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would seem to dictate the standards on which firms would conduct their affairs, and it is truly a sad commentary that the excuse put forward by most of the corporations is that other nations engage in bribery and massive political contributions as well.

The conduct of commercial operations by foreign nations in a morally shabby manner is no excuse for American citizens to engage in such scandalous activities as well. To the extent that international bribery is characteristic of business dealings in other parts of the world, the participation of American firms in it warrants prompt and effective elimination.

Mr. Chairman, I am particularly disturbed to learn that certain major American oil firms have reportedly made secret payoffs to the Arab oil-producing nations which were used to finance an anti-Israel and pro-Arab propaganda campaign in the United States. Practices such as this just cannot be condoned even when the firms plead that the payments were made under duress. They are completely contradictory to our Nation's basic traditions and fundamental principles. Finally, it is unconscionable that any Federal agency or official should even hint that an American business should engage in bribery, such as the Defense Department has reportedly done in the case of American arms dealers seeking business in the Middle East.

Inasmuch as the private sector and the executive branch have both failed to take the initiative to monitor overseas business activities and to bring a halt to these unacceptable business activities, I have introduced legislation to deal with the problem.

The first bill, H.R. 7563, which will come before this subcommittee, directs the State Department to monitor the overseas business activities of American citizens and corporations with a view toward detecting any activities which may violate any Federal law or which may be relevant to the violation of any Federal law. Should any possible violation of Federal law by an American company doing business overseas be discovered, the State Department would have to report such a violation to the appropriate U.S. Government agency responsible for the enforcement of the law which was violated.

The second measure, H.R. 7539, which has been referred to the Judiciary Committee, not only accomplished the goal of the first bill, but also amends title 18 of the United States Code to specifically prohibit the bribery of any foreign government, foreign official, or foreign political organization by any American company or official or employee thereof. Violations under this legislation shall be punishable by a fine of $10,000 or 1-year imprisonment or both.

The time is long overdue, Mr. Chairman, for affirmative and meaningful steps to be taken to cope with this situation. Illegal campaign donations, bribery, misleading, and deceptive reports to Federal regulatory agencies, padded accounts, secret slush funds, and other similar activities cannot be tolerated. Failure to take prompt and effective action can only encourage the continuation of these practices and, thereby, continue to create serious problems in our international economic and political relations throughout the world. One government has already been toppled and political parties in several other countries have been seriously compromised.

By enacting the measures I have introduced, we would provide a real stimulus to American firms and others to conduct their business

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activities on an acceptable and ethical basis and to assiduously avoid any improprieties or questionable business arrangements. This legislation would remove any questions which American business persons, foreign governments and their officials, and any others may have about the manner in which a U.S. firm operates overseas. Current statutes have failed to provide sufficient protection and more positive action is clearly needed.

I am hopeful, Mr. Chairman, that as we listen to the witnesses who will appear before us in the coming weeks that we can focus on the legislation I have authored in order to bring an end to the current state of affairs as far as bribery and other commercial chicanery are concerned and move to provide needed controls and protection.

May I say in conclusion that I am not only most appreciative of your own willingness to launch this kind of investigation into these unfortunate practices, but I am very hopeful that under your wise and experienced leadership, that this subcommittee will be able to come to grips with this problem in a meaningful fashion and come forward with some kind of legislation or recommendations designed to deal with it.

I think what is at stake here is really, in a number of significant respects, the reputation of our own country, and I think that we have an obligation to set a standard of honesty and integrity in our business dealings not only at home but also abroad which will be a beacon for the light of integrity for the rest of the world.

I am hopeful that, with the hearings that are being conducted by our committee, we can point the way toward an improvement in these kinds of business practices abroad.

Mr. Nix. I want to say, Mr. Congressman, on my own behalf and that of the entire committee, that we are particularly grateful to you for insisting that this most important subject be discussed and some solution found. I think it is highly commendable on your part to have taken the position which you expressed a few moments ago, and I am deeply grateful to you.

Mr. SOLARZ. I appreciate that very much, Mr. Chairman.

