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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 process.

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:]


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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?
Mr. BIESTER. Just one last question, I guess.

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.

Mr. MICHEL. This is not to recommend a single agent, but to provide a list of reportedly responsible agents.

Mr. BIESTER. Is there anybody who keeps a scorecard of how well these fellows do?

Mr. LEWIS. That question might better be addressed to the Department of Commerce.

Mr. STERN. The Office of Munitions Control does not require and has not received any information that would make possible the compilation of statistics on agent fees paid. We have referred this question to the Department of Commerce and have been informed that, likewise, it does not record this information.

Mr. Nix. One other thing. In the formulation of these regulations that you mentioned, the agencies formulating the regulations certainly took into consideration, at least I would think they did, that those regulations should not be too stringent because of the increasing competition, not only in this country but all over the world, in the sale of the product to the purchasing countries. Is that correct?

Mr. STERN. I think that this is correct. I mentioned earlier that we have had a number of letters in response to the issuance of these regulations, and here is one that says: "To go further will prejudice the American businessmen with no assurance that any benefits will flow to anyone but our foreign competitors."

So, to answer your question, that is in the mind of the American manufacturers as well as ours. It is a very difficult problem.

Mr. Whalen, do you have anything further?

Mr. WHALEN. No, nothing further.

Mr. BIESTER. One further question, Mr. Chairman.

Do any countries suggest agents to be dealt with?

Mr. STERN. I am not aware of it.

Mr. Nix. On behalf of the subcommittee, gentlemen, I want to express our thanks for your appearance and your contribution to our hearings. Thank you very much.

The subcommittee stands adjourned.

[Whereupon, at 2:50 p.m., the subcommittee adjourned.]







Washington, D.C.

The subcommittee met at 2 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.

Today we will conclude that portion of our hearings which deal with the existence of slush funds maintained by international corporations.

The existence of massive slush funds in accounts of American international business first came to light with revelations by the Watergate Prosecutors Office that illegal corporate contributions were made by corporations out of slush funds maintained abroad.

The Securities and Exchange Commission has proven that hundreds of millions of dollars have been unaccounted for in its investigation of the bribery of foreign public officials by international corporations. The Lockheed Corp. has spent well over $100 million in one country with one foreign agent.

Mr. Edward C. Schmults, the Executive Director of the Emergency Loan Guarantee Board, will detail the payments of such fees by Lockheed and their failure to inform the Board which was set up by Congress to save Lockheed from bankruptcy. Yet this company continued to distribute millions in funds to certain sources.

Hon. Philip A. Loomis, Commissioner of the Securities and Exchange Commission will testify on the difficulty the Commission had recently in obtaining information from corporations on the question of bribery of foreign public officials. It is appropriate here to point out that the membership of this Commission may be establishing the greatest record of service since the 1930's when the Commission was first created by Congress.

The membership of this subcommittee will consider the introduction of legislation to deal with these matters on a case-by-case basis. For example, the members are now considering legislation to require the President to report to the Congress on a regular basis, the names of agents and their fees in military sales contracts by American corporations to foreign governments. I hope that this legislation will make this information public so that it will be available not only to the Congress but to enforcement agencies and the public in order to restore the good name of the United States.

Mr. Schmults, do you have to catch a plane? You may proceed.

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