THE BIG PAYOFF
The unending flow of disclosures of corporate bribes and illegal political contributions to officials in the U.S. and abroad has spread a darkening stain over the global reputation of American business. Throughout the revelations of the past 18 months, however, there was one minor consolation: reports of rampant payoffs by Exxon, Gulf, Mobil, Northrop, United Brands and other corporate giants had not directly implicated any major world leaders. Most under-the-table payments abroad had apparently gone to shadowy intermediaries, lower-or middle-level government officials, or chiefs of small developing countries that had never been known for political purity. But last week the scandal exploded into the highest policy levels in Europe and Japan, shaking the governments of important U.S. allies. Said Secretary of State Henry Kissinger: "The implications for the stability of other countries could be extremely serious."
They could indeed. The new revelations, forced out by a Senate subcommittee headed by Idaho Democrat Frank Church, named those in high places who got some of the $22 million to $24 million that Lockheed Aircraft Corp. has said it paid to spur sales of its aircraft overseas. The major repercussions:
> In The Netherlands, the government publicly identified Prince Bernhard, husband of Queen Juliana, as the "high Dutch official" to whom Lockheed had admitted funneling a total of $1.1 million between 1961 and 1972. The prince, who is a director of Fokker Aircraft Co. and KLM Royal Dutch Airlines, denied having received any Lockheed bribes; the Dutch Cabinet hastily appointed a special commission to investigate. Should the charges against Bernhard be proved true, his wife may be forced to abdicate as Queen--rocking the Dutch nation, where the monarchy is extremely popular.
> In Japan, elections that had been expected this spring will almost surely be postponed until at least the fall while the ruling Liberal Democratic Party tries to repair the damage to its public image caused by revelations that Lockheed bribes in Japan totaled $12.6 million. Some $7 million went to Yoshio Kodama, a founder and onetime major bankroller of the party; the payments coincided with unexpected purchases in 1960 of Lockheed F-104 Starfighters by the Japanese government and the ordering in 1972 of six Lockheed TriStar jetliners by All Nippon Airways. The Japanese Diet will hold hearings on the affair this week; opposition politicians are demanding that Kakuei Tanaka, who was Prime Minister at the time of the TriStar buy, be called for questioning.
> In West Germany, officials waited anxiously to see if the Church subcommittee will, as rumored, release documents this week indicating that Franz Josef Strauss and the Christian Social Union got Lockheed money. Strauss, the longtime right-wing strongman and leader of Bavaria's C.S.U., has been identified by Ernest F. Hauser, a former Lockheed European sales manager, as a receiver of Lockheed largesse; Strauss is suing Hauser for libel. When Strauss was Defense Minister in 1958, West Germany decided to order Starfighters--grimly known as "widow makers" in Germany because 178 of them have crashed.
> In Italy, Luigi Gui lost his job as Minister of the Interior. He had been Defense Minister in 1970, when the Italian government bought 14 C-130 transports from Lockheed for $60 million despite protests from opposition politicians that Italian-made planes were just as effective and cost less. Now a Lockheed memo, made public by the Church subcommittee, discloses that in 1970 the company paid $2.2 million to Italian agents, who passed on "more than 85%" of it to government officials. The reason, according to Lockheed Vice Chairman and Chief Operating Officer Carl Kotchian: "An Italian Senator" told a Lockheed consultant that unless the payments were made, no Lockheed planes would be bought. Normally, Gui would have been included in the new Cabinet named last week by Prime Minister Aldo Moro to end a five-week government crisis; he was left out at his own request so that he can try to clear his name. Whether he can do so or not, the scandal will hardly help the shaky Christian Democratic Cabinet maintain itself against the growing political power of the Communist Party.
