't know whether it would be an item in the contract.
Mr. WHALEN. But there would be a separate form identifying them for the contract?
General FISH. Yes, sir.
Mr. WHALEN. So, as I understand it, it would be two pieces of paper, one indicating the value of the equipment, and the other the contract fee which the agent would receive.
General FISH. It would be best to provide you with a contracting officer who has the information to give you expert testimony on that. I can give you the best of my knowledge. I have seen series of contracts over my time, and inevitably I do examine some of the contracts because of issues that might come up.
1 See appendix 5, p. 217.
It would not necessarily have an item that says "agents fees." The agents fees might very well be included in all the functional items, or as a percentage of the functional items in the overall contract.
In order to be paid for the agents fees, contractors have to list them on the standard form 119, and justify the fee to the contracting officer as being reasonable and bona fide, otherwise the fee would not be allowed as an element of expense.
Mr. WHALEN. So this is identifiable?
General FISH. Yes, sir.
Mr. WHALEN. The Department of Defense has marked as confidential the fees which agents throughout the world have received in connection with contracts. What is the purpose of this?
General FISH. Sir, we did not classify just the amounts. We classified the details that were on the report, which was requested by the Church committee, and also requested by this committee. The report contains much more detail than just the amount of the fee.
It includes weapons provided to governments. It provides dates and the sale amounts. These are, in my view, properly determined as confidential because of the governments' desire to have information on their purchases kept confidential.
Mr. WHALEN. Whom are we protecting by this: DOD, the purchasing governments, the contractor, or the agent?
General FISH. I think that we are protecting the sanctity of government-to-government communications, which is the reason for the classification. If we expect them to respect our requests to keep our information classified, we have to respect theirs. The agents' fees are not classified, sir.
Mr. WHALEN. The agent's fee is not classified, so there would be no objection to the releasing of the agents' fees, provided the other information is kept classified?
General FISH. That is a different question. If the agent's fee is revealed, and then it is going to reveal other classified information. We would be happy to work with the committee and the committee staff to get an unclassified version to be released.
STATEMENT OF BENJAMIN FORMAN, ASSISTANT GENERAL COUNSEL, INTERNATIONAL AFFAIRS, DEPARTMENT OF DEFENSE
Mr. FORMAN. If I may clarify. One is a problem of security classification, which has nothing to do with the agent's fee. As to whether or not the agents' fees themselves, or the data concerning the agents' fees, can be published the problem is that the companies which furnish this information do so in confidence, and on a proprietary basis.
They regard this as proprietary data, and, therefore, we cannot release it within the Department of Defense without running afoul of the provision of the section of title 18 of the United States Code, to which the chairman referred in his introductory statement.
This is not uncommon. It is true for all kinds of reports required by Government agencies, and where the information is given in confidence. Occasionally, one of the conditions will be that you cannot tell the other Government agencies.
Mr. WHALEN. That was the next point that I was going to raise. What we are concerned with in this subcommittee is not just the
payment of commission fees. What we are concerned with are the possible illegal activities on the part of U.S. corporations abroad.
You give this information to other Government agencies, such as the Securities and Exchange Commission.
General FISH. It seems to me that there was one instance and I will have to check with my counsel, but there was one call from the Securities and Exchange Commission, and some data was furnished, but that is the only one that I can recollect. We certainly cooperated with them.
Mr. WHALEN. So, if it were not for the 18 United States Code provision, which you mentioned, would this be made known to other agencies?
Mr. FORMAN. In this matter, if we conduct an audit or an investigation and uncover information which we conclude presents a prima facie case of violation of criminal laws, we will refer that information to the Department of Justice for their analysis and possible prosecution.
Mr. WHALEN. Let us get down to the agent himself. What is an agent in these contractual relationships. General, perhaps you could answer this by going a little bit into the operations of the Department of Defense vis-a-vis foreign purchasers.
