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THE ACTIVITIES OF AMERICAN MULTINATIONAL
THURSDAY, JULY 24, 1975
HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERNATIONAL RELATIONS,
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
The subcommittee met at 3 p.m., in room H-328, the Capitol, Hon. Robert N. C. Nix (chairman of the subcommittee) presiding.
Mr. Nix. The subcommittee will come to order.
We will resume our investigation of the legal implications of corporate bribery of foreign officials.
Today we will take testimony from the Civil Aeronautics Board on their program which resulted from Watergate revelations of illegal campaign spending in the United States. We will also hear testimony from the Antitrust Division on the type of case which would be prosecutable under American law.
At least one airline built up a secret fund abroad through the fictitious recording of sales of airline tickets and the CAB has taken great interest in this case.
The Antitrust Division will testify that if an American company bribed a foreign official for the purposes of excluding another American company from a country or a market, that this would be an example of a proper cause of action; as well as an attempt to tie up a raw material in a monopoly which would be able to raise prices for American consumers here at home. An interoffice memorandum from a sales representative to the home office of the Northrop Corp., according to newspaper accounts, recommended payments to officials in a foreign country in order to obtain exclusive consideration in Saudi Arabia. Perhaps this might be an example of a proper case.
Our hearing will continue until we can answer positively whether our present legal system can meet the challenge of foreign slush funds maintained by the foreign operations of American-based companies. Of course, that does not confine the operations of this subcommittee; it seeks to explore, to examine and to suggest legislation that will meet the needs of the problem that we face.
Now, we are pleased to have with us today as the first witness James L. Weldon, Jr., Acting Director of the Bureau of Enforcement, Civil Aeronautics Board. I am glad to welcome you at this time, sir. You may proceed.
STATEMENT OF JAMES J. WELDON, JR., ACTING DIRECTOR, BUREAU OF ENFORCEMENT, THE CIVIL AERONAUTICS BOARD
Mr. WELDON. Good afternoon, Mr. Chairman and members of the subcommittee. My name is James L. Weldon, Jr., and I am presently Acting Director of the Bureau of Enforcement at the Civil Aeronautics Board. Also here today to answer specific questions and provide detailed information as necessary are Glenn W. Weinhoff, Chief of the Bureau's Investigation and Audit Division, and T. Christopher Browne, an attorney with the Bureau who has done most of the work in this area. Also with those of us from the Bureau of Enforcement is Stephen J. Gross, one of the Board's Associate General Counsel, who is currently the Acting General Counsel and he can provide an overview on behalf of the full Civil Aeronautics Board, if that is
I want to express my appreciation for this opportunity to appear before you on this very important subject, the use and possible misuse of U.S. air carrier funds overseas. At the outset of my remarks, I want to assure the subcommittee that we are continuing and will continue to investigate and prosecute any misuse of U.S. carrier assets overseas. As we understand it, the subcommittee is investigating improper payments by international corporations, including U.S. airlines, whether they be called gratuities, expenses, or bribes to foreign officials. We assume your interest lies primarily, but not exclusively, with payments made to foreign governmental officials, in contrast to payments made to private citizens. At the core of that issue, of course, is the accountability of international corporations, not only to their shareholders, but also to the public. Accountability to the public becomes a very important matter indeed when the corporation is in a regulated industry-like air transportation-wherein licenses are granted for the purpose of furthering the public interest, as well as purely private, commercial interests.
I think we can assist the subcommittee in its work by placing our information in the proper context. First, it may be helpful to explore our responsibilities and powers under applicable Federal law. We will then comment, to the extent it is proper to do so, on several cases we have handled, or are handling at this time, which should be of interest to you. Finally, we will seek to explain some of the problems we have encountered and suggest certain proposals to remedy those problems.
Under the Federal Aviation Act, the Civil Aeronautics Board, an independent agency of the U.S. Government, is charged with the regulation of commerical air transportation in furtherance of the public interest-49 U.S.C. § 1302. Pursuant to this authority, the Board grants certificates to air carriers which have met certain standards. Among the obligations imposed as a condition of receiving a certificate from the Board is compliance with reporting and accounting requirements-49 U.S.C. § 1377. The Board has, indeed, prescribed a "Uniform System of Accounts and Reports" for all certificated air carriers. (See 14 CFR § 241.)