> In Colombia, the government is investigating references in Lockheed records that indicate that at least two air force generals falsified the country's defense needs in return for Lockheed commissions that the Church subcommittee calculated to total $200,000. The references are contained in a letter written in 1968 by a Lockheed agent in Bogota to Lockheed's Georgia office when Colombia was ready to buy a third Lockheed Hercules transport for about $2 million. The agent assured his superiors that even though the Colombian military budget was being cut, the air force officers could "justify the true necessity for more equipment in order to guarantee the national security." Then he added: "Just between you and me, this is not exactly true--as you can imagine--but the important point for us is that they [the generals] want sugar [a common term for payoffs], and for that they are ready to do almost anything." If that is true, the scheme would tend to bear out one of the ugliest suspicions of business critics: corporate bribery encourages poor nations to spend cash on military equipment they do not really need.
Along with these revelations came some less grave--but still nasty--ones. In Hong Kong, Cathay Pacific Airways fired its director of flight operations, E.B. ("Bernie") Smith. Only two weeks ago, he was pictured in four-color ads in U.S. magazines, describing Lockheed's Super-TriStar as "the most intelligent aircraft I've ever flown." But Cathay Pacific found that Smith was the official identified in Church subcommittee documents as receiving $80,000 in Lockheed money from an "unidentified British agent living in France." He got the payment for helping Lockheed sell planes to other lines.
In the U.S., too, the damning Lockheed revelations have touched off profound repercussions. Says a Church subcommittee staffer: "This is the first time this thing is being taken seriously at the White House, the Treasury and the Federal Reserve. People are saying, 'Oh my God, we can't let it go on.' "
He is right. President Ford last week expressed "deep concern about the payoff revelations" and ordered a review, possibly by a Cabinet-level committee, of bribery and other improper activities by U.S. companies overseas. Secretary of Commerce Elliot Richardson let it be known he would be happy to head the probe.
Just what can be done to the offending companies is uncertain because the legal situation is murky. U.S. law draws a sharp distinction between domestic and foreign political use of corporate money. Within the U.S., donations to politicians from a corporate treasury are clear-cut crimes--even though more than a dozen companies have confessed to engaging in such activities. But even outright bribery of foreign officials does not violate any U.S. law. It may break the laws of the countries where the bribes are passed, but some of those countries are lax in enforcing their own legal codes. Concealment of foreign payoffs on the books of a U.S. corporation violates the reporting requirements of the Securities and Exchange Commission; the penalties usually are no more than public disclosure of what payments have been made.
The White House has let it be known, however, that the President, after the review he has ordered, may consider disqualifying companies that give foreign bribes from bidding on federal contracts--an act that could spell bankruptcy for some defense contractors. Treasury Secretary William Simon last week pledged to make sure that companies do not treat bribes as honest business expenses, deductible from their taxable profits. He ordered the Internal Revenue Service to intensify and broaden its antibribery campaign.
For example, to ensure that all payments are listed and bona fide, IRS examiners are taking much more trouble in sifting the records of companies thought to be concealing or mislabeling questionable foreign payments. Federal Reserve Board Chairman Arthur Burns would go even further. He called last week for a new statute under which an overseas bribe would be "treated as a criminal violation."
The turmoil overseas and in Washington is endangering Lockheed's survival--with important consequences for the economies of California and Georgia, where Lockheed is a major employer, and the national defense, since Lockheed is the nation's No. 1 defense contractor. The giant company (estimated 1975 sales: $3.25 billion) was saved from bankruptcy in 1971 by the Government's guarantee to repay $250 million in private bank loans. But the General Accounting Office, which conducts audits for Congress, has expressed doubt that Lockheed can repay the loans on schedule by 1978--and the Government is unlikely to extend the guarantee. Burns, who serves on a Government board that oversees the loans (Simon is another member), declared last week that the original guarantee was a mistake.
