Mr. BUTLER. Remember a couple of things: We do not insure the very large amount of U.S. investment in Western Europe or other parts of the developed world. We operate only in the developing world. Also, we do not insure petroleum exploration and drifling activities, and that also constitutes a significant amount of U.S. investment.

I think that we have a fairly decent percentage of the new investments in the developing world, excluding the petroleum investments I just mentioned. We estimate it is about two-thirds of the new investment. Obviously we don't insure things that have been there 50 or 100 years, but we estimate that we insure two-thirds of the new investments in whole or in part.

Mr. SOLARZ. Your experience with American overseas business activities in the developing world would be fairly representative in the sense that you cover about two-thirds?

Mr. BUTLER. I think so.

Mr. SOLARZ. And yet your inability to indicate the existence of these activities on the part of such firms, I take it, is not a conclusion on your part that they don't go on but rather simply that you are unaware of them?

Mr. BUTLER. That is correct, and we have not gone out and attempted to conduct an audit of all of the U.S. investment activities abroad. We were not aware of it and are certainly going to follow the progress of these hearings as well as other efforts in other forums.

Mr. SOLARZ. Do you have any intuitive feelings about the extent to which these activities are widespread or the extent, on the other hand, to which they are relatively limited?

Mr. BUTLER. I don't know that my intuition is that reliable or all that good. I suspect in the minor kinds of things we are talking about in the sense of paying a bureaucrat to move some papers along, the practice may be not all that uncommon. I think in the sense of the large payments, I would be surprised if there is a great amount of it. It is bad business and risky.

very

Mr. SOLARZ. Do contractual commitments in legal undertakings to which you have referred in your contract-as I understand it, they would apply to the situation which exists prior to the time the contract was signed or at the time that the contract was signed.

Mr. BUTLER. Yes, sir.

Mr. SOLARZ. And the implication was that, in order to establish such a facility in a foreign country, if an individual or corporation had to make an illegal payment, which was not disclosed to OPIC, that would give you the right at any future time to cancel the contract with them. What would happen if, subsequent to entering into a contract, at some later date, the corporation involved made a substantial illegal payment in order to secure a privilege or retain a right-what impact would that have on the continuing validity of their contract? They wouldn't have undertaken to make false representations at the time the contract was signed but then they subsequently engaged in activities which, if they had engaged in them prior to signing the contract, you wouldn't have agreed to enter into a contract with them. Mr. BUTLER. I think that would depend really on the effect that that conduct had on the investment. If it didn't result in expropriation and no action was taken by the host country, I would take it that our cov

erage would continue. If it did result in some action, then these provisions that I mentioned would come into play.

Mr. SOLARZ. In effect, given the way in which your contracts are written, an illegal act before the contract would preclude the contract's coming into being or would enable you to invalidate the contract once it came to your attention; but, if an illegal payment is made after the contract is already signed, then that is not a basis in and of itself, should it come to your attention, for invalidation of the contract?

Mr. BUTLER. That, I think, is generally correct. However, such subsequent illegal actions may invalidate an investor's later claim for compensation.

Mr. SOLARZ. Do you think that it might make sense to change the contract and provide for that kind of contingency-in other words, giving you the right to cancel the contract if an illegal payment is made after the contract is signed?

Mr. BUTLER. That is something that we are reviewing, but you have an awful lot of problems with that approach. For example, how do you write that into the contract? Does that cover the $10 payment to the bureaucrat or to the sewer inspector and so forth? You get into that range of things. You get into the question of whether or not something was extorted out of the investor or whether the investor really was volunteering something.

It is not an easy question to think through and to come up with any kind of sensible answer. It sounds nice to say: "Yes, if they commit bribery, they are evil people." But, it may be better to use our present approach that illegal actions may invalidate a claim rather than have OPIC invalidate the entire contract.

Mr. SOLARZ. Does the Congress have any legislative authority over the terms of your contract?

Mr. BUTLER. Oh, yes, I think the Congress could legislate, and indeed they did in the recent OPIC amendments. The Congress gave specific statutory direction to OPIC to continue some practices which it had been doing in connection with not insuring so-called runaway plants.

