oversight

Summary of Actions Being Taken in the United States To Control Questionable Corporate Payments in Foreign Countries

Published by the Government Accountability Office on 1977-05-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME
02134 -   [A1432431]

Susmary of Actions Being Taken in the United States to Control
Questionable Corporate Payments in Foreign Countries. OP-77-1.
May 2, 1977. 29 pp.
Report by Elmer B. Staats, Comptroller General.

Contact: Office of Policy.
Budget Function: General Government: Other General Government
    (806); Commerce and Transportation: Other Advancement and
    Regulation of Commerce (403).
Organization Concerned: Lockheed Corp.
Congressional Relevance: House Committers on Interstate and
    Foreign Commerce: Consumer Protection and Finance
    Subcommittee; House Committee on International Relations:
    International Economic Policy Snbcommittee; Senate Committee
    on Foreign Relations: Multinational Corporations
    Subcommittee; Senate Committee on Banking, Housing and Urban
    Affairs; Joint Economic Committee: Priorities and Economy in
    Government Subcommittee.
Authority: International Security Assistance and Arms Export
    Control Act (P.L. 94-329). Tax Reform Act of 1976 (P.L.
    94-455). Foreign Payments Disclosure Act; H.R. 15149 (94th
    Cong.); S. 3741 (94th Cong.). Anti-Kickback Act (41 U.S.C.
    51-54). Securities Exchange Act of 1934. Securities Act of
    1933. 41 U.S.C. 22. 18 U.S.C. 't31. 18 U.S.C. 433. 10 U.S.(.
    2306(b). 41 U.S.C. 254ta). 10 U.S.C. 2207. 10 U.S.C. 2313.
    S. 3664 (94th Cong.). S. 305 (95th Cong.). H.R. 15481 (94th
    Cong.). H.R. 1602 (95th Cong.). H.R. 3815 (95th Cong.). S.
    Res. 516 (94th Cong.).
         Payments by American corporations to foreign government
officials or others to obtain business advantages have had a
political impact on the countries involved and have undermined
confidence in public and private institutions. In response, a
series of actions were taken by the President and Congress.
Findings/Conclusions: Hearings were held by congressional
committees and bills were introduced dealing with: circumstances
and legality of corporate payments, development of a code of
conduct for international trade, and U.S. policy and crimi.ial
penalties related to corporate bribery. Laws were passed with
provisions for discontinuing foreign assistance or foreign tax
benefits where 'llegal bribes were determined. A task force,
established by former President Ford, provided interim
suggestions and proposed legislation with payments-reporting
requirements. A proposed international agreement on corrupt
practices was introduced at a United Nations forum. Actions b?
concerned Government agencies included enforcing securities
regulations, utilizing antitrust laws, determining tax fraud;
presenting criminal cases, and auditing transactions. The
private sector also has been seeking solutions. GAO, in auditing
negotiated contracts, generally refers violations to the
;~r .
                          '-
          Summary Of Actions
           Being Taken In The
      United States To Control
       Questionable Corporate
                 Payments In
            Foreign Countries




OP-77-1                 MAY 2, 1977
                           FOREWORD


     Much interest has been expressed in congressional

hearings and in the news media about questionable foreign

payments by American corporations.    In addition, during
General Accounting Office reviews of the implementation

of the Emergency Loan Guarantee Act, several members of

the Congress expressed concern with foreign sales commis-

sion payments by the Lockheed Aircraft Corporation.

Because of this widespread interest, we have compiled the

accompanying summary of the initiatives underway in the

public and private sectors to deal with the problem of

questionable foreign payment practices.




