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government came to us and asked for our help in getting information for them about what had been happening there.
Mr. WHALEN. But only after these instances were uncovered by American authorities?
Mr. LOOMIS. That is correct.
Mr. WHALEN. In connection with your investigations, have there been instances in which foreign officials have refused to cooperate with you?
Mr. LOOMIS. In this area, I don't think we have as yet, at least, enlisted their aid, so to speak, but we have had problems in the past historically in attempting to get information concerning foreign transactions.
As I mentioned a moment ago, it is against the law to disclose them in many foreign nations.
Mr. WHALEN. If I may make my own interpretation, the reason you probably have not gone to foreign officials is the fact that you were able to deal directly with the alleged violators here in the United States.
Mr. LOOMIS. That is correct.
Mr. WHALEN. But in cases where you do not have that assistance available to you, have you had problems in enlisting assistance of foreign officials.
Mr. LOOMIS. As I tried to say, we haven't even tried in these improper payments cases, at least as yet. In other types of cases, we have had problems. On the other hand, in some instances, particularly more recently, we have received remarkable international cooperation. I might digress from this whole subject to say that the foreign cooperation that has developed in the course of the effort to unravel what had gone on in the Vesco, the IOS transaction, was outstanding. Mr. WHALEN. I have no further questions. Thank you, Mr. Nix. Mr. Nix. Mr. Solarz.
Mr. SOLARZ. Thank you, Mr. Chairman. Mr. Loomis, as I understand it, if a corporation has made a payment for some purpose overseas, presumably this has to be disclosed in the disclosure statements they file with the SEC, and that, if they don't comply with that requirement and it comes to your attention, you can get an injunction which requires them to disclose such payments in the future at the risk of having violated then what becomes a criminal sanction.
Mr. LOOMIS. Generally speaking, that is correct, but, of course, the problem is that the payment has to be disclosed only if it is material for purposes of our disclosure requirements.
A company that is doing business abroad makes payments of numerous amounts for numerous purposes. They don't have to itemize each one of them in their disclosure documents with us, so that the mere fact that they made a payment would not necessarily have to be disclosed under our existing requirements.
Mr. SOLARZ. In terms of the kinds of things we are concerned about here, bribes and that sort of thing, is that considered something which has to be disclosed, and, if so, under what circumstances?
Mr. LOOMIS. We have had no specific requirements dealing with the subject of bribes abroad in our disclosure documents. It has been reached as it has been reached, it has been reached primarily through
the avenue of slush funds and unaccounted-for payments, false accounting, so to speak, rather than in terms of express requirement to disclose payments for improper purposes.
One of the things we are considering is to what extent we should amend our requirements to call for that kind of thing. You have to draw the line because our basic purpose is to provide information that is material to investors without inundating them with detail.
Mr. SOLARZ. Do you think that a payment to secure a commercial advantage through, in effect, bribing the individual involved is a matter which investors would consider relevant?
Mr. LOOMIS. In many cases-I would think most cases-yes. On the other hand, we are told that some companies pay $2 a week to a foreign postman to deliver the mail on time. That might not be a thing that we should be concerned with.
Mr. SOLARZ. But bribes of a substantial nature, presumably you would be.
Mr. LOOMIS. I don't want to lay down any general rules, partially because we are in the process of writing down general rules, but I would think that in most instances yes.
Mr. SOLARZ. How soon do you expect to have these new rules ready? Mr. LOOMIS. We are working on them hard. I can't give you the time right now.
Mr. SOLARZ. Under the existing regulations, how detailed do disclosures have to be? I mean, for instance, if someone makes a substantial illegal payment. can they lump that under "public relations"?
Mr. LOOMIS. That is the problem. It arises primarily in the area of financial statements. Now, if they report something under public relations and classify it as public relations and it isn't that, it is a bribe, that is a false statement.
It is more difficult where they put it in. say, general and administrative expense or sales compensation. Is it or isn't it misclassified? Mr. SOLARZ. Now, what happens if they make a false statement? Mr. LOOMIS. Well, if it is a false statement of a material fact required to be stated or necessary to make statements not misleadingthat is the language in the statutes we administer-if a statement is of that category, it is a violation of the law. We can get injunctions in the area of companies. Our choice is basically to get injunctions or, if the case is of that nature, to seek prosecution. We don't prosecute anybody ourselves. We refer that kind of thing to the Department of Justice, which has considerable discretion as to what they do with it. Mr. SOLARZ. How did you get into the United Brands case?
