oversight

Lockheed's Commission Payments to Obtain Foreign Sales

Published by the Government Accountability Office on 1977-03-15.

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

                         DOCURENT RSUSOE            t
01131 - [10516901

Lockheed's Commission Payments to Obtain Foreign Sales.
PSAD-77-85; B-169300. march 15, 1977. Released march 31, 1977. 6
pp. + appendices (13 pp.).
Report t. Sen. William Proxmire, Chairman, Senate Conmittee on
Banking, Housing and Urban Affairs; by Robert P. Keller, Acting
Comptroller General.
Issue Arex: Federal Procurement of Goods and Services:
    ReasoLableness of Prices Under Negotiated Contracts and
    Subcontracts (1904).
Contact: Procurement and Systems Acquisitin Div.
Budget Function: rational Defense: Department of Defense -
    Procuretent S Contracts (058).
Organization Concerned: Lockheed aircraft Corp.; Department of
    Defense; Department of the Treasury.
Authority: Anti-Kickback Act (41 U.S.C. 51-54). International
    Security Assistance and rmas Export Control Act of 1976
     (P.L. 94-329). 41 U.S.C. 22. 18 U.S.C. 431. 18 U.S.C. 433.
    10 U.S.C. 2207. 10 U.S.C. 2306(b). 411 U.S.C. 2541a).
    Executive Order 9001.
          Some aspects of Lockheedas foreign sales commission
payments were examined to determine whether commissions were
improperly charged to Government contracts, the impact of
disclosure of payments on sales, and the existence of
outstanding commitments to foreign officials. Since disclosure
of the payments, Lockheed has taken action to institute more
effective controls. Findings/Conclusions: There was no evidence
that questionable foreign payments were improperly charged to
U.S. Government contracts. With the exception of uncertainties
associated with potential sales to Japan, there was no evidence
that disclosure had adverse effect on current or future foreign
sales. In Japan, there may have been effects on the market
potential of an antisubmarine warfare aircraft program and the
execution of orders for TriStar aircraft. There were outstanding
commitments to international consultants for commissioas
totaling about 8, smillion as of June 30, 1975, but Lockheed has
refused to make payment to an official of a foreign
government-owned company and the case is now in litigation.
Questionable foreign marketing practices were considered
symptomatic of similar actions by other corForations and
initiatives are underway in Congress and executive agencies to
deal with this aatter. (HTU)
               4E5TRICTED - Not to be Veleft.d trotside fhe           .. i(
PC\            JAcounttnyk  Office except on the batsis of specific applral
                by theOnffice of Congressioms4 ZLatlens.

              REPORT 'TO THE CHAIRMAN,
              COMMITTEE ON BANKING.
              HOUSING AND URBAN AFFAIRS
              BY THE COMPTROLLER GENERAL
      "   -   OF THE UNITE) STATES  ace


              Lockheed's Commission Payments
              To Obtain Foreign Sales
              Lockheed Aircraft Corporation

              GAO Jround no evidence that Lockheed's
              questionable foreign payments were improp-
              erly cl,lar'd to U.S. Government contracts.
              Except for some uncertainty on certain sales
              to Jpan, the disclosure of the payments has
              not had an adverse impact on the firm's cur-
              rent or future sales. Lockheed has refused to
              make payment on an outstanding commit-
              rrent to a foreign official of a govern-
              ment-owned companri and the case is now in
              litigation.




              PSAD-77-85                                      M A R CH'1 5, 1 9 7 7
             COMpTROLLAR GENERAL OF THE UN;TED STATES
                        WASHING'ON. D.C.   _6a




B-169300



The Honorable William Proxmire
Chairman, Committee on Banking,
  Housing, and Urban Affairs
United States Senate

Dear Mr. Chairman:
    In response to your request, we have reviewed certain
information with respect to foreign sales commission
payments made by Lockheed Aircraft Corporation during the
5-1/2 year period ending June 30, 1975. The issues addressed
in this letter pertain to (1) whether any of the commissions
were improperly charged to U. S. Government contracts,
(2) the potential impact orh current and future sales due to
disclosure of commission payments, and (3) whether Lockheed
has any outstanding commitments to foreign officials incurred
prior to the new company policy restricting such payments.
In addition, we have compiled a summary of the initiatives
underway in Government and the private sector to deal with
the problem of questionable foreign payment practices.

