STATEMENT OF HON. EDWARD C. SCHMULTS, UNDER SECRETARY OF THE TREASURY, EXECUTIVE DIRECTOR, EMERGENCY LOAN GUARANTEE BOARD

Mr. SCHMULTS. Mr. Chairman, I have a statement which I can read or submit for the record, whichever way you would like me to proceed.

Mr. Nix. Whichever suits your convenience and the necessities of the moment for you.

Mr. SCHMULTS. Whichever you prefer.

Mr. Nix. In view of the fact that you are short on time I think an explanation of the statement will be proper.

Mr. SCHMULTS. Why don't I summarize the first six pages? I would like to submit the entire statement for the record. I might summarize the first six pages because they largely cover the same ground that Secretary Simon covered in his statement before the Senate Banking Committee. Then I might pick up on page 6 and read the balance of the statement, which I think details what the Board has done in large part since the Secretary's statement late in August. Mr. Nix. That is perfectly agreeable.

Mr. SCHMULTS. The first part of the statement describes the enactment of the Emergency Loan Guarantee Act which was passed by Congress in 1971 to assist Lockheed Aircraft Corp. which at that time was under severe financial strain.

The act authorized a Board, composed of the Secretary of Treasury, who acts as the chairman, and the Chairman of the Federal Reserve Board of Governors and the Chairman of the Securities and Exchange Commission, to guarantee loans up to $250 million.

A guarantee for the full amount was committed by the Board in September 1971 to Lockheed's 24 commercial banks. These were banks which at that time were extending bank loans to Lockheed.

At the present time Lockheed has borrowed $195 million under Government guarantee from the lending banks. In June of this year the Board's staff was orally advised by Lockheed that the company may have made payments to foreign officials in connection with its overseas activities, sales activities.

The Board followed these developments through the summer. We were aware at that time that the Securities and Exchange Commission was requesting certain information from Lockheed. This information was subpenaed by the SEC. A Senate subcommittee on multinational operations was also investigating Lockheed and it also subpenaed information.

On August 25 Secretary Simon appeared before the Senate Banking Committee and stated very clearly that the Emergency Loan Guarantee Board does not and will not condone illegal or unethical activities by American business here or abroad. The Board condemned such action in the strongest terms and is deeply concerned about possible improper use of Lockheed's corporate funds and its impact on the loan guarantee program.

Picking up now from my statement on page 6, I think it would be useful to divide the actions which the Board has taken or which will be taken by the Board into three groups: Those seeking to prohibit addi

tional improper payments; those to determine whether the Guarantee Act or the Board's agreements with Lockheed have been violated; and those to obtain a full accounting of the improper payments.

Of primary importance to the Board is to assure that Lockheed makes no further improper payments and that no moneys borrowed under guarantee be used even indirectly to pay off foreign officials.

On August 25, 1975, the Board held a meeting and was advised by Lockheed's chairman that payments to all foreign marketing consultants had been suspended pending action by the company's board of directors on a new corporate policy relating to the selection and use of international consultants. The Guarantee Board unanimously decided that unless Congress otherwise directed it would prohibit-as a condition of continuing the Government guarantee-any additional payments, directly or indirectly, to foreign government officials and political organizations, including these payments presently committed. As the first step to eliminate these improper payments the Guarantee Board sought to assure that Lockheed's board of directors would adopt a forceful policy to govern the company's selection and use of international marketing consultants. On September 8, Lockheed's board of directors formally adopted a new corporate policy prohibiting any payments which do not comply with applicable United States or foreign law and which do not meet the Internal Revenue Service's criteria as an ordinary and necessary business expense. I would like to submit a copy of this new policy to the committee for the record.

Mr. Nix. Without objection the copy will be inserted at this point in the record.

[The information follows:]

LOCKHEED POLICY ON THE SELECTION AND USE OF INTERNATIONAL CONSULTANTS

It is the policy of the Lockheed Aircraft Corporation to conduct its foreign activities so as to comply with applicable United States and foreign law. In order to ensure that this policy is maintained, the following qualifications and limitations shall apply to its dealings with all International Consultants.

1. All Consultants shall be regularly engaged in a business or profession. 2. No Consultant shall be an official or employee of the government or an active member of the armed forces of the country in which the Consultant is to render services unless such dual activity is permissible in the country involved and is approved in writing by either the head of the agency of which such Consultant is an official or employee or by the senior officer of the armed service of which Consultant is an active member, which written approval shall be maintained in the Corporation's file.

3. No Consultant shall be an officer, director, employee or "affiliate" (as that term is defined in the Securities and Exchange Act of 1934) of any customer unless such dual activity is permissible in the country involved and is approved in writing by the chief executive officer of such customer, which written approval shall be maintained in Lockheed's files.