Mr. LOOMIS. United Brands case was not what I call a Watergaterelated situation. We got into that, as I understand it-Mr. Timmeny may be able to supply details--because we read news accounts of how the chairman of the board of this company had jumped out a window and committed suicide and that there was speculation that maybe his reason for doing that might have related to business rather than personal concerns, so our staff launched an inquiry into the situation. Mr. SOLARZ. How did they determine that a payment was allegedly made to the high officials of the Honduras Government?
Mr. LOOMIS. You might be able to carry that a little further. Mr. TIMMENY. When we learned that the chairman of the board had jumped out the window, one of our senior enforcement officials de
cided it would be appropriate to dispatch someone to the company to find out if this suicide was business-related, as the Commissioner indicated.
In the course of interviews with company officials, we covered very broad areas and we were led to the conclusion that there was a problem with respect to the company in Latin America.
It was just a matter of unraveling threads from that point, and asking questions of appropriate officials. We learned that there had been an agreement made to pay a very substantial bribe to Latin American officials.
Basically, I think a short answer is that the information resulted as a result of our initial inquiry and further followup questions of corporate officials.
Mr. SOLARZ. The alleged illegality came in that the alleged bribe was presumably not reported in their financial statements?
Mr. TIMMENY. Yes, and in addition, the hazards of doing business under those circumstances; that is, by obtaining a substantial portion of your business as a result of a bribe, were disclosed to the shareholders in filings that the company had made.
Mr. SOLARZ. Had they described this payment under some kind of general category like administrative expenses, or was it left out completely of their reports?
Mr. TIMMENY. No. Incidentally, that case is still pending. It has not been resolved. So we must speak in terms of allegations. But we alleged in our complaint that there was a periodic filing with the Commission, and I believe a press release stating that the company's business had been affected by a tax provision in a Latin American country and that the tax provision had been worked out. In addition, the press release and the filing described what the arrangement was as to the taxes. We alleged that the press release and the filing included a description of the tax problem and the statement: "and there were some other agreements reached in connection with this tax problem."
We alleged this disclosure was not sufficient to describe a $2.5 million bribe.
Mr. SOLARZ. But they did report that $2.5 million had been spent? They just indicated it had been spent in connection with this tax
Mr. TIMMENY. No; that is not correct. I am sorry. I have misled you, if I gave you that impression. They had reported that the company had reached an agreement with respect to a tax situation in this foreign country. We alleged they had booked these payments improperly. There were allegedly in effect, false books and records covering up the payments.
Mr. SOLARZ. In the report that they were obligated to file with you, was this payment covered under any of the categories in that report? Mr. TIMMENY. I might have to correct this, but my impression is that we alleged it was not anywhere in the report.
Mr. SOLARZ. I was under the impression from Mr. Loomis' testimony that it was precisely that kind of situation for which you are considering new rules, that there is no specific obligation under the existing rules and regulations to explicitly disclose and describe a bribe, that it could theoretically be subsumed in some other category.
Mr. LOOMIS. I think-again Mr. Timmeny may add-that is why I said there is no requirement, no classification in our forms for bribes,
but, if you pay a bribe and classify it in your reports as something else, or attempt to sort of weave it into general and miscellaneous, you might say that that was either inaccurate or incomplete disclosure.
Mr. SOLARZ. Do you think there ought to be any provisions in the law above and beyond disclosure of such bribes which would serve to make them illegal?
Mr. LOOMIS. Well, disclosure really is our business in this area. Our concern by statute is with disclosure. As a matter of policy, whether there should be a Federal statute making such payments illegal or otherwise dealing with them, seems to me a general question within the province of the Congress primarily, rather than our disclosure
Mr. SOLARZ. Do you think it would make sense to specifically require disclosure of significant or substantial bribes, leaving aside for the second the question of what would be "significant or substantial"?