    In our review, we found no evidence that commissions
on foreign sales were improperly charged to Government
contracts. Although we believe the new management policy
and procedures established by Lockheed contain suitable
control features over its own foreign marketing activities,
Lockheed has no control over the ultimate disposition of
otherwise legitimate commission payments. Also, with the
exception of uncertainties associated with sales to Japan,
the disclosure of commission payments has not had an adverse
impact on current or future sales to foreign customers.
However, Lockheed believes that the final assessment of the
impact will not be known until their Special Review Committee
report is released. In regard to outstanding commitments,
we found that Lockheed has a contingent liability of $4.7
million to an official Of a foreign company that made
purchases from Lockheed. This matter is now in litigation.
BACKGROUND

    In July 1975, the company publicly acknowledged that,
from January 1, 1970, through June 30, 1975, about $147
million in foreign sales commissions were paid to consul-
tants. Lockheed disclosed that about $24 million of the
payments were known or suspected to have been received by
3-169300


forign officials and foreign political organizations.
Subsequently, the Securities and Exchange Commission (SEC)
filed a complaint against Lockheed alleging secret pavments
of at least $25 million to foreign government officials that
resulted in the filing of inaccurate statements with the
Commission.

    Lockheed entered into a conser't decree with the SEC
in April 1976, requiring the comp;,ny's Board of Directors
to establish a Special Review Committee to investigate and
report on past practices relating to commissions ano other
payments made in connection with foreign sales activities.
Although the consent decree required the investigation to
be completed by August 1976, the completion date waG extended
and a final report is not anticipated before the latter part
of March 1977.

    Shortly after disclosure of the commission payments,
Lockheed took action to institute more effective controls
over the selection and aoproval of international marketing
consultants and related payment procedures.  The management
policy established in October 1975 prescribed the following
restrictions:

   1. No consultant shall be an official or employee
   of the government or an active member of the armed
   forces of the country in which services are to be
   rendered unless such dual activity is Permissible
   in the country involved and is approved in writing
   by the head of the government agency or senior
   officer of the armed service.

   2. No consultant shall be an officer, director,
   employee or "affiliate" of any customer unless such
   dual activity is permissible in the country involved
   and is approved in writing by the chief execu-ive
   officer of such customer.

   3. Payments shall only be made by check or bank
   transfer to the order of tne consultants.

   4. No consultant shall make payments to third
   parties in connection with oerformance under the
   agreement if such payments would (1) not constitute
   a deduction by Lockheed for U.S. tax purposes, (2) be
   in violation of applicable U.S. and customer country
   laws, or (3) be for political purposes.

   5. Consultants shall comply with applicable laws of
   the United States and the customer country.


                           2
B-169300


    6. Written consultant certifications are required
    in connection with 4 and 5 above for each payment.

    we found that Lockheed's policy and procedures contain
controls that provide a reasonable degree of assurance that
the company itself will not make payments to foreign govern-
mental, military, or customer officials for their influence
in securing sales.  It should be noted, however, that there
are some external factors in the foreign market beyond
Lockheed's coatrol and that the company's actions alone may
not necessarily preclude the possibility of money ultimately
flowing to such officials.

     The first factor to be considered is the amount of money
that is paid to consultants for their services in securing
sales for companies they represent.   The amounts paid are
not controlled or determined by Lockheed alone, but rather
by prevailing rates in a foreign country and in an industry.
It seems that the probability of consultants offering payments
to unauthorized third parties in influential positions and
such third parties accepting the offers increases as the
amrount of money involved increases.

