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General FISH. Yes. My information, I will be happy to correct it for the record, indicates that there was a fee paid on a Hawk sale. It is important to get these things correct. Yes, what you stated is correct, there was an agents' fee involved.
I might add, because I think that it would be helpful at this point, that Israel, Iran, Kuwait and the Minister of Defense and Aviation, in Saudi Arabia, have all asked us to incorporate, and we have now, into all sales contracts the same statement that Congressman Solarz was reading. The only fees allowable would be the ones identified to them before the fact, and approved by them. Israel asked to do that as well, and we did it.
Mr. SOLARZ. I was referring to a sale to Iran of radar and also one involving an aircraft control system, both of which were associated with agents' fees, and both of which I would presume were consummated after your circular of November 1973.
General FISH. I can answer that right off: I know of no agents' fee paid that passed through FMS, since that date, that are in that report. There have been some allegations of agents being paid since that time, but I have not indicated that in the report to the committee because I would not report an unproven allegation.
Mr. SOLARZ. What do you mean by a nonallowable item of cost under this contract. Do you mean that it is not deductible?
General FISH. The cost of money is not allowable under the ASPR's. That is one example.
Mr. SOLARZ. Just one or two more questions. Are there any agents' fees that you have disallowed on the ground that they are not reasonable?
General FISH. I did ask that question, and I do have a reference, if you will give me a moment to go to my backup material.
I asked the same question, sir, of the Defense Contract Audit Agency, and they indicate to me that they reviewed the information in the field office in connection with the preparation of our report. The agents' fees have been questioned, or classified as "unsupported" in a number of
We have found them to be unsupported in a number of cases. In many cases, the substance of the fee was merely qualified pending a contracting officer's approval. Reasons for questioning agents' fees include fees judged not to be allocable to the contract.
Mr. SOLARZ. Out of how many contracts which had agents' fees were questions raised, and ultimately how many of those fees were disallowed?
General FISH. To get that information, we would have to conduct a wall-to-wall audit of 80,000 to 100,000 contracts for a single year. It would be very expensive. We could do it on a sampling basis.
Other reasons why they were not allowed include fees that appear to represent a duplication of effort already performed by the contractor's international sales office. In other words, the contractor has asked for something that we thought was not a bona fide sales agent.
Mr. SOLARZ. Does this suggest to you, General, that in those instances the fees that the agents were supposed to get had little to do with what agents are supposed to do, according to that description, but were rather a pay-off?
General FISH. No, sir. The recitation that I made is a contractor's view of what agents do. What our contracting officers go by is what you
have in front of you on the ASPR's of what is allowable, or his judgment of what is allowable. That is why we furnished the ASPR's.
The recitation that I gave you makes no judgment as to whether they were proper or improper.
Mr. SOLARZ. One last question. There were allegations that the Department of Defense had hinted at bribery in a publication prepared for Americans seeking to do business in the Middle East. Is this any reference to that speech by Mr. Hoenig to which you referred earlier? General FISH. That is what they are talking about.
Mr. SOLARZ. Could you possibly submit that to the committee so that it could be included, if there is no objection. Mr. Whalen, would you object?
Mr. WHALEN. Is that what the chairman put in the record?
General FISH. That is Mr. Hoenig's view of the situation. Incidentally this was prior to my tenure in this office. Mr. Hoenig has made the point elsewhere that it is based upon his considerable experience in the industry, and not necessarily the 5 years that he has worked in the Agency.
Mr. SOLARZ. Thank you very much, Mr. Chairman.
Mr. Nix. The Chair recognizes Mr. Biester.
Mr. BIESTER. Mr. Chairman, I would like to track and see exactly what kind of rules and regulations really do apply here.
I will start with part 5L, ASPR 1-500, et seq. I think we have agreed that that particular ASPR is limited to the contracts for the Department of Defense of the U.S. Government. Is that correct?
General FISH. Counsel will correct me if I am wrong, but what we do in writing a foreign military sales contract, by reference we incorporate.
Mr. BIESTER. I will get to that. I want to start this way. My mind has limitations, and I cannot embrace the whole thing in one fell swoop like that. I want to go on a step-by-step basis.
General FISH. Yes, sir.
