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Mr. STERN. It may not be initially. Initially, the contact could be at a much lower level. It would depend on what it is, on what the manufacturer has to sell. Then, presumably, in the later stage, it may well get to the decisionmaker, but it does not happen in every instance. Mr. BIESTER. It does not get to the decisionmaker?
Mr. STERN. The foreign military establishment may make recommendations to the decisionmaker without the participation of the manufacturer.
Mr. BIESTER. But an agent would be much more useful to the manufacturer if, in fact, he did not have to rely upon the military committee, but could, in fact, himself have contact with the government decisionmakers.
Mr. STERN. That is very possible.
Mr. BIESTER. If, in fact, the agent felt that several hundred thousand dollars in fees would be an inroad on the eventual decisionmaker's judgment, he would have an incentive to do so, would he not?
Mr. STERN. Yes, sir.
Mr. BIESTER. The company that is spending this money also would have a similar equality of interest, would it not?
Mr. STERN. I would imagine so.
Mr. BIESTER. So when we talk about appropriate contact, to contract with elements of the foreign government, if we are talking about a first class agent and his effectiveness, we are really talking about someone who is able to have contact with the ultimate decisionmaker rather than a lower echelon person.
Mr. STERN. A first class agent, yes.
Mr. BIESTER. What is the next thing that agents do?
Mr. STERN. Maintain office space within the country concerned; obtain visas; provide transportation for company representatives; translation services; on occasion, provide for the movement within the country of military equipment after it has been sold.
Mr. BIESTER. Is that it?
Mr. STERN. That is it.
Mr. BIESTER. Really, the one that really counts is that first one. Now in the new regulation, the company is supposed to advise you that the government of X has been informed that the agent has received a certain commission and its amount.
Who in the government is supposed to be told, would it be the ultimate decisionmaker on the sale itself?
Mr. STERN. He is supposed to report this to our Office of Munitions Control.
Mr. BIESTER. Who in the foreign government?
Mr. STERN. That is on the commercial sales side. On the foreign military sales side, the information is provided to the Ministry of Defense of the government involved.
Mr. BIESTER. It does not say the Ministry of Defense.
Mr. STERN. You are looking at the commercial side, and I am trying to distinguish that we have two processes here, and they do run somewhat differently.
Mr. MICHEL. The foreign military sale can be made, according to law, only to a foreign government. The commercial sale could well be made to a private manufacturer, and that is one reason for a little less
Mr. LEWIS. I am just saying, Congressman, not to be argumentative but just for purposes of discussion, that we have had revelations that companies engage in such activities, but we do not know whether this is the norm or not.
As we move toward some form of regulation, we are trying to see what we have here before we go too far.
To get back to your point, my impression still is that most companies keep fairly good records, and have a fairly good idea of what they are paying out.
Mr. BIESTER. But if they don't, and if an American competitor, who is engaging in corrupt practice, competes with another American company that is engaging in clean practice, and honestly puts down the amount that they pay for a contingency fee, and says no more than that, they have complied with the regulation. They would not be subject to prosecution under it.
Mr. LEWIS. That is correct.
Mr. MICHEL. I am not sure I understand the implication.
Mr. BIESTER. The implication is that you can be dishonest and satisfy this regulation, and have no prosecution.
Mr. MICHEL. Your example contemplates a situation where the seller and the buyer are both corrupt, and the seller is willing to pay an exorbitant fee, and the U.S. Government is not a party, we do not condone illicit payments, but there is a question as to how much further we should go.
Mr. BIESTER. The American Government is financing the sale.
Mr. STERN. There is no American taxpayer involved in this, either the foreign military sales or the commercial sales. This is the point that I was trying to make with the chairman before.
Mr. BIESTER. No way at all?
Mr. STERN. No.
Mr. BIESTER. His money is not used to buy any of this equipment? Mr. STERN. No, sir. The only money that the American taxpayer pays is the salary of those persons who are supposed to monitor the
Mr. BIESTER. No mutual security grants, or anything like that? Mr. STERN. It is not involved in this whatsoever.
Mr. MICHEL. This regulation is focused on commercial transactions between American companies and foreign governments. The more stringent requirements of the Department of Defense regulations apply to foreign military sales cases, which can, sometimes, involve U.S. Government financing through loans, or U.S. Government guarantees of loans made by banks. Commerical sales are rarely financed by the U.S. Government.
Mr. BIESTER. What about the Government insurance?
Mr. MICHEL. For those cases involving U.S. Government loans or guarantees, we have the Department of Defense regulations in effect, which reserve to the Department of Defense the right to disapprove the fee. In almost all such cases, the Government is a party. However, not all foreign military sales involve Government funding; I would say that the majority of them do not.
