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under which the Board first learned that Lockheed had made payments to foreign officials and political organizations.


In early 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 marketing activities abroad. At this time Lockheed was in the process of preparing to mail proxy soliciting materials to its security holders for its annual meeting scheduled on July 17. Although the proxy materials had been cleared by the Securities and Exchange Commission staff, the company's independent auditor, Arthur Young and Company, would not certify Lockheed's financial statements. A report which had appeared in the press on June 6 of an allegation by the Northrop Corporation that it had modeled a Swiss subsidiary utilized to facilitate payments to its agents after one established by Lockheed had triggered Arthur Young's inquiry. The auditor sought and was unable to obtain certifications disclaiming knowledge of any payments made by the company to foreign officials from certain senior management.

During early conversations between the Board's staff and Lockheed's financial officers, we were advised that the company and Arthur Young were reviewing Lockheed's foreign sales practices and that the Board would be kept advised. We were left with the impression that these payments represented isolated instances of bribes and that the amounts involved, while large, were not significant when viewed in comparison with those reported to have been made by other corporations. Lockheed also advised us that it had made political contributions of about $25,000 in one country, but that such contributions were legal under local law.

I should indicate that the Board was aware that Lockheed paid sales commissions to foreign consultants. This practice was not cause for alarm in that it is a usual way of doing business. Of course, the Board recognizes the difference between legitimate and appropriate finders' fees or commissions to sales consultants and bribes paid to governmental officials, either directly or indirectly, through commissioned agents.

The Board's staff met with Arthur Young and Lockheed on June 16 and 17, respectively, in California. We were advised of the procedures being followed in their review, which was anticipated to be completed with a report made to Lockheed's Board of Directors on June 23, Following these meetings, the Board's staff became concerned that the amount of improper payments in issue was very large and that they constituted more than just isolated instances.

It was at its meeting on June 17, that the staff first became aware of a letter, dated April 29, 1975, to Lockheed from the Securities and Exchange Commission staff requesting certain general information regarding payments it may have made to foreign officials.

We were then kept advised by Lockheed of the status of the inquiries being made by the SEC and the Senate Subcommittee on Multinational Corporations. Lockheed also furnished the staff with a copy of its mid-July Submission to the SEC which describes a number of transactions known or suspected by the company to have involved payments to foreign officials and how these payments were effectuated. I might note that the transactions described in this Submission reflect the amount of payments Lockheed publicly disclosed as having been made to foreign officials and political organizations, although no identifying details are provided.

The Board's staff again visited Lockheed's corporate headquarters on July 21 and 22 to review the most current information about the bribery inquiries and to evaluate the Company's operating progress. We reviewed Arthur Young's report to Lockheed's Board of Directors, which substantiated the information contained in the company's Submission to the SEC.

Additionally, we have become aware of certain of the identifying details behind the transactions described in the company's Submission to the SEC which have been publicly reported. We are also aware that several other U.S. agencies are closely examining Lockheed's foreign sales activities.


I think it would be useful to divide the actions taken or to be taken by the Board into three groups:

1. Prohibit additional improper payments.

2. Determine whether the Guarantee Act or the Board's agreement with Lockheed has been violated.

3. Obtain full accounting of improper payments.

Prohibit Additional Improper Payments

Of primary importance to the Board is to assure that Lockheed makes no further improper payments, and that no monies 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 those 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. 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 can not 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.

Assessment of Emergency Loan Guarantee Act and Agreement

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 (the "Act") and the Board's agreement with Lockheed to assess whether any violation or defaults have occurred by reason of Lockheed's foreign payments and if so, what legal courses of action might be available to the Board. As this review developed in late July and early August. it became apparent that additional information was needed in order to determine whether 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 Government agencies' investigations could have a direct bearing on our assessment. We will continue to follow these proceedings closely.

Full Accounting of Improper Payments

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 dialogue 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 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 United States corporations to foreign officials. The Board is encouraged that this Committee, as well as other Congressional committees, 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 can not 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. Nix. Mr. Whalen.

Mr. WHALEN. Mr. Chairman, I would yield to you since I was a little late and have not finished reading the statement.

Mr. Nix. Mr. Solarz.

Mr. SOLARZ. Thank you, Mr. Chairman.

Does Lockheed have any subsidiaries overseas?

Mr. SCHMULTS. Yes, I believe they do.

Mr. SOLARZ. Do you know how many?

Mr. SCHMULTS. I don't know the exact number. We can get that for the record.1

Mr. SOLARZ. I think it would be helpful.

Do you know off hand if any of those subsidiaries have contracts with the Overseas Private Investment Corporation?

Mr. SCHMULTS. We can provide that also for the record.1

Mr. SOLARZ. The reason I ask is, in the course of our earlier inquiries on this subject, we received testimony from officials to the effect that they require that, prior to the time at which they enter into an insurance contract with any American firm which has a subsidiary overseas, a direct assurance that the corporation in question has not violated the laws of the land in which they seek to do business is required. Once that assurance has been provided, and OPIC is satisfied that in the course of establishing that operation no illegalities have been engaged in, an insurance contract is then issued for the company in question, assuming of course that they want it.