One reason for the GAO's doubt that Lockheed can repay its loans on time is that civilian sales of the TriStar are lagging because of the recession: the company did not book a single order last year. Another reason is that Lockheed is counting heavily on continued large foreign sales of military equipment--and the publicity about its bribery can only hurt. The Japanese Government last week dropped tentative plans to buy $650 million worth of Lockheed's long-range, low-altitude P-3C Orion planes, which are capable of detecting and destroying submarines. Indeed, the Japanese are having second thoughts about buying 110 to 120 new fighters, costing $10 million to $20 million each, from another American company--either General Dynamics, Grumman or McDonnell Douglas. At week's end the scandal cost Kotchian and Lockheed Chairman Daniel J. Haughton their jobs. Lockheed's 15 directors assembled for a special meeting called by Haughton; a few grumbled beforehand that they had not been kept fully informed of the potential dimensions of the bribery revelations. By the time the meeting began, Haughton and Kotchian had drafted a letter, addressed to all Lockheed employees, announcing their resignation. It referred to "the cascading waves of criticism and outright attack that Lockheed and its management have been subjected to" and called for "a new standard of international business conduct." Haughton had been scheduled to retire on his 65th birthday in September, but Kotchian, 61, might have been expected to succeed him.
For a short period, Lockheed will be headed by Robert W. Haack, former president of the New York Stock Exchange, who was named chairman pro tem. He will share power in a new "office of the chief executive" with two other officials: Roy Anderson, vice chairman for finance and administration, and Lawrence O. Kitchen, president. While briefly in charge, Haack said, his top priority will be to refinance Lockheed's debt, now about $600 million. That may be difficult; Democratic Senator William Proxmire of Wisconsin is planning to introduce legislation demanding a speedup in Lockheed's repayment of the Government-guaranteed portion of its debt.
The revelations about Lockheed and other U.S. corporations caught up in the bribery scandals have their roots in the Watergate debacle. During its investigation of corporate handouts to President Nixon's 1972 re-election campaign, the Watergate special prosecution force found that some companies were keeping their auditors as well as their stockholders in the dark about the nature and purpose of large payments overseas. Subsequent probes by the Securities and Exchange Commission, the Church subcommittee and the IRS have uncovered case after case of payments of corporate money to U.S. politicians, to foreign officials, or often to both.
Many more companies could be scarred by scandal before the investigations are finished. One company now under suspicion is Boeing, which supplies more than half of the commercial airliners flown in the non-Communist world. The SEC last week disclosed that it is investigating Boeing for possible bribery, kickbacks and illegal political contributions, and filed suit to compel the planemaker to hand over its records.
Over the weekend, Tenneco Inc., told the SEC that it had paid $12 million to attorneys, advisers, consultants and agents in 24 foreign countries. The company said that two payments totaling $10,000 to an official of an unnamed government "were improperly described on the books of the company and may have been improperly deducted for U.S. income tax purposes." Tenneco also acknowledged making contributions to candidates in Louisiana that violated state law. Meanwhile, there were reports that the Venezuelan Government was investigating bribes paid by Occidental Petroleum to local officials.
What surprises many U.S. businessmen who have any knowledge of overseas markets is that the bribery revelations have so shocked Congress and the public. True, the Lockheed case has stunned even the most worldly executives--but more because of the size and clumsiness of the bribery, the prominence of the receivers and the potential damage to friendly governments than because of the fact of the payoffs. On a less monumental scale, these managers assert, dash, baksheesh, pots de vin, la mordida--in a word, bribery--is an ancient and accepted practice, necessary in many countries to get any business done.
The chairman of a Chicago-based multinational company, for example, condemns Lockheed for going beyond accepted practice in its payoffs, but then adds that there is a "gray area" in which American companies must accept the moral standards of the countries where they operate, like it or not. His own company, he reports, is now negotiating a contract in an Arab country to which it will add 5% for an agent's fee. The chairman knows quite well that the agent will pass much of the money on to government officials, but will not be told their names and will not ask. If the payments were not made, he says, the company would not get the contract. In effect, the company--like many others--is being subjected to extortion.
Payoffs in about the 5% range appear to be standard in many countries. Edwin Schwartz, a Lockheed agent in Colombia, once wrote matter-of-factly to the U.S. company that "4% or 5% is usually needed to consummate transactions in the price range of Lockheed products. A number of people involved not only in making decisions to buy but also in the financing approvals, import licenses, contract negotiations, etc., etc., expect part of the pie."