                                     omptroler General
                               of the United States
                            CONTENTS

Chapter                                                Page

   1      The President and the Congress Respond         1
               Hearings by Congressional Committees      1
               International Security Assistance
                 and Arms Export Control Act             6
               1976 Tax -kofor.mAct                      7
               Task Force on Questionable Corporate
                 Payments Abroad                         8
               Proposed International Agreement          9


   2      Actions By Government Agencies                12
               Securities and Exchange Commission       12
               Federal Trade Commission                 17
               Internal Revenue Service                 18
               Department of Justice                    21
               Department of Defense                    21


   3      Private Sector Seeks Solutions                23
               American Institute of Certified
                 Public Accountants                     23
               New York Stock Exchange                  24


APPENDIX- General Accounting Office Legal Author.Ly
            to Audit Company Books and Laws Relating
            to Improper Payments to Secure Contracts    25
                             CHAPTER 1

           9TE PRESIDENT AND THE CONGRESS RESPOND


    Over the past few years many American corporations have

disclosed payments made to government officials of other

countries, their political parties or others to obtain

business advantages.   The payments usually were made as petty

corruption to facilitate favorable action, to gain competitive

advantage over others, or because of extortion by corrupt

officials or their agents.

     These revelations have had a political impact in those

other countries cnncerned, have diminished the international

stature of multinational corporations, and have undermined

confidence in public and private institutions of the Western

World.

     The President and the Congress responded vigorously

to the problems of questionable payments with a series of

actions over the past two years.

Hearings by Congressional Committees

     The Subcommittee on Multinational Corporations of the

Senate Foreign Relations Committee held hearings on the circum-

stances that led to, and the legality of, corporate payments
made outside the United States.       The hearings in mid-1975

focused on questionable foreign payments by the Exxon, Gulf

Oil, Mobil, Northrop, and Lockheed corporations.

     The Senate Banking, Housing and Urban Affairs Committee

held a hearing in August of that year focusing on the question-

able payments by Lockheed.

     In October 1975 the Subcommittee on International Trade

of the Senate Finance Committee held hearings on a resolution

to protect the ability of the United States to trade abroad.

The resolution, Number 265, was passed by the Senate on

November 12, 1975.   It states that the U.S. Special Trade

Representative for Trade Negotiations and other officials

should start negotiations on the development of a code of

conduct for international trade.

     The Senate Banking, Housing and Urban Affairs Committee

and the Subcommittee on Multinational Corporations of the

Senate Foreign Relations Committee held more hearings concern-

ing Lockheed Aircraft Corporation in early 1976.

     During the Banking Committee hearings, it was argued

that the bribes and the question of Lockheed's ability to

repay its Federally guaranteed loans were related.       But



                                  2    '
Lockheed stated that its foreign payments had not involved

any funds received from the loans which the Government had

guaranteed.

     The Subcommittee on Multinational Corporations released

during its hearings many documents showing an extensive pattern

of payments by Lockheed in Japan and Europe.   These disclosures

touched off political repercussions in Japan, Italy, and the

Netherlands, jeopardized some of Lockhced's foreign sales,

and prompted several nations to begin investigations of

questionable corporate payments.

     The Subcommittee on Priorities and Economy in Government

of the Joint Economic Committee held hearings in March 19,f,

to determine the policy of the U.S. Department of State on

the issue of corporate bribery in other countries.   It was

announced that the United States would propose a multilateral

agreement on corrupt practices before the United Nations

Commission on Transnational Corporations.

     Meanwhile, the Senate Banking Committee completed action

on a bill (S. 3664) to deal with "corrupt overseas payments

by American business enterprisesl' which it forwarded to th-

Senate body in July 1976.   On September 15, 1976, the Senate

passed S. 3664 but it was not acted on in the House of

Representatives.
                               3
     In September 1976 hearings were held on an identical

bill (H.R. 15481) by the Subcommittee on Consumer Protection

and Finance of the House Interstate and Foreign Commerce

Committee.   However, action by the House was not completed

prior to the congressional recess in October 1976.