In brief, the uniform system is intended to insure the Board that the rates and fares the carriers apply are reasonable, that each carrier remains economically fit to serve the public, and that the air car
riers' activities are in compliance with law. The uniform system lies at the very heart of the regulatory process and if corrupted by deception, either through the inclusion or omission of certain information by the carriers, the public is robbed of any assurance that its best interests are truly being served.
All U.S. air carriers, including the two major international carriers, Pan American and TWA, are obliged to observe the uniform system, although foreign air carriers are under no comparable constraints. Violations may be punished by monetary penalties, in a civil or criminal proceeding-49 U.S.C. § 1471-through referral to the Department of Justice and then to an appropriate U.S. attorney-49 U.S.C. § 1487. Under most circumstances, however, possible violations coming to the attention of the enforcement bureau are first investigated to determine whether grounds exist to reasonably believe that the law has been violated.
If we believe a violation has been committed, we begin an administrative enforcement action before the Board. The remedy we seek, normally, is a cease-and-desist order, which, if granted, requires the carrier to observe the law in the future. Often the cease-and-desist order we seek includes provision for what may be called affirmative action; that is, special obligations not otherwise imposed on air carriers but imposed upon a lawbreaking carrier to insure future compliance.
Under extraordinary circumstances, we may request that the Board amend, suspend, or revoke the air carrier's license if the violations are such that the carrier's fitness, particularly its disposition to obey the law in the future, cannot be expected. In addition, whether a cease-anddesist order or a more drastic remedy, is sought, the Enforcement Bureau institutes an informal procedure designed to secure from the offending air carrier a monetary penalty proportionate to the severity of the offense without the necessity of going to court to do so. This informal procedure is an attempt to settle the monetary statutory civil penalties. If no compromise or settlement can be reached, we refer the matter to the Department of Justice for court action.
With that background, let me turn to the question of foreign payments. Our international air carriers have large scale operations overseas. Large amounts of cash are generated through sale of tickets, aircraft sales, and hotel subsidiary operations. Large amounts of cash are disbursed for payroll, fuel, maintenance, promotional and consulting expenses, landing fees, et cetera. These receipts and disbursements are. of course, proper and necessary for the air carriers to operate. As noted before, summaries of these transactions must be reported in an accurate and timely fashion to the Board.
Despite intensive audit and investigative efforts, the Bureau has no evidence at the present time of any U.S. air carrier using its corporate funds for gratuities or bribes to foreign government officials. Through public admissions, and through our audit efforts, we have developed evidence, however, that certain U.S. air carriers have used such funds in other, equally unacceptable ways. In addition, the carriers have reported and accounted for such funds improperly.
What troubles us is that, regardless of the use to which certain airline funds might be used in a particular case, the potential exists for corporate funds to be used for any purpose that airline management
deems desirable once executives have made a decision to omit or record deceptively the use of funds on the carrier's books of account or in the reports filed with the Board. In short, there is no effective governmental control, no regulation whatsoever, with respect to such funds despite a pretence to the contrary.
Let us turn then, to specific cases. Before doing so, however, it behooves me to point out that certain limitations of fairness and effective enforcement preclude too detailed a discussion of specific cases.
The first revelation of improperly accounted for corporate money, the use of which had not been reported to the Board, came in July 1973. The former president of American Airlines publicly acknowledged having made an illegal corporate political contribution in the amount of $50,000 to the Finance Committee to Re-Elect the President. Shortly thereafter, the chief executive officer of Braniff Airways made a similar acknowledgement. The Special Prosecutor's office accepted misdemeanor pleas from those companies, each of which was fined $5,000, and for the Braniff chairman, who was fined $1,000 for violations of the Federal election laws. (18 U.S.C. 610.)