Mr. LOOMIS. Well, I don't know. I think that that is the kind of a law which would be very difficult to enforce. No one would comply with it voluntarily, so that it would just be something that you could use if you otherwise uncovered it, so to speak.
Mr. SOLARZ. Well, yes, but, if you provided criminal penalties or stiff penalties for not complying with that reporting provision, that might be a way of getting at them.
I am not an expert in the tax law, but I gather that people are theoretically obligated to report their income for income tax purposes even from illegal sources of income, and that very often they manage to get people for failing to report the illegal income rather than for making the illegal income in the first place, and perhaps that might be an approach to this problem.
There are all sorts of difficulties in getting at people who make payments one would like to make illegal overseas, but perhaps, if we can't get it done that way, we can get at them through a reporting provision. Mr. LOOMIS. Yes, that is certainly an approach that could be taken. As I say, it is a general policy judgment more than an SEC question, I believe.
Mr. SOLARZ. One last question, just really more out of personal curiosity than anything else. In the testimony, I guess from Chairman Garrett, which was incorporated in your prior testimony, at page 23 he refers to situations where companies enjoy the appearance of purity along with the pleasures of sin, an arrangement not unknown in other
I am curious what the other contexts are.
Mr. LOOMIS. I am not sure exactly what context he had in mind at that point, although people sometimes do that. I think what he was driving at here was that a company may give money to someone, as a consultant and they pretty well suspect he is going to do something wrong with it, but they don't know anything about it, so they are not involved.
Mr. SOLARZ. Thank you very much.
Mr. Nix. Let me ask just a question. Let us go back to the payment of an unusually large sum of money by an American company to an official of a foreign country and that is reported as a legitimate business expense.
Now, what point in your investigation of that, your analysis of it, do you reach the conclusion that it is a bribe? If you do reach that conclusion, what reasoning do you utilize to support that conclusion? Mr. LOOMIS. Well, our objective is not to find out whether it is a bribe or not. Our objective is to find out whether it was reported accurately or inaccurately.
Mr. Nix. What would be inaccurate if it is reported as a legitimate business expense?
Mr. LOOMIS. They are required, for example, to report their sales and their selling expenses, let us say, and, if they put this thing down as selling expense when it was in fact a bribe, we would say that that was a falsification of a financial statement.
Mr. Nix. Now, assuming they put it down as selling expense, in order for you to conclude that it was a bribe, you would need factual support for your assumption that it is a bribe. How would you obtain that? How would you obtain that?
Mr. LOOMIS. We don't have to prove that it is a bribe. We have to prove that it is not selling expense. If they paid it to Mr. X who was a member of the government, had nothing to do with their selling effort, you would say: "No."
Mr. Nix. So the burden of proof on you would be to prove it is not a selling expense.
Mr. LOOMIS. That is correct.
Mr. Nix. The burden of proof would shift to them to justify it.
Mr. LOOMIS. I might put it precisely in terms of burden of proof. It would be up to us to prove that it was not properly classified as a selling expense. If we proved that, we would be through.
Mr. Nix. And that would be the charge lodged against the
Mr. LOOMIS. That is correct. Simply that it was incorrectly classified. Mr. Nix. I see. Now, one other thing. I must get to the bribe. You mentioned bribery several times. Have you encountered instances of that fact, and, if so, what are the circumstances that impelled you to the conclusion that it was a bribe?
Mr. LOOMIS. I was using these terms generically, so to speak. Bribery seems to be the language sort of used in this area. If you find a substantial sum of money is paid to a foreign official of a foreign government and it appears that that payment is done in order to get the government to do something the company wants, that official to do something that the company wants, and the United Brands case presents that kind of a situation, although I want to emphasize that, since that case is still in the courts, I can only describe it in terms of what we alleged. I am not saying it is a fact. The judge hasn't said so. Mr. Nix. A situation such as you described just then raises a suspicion that it might have been a bribe?
Mr. LOOMIS. Well, referring to the situation then, what was alleged was that this company was threatened with an increase in the taxes on its product by this country, that they paid this payment to a high official in the government, and then the proposed tax increase was rescinded.
Mr. Nix. And the conclusion
Mr. LOOMIS. The conclusion was that there was cause and effect. [Laughter.]