    A second factor to consider is the accepted business
customs and practices in the foreign countries themselves.
In the past, it was the practice in some countries to make
payments to officials of the government, military, or
customer for their influence in securing sales.  It seems
that Lockheed's actions alone would not necessarily halt
such practices by Lockheed's consultants as discussed below.

    Thirdly, while Lockheed consultants contractually agree
not to make payments to unauthorized third parties and certify
that they are not doing so, it should be recognized that
Lockheed has no means of its own to determine what a consul-
tant ultimately does with money received from the company.
This fact,   in light of   the money that can be received for
securing saies and the business practices within the foreign
countries themselves, would seemingly have an impact on a
consultant's actions relative to third parties.

    It is possible that a greater degree of assurance on
the ultimate disposition of monies paid to consultants
would result from country-to-country agreements on ethical
business practices and vigorous in-country enforcement.
Such agreements probably would require political and diplo-
matic involvement and accordingly would be beyond the purview
of Lockheed or any other corporation doing business in foreign
countries.


                                3
B-169300


    We found further that Lockheed's implementation of the
policy was generally adequate. Lockheed established a
committee to review consultant qualifications that did not
cover consultants under agreements predating the policy.
The company agreed to have the committee review the
qualifications of these consultants.

    Since Lockheed publicly announced its past foreign payment
practices, the Emergency Loan Guarantee Board has been working
to prevent future improper foreign payments.  To this end, tne
Loan Guarantee Agreement was subsequently amended, effective as
of September 8, 1976.  Under the amended agreement, the making
of any improper payment or failure to comply with the management
policy could constitute an event of default on the part of
Lockheed which could result in a termination of the Government
guarantee.  In addition, Lockheed is required to make periodic
reports and certifications to the Board regarding its compliance
with the management policy.

EFFECT ON U.S. GOVERNMENT CONTRACTS

     It appears that with the exception of approximately $1
million properly charged to foreign military sales contracts,
none of the reported $147 million of commission payments was
charged to Government contracts. The foreign military sales
regulations permit the inclusion of commission payments in the
contract price as long as they are disclosed and are reasonable
in amount.   Our examination included a selective verification
of payments to the supporting documentation and a test of the
work performed by the Defense Contract Audit Agency and Lock-
heed's external auditors in their special examinations of
Lockheed's commission payments. with respect to commission
payments made by Lockheed's wholly-owned subsidiaries in
Geneva, Switzerland, we relied on the results of work per-
formed by the company's external auditors as access to
pertinent records by foreign government auditors would violate
Swiss law.

EFFECT ON POTENTIAL FOREIGN SALES

    With the exception of uncertainties associated with
potential sales to Japan, we found no evidence that the dis-
closure of Lockheed's commission oayment practices has had
an adverse effect on current or future sales to foreign
customers.   In one geographic area, for instance, where
questionable payments were known or suspected to have been
made, the company has already consummated a significant part
of its projected sales.   However, Lockheed officials believe
that final assessment of the impact will not De known until
after the release of the Special Review Committee report.


                              4
B-16o93uU


    The political climate in Jagan resulting froln disclosure
of commission payments to government officials has affected
Lockheed's Dotential sales to that country.  Lockheed reported
that the disclosure may have adversely affected the market
potential of a P-3 Orion antisubmarine warfare aircraft
program valued at about $300 million over a 10-year period.
This was to have been a production and licensing arrangement.
The disclosure has also contributed to a delay in the execu-
tion of three firm orders for L-1011 TriStar aircraft from
Japanese airlines valued at about $78 million.
OUTSTANDING COMMITMENTS TO
FOREIGN PUBLIC OFFICIALS

    Lockheed retorted that as of June 30, 1975, it had
outstanding commitments to international consultants for sales
commissions totaling about $48 million. We were informed by
Lockheed that $4.7 million represented a contingent liability
to an official of a foreign government-owned company.
    Lockheed has refused to make payment to the company
official because of restrictions in the company's current
management policy. Lockheed's general counsel indicated that
the consultant has initiated proceedings in a foreign court
to recover unpaid commissions.