Mr. SOLARZ. I might say, in view of the fact that your contract in no way prohibits illegal payments from being made, whether they are made under duress or made at the initiative of the company involved, once the contract has been signed, somewhat belies your conclusion that the existing provisions of the contract are adequate to deter significant illegal payments, since it is entirely possible that those illegal payments may be made-as often, I think, they probably are-after the enterprise is originally established. I think this is an area in which you might give some additional thought, because I think, the definition problems aside--and I don't want to belittle or underestimate what would be possible-it might be possible for some tough-minded fellows like yourself to come up with a definition to prohibit this sort of thing and not get into some of the more petty things you spoke about.

Let me ask you: What do you think an American corporation ought to do if, in the course of its business activities in a foreign country, it is approached by responsible officials of the government of the country in which they are doing business and, in effect, are told that

if they don't make what is clearly an illegal payment, they may suffer economically as a result, leaving aside whether the penalty would be expropriation or an increase in local taxes, as was the problem with the United Brands situation? What do you think that their response ought to be if the failure to meet the demand might indeed cost them substantially more than the price that was being asked in order to avoid the penalty in the first place?

Mr. BUTLER. My advice would be to not pay it. That is always cheap advice since it is not my investment that is at risk, but I think my feeling would be that, once you start down that road, it gets worse and worse.

Mr. SOLARZ. Well, I am somewhat encouraged to hear you say that.. It is nice to hear some responsible official of the U.S. Government standing up for some old-fashioned principles of morality even if the price of morality may be the loss of one's company.

That leads me to a final question. As I understand your testimony,.. it seems to me that something is said here, in its implications and application, somewhat at variance with the conclusion you just enunciated, and that is: You indicated that if an enterprise is expropriated because an illegal bribe has been made which comes to the attention of the host government and then, in a fit of pique or outrage, they expropriate the enterprise, in your judgment you said that would not be sufficient grounds for not paying the insurance because you felt expropriation was out of proportion to the act of the bribe itself and the penalty ought not to be expropriation but something far short of that: and consequently, I gather, OPIC, under such circumstances, would pay whatever insurance it was obligated to pay.

On the other hand, if a company or enterprise were expropriated. because of a refusal to pay a bribe, then clearly, under those circumstances, the insurance would be paid as well.

In other words, what I am getting at, from the perspective and point of view of whether or not the premiums will be paid, an official of an American corporation faced with an extortionate demand or considering, on his own, making such a payment to secure an advantage the other way-from the perspective of collecting a premium, he has no incentive not to pay the bribe because, if he pays the bribe and it becomes public and the enterprise is expropriated, he collects the insurance; and, if he doesn't pay the bribe and, as a consequence of failing to pay the bribe, the enterprise is expropriated, he gets the premium also.

So it seems to me another possible change in your contract ought to be that if an enterprise is expropriated because of illegal payments made in violation of the laws of the host country, then, under those circumstances, the insurance premiums will not be paid.

I think if you are right in saying that, faced with such demands, the bribe shouldn't be paid, then, I think, you ought to put teeth in your contract in order to enforce the moral principles which you just articulated.

Mr. BUTLER. I don't think that the risk of expropriation from refusal to pay a bribe is something that really enters into the mind of the businessman when faced with that question. He is likely to say: "I am going to be harassed and I am going to have my taxes increased." But I think expropriation is not something that he weighs in that calcula

tion. To be sure, if he knew he would also run the risk of causing his insurance coverage to be terminated, that might weigh his decision a little but, but I don't think the threat of expropriation is a significant factor in these things.

Mr. SOLARZ. However great the threat, certainly it would incline him to tilt in the direction of morality?

Mr. BUTLER. Yes; but you get into another problem in these situations. One could very well imagine the following situation, if our contract had such a provision, involving a foreign country that expropriated because of a refusal to pay a bribe surfacing. These things can be manufactured in ways such that if a company had been paying modest amounts for years and then refused to pay a big amount, which was really the reason for the expropriation, the public explanation could be that "We just discovered these amounts had been paid" Then the expropriating country could simply say:

We shouldn't pay you compensation. Your own Government says it is such an evil thing to pay bribes that you can't continue your coverage under your own Government's insurance policy.

