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graphs from letters that we have received in response to our publication.

Here is one that reads:

It is doubtful that the undisclosed contingent fees can damage, or have damaged the foreign policy interests of the United States, rather it is a naive attempt at policing the world's morals and ethics that seems to make this country the laughing stock of many foreigners.

This attempt to regulate business practices is outside the purview of the Office of Munitions Control of the State Department, or the U.S. Government. As a matter of policy, it is suggested that this kind of intervention be avoided. As a practical matter, there is little to be gained by extra paperwork for all parties.

I have another letter, which I will not read, but which adopts a similar line. The point that I am trying to make is that this first effort that we have taken is obviously going to present some difficulties for the American manufacturer, and perhaps it should be enough as a first effort.

Mr. Chairman, as I have mentioned, I have some colleagues here and with your permission I would like to see if they have any additional comments to make.


Mr. LEWIS. I simply want to reinforce what Mr. Stern has indicated. We are trying to come to grips with a serious problem. We need some time to see how our proposal works, and to demonstrate if it can provide effective control.

It is a little premature to assume, at this juncture, that we have effective controls.

Mr. Nix. Let me ask you this, Mr. Lewis. How would these regulations that you have initiated, have affected, had they been the rules at that time, the $100 million that was paid by Lockheed to this man from Saudi Arabia in fees?

Mr. LEWIS. I think that the disclosure policy, if it had been in effect, would have alerted the Government of Saudi Arabia to what was transpiring and left it up to the Government of Saudi Arabia to determine whether it wished to proceed. It would not have covered the question of bribery.

I am not entirely sure that the regulations that we propose to implement will cover all aspects of that particular problem. We are still trying to come to grips with that. However, I would suggest to you that the disclosure policy is a good first step, Mr. Chairman.

Mr. STERN. May I also add, Mr. Chairman, that we have to draw a distinction between agents' fees and bribery, or illegal payments. I think that honest people can differ on whether agent's fees are proper or not. I think that this is a question that can be debated.

There is no question on the illegal payments. We would all agree that those are not to be permitted, but agent's fees, I think, are a different proposition.

Furthermore, I would also like to point out, Mr. Chairman, that these fees have been paid by foreign governments. They are not American dollars. They do not come out of appropriations, or from

the American taxpayers. Therefore, there are some limits, I think, beyond which the U.S. Government should not go to avoid interfering with the operations of another government.

Mr. Nix. Mr. Stern, when you say that these agents' fees are paid by the foreign governments, I fail to quite understand why you said


Mr. STERN. Because I think that it is a fact, Mr. Chairman.

Mr. Nix. You mean to say that the fees that we are speaking of, those are payments that come from the treasuries of foreign governments?

Mr. STERN. Yes, sir.

Mr. LEWIS. May I clarify that.

What we are trying to tell you, Mr. Chairman is that the contracts, the agreements on the sales include the actual agents' fees as well. Mr. Nix. The totality of the contractual figure represents the amount that would be paid as fees to agents?

Mr. LEWIS. Yes, by the foreign government.


Mr. MICHEL. The contractor will have an agent with whom he has a separate contract calling for the payment of a fee with respect to the agent's effort in promoting the business of the manufacturing firm, or exporting firm.

The price charged by the manufacturer or exporter, who is selling to the foreign government, will include an amount to recover that fee paid by the firm to its agent. Therefore, the ultimate cost of the agent's fee is borne by the purchaser, which will be a foreign government.

Mr. Nix. Now there is just one other thing that is not clear to me. If a country's government has been influenced by its officials, how does informing the foreign government of the excessive agent's fees control the problem?

You are merely telling the foreign government, "One of your nationals has received an excessive amount of money, an excessive fee." Now, you cannot control any action on the part of that government at all, nor do you recover any of the money paid, if the fees are deemed to be excessive. What is the value of that provision?

Mr. STERN. We inform the government of the amount of the agent's fee included in the contract. It is up to that government to decide whether it is excessive or not; and if it has some reservation about the size of the fee, it can then pursue its own recourses.

Mr. Nix. It is really in the back of my mind that our own government divests itself of the right to determine what is or is not an excessive fee.

Mr. STERN. No, sir. The Department of Defense's present regulations do require a review of that issue, whether the fee is excessive or not. I can read to you a statement covering the DOD position.

DOD reserves the right to disallow any fee on the basis that the amount is unreasonable or the agent is not bona fide. If DOD determines any fee is unreasonable and that the agent is not bona fide, the fee would not be allowable, and therefore no report of agents' fees would be reported within the letter of offer.

Further no fee shall be accepted by DOD if disapproved by the purchasing governments. 60-363-75- -11

So there is a review process that the Defense Department undertakes.