     On January 18, 1977, a new Senate bill (S. 305) was intro-

duced which contains, among other measures, the same provisions

as the bill of the previous year.    On April 6 the Senate
                                                       a crime
 Banking Committee reported out S. 305, which makes it

 to offer or to pay money to a foreign government, official,
                                                        country,
 politician or agent to obtain or hold business in that

 or to influence its laws.   The bill also makes it illegal

 for a company to falsify its records to conceal such payments.

 In addition, it provides for fines of up to $500,000 for
 each violation.

      In the House a new bill (H.R. 1602) also was introduced

 on January 10 which is identical to the one of the previous

 year on which action was not completed.

      In still another coagressional reaction, the House

 Subcommittee on International Economic Policy, International
                                                     on the
 Relations Committee, held hearings in 1975 and 1976




                                 4
                                              -a




policy effects of corporate payments in foreign countries.

Subsequently, the Committee forwarded to the House of Repre-

sentatives a bill providing for the termination of investment

insurance and guarantees issued to U.S. investors by the

Overseas Private Investment Corporation where the investor

makes a significant payment to a foreign government official

to influence the actions of his government.    The bill passed

the House in August 1976, but it was lot acted on by the Senate.

     The Senate adopted Resolution 516 on October 1, 1976,

supporting United States participation in the Organization

of Economic Cooperation and Development's "Declaration

of OECD Member Governments on International Investment and

Multinational Enterprises."   The declaration states, among

other things, that "multinational enterprises should not

render--and they should not be solicited or expected to

render--any bribe or other improper gift, direct or indirect,

to any public servant or holder of public office."

     On February 22, 1977, a bill (H.R. 3815) was introduced

in the House to make it unlawful for an issuer of securities

registered pursuant to the Securities Exchange Act of 1934

to offer, pay or promise to pay, any money, or to offer, give,




                                5
or promise to give, anything of value to any foreign official

for purposes of influencing any act or decision in his official

capacity.   The bill provides for fines of up to $1 million.

The House Subcommittee on Consumer Protection and Finance

held hearings on April 20 and 21 concerning H.R. 3815.

Treasury Secretary Blumenthal noted that H.R. 3815 in its

present formwas acceptable to President Carter, but added

that obtaining convictions under the proposed law would be

difficult in the international arena.

International Security Assistance
and Arms Export Control Act

     A related development in 1976 was the Internaticnal

Security Assistance and Arms Export Control Act (P.L. 94-329),

signed into law on June 30.   One of its provisions requires

that a report be submitted to Congress within 60 days if the

President determines that officials of a foreign country
receiving security assistance have obtained illegal or other-

wise improper payments from an American corporation in return

for a contract to purchase defense articles or services, or

extorted money or other things of value in return for allow-

ing a United States citizen or corporation to conduct business
in that country.   The report shall recommend whether or not



                                6
the United States should continue the security assistance

program for that country.    In response to requirements of

this act, the State Department adopted new regulations in

September.    These require the reporting of political contri-

butions and fee or commission payments on foreign military

sales and some foreign commercial sales.

1976 Tax Reform Act

     The 1976 Tax Reform Act (P.L. 94-455) which became law

on October 4, includes a requirement that all U.S. companies

with foreign subsidiaries report to the Secretary of the

Treasury all direct or indirect payments made to employees,

officials or agents of any other government.     If determined

by the Secretary to be an illegal bribe, the income produced

would not be entitled to any foreign tax benefits.    Also,

foreign bribe-produced income of a domestic international

sales corporation will be immediately taxable.    The House-

Senate Conference Committee on the bill altered the amendment

to provide that bribes paid by a domestic international

sales corporation to foreign officials will be immediately

taxable.     Current law provides that such bribes are not

deductible, but permits deferral of the tax on t;ic mon 1y.




                                 7
Task Force on Questionable
Corporate Payments Abroad

     On March 31, 1976, former President Ford established

the Task Force on Questionable Corporate Payments Abroad.