1 See appendix 17, p. 276.


However, it also turned out that there was no provision in the OPIC contract for a termination of their contractual agreement with the American firm doing business overseas in the event it turned out that the corporation in question violated the laws of the country in which they were doing business subsequent to the time the contract was entered into.

That seemed to be something of an inconsistency because they won't issue a contract if the law has been violated prior to the time the contract is requested but they make no provision for termination of the contract if the law is violated once the contract was signed.

So I introduced legislation which would plug up that loophole in the law by, in effect, requiring OPIC to adopt regulations calling for the cancellation of contracts with American firms overseas when it turns out that those firms have engaged in the bribery of foreign officials subsequent to the time they enter into an insurance contract with OPIC.

Based on your experience in the Lockheed situation I would be interested to know what your reaction is to this kind of approach. Do you think this might be a useful way to try to discourage such activity on the part of American businessmen overseas?

Mr. SCHMULTS. It might well have that effect. We have in our agreement with Lockheed a provision that in the conduct of its business it will comply with all laws. We interpret that provision to include foreign laws, as well as domestic laws. Under our contract a breach of that agreement would permit the Emergency Loan Guarantee Board to in effect withdraw the present guarantee or further guarantees. We see that contractual provision as providing the basis for our requiring Lockheed not to make any more improper payments in the future.

While I am not familiar with the legislation you have introduced I would think that having a provision in the OPIC contract to address this specific problem would be helpful.

Mr. SOLARZ. I am delighted to know that you, on your own initiative and independently, moved in that direction. I think it would be helpful if you could possibly submit for the record, if there is no objection, a copy of the relevant clause in your arrangements.

Mr. SCHMULTS. I would be happy to do that.1

Mr. SOLARZ. I would personally appreciate it if you could send me a copy to my office as well.

How do you expect to enforce that provision? In other words, what would be your method in determining whether or not there had been a kind of violation which would trigger the clause in question?

Mr. SCHMULTS. That provision apparently was not effective in dealing with the problem or at least it hasn't been in the past. As I indicated in my statement what we intend to do is introduce a specific clause in our contract along the lines that your legislation would do for OPIC, directed at the specific problem of the use and selection of international marketing consultants.

Although it hasn't been drafted, that clause as I see it now would. require Lockheed in effect to follow the policy statement which its board has adopted and not to amend that policy statement without the agreement of the Emergency Loan Guarantee Board.

1 See appendix 17, p. 276.

How would we enforce that? We would enforce it through a whole variety of means. We are going to require Lockheed, and indeed I think Lockheed on its own motion wants to do this, to develop internal corporate procedures to monitor the activities of its various overseas representatives to be sure that they comply with the statement. There will be specific provisions in every contract with a consultant requiring the consultant in effect to live up to the statement. The GAO will be looking at Lockheed and examining payments that are made to see whether they comply with the policy statement. The fiscal agent of the Emergency Loan Guarantee Board, which is the Federal Reserve Bank of New York, will also be monitoring those activities, as will Lockheed's independent auditors, Arthur Young & Co. So there will be a variety of means at the Board's disposal to make sure that Lockheed doesn't make any improper payments in the future.

Mr. SOLARZ. I think that is an interesting array of procedures designed to ferret out the truth. What would you do in a situation where the corporation would dispute the finding of fact at which you would arrive? What procedures if any, are there to afford some sort of due process? It may be if they engage in a payment which to some looks like a bribe and which to them is entirely legitimate. Do you have any mechanism to deal with such a proceeding?

Mr. SCHMULTS. The problem you raise is a good one. In many cases it may well be difficult to differentiate between what is a "bribe"-I put that in quotes-and what is a legitimate payment to a consultant. There is a further problem. After you pay the consultant what does he do with the money and how do you check that? So there are problems which are going to be difficult to address.

If as a result of our monitoring anything comes to our attention which indicates that we have good reason to believe that there has been a violation of the policy statement presumably the Board would require Lockheed to justify payment.

If the payment in the Board's judgment could not be justified, the Board would have available to it a number of remedies. One would be in effect to call in the outstanding guarantee or not extend any additional guarantees.

If Lockheed disputed the Board's determination presumably the dispute could be taken to a court and that would provide due process. But I think the Board would afford Lockheed the ability in the first instance to come to us and justify the payment and state their arguments as to why it should not be considered a bribe.

Mr. SOLARZ. Do you have any authority to compel testimony or to subpena witnesses?

Mr. SCHMULTS. We have no authority to compel testimony. But we do have authority in our loan agreement to obtain any pieces of paper Lockheed has, to inspect any records. Through that we can compel the production of information. We do not have the authority to subpena.

Mr. SOLARZ. What would you do in a situation where payment was made to an agent and there was a disagreement as to whether, in effect, that was a bribe or whether it was a legitimate payment for services rendered which was instrumental in obtaining the contract which they were seeking?

Presumably under such circumstances the only way that they could explain whether the payment was legitimate or illegitimate would be

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