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Military factors include threat analysis, the likely regional impact of the transfer, the recipient's absorptive capacity, the impact on U.S. readiness, the sensitivity of the weapons systems, whether the United States in its supplier role could restrain future conflict, and other U.S. interests such as base or overflight rights.
On the economic side, we look for possible inconsistencies with the recipient's development goals or other aid programs, if any, and at the budgetary impact. While possible commercial benefits to the United States are not ignored, these are very secondary to political and military considerations.
We attempt to make the best possible systematic judgments in light of the totality of U.S. interests. I would like to reemphasize that we deal with military sales only as a component of our overall security assistance program. Under no circumstances do we promote sales for their own sake.
Whereas Defense's monitoring role is exercised in the area of FMS cash and credit sales-primarily through the process of negotiating letters of offer-State's involvement is primarily in the commercial sales sector.
Section 414 of the Mutual Security Act of 1954 authorizes the President to control the export and import of arms, ammunition, implements of war and related technical data "other than by the U.S. Government"-that is, commercial sales.
This responsibility has been delegated through the Secretary of State to the Director of the Office of Munitions Control, whose functions I would like to discuss briefly.
His office implements its authority through the International Traffic in Arms Regulations-ITAR. I have copies for you of a State publication that includes this as well as related executive orders and regulations.1
The ITAR defines the material and technical data subject to regulation and prescribes how export authorization can be obtained. Munitions Control does not itself promulgate export policy but develops this through consultation within the Department and with other agencies.
The regional and functional Bureaus of State provide advice on U.S. foreign policy matters. Defense, NASA. ACDA, and other agencies advise on security and technical matters. The export of hardware is authorized by the issuance of a license, whereas the export of technical data is authorized either by issuance of a license or approval of an agreement.
The problem of agency fees, and the manner in which the Departments of State and Defense have attempted to cope with it, illustrates the extent to which coordination is an important aspect of U.S. foreign policy. Our most immediate goal in the arms transfer program is to have all U.S. investors and foreign governments clearly understand the position of the U.S. Government in this matter. We condemn activities by U.S. citizens which violate the laws of other countries; we also have made clear that we will not tolerate use of our program as a vehicle for illicit payments to foreign officials, either directly or through intermediaries such as local agents.
1 See appendix 18, p. 279.
Citizens that engage in such activities cannot look to the State Department to protect them from legitimate law enforcement actions by responsible authorities of either the host government or the United States.
The further question arises whether the executive branch is prepared to take steps seeking to curb illicit activities, I am able to respond in the affirmative.
On August 25, 1975, the Department of State published in the Federal Register a notice of proposed rulemaking on the subject of contingent fees and commissions in international arms sales. On the same day, copies were submitted to Congress.
The proposal would amend the International Traffic in Arms Regulations to require a certificate from exporting firms regarding contingent agency fees. In connection with each direct or indirect sale valued at $100,000 or more to a foreign government, the exporter will have to certify that any contingent fee or commission of $10,000 or more and the identity of the recipient have been disclosed to the government concerned.
This requirement will avoid interference with the normal commercial practice of paying commissions and contingent fees to agents involved in furthering the business of exporting firms.
By requiring disclosure of such payments, however, we intend to minimize the risk that they will be used as a conduit for efforts to influence improperly the decisions of purchasing governments.
This proposal has been formulated in close collaboration with the Department of Defense. As you are aware, DOD has issued comparable guidance to cover sales under the Foreign Military Sales Actwhich requires disclosure to purchasing governments of any agents' fees included in an foreign military sales contract.
I believe, gentlemen, that these efforts reflect the extent to which effective interagency cooperation can be secured.
Mr. Chairman, that concludes my introductory statement, which I hope will be of assistance to the subcommittee. I will be happy to receive any questions that you may have.
Mr. Nix. Mr. Stern, as to disclosure, the contracting parties to any agreement would be the U.S. Government, the arms manufacturers, and the foreign government involved. We have to take into consideration, in my view, the stockholders of any company involved, and that would be the question of bribes that have been taken as tax deductions. I want to ask you whether or not, in your view, you are convinced that the disclosure system is sufficiently rigid to assure us against future violations.