The task force was headed by Secretary of Commerce Elliot

Richardson and its    purpose was to find ou: whether "additional

avenues should be undertaken in the interest of ethical con-

duct in the international marketplace and the continued vitality

of our free enterprise system."        This task force did not

 release   its final report, but did provide interim suggestions

 to the President in the spring of 1976, and in mid-January 1977,

Mr. Richardson sent a memorandum to the former President

 suammarizing the task force's activities and accomplishments.

      In August former President Ford submitted the Task

 Force's proposer    Foreign Payments Disclosure Act to the

 Congress (S. 3741, H.R. 15149).       Thi. legislation would

 require that payments made to any individual or entity in

 connection with an official action, or sale to or contract

 with a foreign government for the commercial benefit of the

 individual, company, or foreign affiliate, be reported to the




                                   8
Secretary of Commerce.     By requiring reporting of all signifi-

cant payments, whether proper or improper, the bill avoids

problems of definition or proof of bribery and extortion.

The report would be made public one year after its receipt.

     Because of its late submission, Mr. Ford's bill did not

receive serious consideration before the congressional recess.

It is expected to receive a full hearing in the 95th Congress.

Proposed International Agreement

     Former President Ford also sought priority consideration

for the United States' proposed international agreement on

questionable corporate payments.    Introduced in a United

Nations Forum in March 1976, the agreement would result in an

international treaty based on the follo ling principles.

     *   The treaty would apply to international trade and

         investment transactions with governments, such as

         government procurement and other governmental actions

         affecting international trade and investment.

    ·    The treaty would apply equally to those who offer

         to make improper payments and to those who request

         or accept them.




                                9
    ·       Importing governments would agree to (1) establi-Lh

            clear guidelines concerning the use of agents in

            government procurement and in other covered trans-

            actions and (2) establish appropriate criminal

            penalties for defined corrupt practices by enter-

            prises and officials in their territory.

    ·       All governments would cooperate and exchange informa-

            tion to help eradicate corrupt practices.

        *   Uniform provisions would be agreed on for requiring

            enterprises, agents, and officials to disclose poli-

            tical contributions, gifts, and payments made in

            connection with covered transactions.

        The objective was to have the United Nations Economic

and Social Council pass a resolution creating a group of

experts charged with writing the text of an international

treaty on corrupt practices.      The Council adopted a resolu-

tion in August 1976 calling for an ad hoc working group of

representatives from the United States and 17 other nations

to complete its task by summer 1977.      The Ad Hoc Intergovern-

mental Working Group held its first session from November 15

to 19, 1976.      The first session was devoted to the organi.-

zation of its substantive work and to a general exchange of



                                  10
views by the delegations.   At its second sessiot., held from

January 11 to February 11, 1977, the working group adopted

a list of major issues to be considered in examining the

problem of corrupt practices, particularly bribery, in

international commercial transactions by transnational and
other corporations as a basis for future work.

     Treasury Secretary Blumenthal announced in March 1977

President Carter's full support of the treaty proposal and
encouraged early action by the United Nations.




                               11
                           CHAPTER 2

               ACTIONS BY GOVERNMENT AGENCIES


    There has been much scrutinizing by Government agencies

of the behavior of American corporations to identify the form

and extent of questionable or illegal payments and to deter-

mine actions necessary for discouraging and preventing such

payments in the future.   A brief synopsis of the more signi-

ficant efforts follows.

Securities and Exchange Commission

     United States laws dealing with the buying and selling

of shares or securities are designed to protect investors

from misrepresentation, deceit, or other fraudulent prac-

tices by requiring putlic disclosure of information by those

who issue shares or securities.     The Securities and Exchange

Commission provides for the fullest possible disclosure to

the investing public and protects the interests of the public

and investors against malpractices in the securities and

financial markets.

     The Securities Act of 1933 requires a registration

statement to be filed with the Securities and Exchange

Commission before a public offering of securities.     The



                               12
Securities and Exchange Act of 1934 requires periodic reports

and proxy materials to be filed with the Commission by

registered companies.

