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Mr. STARRETT. That is correct.

Mr. WHALEN. You do, as you have explained, get into foreign sales, which, of course, concerns us here.


Mr. WHALEN. In connection with the domestic contracts, do I understand that you audit all of them on a spot check basis, or only on request of the contracting officers?

Mr. STARRETT. In order to respond, I have to break it into several different parts. We do audit the proposals.

Mr. WHALEN. You indicated that.

Mr. STARRETT. We previously outlined the rules on that. We audit costs incurred under certain types of contracts as they are being incurred.

Mr. WHALEN. You do all that, or what factors determine whether you will make an audit, both pre and post?

Mr. STARRETT. In the prearea, we audit, if the contract is to be negotiated and it exceeds $100,000, and it is not going to be priced based on catalog or market prices, or prices set by law. In other words, if it is subject to Public Law 87-653, we will be performing a preaward review of the proposal. For purposes of postauditing if the contract is the type that will result in the price being set after performance, in other words, it is a flexibly priced contract, we will audit the costs that are incurred.

Mr. WHALEN. You mentioned that you have 2,800 professional auditors in your organization. Approximately how many of those deal with foreign military sales?

Mr. STARRETT. I am afraid that I do not have that information.

Mr. WHALEN. Now, may we assume that the total amount of foreign military sales audit is roughly in proportion to the total DOD domestic contracts awarded?

Mr. STARRETT. If I understood your question correctly, by far the majority of our time is spent on domestic contracts.

Mr. WHALEN. To that extent, the 2,800 professional auditor figure might be misleading because one could assume that their time is spent on foreign military sales, when, indeed, it is not.

Mr. STARRETT. No, I was trying to provide some overall information. Mr. WHALEN. It is a very minimal part of your overall responsibilities.

Mr. STARRETT. Yes, it is.

Mr. WHALEN. On page 5, you indicated that you undertook analyses of foreign military sales pricing actions over $15 million for the 15 contractors with the most foreign military sales for the period July 1, 1972, to December 31, 1974.

Was this an on-going analysis, or was this just undertaken for the purpose of our hearing here today?

Mr. STARRETT. It was undertaken for the purpose of the hearing. Mr. WHALEN. Apparently, then, you did not audit these contracts prior to that time?

Mr. STARRETT. I mean by that that we gathered this information for the purpose of this hearing.

Mr. WHALEN. But had these contracts been previously audited by your agency?

Mr. STARRETT. Yes. The procurement actions that we are talking about here cover a period of time that goes back to July of 1972. The

60 reviews that we made of these procurement actions were made during that period of time.

Mr. WHALEN. Then you did it again for statistical purposes?

Mr. STARRETT. What we did was gather the information.

Mr. WHALEN. But each of these contracts previously had been reviewed as they were awarded. Is that it?

Mr. STARRETT. Yes, that is correct.

Mr. WHALEN. You mentioned denials of agent's fees, and you mentioned the fact that you reviewed four contracts providing for agent's fees. Did you indicate that the entire range of fees had been denied, or how much of that had been denied?

Mr. STARRETT. I did not indicate that. But for the four actions that are in this statement, there was approximately $6 million involved in agent's fees, and we questioned the entire $6 million.

I happen to know, in those four cases, that the $6 million was not included in the negotiated cost of the resulting contracts.

Mr. WHALEN. You mention on page 7 that $30.3 million included in these proposals was for sales commissions. Are we talking about the same four contracts?

Mr. STARRETT. The four that I have referred to previously are included in these statistics, yes.

Mr. WHALEN. Now the six reasons which you cite in connection with questioning the commission, do they deal with only four contracts or more?

Mr. STARRETT. The six reasons that I have given cover approximately 85 audit reports that were issued during the period of the survey. Mr. WHALEN. Were they sufficient to bring out the denial of these fees or commissions; or were they simply limited to questioning them? Mr. STARRETT. What we do is provide advice to the contracting officer.

Mr. WHALEN. Let me interrupt you there. Do you have authority to tell the contracting officer: "Look, we disallow this."

Mr. STARRETT. Not in this case. We provide advice to the contracting officer as to what we believe, what course of action we would recommend for the negotiations.

Mr. WHALEN. In the case of the Saudi Arabian commissions, were you involved in that in any way in terms of proffering advice to the contracting officer?

Mr. STARRETT. In those cases, I believe we were involved in one of the early cases. Yes.

Mr. WHALEN. Did you assume that it was vour advice that resulted in the denial of the first commission, or the commission that was questioned?

Mr. STARRETT. I don't really know the answer to that question.
Mr. WHALEN. Thank you, Mr. Chairman.

Mr. Nix. Mr. Solarz.

Mr. SOLARZ. No questions.

Mr. Nix. I want to express my thanks and the thanks of each member of this subcommittee for your presence here today. gentlemen. We are deeply interested in the subject matter that we have discussed, and will continue to discuss. You have made a contribution to what we seek to establish. Thank you very much.

The subcommittee will be adjourned.

[Whereupon, at 4:05 p.m.. the subcommittee adjourned, to reconvene at 2 p.m., Thursday, September 18, 1975.]







Washington, D.C.

The subcommittee met at 2:05 p.m., in room H-236, the Capitol, Hon. Robert N. C. Nix (chairman of the subcommittee) presiding. Mr. Nix. The subcommittee will be in order.

Mr. Thomas P. Stern, Acting Director of the Bureau of Political and Military Affairs, Department of State, will testify today on the Department of State's response to problems arising from recent revelations on the matter of agents' fees on arms contracts which run into the tens of millions of dollars.

