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to take testimony from the individuals at the other end of the transaction who dealt with the agent in question in order to determine whether those representations were legitimate or not. Have you thought through the problems involved in that kind of undertaking in terms of how would actually go about obtaining the necessary kinds of testimony so that you could reach a fair judgment in a situation where there is a dispute as to the legitimacy of a payment?


Mr. SCHMULTS. As I said, we are in the process of working with Lockheed to develop their internal corporate controls. I don't know if we have thought out all the way down the road how we would proceed. But it would certainly be incumbent upon Lockheed, after the Board takes a position that a payment was improper, to justify the payment to the Board. I would think that Lockheed in making its justification would presumably call people in from overseas or those who knew most about it. I would think the Board would not be satisfied with Lockheed's presentation unless it received complete and accurate information.

Of course once you got to court with the dispute presumably there would be authority to compel witnesses to attend and so forth.

Mr. SOLARZ. I know a court can compel American citizens to testify. What I am trying to get at is—and I am not an attorney so that is perhaps why I ask the question—do you have any advice from counsel on your ability to withstand a legal challenge in the American judicial system from Lockheed on the grounds that in arriving at your determination you did not adequately go into the guts of the matter, as it were, that you didn't take testimony from people overseas, the kinds of proceedings that would give opportunity for cross-examination or what have you?

Are you confident in your ability to make such a judgment and make it stick, that it would be upheld in the courts if it were challenged in effect on due process grounds?

Mr. SCHMULTS. I can't state an answer with any definity. But I must say that I am hopeful that the Board, by the time it gets through working with Lockheed on the internal corporate controls and the contractual provisions to be added to our agreements, will have a package adequate to protect the Government's interests as a creditor. Whether it will work perfectly in every case, no, I can't assure you

of that.

Mr. SOLARZ. Based on your knowledge of the situation in which they paid bribes in the past, can you tell us whether in your judgment they would have been able to have secured the business they did if they hadn't paid the bribes?

In other words, were the bribes, in point of fact, a necessary precondition for their obtaining the business which they were seeking? Mr. SCHMULTS. I can't make a judgment on that at this time. We have requested additional information to assess what our position is as a creditor of Lockheed, or I should say a guarantor on some of its bank loans. That information has not come in yet. I am not sure even after it comes in whether I can answer your question. I can't now make that judgment.

Mr. SOLARZ. I have just one final question. It is a sort of philosophical one. During the course of these hearings it seems to me there

are two fundamentally different approaches to this problem that have emerged. There are those who contend that the realities of international finance and commerce in these situations is such that if you don't make the payments you don't get the business and if one corporation doesn't make the payments others will.

On the other hand, you have those who say that payments really are not necessary and that if we have laws preventing them that it would enable American businessmen to refuse to pay on the grounds that it would violate American law without in any way seriously compromising their capacity to do business overseas.

I wonder if you have any thoughts about that.

Mr. SCHMULTS. I think the thoughts Secretary Simon expressed on behalf of the Board are certainly views that I share completely. I think it is indefensible for American corporations to pay bribes. I am talking about bribes to government officials now. I am not talking about things that people can argue about whether they are bribes or whether they are legitimate payments. I think they are indefensible.

Aside from the problem of whether bribes are necessary to do business or not I think the payment of bribes and the knowledge of the payment of those bribes are doing incalculable harm to American business in the view of the American public. With many now believing that oil companies are ripping off the public and now learning that corporations are paying bribes abroad, our system of free enterprise is being badly hurt.

Therefore when we are talking about this very limited practice-I am talking about the payment of bribes to government officials-to my mind the Secretary hit the ball out of the park when he said that that should be condemned in no uncertain terms.