     Payments to foreign officials are not specifically

required to be disclosed in materials filed with the Commis-

sion pursuant to the 1933 Act or the 1934 Act.   However,

disclosure is required of all material information concerning

registered companies and of all information necessary to

prevent disclosures that have been made from being misleading.

Thus, facts concerning questionable payments must be dis-

closed insofar as they are material.

     The courts have not yet addressed the issue of whether

and under what circumstances questionable payments made by a

United States corporation to foreign officials would     be

material information which should be disclosed to the public.

So far, the Commission, through its enforcement and voluntary

disclosure programs, has been the sole judge of the materiality

of such payments in this country.

     Through its enforcement program the Commission is investi-

gating questionable and illegal corporate payments and practices

for the following reasons:   (1) bribes and kickbacks may



                              13
involve falsification of accounting records; (2) the securities

laws require companies to disclose material facts for investors

to make informed investment decisions and to assess the quality

of management; (3) corporate management and their advisors

need to become fully aware of these problems and to effectively

deal with them, and (4) to clarify its approach and authority

in the area.   The main thrust of the Commission's enforce-

ment actions has been to restore the effectiveness of the
system of corporate accountability and to encou) ge the
boards of directors to exercise their authority to deal with

 the issue.
      The Securities and Exchange Commission has taken the

 position that significant questionable payments or smaller

 payments that relate to a significant amount of business are
 material and are required to be disclosed.   Other questionable

 payments may be considered material if repeatedly made with-

 out broad knowledge and without proper accounting.

      As the potential magnitude of the problem became apparent,
 the Commission sought to encourage voluntary corporate dis-

 closure of the questionable or illegal foreign payments.




                               14
Accordingly, it advised companies with possible disclosures

problems to:

     *   Authorize an in-depth investigation of the question-

         able activities by a special independent review

         committee.
     *   Request the board of directors to issue an appropriate

         policy statement on transactions involving illegal

         or questionable activities in the United States or

         other countries.

     *   Consider whether interim public disclosure of the

         results should be made prior to completion of the

         investigation.

     •   Report to the Commission on the final results of

         the investigation.   In addition, the Commissioin is

         encouraging disclosure by the companies of investi-

         gations in a current or annual report, registration

         statement or by some other means of reporting.

     Under its voluntary programs, more than 350 companies

had filed reports with the Commission by April 1977 disclos-

ing questionable payments to foreign officials.




                                15
     On April 28, 1977, the Commission announced that it

would make public the names of the recipients of question-

able and illegal payments from U.S. companies.   This action

is being taken in response to requests for release of such

information under the Freedom of Information Act.

     In a May 1976 report prepared for the Senate Banking,

Housing and Urban Affairs Committee, the Commission made an

analysis of the public disclosures of questionable foreign

and domestic activities of 89 corporations.   The report

concluded that:

     "The almost universal characteristic of the cases
      reviewed to date by the Commission has bt:en the
      apparent frustration of our system of corporate
      accountability which has been designed to assure
      that there is a proper accounting of the use of
      corporate funds and that documents filed with the
      Commission and circulated to shareholders do not
      omit or misrepresent material facts. Millions of
      dollars of funds have been inaccurately recorded in
      corporate books and records to facilitate the making
      of questionable payments. Such falsification of
      recurds has been known to corporate employees and often
      to top management, but often has been concealed from
      outside auditors and counsel and outside directors."

      The Commission issued on January 19, 1977, a rulemaking

 proposal (Release No. 34-13185) designed to promote the

 reliability and completeness of the financial information

 filed to meet requirements of United States securities laws.



                               16
These proposals require each issuer of securities or shares

to maintain books and records accurately reflecting the

transactions and dispositions of assets of the issuer and an

adequate system of internal accounting controls to provide

reasonable assurance that specified objectives are satisfied.