    We believe that Lockheed's questionable foreign marketing
practices are symptomatic of similar actions by many other
American corporations. We believe it is a serious problem
and have set forth for your information the major initiatives
currently underway dealing with this subject. (See Appendix.)
    We are sorry for the length of time required to respond
to your request, but as you know, it took months to make the
necessary arrangements witn Lockheed to gain access to the
needed records and further time to work out procedures for
dealing with the highly complex and sensitive matters
involved.




                              5
B-169300




    We are currently working on our annual report on the
implementation of the Emergency Loan Guarantee Act and will
issue it shortly.

                                  Sincerely yours,




                        ACTING Comptroller General
                               of the United States
Enclosure




                              6
APPENDIX                                          APPENDIX

          ACTIONS TAKEN OR UNDERWAY TO PREVENT IMPROPER
                     CORPORATE EXPENDITURES


BACKGROUND

    Over the Dast few years, many kmerican corporations have
disclosed payments made abroad to foreign government offi-
cials, political parties and others in anticipation of
business advantages.  These payments were usually made for
one or more of the following reasons: (1) as petty corruption
or "grease" payments to facilitate favorable action,      (2) to
gain competitive advantage over other competing firms, or
(3) because cf extortion by coriupt officials or their agents.

    According to the Presidential Task Force on Questionable
Corporate Payments Abroad, these activities andi their subse-
quent disclosure tend to affect our foreign relations with
certain countries, the international stature of multinational
corporations, and, in broader terms, confidence in "free"
institutions.

    In making these payments, many corporations have violated
ethical, and, in some cases, legal standards of both the
United States and the foreign countries.  Some corporations
have reportedly falsified records, lied to auditors, used
off-the-books "slush" funds and, in some cases, illegally
deducted the improper foreign payments as ordinary and
necessary business expenses for Federal income tax purposes.
In addition to Conducting improper business practices abroad,
several major corporations have reportedly made illegal
political contributions in the United States.

    The Congress, several Federal agencies and international
organizations, as well as activities in the private sector,
are currently trying to determine the effects of these
improper business activities.  The ongoing inquiries are
focusing on the effectiveness of applicable laws and
regulations and the possible need for additional corrective
action.

    Existing laws and actions taken or underway that relate
to this matter are outlined below.

Specific Laws Regarding Improper Payments
In Connection with U. S. Government Contracts

     1.    General

      There are several statutes that bear upon the question
of   improper payments made to secure Government contracts.

                                 7
APPENDIX                                              APPEYrrI


These statutes    are   in turn   implementea oy contract clauses
that must be inserted in Government contracts.         If GAO, in
its audits of negotiated contracts, finas a violation of
these laws or contract provisions, it generally refers the
matter to the procuring agency if it is a civil matter in-
volving a price reduction, or to the Department of Justice
for investigation and possible prosecution if it is a
criminal violation.

    2.     "Officials Not to denefit"

    Section 22 of Iitle 41 of the United States Code requires
that all contracts or agreements (with only certain specific
exceptions) must contain an exoress condition that no Member
of or Delegate to Congress shall have any share  r oart of
such contract or agreement, or receive any benet.t for such
contract or agreement.

    This matter is further dealt with in the Criminal
Code.  Section 431 of Title lb of the Unitea States Code
provides for criminal Penalties for Members of or Dele-
gates to Congress, or resident commissioners who have a
prohibited share of a Government contract.   This provision
does not aopply to corporations in which the person may hola
stock (18 U.S.C. 433).   The code also Provides that contracts
made in violation of this law are void ana the Government
can recover any money paid under the contract.