Mr. SOLARZ. Mr. Chairman, let me just say in conclusion since this is, I gather, the last hearing we are going to be holding on this subject that I think these proceedings have been tremendously valuable. I think they have been conducted in a most responsible way. I think we have uncovered a number of loopholes in the law which need correction. I am very grateful to know that you have come up with some legislative proposals and that the members of the subcommittee have some as well. I look forward to our considering those recommendations in the future so we can report back to our full committee with some progressive recommendations for dealing with these very difficult situations.

Mr. Nix. Thank you very much. Mr. Solarz.

Let me just ask a few things. First, I have no intention to belabor the past. It would not have been necessary to formulate the regulations that the Board came forth with had we not needed them. So I compliment the Board for the action it has taken, first, to prohibit additional improper payments and second to determine whether or not the Guarantee Act or the Board's agreement with Lockheed has been violated and, three, obtain full accounting of improper payments and prohibit additional payments.

The committee-and I believe I express the thinking of the other members of the committee-will cooperate with you in making every effort to see that the regulations now under consideration and under study will meet future problems that might arise.

I think it is our responsibility and that is what we should have in mind.

Mr. Whalen.

Mr. WHALEN. Thank you, Mr. Chairman.

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Mr. Schmults, on page 4 you indicated that the Board was aware of the fact that Lockheed paid sales commissions to foreign consultants. Did you assume these were perfectly legitimate? So apparently you had no reason to question these payments. Is that correct? Mr. SCHMULTS. That is correct.

Mr. WHALEN. I think it was on page 5 that you indicated the time you became aware of the fact that these payments in some or many instances were illicit. Would you agree that this was not due to investigation on your part but was really due to a fallout from another situation? Kind of a domino effect?

Mr. SCHMULTS. I think that is largely true, yes.

Mr. WHALEN. Had it not been for this it is probable that Lockheed could have continued the practice without any further investigation on your part?

Mr. SCHMULTS. That is certainly possible.

Mr. WHALEN. I certainly, as the chairman did, want to commend you for the steps you are now taking to try to not only recapture what could have been illicit payments but also trying to prevent Lockheed from doing this in the future.

On page 6 you indicated the steps that you would take to seek to prevent this from happening in the future, prohibiting additional improper payments, obtaining full accounting of improper payments.

Of course in terms not so much of Lockheed but maybe of many other claimants that you may have, don't you run into the same situation? How can you really tell?

Mr. SCHмULTS. First of all, Lockheed is our only customer. The guarantee to Lockheed exhausted the authority the law, which was not renewed by the Congress. So the Board only stays in existence to administer the Lockheed guarantee.

Mr. WHALEN. So vou don't have that problem then.

Mr. SCHMULTS. No, sir.

Mr. WHALEN. Once you know that the company has been involved in this kind of thing the problem, I guess, is a little easier in terms of stopping it in the future.

Mr. SCHMULTS. Yes, sir.

Mr. WHALEN. I don't want to prolong this because I know Congressman Solarz elicited your answers in this area. It seems to me that the members of the subcommittee feel pretty much as you do, that commissions per se are not wrong. Commissions may be valid if they are payments for legitimate services.

What we are concerned about is the fact that U.S.-based firms have used commissions for at least two illicit kinds of activities: first, to bribe foreign officials; second, to launder these funds and bring them back to the United States for the purpose of campaign contributions. I think what we all want to do is deal with this effectively so that it will not recur in the future.

I suppose there are two possible approaches that can be taken. The rst is to ban all commissions. What would your view be on that?

Mr. SCHMULTS. I think that would be a mistake because it is important in many cases, not only abroad but here at home, to hire commission agents and other independent agents to perform services for you. It is a long-standing way of doing business. I think it would be a serious mistake to ban the practice across the board.

Mr. WHALEN. I would agree with you. You indicate that there are legitimate services that are performed. People who are carrying out this function are deserving of some kind of compensation.

The second handle I suppose that the Congress would have is reporting. We are in an era when the President is going around the country saying that we have got to have less regulation, not more. And yet we know that regulations usually stem from illegal activities on the part of certain segments of our society and our economy.