However, these proceedings did not terminate the investigations then being conducted by the Board's enforcement staff. Pursuant to our authority under the Federal Aviation Act, we were investigating the accounting and reporting aspects of these political contributions. Throughout 1974, in-depth audits were performed at each carrier's home office and at other locations, as necessary. Over 5,000 audit hours were expended in this effort. In February of this year, formal administrative complaints were filed. The American case was settled recently, while the Braniff case is still pending.
In the American case, the corporation and certain of its officers who had been individually named admitted that American had maintained a corporate fund for use as political contributions for which there was either no accounting or bogus accounting. Such activities had begun as early as 1964. The head of American Airlines de Mexico had withdrawn $1,000 per month for this purpose. In addition, insurance refund checks had been cashed and diverted to the fund. Finally, a bogus aircraft sales commission had been used to "launder" money through an agent in the Middle East.
All of these transactions had been misrepresented both on the carrier's books of account and in reports filed with the Board. American paid $150,000 in civil penalties as the result of these violations and for the next 5 years it and the individual officers named in the enforcement action will be required to file special reports with the Board. In addition, American will be obliged to observe new internal control procedures intended to make similar activity more difficult in the future.
The Braniff case is still pending before the Board and my comments must be limited to the four corners of the enforcement complaint and the answers filed by the corporation and those officers named as respondents.
On the basis of its audit. the Bureau alleged that from 1969 through 1973 Braniff had sold special ticket stock in many of the Latin-American countries which it serves, that the proceeds from the sales (amounting to something between $641,285 and $926,955) had not been accounted for on its general books or reported to the Board, and that
the individual corporate officers of Braniff, when interview by our agents, denied knowledge of pertinent facts, or provided incorrect information concerning those facts, for purposes of concealment. The Bureau requested an appropriate cease and desist order similar to the American Airlines order. In addition, we requested that, if the Board found the violations as alleged, a new proceeding be initiated to determine whether Braniff should be permitted to continue its routes or whether they should be reassigned to other carriers.
In the answers filed by Braniff and the individual respondents, the Bureau's allegations were admitted generally, except for the alleged attempts at concealment. Furthermore, the individual respondents, in varying degrees, denied knowledge of the activities. In particular, the chief executive officer denied knowledge of the ticket practice prior to August 1974. Braniff maintains that approximately $300,000 in cash was actually received and was used to pay excess commissions and other concessions to travel agents within Latin America. The case will soon be scheduled for hearing.
In addition to the extensive American and Braniff audits, special "wildcat" or otherwise unscheduled audits have been, and are presently being, performed to determine whether any other U.S. carrier has engaged in similar activities and whether unaccounted for and unreported cash flows exists in the airline industry for use or misuse as top management determines. We have concentrated our efforts on purported sales commissions, consulting fees, advertising expenses, insurance refunds, legal fees, employee bonuses and expenses, and other payments which might be used to mask the disbursement of funds for other than the stated purposes. So far, more than 17,000 audit hours have been devoted to these efforts, an allocation of between 35 and 40 percent of the Bureau's entire audit capability over the past year and a half.
Our experiences in auditing improper cash flows over the last 18 months have taught us a great deal. Basically, and most importantly, we have come to realize the limitations of our resources and overall effectiveness when operating without the assistance of inside information The head of enforcement at the Securities and Exchange Commission, Stanley Sporkin, has recently been quoted in the press as sharing this sentiment.
In short, the task of attempting to spot disguised cash on a corporations' books of account without the benefit of knowing where to look or, indeed, whether it even exists, without the benefit of a "tipster" to lead the way, makes the task of finding the proverbial needle in the haystack seem like childs play.
Enormous difficulties exist, of course, in any attempt to deal effectively with the problem. Every air carrier has an elaborate system of internal control, monitored periodically by independent certified public accountants, to insure that corporate money is in fact used for legitimate purposes, to insure that the money is not stolen by employees, and that it shows up in the right box on their books of account and forms filed with the CAB, SEC, IRS, and other governmental agencies. When top corporate management elects to deliberately circumvent such internal control procedures, however, all protection is lost. Top management has made those rules and top management can break them. All we can realistically do is to conduct certain audit tests and