Mr. Nix. Our next witness is Mr. Michael F. Butler, Vice President and General Counsel of the Overseas Private Investment Corporation. STATEMENT OF MICHAEL F. BUTLER, VICE PRESIDENT AND GENERAL COUNSEL, OVERSEAS PRIVATE INVESTMENT CORPORATION

Mr. BUTLER. Mr. Chairman, before proceeding with my statement I thought I might introduce other officials of OPIC who are here with me today. On my far left is our Vice President for Development, Mr. Howard Houston; immediately to my left is Mr. Jonathan Dill, Senior Corporate Planning Officer; and on my right is Caryl Cole, who is Senior Counsel for Insurance.

Mr. Chairman and members of the committee, it is a pleasure for me to be here today before you, and I hope I may be of some assistance to you.

The subject of the hearings, contributions by American corporations to foreign officials, is difficult and complex. On the broad issue, OPIC's position is quite clear: OPIC condemns all forms of illegal contributions to foreign officials, whether they result from a corpo

ration seeking special advantages or result from extortion by foreign officials taking advantage of their power to cause adverse action against the corporation. Our insurance contract and operating procedures provide a strong deterrent to such practices.

OPIC's mission, as stated in the Foreign Assistance Act of 1969, is "to mobilize and facilitate the participation of U.S. private capital and skills in the economic and social progress of less developed friendly countries." In furtherance of such policy, OPIC seeks to encourage investments which will be made and conducted in accordance with local laws, are in accordance with the development aspirations of the host country, which will help the host country realize those aspirations, and which are welcomed and approved by the government of the host country.

We seek to promote investments that are mutually beneficial to the host country and the investor and feel most strongly that insured investors must be good citizens in the host country and regarded as welcome guests. Investments that are made or sustained through illegal payments to foreign government officials are simply not consistent with our purposes. Although such payments may result in short-run advantages, in the long run they are likely to cause serious problems to the investor.

To keep this problem in perspective, we are not aware that any significant number of American corporations are engaged in the making of illegal payments to officials of foreign countries in connection with investments in such countries. In our experience, we have no doubt that the overwhelming majority of American corporations regard such payments as repugnant and that in the instances where they have been made the companies have done so reluctantly and under great pressure from local interests in the country involved.

As I am sure the committee knows, OPIC has no general powers to regulate U.S. investment abroad. We have two broad programs, one to finance U.S. investments in developing countries through direct loans or through guarantees of loans by U.S. financial institutions. The second is to provide political risk insurance for investments made by eligible U.S. investors in projects in developing countries. There are three political risks insured against: the risk of inconvertibility of local currency into dollars, the risk of loss from expropriation or confiscation, and the risk of loss from war, revolution, or insurrection. Investors elect whether or not to insure their investments with OPIC. We charge substantial premiums for the insurance and we are directed by statute to operate the insurance program "with due regard for principles of risk management" and "on a self-sustaining basis." As I mentioned at the outset, the matter of contributions by American corporations to foreign officials is difficult and complex. A payment of a large sum of money directly to a foreign government official is undoubtedly illegal in any country under any circumstances. But such matters as tips, commissions, consulting fees, campaign contributions, contributions for charitable projects favored by important foreign officials, and the like, may be normal and accepted practices in one situation and illegal acts in another.

Clearly, the best and most appropriate way for these problems to be handled is under the provisions of local law. Where activities are illegal under local law, there should be no question about the position of the

U.S. Government. As set forth in a recent policy statement by the State Department:

** the U.S. Government does not condone illegal activities by American business and industrial firms abroad. The United States condemns such actions by U.S. corporations in the strongest terms. Moreover, any American firm or individual making unlawful payments to officials of foreign governments cannot look to the Department of State for protection from legitimate law enforcement actions by the responsible authorities of either the foreign country in question or the United States.

At the same time, the U.S. Government believes it would be helpful if host governments would clarify the rules for foreign firms in their countries regarding political contributions and other payments. We assume that the investigation and prosecution of offenses by foreign authorities will be nondiscriminatory; that the penalties will be proportionate to the offense; and that persons or firms found guilty of improper conduct will be treated fairly and in accordance with international law.

As indicated by this statement, we think that the sanction for making an illegal payment should be the punishment applicable to such offense under local law. While a contract entered into because of a bribe might be subject to modification or termination in accordance with established legal principles of the country, we do not think that expropriation is an appropriate response to an illegal payment. Nor do we think that an illegal payment justifies a host country's refusal to pay "prompt, adequate and effective compensation" for expropriated assets as is required under international law.