    This statutory requirement is implemented oy tne
"Officials Not to Benefit" clause that is inserted in all
Government contracts.  GAO generally has authority only to
audit negotiated contracts, while this statute applies to
all contracts.  If GAO stuuld discern, as a result of its
audit, that there was a seeming violation of the statute,
the matter would be referred to both the procuring agency
and the Department of Justice.

    3.     "Covenant Against Contingent Fees"

    Perhaos most pertinent to the auestion or imoroper
payments made to secure Government Dusiness is tie
so-called "Covenant Against Contingent Fees."  FJst
required by Executive Order in 1941 (No. 90ul. 6 Fed. Reg.
6737), the requirement was later incorporated in statutory
Provisions (10 U.S.C. 2306(b) and 41 U.S.C. 254(a)).   The
requirement is implementel by insertion of the "Covenant
Against Contingent Fees" :lause.

    Under the requirement, a contractor ;,uT warrant that
no Person or selling agency has been employea to secure          t;e


                                    6
APPENDIX                                      APPENDIX

contract on a commission or contingent fee basis, except
for bona fide employees or bona fide established commer-
cial or selling agencies maintained by tne contractor for
the purpose of securing business.
    Should this requirement be violated, the Government
may (1) annul the contract, or (2) deduct from the contract
price the full amount of the contingent fee or commission.
    4.     "Gratuities"

    In 1l62, Congress provided in the law, Title 10, United
States Code, section 2207, that all contracts using Defense
Oepartment appropriated funds must contain a clause providing
for stringent penalties if gratuities are qiven by a contractor
or his agents, or representatives to any Government official
in an effort to secure a contract or receive favorable treat-
ment. 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 aamages 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.
    5.     "Anti-Kickback Act"

    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.
51-54). 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 tnat 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. GAO has also
recommended that a specific clause be included in each nego-
tiated Government contract to prohibit payments of gratuities
oy subcontractors to higher tier contractors involved in
Government contracting.    (See Report to the Subcommittee on
Priorities and Ecunrmy  in  Government, Joint Economic Committee,
PSAD-76-.23, November 19,  1975.) The Office of Federal
Procurement Policy is currently considering a requirement for
such a clause in negotiated contracts.



                                 9
APPENDIX                                        APPENDIX


GAO's Legal Authority to Audit
Contractor Books and Records

    The authority of the General Accounting Office to examine
the books and records of companies doing business with the
Government is, in the main, limited to those holding nego-
tiated rather than formally advertised contracts. 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:

    "entitle-d * * * 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 negotiated contracts, and records that are
directly pertinent to the negotiated contracts. Thus, the
GAO, as a general proposition, may not conduct a far
reaching and exhaustive examination of any company's books
of account or corporate records.



    In addition to the laws discussed above, a number of
proposed actions are being considered or taken by the
Congress, U.S. Government agencies, and international
organizations as discussed below.

CONGRESSIONAL ACTION

    The Subcommittee on Multinational Corporations of the
Senate Foreign Relations Committee held hearings in mid-1975
on the circumstances that led to, and the legality of,
corporate payments abroad. The hearings focused on question-
able foreign payments by Exxon, Gulf Oil, Mobil, Northrop,
and Lockheed.

    The Senate Banking, Housing and Urban Affairs Committee
held a hearing on August 25, 1975, dealing with the question-
able foreign payments by Lockheed. The hearing centered upon
the Emergency Loan Guarantee Board's position and action on
the payments by Lockheed, the only borrower under its program.



                              10
APPENDIX                                     APPENDIX



    In October 1975, the Subcommittee on International Trade
of the Senate Finance Committee held hearings on Senate
Resolution No. 265, a resolution to protect the ability
of the United States to trade abroad.   The resolution, which
passed on November 12, 1975, states that   the Special Trade
Representative for Trade Negotiations  and  other appropriate
officials should start negotiations on  the  development of
a code of conduct in international trading.