Mr. BIESTER. ASPR 1-500 et seq. all deal with contracts for the Department of Defense. Is that correct?
Mr. FORMAN. Basically, that is correct. This is correct for all ASPR. As I mentioned, there are only 10 provisions scattered throughout the ASPR dealing specifically with, or mentioning specifically FMS.
Mr. BIESTER. One of the items that this particular ASPR seeks to get at is the contingent fee, which is based upon the solicitation and acquiring of certain contracts. It seems to me that the ASPR tends to separate actual work done from a contingent fee arrangement. Is that a fair characterization of the position?
In ASPR 1-505-4(a) appear the phrases, in the second sentence and in the third sentence: "In evaluating reasonableness of the fee, there should be considered services of the agent other than actual solicitation."
(b) States that the selling agency should have adequate knowledge of the products and the business of the concern represented, as well as other qualifications necessary to sell the products or services on their merits.
Basically, the concern expressed in that ASPR is the vice of the contingent fees based upon the success of the agent's work in obtaining the contract. Would that be a fair characterization?
Mr. FORMAN. I am not sure what you mean by the "vice of the contingent fees." The ASPR permits contingent fees as such as long as it is to a bona fide, established commercial or selling agency.
Mr. BIESTER. Let us try it this way. In ASPR 1-505.1:
Any fee whether called commission, percentage, brokerage, or contingent fee, or otherwise denominated, is within the purview of the covenant if, in fact, any portion thereof is dependent upon success in obtaining or securing the Government contract or contracts involved.
Now this implies to me that within the purview of the covenant of a contract is a fee which is dependent upon the securing of the government contract.
Mr. FORMAN. Yes, sir, that is what the whole part deals with.
Mr. BIESTER. This particular part 5 of section 1 means that we are against that?
Mr. FORMAN. No, sir. We are against that only if you are paying it out to influence peddlers. We are not against it if it is being paid to a bona fide sales agent.
Mr. BIESTER. The "Covenant Against Contingent Fees" clause, this is what I am having difficulty with. "Every contract shall contain the clause entitled 'Convenant Against Contingent Fees.""
Mr. FORMAN. The text of 103.20, which is also in that packageMr. BIESTER. It states:
The contractor warrants that no person or selling agency has been employed or retained to solicit or secure this contract upon an agreement or understanding for a commission, percentage, brokerage, or contingent fee, excepting bona fide employees or bona fide established commercial or selling agencies maintained by the contractor for the purpose of securing business.
Mr. FORMAN. This is what I have been saying.
Mr. BIESTER. Nothing, therefore, in part 5, or in that covenant prohibits the contingent fee based upon the success of the contract.
Mr. FORMAN. That is correct as long as it is to a bona fide agent. Now, the allowability of the particular fee, of course, depends, or the extent to which it is allocable to that particular contract and on whether or not it is reasonable.
Mr. BIESTER. Who sets that?
Mr. FORMAN. The contracting officer.
Mr. BIESTER. How do you measure that?
Mr. FORMAN. That is measured by the remaining standards which are set forth in the paragraphs we gave to you. ASPR 1-505.3, and it is also in several other places. In the FMS context it is even further elaborated on in ASPR 6-705.3 and in the Defense Procurement Circular 74-1.
Mr. BIESTER. The FMS contracts will follow the same principles as nominal defense contracts. I take it that this is the language that tends to bring in ASPR 1-500, et seq.
Mr. FORMAN. Yes, sir.
Mr. BIESTER. So, if one is an aerospace corporation attempting to sell fighter planes to any country in the Middle East, one could have an agency agreement with an agent anywhere in the world, the amount of the fee to be paid to each agent would depend upon the success of the agent in obtaining the contract, so long as it was a bona fide agent. This is one of the terms that is deemed to be reasonable.
General FISH. I noticed that your question was restricted to the Middle East.
Mr. BIESTER. It could be anywhere.
General FISH. Yes. Agents exist, as we have indicated in our report, throughout the world.
Mr. BIESTER. It could be a sale to Peru, or to any country. In fact, it has been pointed out that the foreign companies operating in the United States have agents involved in the sales. It is a common practice that is totally international.