How do you view congressional passage of legislation which would require companies to indicate to the executive branch all commissions paid for foreign military sales and the executive branch, in turn, providing this information to the Congress and this information, in turn, being made available to the public?

Mr. SCHMULTS. First of all let me say

Mr. WHALEN. Let me just summarize it: public disclosure of all commissions paid.

Mr. SCHMULTS. I am here in my capacity as an Executive Director of the Emergency Loan Guarantee Board. We have a very limited function as a creditor of Lockheed. So I am not in a position to speak for the administration on this point. I think your disclosure proposal is something that ought to be considered. It forms the basis of many of our securities laws. Disclosure is a very good thing in the area of those laws. But as to whether it adequately addresses the problem I am not sure.

As I indicated in my statement we were aware that commissions had been paid by Lockheed. We have had that sort of disclosure. We were not aware of the so-called improper aspects of some of these commissions.

So whether it makes sense to require all American corporations to report on all commissions paid, whether that adequately addresses the problem, I am just not in a position to speak to that point now. It is certainly a method of dealing with the problem that we ought to look at.

Mr. WHALEN. I think your observation is pertinent. A number of agencies, yours included, have taken steps to look into this situation. in the future.

Mr. SCHMULTS. The State Department has. The Department of Defense has.

Mr. WHALEN. But you are still not certain whether the payments that were made were for legitimate purposes or for illicit purposes. The same thing would be true, I suppose, if reports came to Congress and we made them public. At least there are people on the outside, and I would especially include the press, who may have more time than the Congress to look up or to follow up these matters and may unearth evidence of wrongdoing.

Thank you, Mr. Chairman.
Mr. Nix. Thank you.

I will not ask you to wait. I know you must catch a plane. The time has come according to those bells when I must go over and sign the 'book.

The subcommittee will stand in recess for just a few moments. [A recess was taken.]

Mr. Nix. The subcommittee will be in order.

Mr. Loomis, you may proceed, sir.


Mr. LOOMIS. Mr. Chairman, I have a prepared statement. With your permission I will not read it in full. But I will stick fairly close to it and try to summarize certain aspects of it.

Mr. Nix. Without objection it is so ordered.

Mr. LOOMIS. As you will recall, I appeared and testified on July 17 with respect, in general, to the Commission's relationships and responsibilities with respect to this problem. I will not repeat what was considered then but will confine myself generally to the two questions asked in your letter of September 22 which asked what success the Commission has had and what difficulties the Commission has had in obtaining information from Lockheed regarding its foreign payments and second what success the Commission has had in its program of obtaining voluntary disclosure from corporations on these matters. With respect to Lockheed I am under some inhibitions. It is not our policy to discuss pending investigations or to air our disagreements with companies that we are investigating in public rather than in


On the other hand this subcommittee has specifically asked this question in which it has a legitimate interest. I will try to be as helpful as I can.

The short answer is that we are having difficulties in obtaining certain information from Lockheed, specifically with reference to the names of recipients, the countries and the amounts of payments.

We have been meeting with Lockheed in an effort to dispose of this matter. Lockheed representatives have expressed great reluctance to provide our staff with information and documents relating to what they appear to regard as details concerning payments abroad.

It would not be in order for me to attempt to explain Lockheed's position. This explanation had better come from them. However they appear to believe that this conduct should be regulated by Congress rather than as an aspect of SEC disclosure policy, that detailed disclosure would be very harmful to the company since it could provoke adverse reactions abroad and might endanger continuing contracts in foreign countries and that this possible injury to the company and its stockholders and employees outweighs any possible public interest in disclosure of the details, as they characterize them.

Our staff's view is that it must in its investigations obtain all relevant information in order that it may be in a position to make an informed recommendation to the Commission. Lockheed appears to fear that if detailed information is made available to the Commission, the Commission may not be able to safeguard the confidentiality of that information.

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