    Both the Senate Banking, Housing and Urban Affairs
Committee and the Subcommittee on Multinational Corporations
of the Senate Foreign Relations Committee held additional
hearings in early 1976.  During the Banking Committee hearings,
it was argued that the bribes were related to the question
of Lockheed's ability to repay its Federally guaranteed loans.
Lockheed stated that its foreign payments had not involved
funds from the guaranteed loans.
    During the course of its hearings, the Subcommittee on
Multinational Corporations publicly released many Lockheed
documents showing an extensive pattern of payments in Japan
and Europe. These revelations touched off political reper-
cussions in Japan, Italy, and the Netherlands, jeopardized
some of Lockheed's foreign sales, and prompted several nations
to begin their own investigations of the questionable corporate
payments. (See p. 16.)
    The Subcommittee on Priorities and Economy in Government
of the Joint Economic Committee held hearings in March 1976 to
determine the State Department's policy on the issue of cor-
porate bribery abroad. It was announced that the United States
would propose a multilateral agreement on corrupt practices
before the United Nations Commission on Transnational
Corporations.   (See p. 18.)

    The Senate Banking Committee completed action on several
bills in June 1976 and reported out S. 3664 on July 2, 1976,
to deal with "corrupt overseas payments by U.S. business
enterprises." On June 11, 1976, the Committee received
interim recommendations from the Presidential Task Force
on Questionable Corporate Payments Abroad.  (See p. 17.)

    On September 15, 1976, the Senate passed S. 3664 which
(') prohibits direct or indirect payments made tc a foreign
official to assist a U.S. company's business dealings with
that government, (2) requires corporations registered with
the SEC to keep accurate books and records and to maintain
a system of internal accounting controls to insure that

                               11
APPENDIX                                    APPENDIX



management would be able to prevent future prohibited
payments, and (3) makes it illegal to mislead an accountant
by lying or by making statements that exclude material facts.
The Subcommittee on Consumer Protection and Finance of the
House Commerce Committee held hearings in September 1976 on
an identical bill (H. R. 15481), but did not complete action
prior to the congressional recess. A new Senate bill (S. 305)
was introduced on January 18, 1977, and contains, among other
measures, the same provisions as S. 3664. A new House bill
(H.R. 1602) was introduced on January 10, 1977, which is
identical to H.R. 15481.
    The 1976 International Security Assistance and Arms Export
Control Act (P. L. 94-329) was signed into law on June 30, 1976.
One provision of the act requires that a report be submitted to
Congress within 60 days if the President determines that offi-
cials of a foreign country receiving security assistance have
(1) obtained illegal or otherwise improper payments from a
U. S. corporation in return for a contract to purchase defense
articles or services, or (2) extorted money or other things of
value in return for allowing a U. S. citizen or corporation
to conduct bpsiness in that country. The report shall
recommend whether or not the United States should continue the
security assistance program for that country. On September 16,
1976, the State Department, in response to requirements of
P. L. 94-329, adopted new regulations which require reporting
of political contributions and fee or commission payments
on foreign military sales and certain foreign commercial sales.

    A bill on corporate bribery, submitted by Senator Harry F.
Byrd, Jr., was adopted as an amendment to the 1976 Tax Reform
Act which became law (P. L. 94-455) on October 4, 1976. The
amendment requires that all U. S. companies, which have foreign
subsidiaries, report tc the Secretary of the Treasury all direct
or indirect payments made to employees, officials or agents of
any foreign government.  If determined by the Secretary to be
an illegal bribe, foreign bribe-produced income would not be
entitled to any foreign tax benefits. Also, foreign bribe-
produced income of a domestic international sales corporation
(DISC) will be immediately taxable. The House-Senate Conference
Committee on the bill altered the Byrd amendment to provide that
bribes paid by a DISC to foreign officials will be immediately
taxable. Current law provides that such bribes are not
deductible, but permits deferral of the tax on the money.