The attitude that bribery is acceptable where it is customary seems to be widespread in American business. Recently, Pitney-Bowes Chairman Fred T. Allen commissioned Opinion Research Corp. to poll upper-and middle-level corporate managers on whether they believed bribes should be paid to officials in foreign countries where such practices are standard. A surprising 48% said yes. A survey of 73 senior international executives, announced last week by the Conference Board, an independent business research organization, came up with exactly the same finding. Three-quarters of the executives said their companies had been asked to pay bribes, and 25% added that the demands are a serious problem in their industries.
Of course, many American companies do succeed overseas without making extraordinary payments--beyond, perhaps, a tip to a customs official to get an executive's household furniture cleared for delivery. Indeed, most American businessmen overseas run their operations pretty much as they do in the U.S.: they work through commission merchants and sell their goods to private concerns on the basis of price and efficiency. Such firms come in all sizes, from tiny to giant. IBM, Xerox, W.R. Grace and Phelps Dodge, among others, are widely known for refusing to make payoffs.
Yet for many U.S. companies, the pressure to pay bribes overseas is intense. For one thing, the stakes are enormous. Foreign sales--by export or overseas manufacturing--account for around 20% of U.S. corporate profits and support roughly 8 million jobs at home. For many companies, foreign business is both crucial and vulnerable. The most flagrant payoffs have been made by oil companies and aircraft and weapons makers. The oil companies are especially vulnerable to unfavorable government action--expropriation, revocation of drilling concessions, tax increases, price control. The aircraft makers do not have a steady flow of sales for standard products; their prosperity for years to come may depend on bagging a single big contract for new planes.
In negotiating those contracts, American companies are in a bruising competition with foreign corporations that have no inhibitions about bribery. British Labor M.P. John Stonehouse, a former Minister of Aviation, asserts: "There is not a single British company selling capital equipment, military or civilian, to areas like the Middle East and Latin America that has not made payments of special commissions over and above the ordinary commercial limit. These sums range from 2 1/2% to 10% of the purchase price." Although Stonehouse is currently awaiting trial on charges of fraud, he has long experience assisting in the sale of British weapons, and his observations are widely believed.
In testimony before the Church subcommittee, Lockheed's Carl Kotchian reported that the company had lost a contract in The Netherlands (of all places) to a French concern. Republican Senator Charles Percy from Illinois asked: "Was the French plane superior or did they pay more [in bribes]?" Kotchian's answer: "In my opinion, it was the latter." That, Kotchian indicated, was one reason why Lockheed paid some $2 million in Italy in 1970 to land a contract for C-130 transports: the company was determined not to lose out in that country too.
Unlike their American competitors, foreign firms are rarely exposed by their governments for making payoffs. For example, in the '60s, a West German arms maker, Heckler & Koch, managed to elbow out a Belgian rival for an army-rifle contract in Colombia by paying a tribute of $200,000 to the committee of officers who approved the weapon. The rifles have proved extremely unpopular with the troops because they are difficult to maintain and not very efficient. But not a whisper of criticism has been raised in Germany. Last week in Amsterdam, an agent of the French planemaker Dassault went on trial charged with trying to bribe two members of the Dutch Parliament in an attempt to sell the company's Mirage jet. The prosecutor at week's end asked for his acquittal on the ground of insufficient evidence. The case has caused barely a ripple in France.
Competition alone, however, does not explain the pervasiveness of payoffs abroad. Another factor is that so many officials at almost every level are on the take. Part of the reason is that in many parts of the world, notably the Middle East, Asia and Africa, a true market system based on the price and quality of goods has never existed. Instead, commerce is carried on through intricate webs of associations and social connections that are lubricated by many forms of tribute, including money.
Even in a nation as advanced as Japan, there is a bewildering and deeply rooted system of extramarket arrangements that shape and guide the way that business is done. One of these is the custom of On, which requires that all favors be repaid, often in the form of cash. Not only are there no moral qualms about such payments but failure to make them could result in a loss of face. Asked why Lockheed had made its lavish payments to Political Manipulator Kodama, Kotchian replied that the Japanese political-industrial establishment is extremely tightly knit and Lockheed had to have someone in it speaking for the company in order to win any contracts.