The Department has caused the publication of proposed changes in the International Traffic in Arms Regulations. The changes would require exporters of munitions to certify that they have informed the buyer government as to the identity and the amount paid to an agent on a contingent basis as a fee, if the amount paid exceeds $10,000.

If no contingent fee is paid, a statement to this effect must be filed with the Department. The Department of Defense requires the providing of similar information to the government contracting for arms sales.

The Criminal Code, title 18, section 1001, provides that whoever makes any false or fraudulent statement to an agency of the U.S. Government on a matter within that agency's jurisdiction, shall be subject to a $10,000 fine, or imprisoned not more than 5 years or both.

This provision of title 18 would apply to any violation of the proposed change which would amend the International Traffic in Arms Regulations (ITAR), title 22, Code of Federal Regulations, which put into effect the purposes of the United States Code.

This step is a positive one. Since American exports during the last year include as a major proportion arms and food, the proposed change is not a small step.

Our witness today is a leading expert in the field of military export sales and government programs in this field. He is well able to answer policy questions. The members may wish to make such inquiries.

Mr. Stern would you present your associates and begin your testimony?


Mr. STERN. Thank you, Mr. Chairman.

I appreciate this opportunity to appear before your subcommittee today in order to discuss the Department of State's policymaking role in the administration's security assistance and sales programs, and our responsibility and policies with regard to agent fees.

Accompanying me are Mr. William Lewis, Special Assistant to the Under Secretary for Security Assistance, Mr. James Michel, Assistant Legal Adviser for Politico-Military Affairs, and Mr. William Robinson, Director of the Office of Munitions Control.

Today's session should provide a useful addition to the continuing dialog between the Congress and the executive branch on these important subjects.

With your permission, I would like to begin with a basic description of our overall security assistance program, and then discuss the complex decision processes in which State is involved.

Our global security assistance and cash sales programs encompass many activities. On the assistance side, there are three main areas from a budgetary point of view-grant military assistance (MAP), which includes military materiel and training; funds for credits and guarantees for foreign military sales (FMS); and security supporting assistance, which encompasses financial grants and loans for specific political and security objectives.

Resources for security assistance include items obtained by new manufacture and procurement as well as transfers from Defense Department stocks, including excess defense articles and ship loans.

Cash sales, which are distinct from security assistance, are handled either on a government-to-government basis under the FMS Act or through commercial channels with the U.S. Government acting as a licensing authority for exports.

I wish to draw the attention of the subcommittee to the fact that transfers of weapons systems, while an essential part of these programs, are not always the principal vehicle for the attainment of our objectives.

We also provide budget support, make advanced training and education available in such fields as computer technology and fiscal management finance imports of food, and engage in a wide range of other activities that are not directly related to the transfer of military equipment to other nations.

Even in the area of military material, our exports do not always and everywhere involve hardware end-items. In dollar terms, weapons and ammunition currently account for only 40 percent of our military exports.

Supporting equipment, such as cargo aircraft, accounts for 19 percent; construction, supply operations, training, and technical services for 24 percent, and 17 percent goes to spare parts.

The Department of State has a primary policymaking role in all of these areas. The Bureau of Politico-Military Affairs, of which I am Acting Director, directly oversees commercial sales of armaments, ammunition, and related technical services through its Office of Muni

tions Control and monitors all other phases of programs for provision of defense articles and related services through its Office of Security Assistance and Sales.

The Department of Defense is specifically responsible for implementing the military assistance program and foreign military sales program. AID manages the supporting assistance program.

To be more precise, the Foreign Assistance and Foreign Military Sales Acts specify that the Secretary of State is responsible for the continuous supervision and general direction of military assistance and sales, including whether there shall be a program and the dollar amount thereof.

This authority has been formally delegated to the Under Secretary of State for Security Assistance, Hon. Carlyle E. Maw. He, in turn, is advised by the Security Assistance Program Review CommitteeSAPRC which has members from State, Defense, Treasury, OMB, NSC, AID, and the Arms Control and Disarmament Agency.

SAPRC reviews annual country program plans for security assistance, and makes recommendations on resources allocation, proposed budgetary levels, and long-term program goals. The Under Secretary transmits his annual program proposals to the President through OMB.

There is also an Interdepartmental Politico-Military Group, chaired by the Director of the Bureau of Politico-Military Affairs, which meets on an ad hoc basis. Among other things, this group determines whether certain weapons systems are sophisticated within the meaning of the Conte-Long amendment to the Foreign Assistance Act.

State's policy responsibilities also involve the continuous review of transfers of defense articles and services on a case-by-case basis. This activity is centered within our Office of Security Assistance and Sales.

Cases may enter the review process from several directions. For example, foreign purchasers may submit their requests to our Embassies or military advisory groups overseas, or through their own embassies or purchasing missions in Washington to the Defense Security Assistance Agency. Occasionally, the request may be routed directly to State.

In commercial sales cases, the American supplier files an export license request with our Office of Munitions Control. With the exception of routine transfers to NATO allies, which are processed within the Defense Department, State reviews virtually all transactions where there is a potential policy issue. The Office of Security Assistance and Sales not only is in constant touch with its counterpart in the Defense Security Assistance Agency, but also consults with the geographic bureaus within State and with AID, ACDA, OMB, and Treasury.

Controversial issues can be raised to the highest level for a decision to the Under Secretary or even to the Secretary or the President, if necessary.

On the political side, we examine the commonality of United States and recipient country interests, the regional role of the recipient and its internal stability, the likely value of the transfer in terms of U.S. influence, whether it will establish an unfavorable precedent. the recipient's other purchase options, its human rights record, and the likely implications of our refusal to sell.

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