APPENDIX 10 "ANTITRUST AND WORLD TRADE; TEMPEST IN AN INTERNATIONAL TEAPOT?" FROM THE CORNELL INTERNATIONAL LAW JOURNAL BY DONALD I. BAKER* (Reprinted from Volume 8, Number 1, 1974 by Cornell University. All rights reserved.) For several years, we have heard a great deal of shouting-and quite a lot of lawyering-about the impact of American antitrust law on international trade and investment. Unfortunately, we have not seen much quiet thinking on the relevance of antitrust to our broader goals as a nation of both consumers and producers. Various American business groups have complained loudly that antitrust hampers their efforts to compete in an increasingly competitive world. Foreign businessmen have sometimes complained that American antitrust merger enforcement discriminates against them and hampers foreign investment in the United States. Both groups repeatedly stress that we in the United States apply legal rules which foreign governments do not apply to enterprises. American business asks for broad antitrust exemptions to make it "more competitive" with firms abroad (and foreign firms sometimes seem to be asking for "diplomatic immunity" for various U.S. activities). Both arguments rest on some doubtful factual assumptions. Both seem to assume a "least common denominator" approach to law enforcement. If the criticism that "the United States is tougher" amounts to no more than saying “the United States protects its consumers better than other governments," then most would say "so be it." I believe that the business criticism of the antitrust laws in the international field involves serious errors, both of fact and of law. * Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice; and Visiting Professor of Law, Cornell Law School (Spring 1974). The views stated do not necessarily represent those of the Department of Justice. 1. See generally Hearings on S. 2754 Before the Subcomm. on Foreign Commerce and Tourism of the Senate Commerce Comm., 92d Cong., 2d Sess., ser. 92-83 (1972) [hereinafter cited as Export Expansion Hearings]. foreign arms sales. We also believe it would permit United States manufacturers to employ the legitimate agents which are clearly required for successful sales efforts in many parts of the world. It would, indeed, be anomalous for a United States manufacturer to be required to make greater disclosures in its sales to foreign countries than it is required to make in sales of similar products to the United States government. In summary, we urge you to take no action on the proposed amendments until after the current studies by the SEC and the Congress of the broader problems have been concluded. If action is to be taken now, we respectfully suggest that the proposals be modified to conform with the "Covenant Against Contingent Fees" currently contained in the Federal Procurement Regulations. Very truly yours, H. JAMES SHEEDY. DEFENSE SECURITY ASSISTANCE AGENCY, AEROSPACE INDUSTRIES ASSOCIATION, Washington, D.C. (Attention Mr. M. J. Garrett.) ELECTRONIC INDUSTRY ASSOCIATION, Washington, D.C. (Attention M. Jean Coffiaux.) NSIA, Washington, D.C. (Attention Mr. Gene Lambert.) GENTLEMEN: Enclosed is a copy of an article on "Agent's Fees in the Middle East." This article has now been cleared for open publication by the Directorate for Security Review, Department of Defense. If you think your members may be interested in the contents, please feel free to use it as you see fit. Sincerely, JOSEF K. HOENIG, Assistant Director. NESA/AFR Division Sales Negotiations. AGENT'S FEE IN THE MIDDLE EAST The Middle East, Far East and Latin America are areas of the world where an agent is generally required for the successful completion of a commercial sale. In some areas of the Middle East it is a legal requirement to have a local agent before a proposal is considered. For the most part the Request for Quotations will request among other things, who the local agent is and without this information little or no serious consideration will be given to the contractor's response. HISTORY While agents or concessionaries existed since pre-biblical times, it was during the industrial revolution that the prominence of agents became a factor to be considered in manufacturing/commerce as we know it. At that time a local agent was engaged by the purchaser who required a given product or commodity and did not have the talent, facility, or faculty to locate the equipment or product in a complex international market place. The local agent who was well versed in national and international commerce was rewarded for his time and effort in the form of a fee paid by the purchaser. Hence, the term "finders fee" evolved and was based on a negitiated amount, depending entirely upon the supply and demand of the commodity. Since then, the term finders fee has taken on a somewhat different connotation. As manufacturers or users of equipment became more sophisticated, they began employing their own purchasing agents at a fixed salary to fill the role formerly accomplished by an outside agency on a percentage basis. This was done primarily to eliminate the excessive fees required for alleged scarce material. With this transition, the more aggressive agents turned their efforts from a purchasing function, on behalf of the buyer-to one of selling-on behalf of the -supplier, in many cases dealing with the same principals. WHY USE An agent The use of sales agents in some foreign countries by U.S. companies has developed over the years on the basis that locals must deal with locals because of an inherent mistrust of foreigners. Foreign marketeers generally have a reputation for aggressiveness (not appreciated in some areas of the world), have little or no local language competence, insist on doing business in