                              12
APPENDIX                                         APPENDIX




      The Subcommittee on International Economic Policy of tne
House International Relations Committee held several hearings
in 1975 and 1976 on the policy effects of corporate oayments
abroad.    Subseauently, the full Committee reported out a bill
(!.R.   14681) to provide for the termination of investment
insurance and guarantees issued by the Overseas Private In-
vestment Corporation where the investor makes a significant
oayment to a foreign government official to influence the
actions of such government.    The oill passed the House on
August 24, 197o.

    The Senate Foreign Relations Committee approved Senate
Resolution No. 516, supporting the United States partici-
pation in the Organization of Economic Cooperation and
Development Declaration on International Investment and
Multinational Enterprises.  The resolution passed the Senate
on October 1, 1976.

U.   S. GOVERNMENT AGENCIES' ACTIONS

    In addition to the ongoing congressional hearings and
legislation, the Securities and Exchange Cormmission and
other executive branch agencies are conducting individual
investigations.

Securities and Exchange Commission

    The securities laws are designed to protect investors
from misrepresentation, deceit, and other fraudulent prac-
tices by requiring public disclosure of certain information
by the issuers of securities.     The Securities Act of 1933
requires a registration statement to be filed with the
Securities and Exchange Commission (SEC) prior to a public
offerinn of securities.     The Securities Exchange Act of 1934
reauires periodic reports and proxy materials to be filed
with the SEC by register->,l companies.

    Payments to foreign officials are not specifically required
to be disclosed in materials filed pursuant to the 1933 act or
the 1934 act.  However, the S.C requires the disclosure 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 are required to be disclosed insofar as they are
material.

    The courts have not vet addressed the issue of whether and
under what circumstances questionable pavynents made bv a U. S.
corporation to foreign officials would be material information


                                 L3
APPENDIX                                        APPENDIX


which should be publicly disclosed. Thus, the SEC, through
its enforcement and voluntary disclosure programs, has been
the sole judge of the materiality of such payments.

    The SEC, through its enforcement program, is investigating
questionable and illegal corporate payments and practices
abroad for the following reasons: (1) bribes and kickbacks
may 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
SEC's enforcement actions has been to restore the effectiveness
of the system of corporate accountability and to encourage
the boards of directors to exercise their authority to deal
with the issue.

    The SEC 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 without board knowledge and without
proper accounting.

    As the investigation progressed and the potential
magnitude of the problem became apparent, the SEC sought to
encourage voluntary corporate disclosure of the questionable
or illegal foreign payments. Accordingly, the SEC advised
companies with possible disclosure problems to (1) authorize
an in-depth investigation of the questionable activities
by a special independent review committee, (2) request the
board of directors to issue an appropriate policy statement
on transactions involving illegal or questionable activities
in the United States or abroad, (3) consider whether interim
public disclosure of the results shculd be made prior to com-
pletion of the investigation, and (4) report to the SEC on
the final results of the investigation. In addition, the SEC
is encouraging disclosure of the ongoing investigations in
a current or annual report, registration statement, or other
filing.
    The SEC made an analysis of the public disclosures of
questionable foreign and domestic activities of 89 corpora-
tions as of April 21, 1976. The results of this analysis
were included in a special report (dated May 12, 1976),




                              14
kPPENDIX                                       APPENDIX


prepared for the Senate Banking, Housing and Urban Affairs
Committee. The report concluded that:

      "The almost universal characteristic of the cases
      reviewed to date by the Commission has been 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 crroorate
      books and records to facilitate the making of
      questionable payments. Such falsification of Lecords
      has been known to corporate employees and often to
      top management, but often has been concealed from
      outside auditors and counsel and outside directors."
    On January 26, 1977, the SEC announced a series of
rulemaking proposals designed to promote the reliability and
completeness of the financial information filed pursuant to
the Federal securities laws. These proposals would require each
issuer of securities to maintain (1) books and records accurately
reflecting the transactions and dispositions of assets of the
issuer, and (2) an adequate system of internal accounting controls
designed to provide reasonable assurance that specified objectives
are satisfied.