Note: The criteria set forth in 2. and 3. above apply to the owners, principal shareholders, officers and active representatives of a Consultant organization.

4. No payments to or agreements with any Consultant shall be made in violation of applicable U.S. and foreign law.

5. No payments shall be made to any Consultant which would not be deductible as ordinary and necessary business expenses for U.S. income tax purposes under IRS criteria.

Note: A question of deductibility arises if the Consultant is an employee of a foreign government or if for any reason payments would not be deductible if made in the United States or if there is reason to believe that the payment might contravene the law of the country involved.

6. No payment shall be made to any Consultant until a written agreement has been executed by both parties. Such agreement shall be approved by any one of the following: the Vice President and General Counsel, the Chief Counsel, an Assistant General Counsel or an Assistant Chief Counsel of the Corporation. All payments under said agreement shall be made strictly in accordance with the terms thereof.

7. Consultant agreements shall as a minimum, incorporate the following provisions:

a. Consultant shall not, in connection with performance under the Agreement, make any payments to third parties if such payments (i) would not constitute a deduction by the Corporation as ordinary and necessary business expenses for U.S. tax purposes under IRS criteria, or (ii) would be in violation of applicable law, including the laws of the United States and the customer country.

b. Consultant shall not, in connection with performance under the Agreement, make any payments for political purposes.

c. Consultant, in performance under the Agreement, shall comply with all applicable laws, including the laws of the United States and the customer country.

d. Concurrently with payments made to Consultant, Consultant shall provide the Corporation with written certification that Consultant has complied with a., b. and c. above. The Corporation shall maintan such certifications as part of its books and records.

e. Consultant shall act solely as an independent contractor and not as an employee or agent of the Corporation.

f. Payment shall be made by check or bank transfer to the order of Consultant. Payment shall not be made in cash or other bearer instrument, or except pursuant to an assignment approved in writing as provided in paragraph k. below, to anyone other than Consultant.

g. To the extent that any agreement provides for future determination of compensation, such agreement shall provide that any such compensation shall be established with due consideration to such factors as accepted practice in the customer country and in the industry, the anticipated duration of marketing campaigns, expected intervals between sales, specific services requested of the Consultant, and the anticipated value of Consultant's contribution to the marketing efforts.

h. Compensation which may be due as a result of a sale made through any department or agency of the United States Government shall, in accordance with applicable regulations, be disclosed to such department or agency prior to any payment to such Consultant.

i. No Lockheed employee shall have any authority to give any direction, written or oral, with respect to the making of any commitment by the Consultant to any third party in contravention of the terms of the agreement.

j. The Corporation shall not be obligated to third parties with whom the Consultant may make agreements or to whom the Consultant may direct payments.

k. Consultant shall have no right to assign any portion of his rights or obligations (including payments due or to become due) to any third party without the prior written consent of the Corporation.

Note: No such consent shall be given without the approval of the Board of Directors.

8. The amount of and basis for compensation of Consultants shall be established with due consideration to such factors as accepted practice in the customer country and in the industry, the anticipated duration of marketing campaigns, expected intervals between sales, specific services requested of the Consultant, and the anticipated value of Consultant's contribution to the marketing efforts.

9. If any officer or other managerial employee of the Corporation learns that any employee of the Corporation has given a Consultant any direction, written or oral, with respect to the making of any commitment to any third party in contravention of these policies without the prior approval of such commitment by the Board of Directors, he shall promptly report all of the facts regarding such commitment to senior management, who will in turn promptly report such facts to the Board of Directors together with the action that has been or will be taken in connection therewith.

10. Any failure of any Consultant to comply with these Corporate policies (as set forth in an approved agreement with such Consultant), which comes to the attention of any officer or other managerial employee of the Corporation, shall

be reported promptly to the Board of Directors, together with a statement as to the action that has been or will be taken in connection therewith.

Mr. SCHMULTS. It is my opinion that this new policy is a very strong statement by the company which should go a long way in eliminating future improper payments by Lockheed. In order for this policy to be more than just a piece of paper, however, procedures will have to be adopted by Lockheed which will assure the policy is fully implemented. Lockheed has already begun to develop these procedures and the Guarantee Board will continue to work with the company in order to assure itself that the procedures are adequate to implement the policy.

It should be noted that the use of independent agents performing legitimate services is often a preferred and an appropriate method of doing business in certain parts of the world. Under these arrangements Lockheed or for that matter any corporation does not have total control over an agent's activities. This represents a hazard not only for Lockheed but for the Board. The company's new policy attempts to address this problem but the policy cannot fully protect against dishonesty.