Mr. FORMAN. Let me add one qualification. I don't mean to add any levity at this point, but there is one prohibition on the payment of fees, and that is the standard provision against Congressmen to benefit. No member of Congress can make such a fee.
Mr. BIESTER. That is appropriate.
Therefore, if one is going to be an agent in this business, in which the commitment of money may be fairly substantial, it would be pretty hard to stay in business competitively if one did not place contracts. Would that not be correct?
Mr. FORMAN. I would say so.
Mr. BIESTER. That is the way it comes down to me.
General FISH. Yes.
Mr. BIESTER. Therefore, if you are going to be a successful agent in this business, the hallmark of your success is not really your mechanical ability, or how many good engineers you have, but how good your success record is in placing contracts. That is what seems to me to be the problem.
Mr. FORMAN. I assume that the unstated implication or promise of what you have just said is that since the agent stays in business and earns his fees by making a sale, he is making the sales regardless of other considerations. Ergo, if you continue to permit agents fees to be earned, even though reasonable, we are turning over our foreign policy, our national security policy, in effect, to agents. That is just not the case.
Whether an American firm does business with an agent, it does not drive the foreign policy of the Government, nor does it drive the national security objectives of the Department of Defense.
These activities, whether they be by agents on behalf of a company, or by a company directly, can only be conducted overseas in according with our foreign policy. They cannot take place unless the company concerned has received a prior clearance from the Office of Munitions Control of the Department of State, in according with the traffic in arms regulation. They only get that consent if it is believed to be in furtherance of our policy.
Mr. BIESTER. I understand that. I am still working on this side of things, and I have not gotten to that side of things yet.
Would you read me the first two or three things that an agent is supposed to do for his principal.
General FISH. Now, sir, I am reading again from the list that the aerospace corporation that I asked the same question of furnished to me, because, really, we don't have direct access to the agents because that is not the nature of our business.
Mr. BIESTER. Part of your job is to measure the reasonableness of their fee.
General FISH. No, it is not my job. It is the contracting officer's and he does it against those ASPR's.
Mr. BIESTER. Who does he report to?
General FISH. To the head of the procurement agency.
Mr. BIESTER. Who does he report to?
General FISH. The Commander of the Materiel Command, and ultimately to the Secretary of Defense. My job is different, as I said in my statement.
My job is the arrangements between the two governments. The contracting officer actually procures the services.
Mr. BIESTER, Did you ask the contracting officer what criteria he uses?
General FISH. It is prescribed for him in the ASPR's.
Mr. BIESTER. Aerospace told you what they think.
General FISH. In trying to anticipate the questions of the committee, I asked: "What do these agents do for you?" I thought that it would be useful, and this is the sort of information that they gave
"Identify opportunities in the country versus the product line that the company has got." That is where there is a sale potential.
Mr. BIESTER. How would someone identify an opportunity for a sale in a given country? Would you identify what an opportunity for a sale is of 10 fighter planes?
Would you read the newspaper daily? Would you try to have a friend in high places who might know? Would they identify the opportunity for a sale?
General FISH. I don't know, sir.
Mr. BIESTER. What is the next thing they do?
General FISH. "Make initial contact to generate customer interest." Mr. BIESTER. What kind of initial contact would the individual contractor make in a foreign country for these kinds of sales? Wouldn't that also be done by gathering and collecting friends in high places?
General FISH. Again, I could speculate the initial contact would be with whoever the decisionmakers would be at any level. It would depend on what they are trying to sell.
Mr. BIESTER. What is the next?
General FISH. "Advise when a visit by experts is timely."
Mr. BIESTER. How would you know when a visit would be timely? General FISH. I am sure that it would not be by walking the streets. The implication of this question is that they have to have an agent that is knowledgeable of the practices of the particular government that they are interested in, in order to advise them.
Mr. BIESTER. And have a pretty good line into the decisionmakers in the country.
General FISH. You insist upon that being the main thrust.
Mr. BIESTER. I did not make the list.
General FISH. You are interpreting it that way, and I would say that the list is subject to that or many other interpretations.
Mr. BIESTER. I have overtaxed my time, Mr. Chairman. I wonder if
that list could be made part of the record?
General FISH. I read it into the record.
Mr. Nix. Yes.