You mentioned, of course, that you oversee MAP, military assistance programs, which are grants, and also foreign military sales come under your jurisdiction. Could you elaborate a little bit as to how those transpire, and what the role of an agent is in these acquisitions abroad?
General FISH. I think that one of the most important points to make to begin with, transactions which are concluded as military sales do not always start out as military sales. There is often considerable marketing activity accomplished in the country prior to a decision.
If a country decides that it needs fighter aircraft, apparently this is a decision made by the leadership of that country.
Mr. WHALEN. What is the next step? How do they approach contractors in the United States? Is this through the DOD or do they use an agent to come over? This would not only be to the United States, but France and other nations providing this type of aircraft?
General FISH. This is a classical case of all of the above. If the country determined that it needed a fighter capability, we would get a request through diplomatic notes, or directly, if we have a military assistance group.
In any case, it would go to the State Department, if it came through our channels we would refer it to the State Department to determine whether or not it would be within the foreign policy objectives of the United States, and our national security to furnish such a capability.
Such a capability can be furnished, in the case of the fighter aircraft that I mentioned before, by more than one fighter aircraft contractor and by more than one other country.
Mr. WHALEN. Are we dealing with an agent at this point?
General FISH. Whether the country would be dealing with an agent, it would depend upon the country. You asked at the beginning, what would an agent do. I also asked that question because we are very concerned, as the committee is, by these agent's fees.
I asked one member of the aerospace industry: "Just what does an agent do," because I felt that they were in better shape to answer
that question than I, because they are the ones who are required to have agents, marketing representatives or whatever.
I got a listing, and it might be interesting, would you like to have me read it, sir?
They say that:
Agents identify opportunities versus the product lines. Make initial contact to generate customer interest. Advise when a visit by experts is timely. Set up appointments, schedules for 3 day visits instead of 3-week or 3-month, or 3-year campaigns.
Mr. WHALEN [interrupts]. Who is he helping, our contractors or the host government?
General FISH. The company [continues reading].
Brief on the politics of the situation. Identify the decision-makers. Identify the procurement process for the instant case. Enlightens the company on competitors' position, approach, strengths, and weaknesses. Will answer customer questions to keep proposal of the company working. Translate letters and customer communications from the language into English. Furnish transportation, and services which can be used in the approach to bid. Consult on legal matters and representation thereof. Assist in getting billings paid. Assist in important custom procedures. Assist in technician and locating house, transportation for out-of-town visits. Corporate and logistic support after the sale is made. Feed back information on production, et cetera.
It is true that there have been indications of the possible improper use of agents. But they also serve a very definite commercial, legitimate practice. That is the point that I am trying to make.
Mr. SOLARZ. You are not suggesting, General, that the agents are underpaid?
General FISH. I am not suggesting that they are underpaid or overpaid, either one. I really have no judgment on that.
Mr. WHALEN. As I understand your description, these agents normally would reside in the purchasing country. Is that correct?
General FISH. I think that it is a fair characterization, although I can think of some that do not necessarily. I don't think that it is invariably true, but mostly true.
Mr. WHALEN. Who bears the cost of the agent's fee?
General FISH. The purchaser.
Mr. WHALEN. What about in the military assistance program?
Mr. WHALEN. Under those programs, the taxpayer bears the cost. General FISH. It is not an allowable expense in any way, shape, or form.
Mr. WHALEN. I yield my time.
Mr. Nix. The subcommittee will recess to take this vote. We will come right back.
[Whereupon, the subcommittee recessed from 4:05 p.m., to 4:10 p.m.] Mr. Nix. The subcommittee will come to order.
Have you concluded, Mr. Whalen?
Mr. WHALEN. Yes, I have, Mr. Chairman.
Mr. SOLARZ. Thank you, Mr. Chairman.
General, in the last fiscal year, can you tell us, offhand, how much worth of weapons we sold through our foreign military sales as compared to how much was purchased through private commercial channels in our own country?