Another reason U.S. firms are forced to do business amid a cluster of outstretched palms is that in many developing countries all Western (and even Japanese) companies are regarded as neoimperialists, out to extract all they can from the land and its labor. Such a view overlooks the modernizing benefits such firms can bring to the Third World and considers it almost patriotic to nick foreign companies for as much as possible. Beyond all that, however, much of the bribery that goes on overseas is nothing more than a reflection of the rapacious greed of those in positions of power.
Bribery, in fact, greases all kinds of transactions, from getting a minor import license to selling a fleet of aircraft. An American ambassador in an Arab country asks rhetorically: "You don't think Arab governments equip their armed forces on the basis of sophisticated flypasts or comparative field trials, do you?"
Sometimes the demands for payoffs are presented directly and bluntly. A classic example occurred in 1970 in South Korea, where Gulf Oil has a $300 million investment in refineries and chemical plants. The late S.K. Kim, a power in the ruling Democratic Republican Party, called in Bob Dorsey, then Gulf president, who was visiting Korea. According to Dorsey, Kim "dived right into the matter and told me that we were doing exceedingly well out there and that basically, our continued prosperity depended on our coming up with a ten million [dollar] political contribution to the party." After much haggling, Gulf got away with a $3 million contribution.
In most cases, though, the approaches are much more subtle: bribegiver and receiver never even meet, but deal through middlemen or agents. A company wanting to do business in a country where it is not known may seek out an agent, or an agent may approach it and claim--quite rightly--to know how to land contracts. Working--often luxuriously--on the fringes of the worlds of politics and business, middlemen are the indispensable Mr. Fixits for companies operating in foreign countries. Often natives of the country, the agents are well connected and know their way around the corridors of power as well as around the ski and sun resorts where many deals are born.
Of course, a good agent's role is not restricted to payoffs. He can set up appointments between important government officials and company representatives, help the firm chart its investment strategy, advise it on how to shape its bid and funnel back useful intelligence on government needs. All that is wholly ethical, and thus it often is next to impossible to determine how much of the agent's fee is a legitimate business expense and how much is passed on in bribes--particularly because the client companies have good reason for not trying to find out. If they do not know, they can, with only moderately queasy conscience, treat the agent's fee as a tax-deductible business expense. Then, if bribes become public knowledge, company executives can deny with a straight face having ever knowingly authorized them.
Among the middlemen in the Middle East, no one rates higher than Adnan Khashoggi, a fabulously wealthy Saudi Arabian who jets about his business in a plushly furnished private Boeing 727. He has at one time or another represented, among others, Lockheed, Northrop, Raytheon and Chrysler. As Northrop's agent, he stands to collect a fee of $45 million for a single deal to sell fighter planes to Saudi Arabia. Northrop once reported that it had given $450,000 to Khashoggi to pass on to two Saudi air force generals; Khashoggi says he pocketed the money to "punish" Northrop for thinking it could bribe the Saudis.
True, there are times when having an agent can be a liability, as Grumman Corp. is now learning. The U.S. Navy helped to set up a deal under which Grumman will sell 80 F-14 Tomcat fighters to Iran. But Grumman officials were still worried about competition from McDonnell Douglas, so they bought a little extra insurance: they hired U.S.-based agents for $28 million to make sure that the deal went through. What Grumman did not know was that the agents it chose were in bad odor in Iran. When the Shah learned of the arrangement, he concluded that Grumman had included the $28 million in the $2.2 billion contract price and demanded that the price of the 80 planes be reduced by that much, as a kind of fine. Grumman, arguing that the money came out of its own pockets, is now desperately trying to persuade the Shah to relent.
The Navy's role in the Grumman affair points to another problem in controlling foreign bribery: the Pentagon's relentless push to increase exports of U.S.-made weapons. U.S. military-assistance groups are constantly touting the benefits of American arms in almost every non-Communist country where the U.S. has an embassy. Once military officers determine that a foreign government is interested, they will put it in touch with U.S. companies that can supply the weapons required, and try to help clinch a deal.