Mr. MICHEL. Mr. Chairman, we should distinguish here between governmental and commercial sales. The paragraph that Mr. Stern just cited is from a current regulation regarding foreign military sales contracts. These are contracts in which the U.S. Government is involved as a party to the transaction. Although the payment is made by the foreign government, we are between the manufacturer and the purchaser as the seller of the item to the foreign government.

In the case of the purely commercial sale, we do not become directly involved in the transaction, but act only as the authority for issuing an export license. In these commercial transactions we do not review, approve or disapprove the amounts of fees that are to be charged and paid by the purchaser, ultimately.

In the case of commercial contracts, we have, in our proposed regulations, suggested a requirement only for disclosure to the purchasing government, leaving the parties to the contract, the seller, who is the private company in the United States, and the purchaser, who is the foreign government, to determine between themselves the extent to which their arrangement will include reimbursement for the services of agents.

Mr. Nix. Let me ask you. When your Department decided that these new regulations that have been promulgated are absolutely necessary, what prompted the decision?

Mr. STERN. I think that there is no doubt that increased interest in this whole subject was accelerated by the hearings in Congress. The date of our new regulation is August 25; so, obviously, there is a relationship.

Mr. Nix. This is the first step forward.

Mr. MICHEL. Mr. Chairman, this is a proposed regulation that has been published in the Federal Register for public comment. Mr. Stern has read one of the public comments that we have received.

The regulation is not in effect at this time. The intention is to permit the public to participate in the process, and suggest, perhaps, additional or different language and provisions than we have proposed before the final regulation is adopted and made effective.

Mr. LEWIS. The Department of Defense regulation is no longer in the review process. It is accepted and implemented as standard procedure in the Department of Defense for foreign military sales.

Mr. Nix. Mr. Biester.

Mr. BIESTER. Thank you, Mr. Chairman.

One of the continuing quests that I have had in this hearing is to discover exactly what an agent does. In view of the buildup that the chairman gave you, I thought that I would ask you if you knew what an agent does.

Mr. STERN. Agents perform such legitimate duties for companies as establishing appropriate contact points with foreign governments; maintain office space

Mr. BIESTER. Let us stop right there. You have to go slowly.

The appropriate contact points in the foreign governments, if we are talking about foreign military sales, I assume that this would be someone who makes the decision as to whether, in fact, country X buys a Mirage, or whether it buys a Lockheed or something like that.

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

specificity as we have a greater variety of potential kinds of transactions to which this regulation is intended to apply.

Mr. BIESTER. Let us suppose that this agent has money at stake, perhaps as much as half a million dollars. He tells a falsehood to the company, and they do correctly certify it even though it is falsely certified. How is that found out, and who prosecutes who?

Mr. STERN. That is a very good question.

Mr. BIESTER. Let me put it in even worse terms than I did.

Mr. STERN. We have not even answered your first question, without going to the second one.

Mr. BIESTER. Let us suppose that in country X, the agent resides there, and operates there, and never comes to the United States. He has corrupted an official of that country. He has gotten a successful contract, a heavy contingent fee, and has lied to the American


The American company, on the other hand, in good faith has made the certification to you. Then you discover that it was false. You cannot prosecute the American company, and you cannot really prosecute the agent who is not subject to our jurisdiction. Who gets prosecuted? Mr. MICHEL. If the company makes a willful misstatement of facts, then it would be subject to prosecution.

Mr. BIESTER. I agree, but how do you determine that?

Mr. MICHEL. Prosecution could be initiated under section 1001 of title 18, United States Code. Also, if they engage in a willful violation of the regulation, that carries with it a separate criminal penalty under section 414 of the Mutual Security Act of 1954, which penalty can include a fine of up to $25,000 and imprisonment for up to 2 years. So there are pretty stiff penalties.

The standard is knowing misrepresentation, or a willful violation of the regulations. These are tough standards.

Mr. BIESTER. To demonstrate the willful misrepresentation. Looking at the American company, the American company has to certify that it has paid, that it has notified the foreign government that it paid a fee of such and such an amount, so that, really, does tend to draw the American company.

Mr. MICHEL. That was taken into account in devising the regulation. We wanted the company's certification, and not a certification by someone provided to the company, one by a third party that might not be subject to our laws.

Mr. BIESTER. If, in fact, the company and agent and official of a foreign government have engaged in the corrupt practice of literally paying for contract, the company would quite probably say that it paid a fee of $500,000, and not be telling a lie at all, and under that regulation they could not be subject to punishment.

Mr. LEWIS. The companies normally keep some measure of account that they can relate to their stockholders. I agree with you, and I am not disputing it. I am only raising the point that this is normally the way that companies function.

Mr. BIESTER. Up until a few months ago, I would have agreed with you.

Mr. LEWIS. I agree that there are exceptions.

Mr. BIESTER. We are dealing with a serious problem. We have to write laws and regulations which are designed to draw the net on those controls.

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