     In order to protect the reliability of financial informa-

tion and the integrity of the independent audit of issuer

financial statements, the Commission is proposing rules to

prohibit explicitly falsification of an issuer's accounting

records and making false, misleading or incomplete statements

by officers, directors, or stockholders to an accountant

engaged in an examination of the issuer.

    Although not directed solely to the problem of question-

able or illegal corporate payments and practices, the Commission
believes that these proposals will   create a climate which

would discourage serious abuses uncovered in this area.

Federal. Trade Commission

     The Federal Trade Commission    is charged with keeping

competition free and fair by preventing the free enterprise

system from being stifled, substantially fettered by monopoly

or restraints on trade, or corrupted by unfair or deceptive

trade practices.



                              17
    The Federal Trade Commission is trying to determine if

United States' laws concerning unfair competition were

violated by corporations making questionable payments.   The

main issue here is whether a corporation making such payments

has an unfair competitive advantage over another that does

not make such payments.    The Trade Commission's inquiry is

the first use of the antitrust laws In combating the practice

of making payoffs.

Internal Revenue Service

     The laws governing taxation of business income provide

that bribes and kickbacks, including payments to government

officials, made in other countries cannot be deducted in

computing taxable income if the payment would be unlawful

in the United States.

     In April 1976, the Internal Revenue Service issued new

instructions to its field offices to help uncover tax evasion

and avoidance schemes involving bribes, kickbacks and similar

illegal payments.    These instructions will be followed in

the auditing of about 1200 corporations whose gross assets

exceed $250 million.    The Revenue Service's examining officers

will direct a minimum of 11 specific questions to present




                                18
and former officials or employees who have had sufficient

authority, control or knowledge of corporate activities so

as to be aware of any possible misuse of funds.

      For example, one of the questions the examiner will ask

is:

           "* * * did the corporatirn   ,   any corporate officer
      or employee or any third part   tocting on behalf of the
      corporation, make, directly o'    .directly, any bribes,
      kickbacks or other payments, ..oardiess of form,     -
      whether in money, property, or services, to any employee,
      person, company or organization, or any representative
      of any person, company or organization, to obtain favor-
      able treatment in securing business or to otherwise
      obtain special concessions, or to pay for favorable
      treatment for business secured or for special con-
      cessions already obtained?"

      Responses must be in writing and signed by the individual

being questioned, either in affidavit form or as a written

declaration made under penalties of perjury.       If the indivi-

dual refuses to answer, a summons will be issued.       The

managing partner of the corporation's public accounting firm

also is required to attest to the affidavits submitted by

selected corporate officials and key employees.

      Under recent arrangements, the Revenue Service also will

be examining all Securities and Exchange Commission reports

for matters having tax significance.




                                 19
     The Revenue Service has also established procedures to

improve its effectiveness in detecting the misuse of corporate

funds.   Included are guidelines for detecting schemes created

for political contributions and bribery in the United States
and other countries.   Some of these guidelines call for:

     ·   Examining the books and records of American

         companies located in other countries.

     *   Examining international transactions of multi-

         national corporations.

     ·   Working to strengthen cooperative efforts with nations

         with whom the United States has tax treaties.

     The purpose of the new instructions and guidelines is to

determine whether corporations have reduced their income taxes

by deducting payoffs as expenses.      If the Internal Revenue

Service charges a corporation with such an act, its officers

may face charges of conspiring to violate tax laws, making

a false return, and giving a false statement to Internal

Revenue agents.   If it is determined that a company has committed

tax fraud, the case will be referred to the Department of

Justice for prosecution in the courts.




                                  20
Department of Justice

    With its thousands of lawyers, investigators, and agents,

the Department of Justice plays al. important role in protection

against corporate criminals and in maintaining healthy competi-

tion of business in our free enterprise system.

     The Department's Deputy Chief of the Criminal Frauds

Division heads a Federal task force   which was formed in 1976

to investigate allegations of corporate foreign payments.