their language and on their terms, and are unfamiliar with customs, procedures and regulations of the purchasing country. Generally, the local purchaser is much more at ease in dealing with a local representative or agent because of long standing friendships or business arrangements. In addition, the local agent relieves the purchaser of the arduous task of communicating with the foreign supplier in a strange language. In essence, the agent again becomes a middleman between buyer and seller, serving a useful purpose to both parties. The question as to whether agents are necessary, has arisen many times. There is the classic example of a new Vice President of a U.S. firm who, after reviewing company agent's fees, decided that a local Middle East agent's contract could be cancelled. All that the company had in the country at that time was a continuous but lucrative servicing contract that had been negotiated many years ago. Within 48 hours after the agent had been cancelled, all local work permits of the company's employees were withdrawn. Needless to say, the agent was reinstated immediately. Another case involved competition by two U.S. firms in a North African country. As the competition became keener, one of the contractors found it almost impossible to obtain a visa for its sales personnel, which would have enabled their marketing people to make a sales presentation. This action was attributable to influence of one of the competitive agents. THE PROBLEM In the past, the volume of sales to the Middle East have been rather limited with the result that the agent's commission has been nominal and, in general, in proportion to the effort expanded by the agent. Recently, however, the countries in the Middle East have embarked on huge defense modernization programs involving hundreds of millions of dollars. Obviously the agent's fee, since it is based on a percentage of sales, is inordinately large and in no way can be equated directly with the amount of effort expended by the agent or representative. With the increasing expenditures in the Middle East for defense modernization, the Gulf countries are becoming increasingly aware of additional cost for which there is little in the way of value received. More importantly, they are concerned with the influence on the equipment selection process which is being applied by local agents. This influence, if not countered, can result in the acquisition of equipment unsuited or marginal to the defensive posture of the procuring country. A classic example of influence by a local agent on procurement resulted in the purchase by one country of used aircraft. These aircraft have been plagued with maintenance problems since arrival in country with the resulting capability of having not more than three aircraft fully operational at any one time. This same agent was influential in promoting European wheeled vehicles with complete disregard of local desert conditions and temperatures. The result-complete immobility due to engine overheating during the hot summer months. INFLUENCE The term "influence" is used here rather loosely. To be more specific, it can range from normal friendships or family ties between local agent and procuring officer to the payment of substantial sums of money to individuals in high government positions with somewhat lesser amounts paid to lower echelon government officials. One local agent had admitted to the writer that he has three members of the National Assembly (Parliament) of the country on retainer fees for the purpose of obtaining inner circle intelligence and to promote the sale potential of his principal's product. Since most major defense contractors (both U.S. and foreign) have local agents for the express purpose of influencing a sale, it is no wonder that the decision-making process is complicated by conflicting points of view as to the proper equipment to acquire. Obviously the agent with the greatest margin of profit or percentage has a distinct advantage over those with a lesser fee in that greater "influence" can be applied to all personnel in the governmental decision-making chain. Influence is not always related directly to a cash gratuity. It can include the rent-free use of a villa in France or a flat in London along with car and servants. Sometimes the government official is a silent partner in the agency or other business completely divorced from his normal activities from which he receives a financial benefit. THE AGENT'S FEE The "points" or percentage of a sale received by an agent vary depending upon the size, reputation, and effectiveness of the agent. U.S. contractors selling major systems usually limit their standard fee to an agent of between four and six percent. On less expensive equipment the percentage can exceed 25% of the selling price. There are known cases, however, where the agent has insisted upon an additional four to five percentage points to insure the successful completion of the sale because of some "unusual" added expenses. The French and British industries are masters in dealing through agents and generally have no compunction to agreeing to excessive fees, if, in the final analysis, the sale is consummated. In an on-going negotiation in the Middle East, one European aircraft contractor had a tidy 21 points for the local agent. On the basis of this $200 million contract, the agent had millions to use for influence and still retain a respectable profit for his effort. Intensive negotiation of this contract by the country over an eight-month period finally resulted in a reduction of 16 percentage points and ultimately to a complete elimination of any agent's fee in the price of the aircraft. In another ME country an agent for a French firm was reported to have netted $40 million on a