Mr. STERN. Mr. Chairman, first of all let me point out that you have two different situations. You have one situation where the contract is between the American manufacturer and the foreign purchaser; and another situation where the contract is between the U.S. Government and the foreign government. So there are two different and distinct situations.
As to the answer to your question, I don't know the answer. I think that only time will tell. I do know this, Mr. Chairman, that we have had some pretty strong responses to the rulemaking changes that we propose. With your permission, I would like to read a couple of para
graphs from letters that we have received in response to our publication.
Here is one that reads:
It is doubtful that the undisclosed contingent fees can damage, or have damaged the foreign policy interests of the United States, rather it is a naive attempt at policing the world's morals and ethics that seems to make this country the laughing stock of many foreigners.
This attempt to regulate business practices is outside the purview of the Office of Munitions Control of the State Department, or the U.S. Government. As a matter of policy, it is suggested that this kind of intervention be avoided. As a practical matter, there is little to be gained by extra paperwork for all parties.
I have another letter, which I will not read, but which adopts a similar line. The point that I am trying to make is that this first effort that we have taken is obviously going to present some difficulties for the American manufacturer, and perhaps it should be enough as a first effort.
Mr. Chairman, as I have mentioned, I have some colleagues here and with your permission I would like to see if they have any additional comments to make.
STATEMENT OF WILLIAM LEWIS, SPECIAL ASSISTANT TO THE UNDER SECRETARY FOR SECURITY ASSISTANCE, DEPARTMENT OF STATE
Mr. LEWIS. I simply want to reinforce what Mr. Stern has indicated. We are trying to come to grips with a serious problem. We need some time to see how our proposal works, and to demonstrate if it can provide effective control.
It is a little premature to assume, at this juncture, that we have effective controls.
Mr. Nix. Let me ask you this, Mr. Lewis. How would these regulations that you have initiated, have affected, had they been the rules at that time, the $100 million that was paid by Lockheed to this man from Saudi Arabia in fees?
Mr. LEWIS. I think that the disclosure policy, if it had been in effect, would have alerted the Government of Saudi Arabia to what was transpiring and left it up to the Government of Saudi Arabia to determine whether it wished to proceed. It would not have covered the question of bribery.
I am not entirely sure that the regulations that we propose to implement will cover all aspects of that particular problem. We are still trying to come to grips with that. However, I would suggest to you that the disclosure policy is a good first step, Mr. Chairman.
Mr. STERN. May I also add, Mr. Chairman, that we have to draw a distinction between agents' fees and bribery, or illegal payments. I think that honest people can differ on whether agent's fees are proper or not. I think that this is a question that can be debated.
There is no question on the illegal payments. We would all agree that those are not to be permitted, but agent's fees, I think, are a different proposition.
Furthermore, I would also like to point out, Mr. Chairman, that these fees have been paid by foreign governments. They are not American dollars. They do not come out of appropriations, or from
the American taxpayers. Therefore, there are some limits, I think, beyond which the U.S. Government should not go to avoid interfering with the operations of another government.
Mr. Nix. Mr. Stern, when you say that these agents' fees are paid by the foreign governments, I fail to quite understand why you said it.
Mr. STERN. Because I think that it is a fact, Mr. Chairman.
Mr. Nix. You mean to say that the fees that we are speaking of, those are payments that come from the treasuries of foreign governments?
Mr. STERN. Yes, sir.
Mr. LEWIS. May I clarify that.
What we are trying to tell you, Mr. Chairman is that the contracts, the agreements on the sales include the actual agents' fees as well. Mr. Nix. The totality of the contractual figure represents the amount that would be paid as fees to agents?
Mr. LEWIS. Yes, by the foreign government.
STATEMENT OF JAMES MICHEL, ASSISTANT LEGAL ADVISER FOR POLITICO-MILITARY AFFAIRS, DEPARTMENT OF STATE
Mr. MICHEL. The contractor will have an agent with whom he has a separate contract calling for the payment of a fee with respect to the agent's effort in promoting the business of the manufacturing firm, or exporting firm.