The task force includes representatives from Justice, the

Securities and Exchange Commission and the Internal Revenue

Service.   Emphasis has been placed on possible violations of

the mail fraud statutes, the securities laws, the Bank Secrecy

Act as well as statutes prohibiting the submission of false

statements to Government agencies.

     As a result of its investigations, the task force recently

began presenting criminal   :ases to grand juries in several

cities involving illegal foreign and domestic payments by

American corporations.

Department of Defense

     Similarly, the Department of Defense has been much con-

cerned about the possibility of questionable corporate pay-

ments made by its contractors in defense industries.



                               21
    The Department's contract audit agency has been heavily
                                                   t
involved in audits of transactions and sales agents fees

-o determine that improper and inappropriate costs are not

reimbursed through Government contracts.   Although the audit

agency has no investigative responsibilities, it is alert to

the possibility of improper transactions and maintains with

its auditors a constant state of awareness.   If irregular

activity is found during a contract audit, the matter is

referred to the Army, the N.vy or the Air Force, as appropriate,

or other defense agency for investigation.




                              22
                            CHAPTER 3

               PRIVATE SECTOR SEEKS SOLUTIONS


     The efforts discussed in chapters 1 and 2 evidence a

commitment by the Federal Government to maintaining a world

marketplace more free of illegal activities and questionable

moral and ethical practices than in the past.         The Government

is not alone in these efforts, for organizations in our

private sector are also seeking solutions.

American Institute of Certified Public Accountants

     The American Institute of Certified Public Accountants

issued in January 1977 two statements on auditing standards

to its membership.

    One statement (SAS No. 16X entitled "The Independent Auditor's

Responsibility for the Detection of Errors or Irregularities,"

stresses that under generally accepted auditing standards

the independent auditor   has the resp¼.?,ibilll     y to m"arch

for errors or irregularities that wouii      4iave   s;material effect

on the financial statements of tlne organization being audited.

The statement emphasizes the inherent limitations of the audit

  ¢ass but also provides guidance as to procedures to follow
prc

when the auditor suspects that errors or '.rregularities may

exist.

                                23
    The other statement (SAS No. 17), entitled "illegal Acts

by Clients," provides guidelines for the auditor's conduct

when acts such as illegal political contributions, bribes, and

other violations of laws and regulations are encountered during

an audit.   The statement emphasizes that an audit in accordance

with generally accepted auditing standards cannot be expec-ted to
provide assurance that illegal acts will be detected.   However,

it provides suggestions on procedures for identifying illegal

acts and actions to be taken by the auditor when they are
suspected cr found.

New York Stock Exchange

     The New York Stock Exchange recently made a rule proposal

for companies with common stocks listed by it under which the
companies have until June 30, 1978, to create audit committees

made up of nonmanagement directors.   The proposed rule has

been endorsed by the Securities and Echange Commission.

These independent audit committees would have as their main

objective the evaluation of the corporate audit function to
determine the adequacy and efficacy of accounting procedures

and controls.




                               24
APPENDIX                                             APPENDIX


                   GENERAL ACCOUNTING OFFICE
               LEGAL AUTHORITY TO AUDIT COMPANY
              BOOKS AND LAWS R.ELATING TO IMPROPER
                 PAYMENTS TO SECURE CONTRACTS


     The authority of the General Accounting Office (GAO)

to examine the books and records of companies doing business

with the Government is, in the main, limited to those hold-

ing negotiated rather than formally advertised contracts for

supplies and services.   Contracts negotiated by the Department

of Defense are governed by section 2313 of Title 10 of United

States Code, which provides that the Comptroller General is:

     "entitled * * * to examine any books, documents,
     papers, or records of the contractor, or any of
     his subcontractors, that directly pertain to,
     and involve transactions relating to, the contract
     or subcontract.'

Similar laws exist regarding contracts negotiated by other

Federal agencies.