contract valued at $200-300 million. THE CURRENT TREND A trend has now developed throughout the Middle East to purchase defense material on a government-to-government basis. The principal reason for this development is to eliminate the influence factor in equipment selection as well as to restrict the payment of exorbitant fees to a local agent on major procurements. While the development of this trend is to go government-to-government on defense procurement is being dictated by the very highest government officials (Heads of State, Ministers of Defense, etc.), it must be kept in mind that the second echelon and lower governmental officials who are normally the benefactors of gratuities, still continue to become involved in exerting influence for a fee. A distinction must also be made between what top governmental officials say publicly and what they really mean. In one ME country the Defense Minister has repeatedly stated in public that no "third party" will be used for the procurement of equipment for their defense modernization program. Yet the Defense Council, of which he is a member, has approved the use of local agents for the procurement of defense material. CURRENT REGULATIONS The Armed Service Procurement Regulation (ASPR) permits payment of reasonable agents' fees as part of "cost of sales" on Foreign Military Sales (FMS) and contains general guidelines on how "reasonableness" is to be determined. There are exceptions, however, such as in the case of Iran. The Iranian Government has categorically stated that under no circumstances will they permit a fee for an agent in the price of any U.S. equipment purchased under FMS. This has resulted in the issuance of Defense Procurement Circular #117 dated 23 November 1973, and dictated the inclusion of the following paragraph on all USG Letters of Offer to Iran. "Notwithstanding any other provision of this contract, any direct or indirect costs of agent's fees/commissions for contractor sales agents involved in FMS to the Government of Iran shall be considered as an unallowable item of cost under this contract." CONCLUSIONS While this is only one example of a country that has already taken concrete steps to remove the agent's fee from Defense procurement activities, it is fully expected that other countries in the Middle East will soon follow suit. Therefore, U.S. contractors who are already doing business thru agents in these areas, or those, that are contemplating making agency arrangements should be aware of this trend in the Middle East and be guided accordingly. As stated in the onset of this paper, the more aggressive agents earlier switches from a purchasing function to one of a selling function. It will be most interesting to see how and in what form they adapt to this latest trend. One thing for sure, this lucrative function, developed over the past two thousand years will not evaporate easily. AYDIN CORP., Fort Washington, Pa., September 16, 1975. Re Proposed amendments to the International Traffic in Arms Regulations concerning Contingent Fees as covered in Newsletter No. 13. OFFICE OF MUNITIONS CONTROL, BUREAU OF POLITICO-MILITARY AFFAIRS, GENTLEMEN: Aydin Corporation designs, manufactures and sells microwave and digital data comunications equipment and conducts a great deal of business with foreign companies and governments located in Europe, the Middle East and Asia as well as in the United States. As a normal practice in such business, we enter into agreements with independent sales representatives whereby we pay them a percent commission on the sales they make on our behalf. We propose that no reporting should be required on amounts up to 7% of $100,000 for commission or fees for the following reasons: 1. Requiring a report of any commission or fee might cause the local sales representative to be concerned over the possibility that he will be accused of profiteering. As a result, he may choose not to deal with American manufacturers and prefer to deal with European firms. A lot of honest sales reps. in Middle Eastern and Asian countries have been accused of excess profits from time to time. 2. The amount of commission changes as the scope of the work, spare parts and add-ons are revised from time to time. Therefore, reporting will be too cumbersome and prohibitive. Putting a sales representative on the defense is no way to help us export more goods to foreign countries. There are many European countries which are very anxious to sell. We do not condone illegal bribery payments; however, it will be against the interests of the U.S. to publicize normal commissions payable to sales reps. Commissions up to 7% are normal for sales representatives selling in the U.S. therefore, commissions up to this amount should not be suspect and need not be reported. Very truly yours, AYHAN HAKIMOGLU, President. INTERNATIONAL DISTRIBUTORS, INC., Re Newsletter No. 13, September 1975. GENTLEMEN: We are in receipt of the proposed rule changes concerning com. missions paid to foreign agents and certainly have no objections to the proposed rule change. However, we do note one area of vagueness and that is, if there is a payment made we are to offer a statement to the effect that the payment will be made and in what amount and "has advised the Government of as to the identity of the recipient The question is, exactly who and what branch of a government involved do we notify? As an example, if we had a contract to supply the Government of Chile with a contract sufficient to be covered by the proposed rule and a commission sufficient to be covered by this proposed rule change, could we simply notify by mail the Chilean Consul in Miami that we were paying a certain individual a commission on the sale? Sincerely yours, EDWARD G. DAVIES, President. |