The Pentagon has reasons for this policy. Strengthening the military muscle of friendly nations helps the U.S., and the economies of scale that result when a company manufactures weapons for foreign as well as American markets help to keep down the prices that the Pentagon itself pays. But military officers cannot help knowing that in some of the countries in which they are pushing American weapons, bribery is routine. There is no evidence that the Pentagon has actually encouraged payment of bribes to expand exports of arms, but it has been tolerant of agents' fees.
Whatever excuses might be offered for bribery--Pentagon pressure, foreign extortion, "Everybody does it"--the practice has become intolerable. Tips to customs officials to perform duties that they ought to carry out anyway might be unremarkable ethically, but payments to Cabinet ministers to put a U.S. company's interests ahead of those of their own country are totally immoral and strike at the very basis of democratic government.
Economically, bribery may increase a company's sales and profits for a time, but ultimately the practice is self-defeating --as Lockheed is now learning. Some of the U.S. executives who authorized bribes undoubtedly thought they would never be discovered, but they have been, and are costing the companies much-needed sales. Worse, the disclosures could well put a dent in the foreign business of other American corporations that are wholly innocent of any wrongdoing.
A permissive corporate attitude toward bribery loosens morals throughout the company; lower-echelon employees cannot be expected to operate ethically while the boss is setting an example of handing out payola. It is no coincidence that several of the companies caught paying off abroad are the same ones that broke the law at home to make political contributions out of corporate funds. The damage that corporate chicanery is doing to U.S. foreign relations, and to the reputation of the nation overseas, is painfully obvious.
What can be done to stop the bribery? The most obvious possibility is the one urged by Arthur Burns: passage of a law that would make bribery of foreign officials a crime in the U.S., punishable by heavy fines and jail sentences for offending executives. There would be many difficulties in framing and enforcing such a law. For one thing, a definition of just what constitutes bribery would have to be written--and that could be tricky, especially in the case of fees to agents who mix unethical operations with standard business practice.
Proving a case of bribery against an executive might well require evidence from foreign sources that U.S. courts have no power to compel. Then too, as one Washington official states, "We will not clean up the Indonesian civil service by American law. It will take a bribe to place a telephone call from Surabaya to Jakarta, as far as I can tell, for the next 50 years. Do you send an American businessman to jail for that?" The answer is, of course, no: enforcement would have to focus on the big payoffs.
For all its problems, an anti-bribery law may be the best answer. Its mere presence on the books ought to constitute a powerful deterrent. The prospect of being branded a criminal and sent to jail would give pause to even the most sorely tempted executive. And if enough U.S. companies were impelled to say no to bribery demands, they might indeed find, after some initial loss of sales, that foreign countries had to do business with them anyway because of the U.S.'s long lead in technology.
Some form of anti-bribery legislation would also open the way for much more vigorous probes into company books by such agencies as the SEC, the Justice Department and the IRS. Company records relating to possible bribery would be much easier to obtain. Accountants might well be prompted to be much more inquisitive about overseas payments by companies they audit and to report any evidence of bribery. They seem to have been singularly incurious about the foreign accounts of some companies that were later found to have made payoffs; they would have an incentive to look harder if they knew they might be accused of helping the company to conceal a crime. Successful prosecutions of some American executives for bribery might even embarrass foreign governments into tightening up on the venal practices of their own businessmen.
Laws, however, can be broken--as the law against political contributions in the U.S. has been. So in the end, the responsibility for stopping bribery rests with the chief executives of companies that do business abroad. Says Najeeb E. Halaby, who as head until 1972 of Pan American World Airways resisted both bagmen for Richard Nixon and bribetakers overseas: "The top guy has to set the ethical standards." He is right. Companies may draft codes of ethical behavior forbidding bribery, as many are doing now, but those codes are unlikely to be observed unless the chief lets it be known that violators will be fired--starting with himself. In spreading that word, chief executives could be helped by legislation that enabled them to tell employees that bribery is not only unethical but criminal.
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