Turning now to how OPIC deals with this problem, we have a number of operating procedures and various provisions in our standard insurance contract that relate to illegal payments.

All applicants for OPIC insurance are required to disclose all agreements with the host government regarding the investment and the operation of the project. OPIC carefully reviews the terms under which the project will operate and particularly reviews the terms of any concession agreements, tax holidays, or other special terms which may be granted to the investor or to the project. OPIC's purpose in doing this is to ascertain to the best of its ability whether or not the terms under which the project will operate are fair both to the host country and to the investor.

In this effort, we seek the advice of the U.S. Embassy in the country. We also have hired special consultants to evaluate the terms under which a project will be operated and have urged the host country to hire special consultants to advise it. We also discourage an investor's acceptance of terms and conditions that we consider unfair to the host country, either by refusing to insure the investment at all or by excluding such terms from insurance coverage.

In addition to these procedures, the standard OPIC insurance contract contains provisions derived from general principles of insurance law and practice that limit the insured's rights and OPIC's obligations in cases of significant illegal payments.

In the contract, the investor represents and warrants that the project is in conformity with all laws of the host country. If such representation is untrue in any material respect, OPIC has the right to terminate the contract.

In paying expropriation claims, OPIC is not liable for action by a host country which is provoked or instigated by the investor. Neither is OPIC liable for the legitimate law enforcement activities of the

host government, such as the enforcement of existing legal penalties against a corporation making illegal payments.

At the same time, the insurance contract as a whole protects the investor against instances where bribery allegations are a mere pretext for an expropriation or other illegitimate sanctions.

These provisions, we believe, should be adequate to deter significant illegal payments, should provide sufficient protection of OPIC's interest as an insurer if such payments occur, and should serve to reinforce the U.S. Government position of strong opposition to illegal payments.

Mr. Chairman, this concludes my prepared statement. The counsel to the committee has suggested that it might be of interest to the committee members if I referred specifically to provisions of our contract and, with your permission, I will do that.

I would first refer you to section 2.02 of the contract on page 12, where it says:

Information Furnished to OPIC. The statements heretofore made and the information heretofore furnished to OPIC by the Investor in connection with this Contract were true, correct, and complete when made.

This, Mr. Chairman, is in the title entitled "Representations, Warranties, and Covenants of Investor," and it says: "The Investor represents and warrants that" and one of the warranties is the statement I just read about the information being true, correct, and complete.

Section 2.04 of the contract, also on page 12 and again in the article entitled "Representations and Warranties," is entitled "Legality of Project”—“The Project is in conformity with all laws of the Project Country which would have been ascertained had a reasonable investigation been made.”

Now, the effect of these two provisions, which we regard as very important, is found in Article 4, section 4.01, which is entitled "Default by Investor and Termination by OPIC." Section 4.01 is on page 17. At the bottom of the page, it states "Incurable Default. If *`* *” and then (b): “* * * any of the representations and warranties contained in sections 2.01 through 2.04 is untrue in any material respect

* * *"

Now, the two representations and warranties that I read are sections 2.01 and 2.04, so they are covered by this section 4.01 (b), and it says if any of those warranties and representations, "are untrue in any material respect," and skipping down a line.

OPIC shall have the right to terminate this contract at any time upon notice to the Investor, and, with or without exercising such right of termination, shall have the right to refuse to make any payment to the Investor hereunder and to require the Investor to refund to OPIC any payments made to the Investor hereunder subsequent to the commission of any such default.

This section goes on to elaboate what constitutes a material misrepresentation or breach of warranty, and still in that same paragraph, on page 18. it reads:

By way of example and not by way of limitation, a misrepresentation or breach shall be deemed to be material if such breach or the true state of affairs to which such misrepresentation relates affects the eligibility of the Investor or if it increases the likelihood of the making of any payment by OPIC hereunder ***. I will skip down a few lines

* or if the Investor knows or has reason to know that it might affect the decision of OPIC to issue the Contract or the terms or conditions on which OPIC would be willing to issue the Contract.

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