The price charged by the manufacturer or exporter, who is selling to the foreign government, will include an amount to recover that fee paid by the firm to its agent. Therefore, the ultimate cost of the agent's fee is borne by the purchaser, which will be a foreign government.
Mr. Nix. Now there is just one other thing that is not clear to me. If a country's government has been influenced by its officials, how does informing the foreign government of the excessive agent's fees control the problem?
You are merely telling the foreign government, "One of your nationals has received an excessive amount of money, an excessive fee." Now, you cannot control any action on the part of that government at all, nor do you recover any of the money paid, if the fees are deemed to be excessive. What is the value of that provision?
Mr. STERN. We inform the government of the amount of the agent's fee included in the contract. It is up to that government to decide whether it is excessive or not; and if it has some reservation about the size of the fee, it can then pursue its own recourses.
Mr. Nix. It is really in the back of my mind that our own government divests itself of the right to determine what is or is not an excessive fee.
Mr. STERN. No, sir. The Department of Defense's present regulations do require a review of that issue, whether the fee is excessive or not. I can read to you a statement covering the DOD position.
DOD reserves the right to disallow any fee on the basis that the amount is unreasonable or the agent is not bona fide. If DOD determines any fee is unreasonable and that the agent is not bona fide, the fee would not be allowable, and therefore no report of agents' fees would be reported within the letter of offer.
Further no fee shall be accepted by DOD if disapproved by the purchasing governments. 60-363-75- -11
So there is a review process that the Defense Department undertakes.
Mr. MICHEL. Mr. Chairman, we should distinguish here between governmental and commercial sales. The paragraph that Mr. Stern just cited is from a current regulation regarding foreign military sales contracts. These are contracts in which the U.S. Government is involved as a party to the transaction. Although the payment is made by the foreign government, we are between the manufacturer and the purchaser as the seller of the item to the foreign government.
In the case of the purely commercial sale, we do not become directly involved in the transaction, but act only as the authority for issuing an export license. In these commercial transactions we do not review, approve or disapprove the amounts of fees that are to be charged and paid by the purchaser, ultimately.
In the case of commercial contracts, we have, in our proposed regulations, suggested a requirement only for disclosure to the purchasing government, leaving the parties to the contract, the seller, who is the private company in the United States, and the purchaser, who is the foreign government, to determine between themselves the extent to which their arrangement will include reimbursement for the services of agents.
Mr. Nix. Let me ask you. When your Department decided that these new regulations that have been promulgated are absolutely necessary, what prompted the decision?
Mr. STERN. I think that there is no doubt that increased interest in this whole subject was accelerated by the hearings in Congress. The date of our new regulation is August 25; so, obviously, there is a relationship.
Mr. Nix. This is the first step forward.
Mr. MICHEL. Mr. Chairman, this is a proposed regulation that has been published in the Federal Register for public comment. Mr. Stern has read one of the public comments that we have received.
The regulation is not in effect at this time. The intention is to permit. the public to participate in the process, and suggest, perhaps, additional or different language and provisions than we have proposed before the final regulation is adopted and made effective.
Mr. LEWIS. The Department of Defense regulation is no longer in the review process. It is accepted and implemented as standard procedure in the Department of Defense for foreign military sales.
Mr. Nix. Mr. Biester.
Mr. BIESTER. Thank you, Mr. Chairman.
One of the continuing quests that I have had in this hearing is to discover exactly what an agent does. In view of the buildup that the chairman gave you, I thought that I would ask you if you knew what an agent does.
Mr. STERN. Agents perform such legitimate duties for companies as establishing appropriate contact points with foreign governments; maintain office space
Mr. BIESTER. Let us stop right there. You have to go slowly.
The appropriate contact points in the foreign governments, if we are talking about foreign military sales, I assume that this would be someone who makes the decision as to whether, in fact, country X buys a Mirage, or whether it buys a Lockheed or something like that.