     It should be noted that the access to company records is

limited to (1) negotiated contracts, and (2) records that

are directly pertinent to the negotiated contracts.    Thus,

GAO, as a general proposition, may not conduct a far reaching

and exhaustive examination of any company's books of account

or corporate records.




                               25
APPENDIX                                            APPENDIX


Specific Laws Regarding Improper Payments
     There exist several statutes that bear upon the question

of improper payments made to secure Government contracts.

These statutes are in turn implemented by clauses that must
be inserted in Government contracts.   Should GAO, in its

audits of negotiated contracts, find violations of these

laws and contract provisions, it generally refers the matter

to the procuring agency, if it is a civil matter involving

a price reduction, or to the Department of Justice for investi-

gation and possible prosecution, if it is a criminal violation.

     Section 22 of Title 41 of the United States Code (Civil

Code) requires that all contracts or agreements (with only

certain specific exceptions) must contain ar. express condition

that no member of or delegate to Congress shall have any

share or part of such contract or agreement, or receive any

benefit from such contract or agreement.

     This matter is further dealt with in the Criminal Code.

 Section 431 of Title 18 of the United States Code provides

 for criminal penalties for members of or delegates to Congress,
 or resident commissioners who have a prohibited share of a

 Government contract.   This provision does not apply to corpora-
                                                        3
 tions in which the person may hold stock (18 U.S.C. g43 '.


                                26
APPENDIX                                              APPENDIX


The Code also provides that contracts made in violation

of this law are void and the Government can recover any

money paid under the contract.

      This statutory requirement is implemented by the "Offi-

cials Not to Benefit" clause that is inserted in all Govern-

men   contracts.   GAO, as noted before, generally has authority

only to audit negotiated contracts, while this statute applies to

all contracts.     Should GAO discern as a result of its audit

that there was a ,eeming violation of the statute, the matter

would be referrel to both the procuring agency and the Depart-

ment of Justice.

      Perhaps most pertinent to the question of improper pay-

ments made to secure Government business is the so-called

"Covenant Against Contingent Fees."     First required by

Executive Order in 1941 (No. 9001, 6 Fed. Reg. 6787), the

requirement was later incorporated in statutory provisions

(10 U.S.C. g2306(b) and 41 U.S.C. g254(a)).     The require-

ment is implemented by insertion of the "Covenant Against

Contingent Fees" clause.

      Under the requirement, a contractor must warrant that

no person or se.ling agency has been employed to secure the




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APPENDIX                                             APPENDIX


contract on a commission or contingent fee basis except for

bona fide employees or bona fide established commercial or

selling agencies maintained by the contractor for the purpose

of securing business.

     Should this requirement be violated, the Government may

annul the contract or deduct from the contract price the full

amount of the contingent fee or commission.

     In 1962, Congress provided in Title 10, United States

Code (Civil Code), section 2207, that all contracts using

Defense Department appropriated funds must contain a clause

providing for stringent penalties if gratuities are given by

a contractor or his agents or representatives to any Govern-

ment official in an effort to secure a contract or receive

favorable treatment.    This requirement is implemented by

 insertion of the "Gratuities" clause in covered contracts.

     Violation of the requirement may result in termination

 of the contract.   If this is done, the Government may sue

 for damages for breach of contract, and seek as an added

 penalty to recover no less than 3 nor more than 10 times

 the cost of the gratuities paid or given.    These remedies

 are in addition to the penalties provided for in the Criminal

 Code.


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APPENDIX                                            APPENDIX


     The "Anti-Kickback Act" prohibits any subcontractor

from making a gift to a prime contractor or his employee

as an inducement for the award of the subcontract (41 U.S.C.

~851-54).   The law provides that the United States may recover

the amount so paid.   While the law does not expressly provide

for cancellation of the subcontract, the Supreme Court has

held that that was a proper remedy for public policy reasons.

The law also provides that for the purpose of enforcing the

law, GAO has the "power to inspect the plants and audit the

books and records" of any prime or subcontractor engaged in

performing a negotiated Government contract.




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