Mr. STERN. The great majority of them do not.
Mr. BIESTER. But your point is that you feel that there is a limit to which the U.S. Government can go with respect to regulation of American companies and their potentially corrupt conduct; or are you meet
ing at arms-length the corrupt conduct of officials of other countries. Mr. MICHEL. That is the question before us. What is the limit, and how far should we go, recognizing that there are legitimate functions that can be performed by agents? It is a common practice for all businesses not to maintain staff on their payrolls in all countries, but to use commission agents in many places.
After a great deal of internal debate, and lengthy deliberations, we concluded, at least as an initial step, that a disclosure requirement was an appropriate beginning in the case of commercial sales where the U.S. Government is not a party and where no U.S. Government financing is involved. At present, we do not see a reason for U.S. Government official action going beyond the requirement for disclosure now proposed.
Mr. STERN. There is also a practical problem; namely, what resources does the U.S. Government have to conduct investigations overseas? I believe that this was mentioned to the committee before. It is always a problem.
Mr. BIESTER. I have overtaxed my time, Mr. Chairman. Thank you very much.
Mr. Nix. Would you mind if I asked one question?
Mr. WHALEN. Certainly, Mr. Chairman.
Mr. Nix. May I ask you to indicate the number of countries with whom we are presently engaged in the sale of arms?
Mr. STERN. As indicated by the following table, the U.S. Government processed FMS sales of 72 countries in fiscal year 1975, which represented an increase of 11 over the 61 countries making FMS purchases in fiscal year 1971. The changing dollar volume of FMS orders during this period is indicated by the table.
[The information supplied by Department of State follows:]
FOREIGN MILITARY SALES PROGRAM BY NUMBER OF RECIPIENT COUNTRIES AND DOLLAR PROGRAM VALUE, FISCAL YEARS 1971-75
Mr. Nix. Let me ask you if that has materially increased in the last 5 years?
Mr. STERN. The number of countries, no, sir.
Mr. Nix. Let me ask you if the volume of sales has increased in that period of time?
Mr. STERN. Yes, sir.
Mr. Nix. Let me ask you whether or not the competition for sales contracts has not increased over that period of time?
Mr. STERN. Absolutely no question about that.
Mr. Nix. Then, let me ask you. In the face of competition such as exists today in this field, how is it possible to prevent the agent's fees from increasing in amount?
Mr. STERN. I don't think that there is any way. Obviously, the sales go up, and so will the agent's fees involved.
Mr. Nix. The point I make is that the increasing competition in business, it would seem to me that inevitably the agent's fees, or the amount paid for business, would increase. People are still greedy, and they still want business.
Mr. STERN. Even beyond the question of greediness, Mr. Chairman, I would say that the amount of work increases with the amount of sales. So between the competition and the work, the amount of fees is likely to go up.
Mr. LEWIS. We also ought to point out that traditionally, agents operated under contingent fees on a percentage basis, let us say 5 percent of the sales contract. This was regarded in our own department, and the Department of Defense, as a reasonable amount.
However, now, the value of purchases is increasing tremendously; so when you talk about 5 percent of $1.5 billion, the fee is substantial. It is not an insignificant amount of money we are talking about.
Another question arises: What has the agent done to secure for himself 5 percent of $1.5 billion, or whatever billions of dollars we may be talking about. There is considerable debate within the Government and elsewhere as to what constitutes a reasonable fee for agents. The percentage approach may not be a satisfactory one, and we recognize this.
Mr. Nix. Mr. Whalen.
Mr. WHALEN. Thank you, Mr. Chairman.
I understand, checking with staff counsel, that most of the questions that I would have asked have already been raised. I have no questions.
Mr. Nix. Mr. Biester, do you have any further questions?
As one thinks about it, if this amount of money is floating around, how is the company selecting an agent? Is there an advisory office that the company can go to, and say: Who is a good agent in capital city Y in country X? It sounds like a pretty good business to get into.
Mr. STERN. I understand that there is at least one occasion where our Embassy has been approached to inquire about the availability of potential agents. I expect that this may very well go on in other places as well.
I believe that this is part of the regular service that we provide to businessmen overseas. It is not restricted to foreign military sales. It should be noted that not all American companies employ foreign agents. Among those who do, there will be many considerations that will go into a decision regarding the selection of an overseas representative. Presumably, companies make their selection on the basis of recommendations from various overseas and domestic sources and from information concerning the reported effectiveness of a specific agent.
Mr. LEWIS. I am sorry to interrupt, but as a matter of fact, the Department of Commerce's representatives posted abroad maintain a list of what they regard as responsible agents when American businessmen visit the country for the first time, and ask about bona fide local agents.
Mr. BIESTER. This would be available in the missions overseas.