Finally to further protect against future improper payments the Board will seek to amend its agreement with Lockheed to provide the Board with contractual remedies should any improper payments be made in the future.

The Board's staff after becoming concerned in June that the payments to foreign officials by Lockheed were more than isolated cases undertook a review of the Emergency Loan Guarantee Act and the Board's agreement with Lockheed to assess whether any violations or defaults had occurred. Additional issues also had to be considered. These included the purpose underlying the act, the Board's responsibilities under the act and general U.S. policy with regard to bribery of foreign officials by U.S. corporations.

The Board's agreement with Lockheed is extremely complex and although the Board's staff has identified certain provisions where a breach may have occurred, the ultimate outcome of other governmental agencies' investigations could have a direct bearing on our assessment. We will continue to follow these proceedings closely.

It is the Board's opinion that a full accounting of the improper payments made by Lockheed is important for several reasons. First for the Board to take all appropriate actions under the guarantee program it should understand fully the payments in issue and second as a guarantor for Lockheed's creditors the Board must assess the potential risks to Lockheed's operations arising from these payments. The Board has established a dialog with the SEC, the GAO and the DOD for the purpose of working in cooperation with them where appropriate in order to assure itself to the extent possible that all improper payments have been accounted for. In addition we will continue to work with Lockheed and others so that a full accounting will be made.

From the information we have obtained from Lockheed as well as from the company's public statements it is clear that bribes had been paid by Lockheed prior to the guarantee program. Whether laws of the United States have been violated is to be determined following the reviews underway by the various congressional committees and the agencies investigating these questions.

The Guarantee Board has the responsibility of protecting the Government's interest as a guarantor for creditors of Lockheed. In so doing it finds itself working with a company that alleged that foreign payments of this nature are a normal and necessary method of doing business abroad in the highly competitive aerospace market. Since the Board's responsibilities are limited, its actions can only be directed at borrowers under the act or at Lockheed. In this regard the Board will take all appropriate actions necessary to assure itself that Lockheed does not make any further improper payments.

Congress likewise has a responsibility to determine what actions it should take with regard to bribes paid by U.S. corporations to foreign officials. The Board is encouraged that this committee as well as other congressional commitees are considering this matter.

Mr. Chairman, we live in a time when the American public is cynical about government, about business, and about our many other institutions. The knowledge of the practice of bribery exists, the Government knows and the American people know. We cannot expect to rebuild the confidence necessary for our system of government if we do not speak out against these practices and take appropriate steps to end them.

I would be pleased to respond to any questions you might have at this time.

[Mr. Schmults' prepared statement follows:]

STATEMENT OF HON. EDWARD C. SCHMULTS, UNder Secretary oF THE TREASURY

Mr. Chairman and Members of the Committee: I am pleased to appear before this Committee, on behalf of the Emergency Loan Guarantee Board (the "Board"), of which I am the Executive Director and General Counsel, to testify on the payments made by the Lockheed Aircraft Corporation, (“Lockheed”) to foreign officials and political organizations in connection with certain of its sales activities.

The Board has gone on record condemning illegal or unethical activities by American business, here and abroad, in the strongest terms and has expressed its deep concern about the possible improper use of Lockheed's corporate funds and its impact on the guarantee program.

BACKGROUND ON THE EMERGENCY LOAN GUARANTEE PROGRAM

In August, 1971, The Emergency Loan Guarantee Act (the “Act”) was passed for the purpose of providing guaranteed loan assistance to major corporations whose failure could have a material adverse impact on the economy. At that time, Lockheed was considered the most likely applicant for assistance. The Act created a Board composed of the Secretary of Treasury, who acts as Chairman, the Chairman of the Federal Reserve Board of Governors, and the Chairman of the Securities and Exchange Commission. The Board was authorized to guarantee loans, in the aggregate, of up to $250 million which guarantee was committed by the Board in September, 1971. to Lockheed's twenty-four commercial banks in the full amount. At the present time, Lockheed has borrowed $195 million under Government guarantee.

After the Board extended a government guarantee to Lockheed's lending banks, it then assumed the function of protecting the Government's interest in amounts advanced under the program. In this regard, the Board has sought to assess the risks associated with Lockheed's operations from a credit analysis standpoint, thereby minimizing the potential that the Government would be called upon to purebase the Guaranteed Notes issued by Lockheed to its banks. Since becoming aware of the payments in issue, the Board has taken the position that it has a responsibility to make sure no further improper payments are made by Lockheed.

Before providing this Committee with a summary of the actions taken by the Beard after becoming aware of this problem, let me review the circumstances