Such a proviso by OPIC could be interpreted as a very clear statement that expropriation without compensation is a justifiable penalty in bribe situations. That is an argument that could haunt us and I would be very nervous about that kind of situation. I think it is fraught with lots of problems. That is, perhaps, the conclusion I would like to leave with the committee.

Related to this problem, there is another provision of our contract which requires that the project is to be carried out substantially in accordance with the statements made and the information furnished to OPIC. This is section 2.07 of the contract. There could be situations in which the payment of a bribe in the course of operating a project might violate that provision. I am not sure it would always be applicable, because we don't require a statement that "you are not going to pay any bribes in the course of this investment." But bribery could violate this provision of the contract.

Mr. SOLARZ. I have one final question. Based on your experience in dealing with these problems, do you think it would make sense for the Congress to provide for some kind of mechanism by which American overseas business activities could be continuously reviewed with a view toward determining whether or not these kinds of illegal activities were being engaged in so that, in one fashion or another, they could be prevented?

Mr. BUTLER. I have my doubts whether we in this country can police the morality of the world. I would be a little skeptical about that. Also I would be very reluctant to get into that sort of situation because how would one determine whether or not a bribe had been extorted from a U.S. investor? You probably would have to talk to the foreign government official, and that really interjects the U.S. Government into matters that I think rather clearly are not its business. Such a mechanism could create very serious foreign relations problems by forcing the U.S. Government to take actions which could be easily regarded as outrageous interference in the governmental affairs of a foreign country.

Mr. SOLARZ. Except it is my understanding that it is as illegal to extort a bribe as to pay one. That doesn't eliminate the fact that the law was violated in the payment.

Mr. BUTLER. I don't have any idea of the scope of foreign laws dealing with bribes. It may be that a perfectly valid defense in a bribe case is to prove that it was extorted; and in that case the payment would not be illegal. But I think getting the U.S. Government into that kind of a tangle with foreign government officials could be very, very troublesome and the kind of thing that I think we are trying to get away from in other sorts of situations by not trying to control foreign countries and foreign governments and foreign ways of life. Mr. WHALEN. What you are saying is that if you are forced to make a determinaiton as to whether it was a bribe or extortion and you come down on the side of extortion, we have real problems in that country?

Mr. BUTLER. Yes; because how do you know whether it is extortion without talking with the foreign government official?

Mr. WHALEN. Even if you do know or somehow determine it to be extortion and you say, "President 'A' of Country 'X' extorted, and therefore we are going to pay this expropriation claim"?

Mr. BUTLER. I would not want to be in Mr. Feldman's department and have to explain that to that country.

Mr. BIESTER. I am pleased that my colleague from New York has explored the line that he has explored because, as I was listening to your testimony and as I tried to look through your contract, I could not find a place in which action after the contract was entered into would come into play.

Mr. BUTLER. If I could interject there, some illegal activity after the investment has been made would not automatically terminate coverage; but, if it had the effect of provoking expropriation or if action were taken to reform or rescind some contractual arrangement the investor had entered into even subsequently and the host country said, "This contract was entered into fraudulently because you paid off this particular governmental official and he signed the contract and we are going to rescind that contract," that would not constitute expropriation action and would not give rise to a claim.

Mr. BIESTER. It lies in the extent of being expropriated without being compensated but that is the only measuring device you or the company have to go by?

Mr. BUTLER. It depends on whether we have to pay compensation or the amount of compensation.

Mr. BIESTER. Now do any other countries of the world have operations like OPIC?

Mr. BUTLER. Oh, yes; the French do, the British do, the Germans do, most of the Western European countries, and Japan and Canada all of them provide insurance at better rates, much lower rates. They are subsidized by their governments, and our rates, we hope, are selfsustaining and sufficient to provide for adequate reserves over the years to pay claims and continue in business on a profitable basis.

Mr. BIESTER. With respect to the policies of those countries, have they, in your experience, confronted this difficulty?

Mr. BUTLER. Not to my knowledge. I simply have no knowledge on that.

Mr. BIESTER. It is extraordinary over all of those years.

Mr. BUTLER. I have the understanding that their contracts are somewhat modeled after ours. Our programs started much earlier than