    In order to protect the reliability of financial information
and the integrity of the independent audit of issuer financial
statements, the SEC is proposing rules which would explicitly
prohibit (1) the falsification of an issuer's accounting records,
and (2) the officers, directors, or stockholders of an issuer
from making false, misleading or incomplete statements to an
accountant engaged in an examination of the issuer.

    Although not directed solely to the problem of questionable
or illegal corporate payments end practices, the SEC believes
that these proposals would serve to create a climate which
would significantly discourage the serious abuses uncovered in
this area.

Federal Trade Ccmmission
    The Federal Trade Commission (FTC) is trying to determine
if Federal laws against unfair competition were violated by
corporations making questionable payments abroad. Some believe
that a corporation that makes payments may have an unfair com-
petitive advantage, in 'iolation of Federal law, over another
corporation that does no\ make such payments. Although no
charges have yet been made, the FTC inquir is the first use
of antitrust laws to combat the practice of making payoffs.
                                15
APPENDIX                                   APPENDIX


Internal   Revenue Service

    The Internal Revenue Code provides that bribes and
kickbacks, including payments to government officials, cannot
be deducted in computing taxable income if the payment (vher-
ever made) would be unlawful under U. S. law if made in the
United States.

    In April 1976, the Internal Revenue Service (IRS) issued
new instructions to its field offices to help uncover tax
evasion and avoidance schemes involving bribes, kickbacks
and similar illegal payments.   The new instructions will be
used in the audits of about 1200 corporations whose gross
assets exceed $250 million.   IRS examining officers are to
direct a minimum of 11 specific questions to present 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 all open
tax years.

    The IRS has set up procedures to improve their
effectiveness in detecting the misuse of corporate funds.
Included are guidelines to detect schemes created for poli-
tical contributions and bribery in the United States and
abroad and techniques for examining "slush funds."  Some of
these guidelines call for (1) examining the books and records
of American companies abroad, (2) examining international
transactions of multinational corporations. and (3) working
to strengthen cooperative efforts with nations with whom the
United States has tax treaties.  Under recent arrangements,
the IRS will also be examining all SEC reports for issues
having tax significance.

    The major thrust of the investigations is to determine if
any corporations have reduced their income taxes by deducting
payoffs as expenses.  If the IRS charges a corporation with
such an act, its officers may face charges of (1) conspiring
to violate Federal tax laws, (2) making a false return, and
(3) giving a false statement to IRS agents.  If it is deter-
mined that a company has committed tax fraud, the case will
be forwarded to the Justice Department.

Department of Justice

    Present Federal law does not prohibit, per se, bribery
or similar questionable foreign payment practices by U. S.
corporations in furtherance of commercial gain.  However,
criminal or civil liability may be incurred from collateral
false reporting practices or by making false statements to
a Federal agency.


                              16
kPPNDIX                                        APPENDIX




    Amid reports and congressional hearings outlining
extensive questionable payments by Lockheed to foreign
officials, some of the affected governments have requested
information on the Lockheed payments.  Since December 1975,
certain Lockheed documents on their foreign payment activities
held by the U. S. Government have been under a court order
limiting third-party access.

    On March 5, 1976, Congress was told that the Department of
Justice would develop cooperative arrangements with interested
foreign governments to exchange information on the Lockheed
payments.   The information exchanged would be kept confidential
unless used  in a criminal prosecution.  Subsequently, Japan,
Italy, and  several other countries have obtained copies of
Lockheed documents through these "cooperative arrangements."
The Subcommittee on Multinational Corporations of the Senate
Foreign Relations Committee has released related Lockheed
documents to the Justice Department for their transmittal
to interested foreign governments.

    The Justice Department's .riminal Division has formed a
task force to investigate allegations of corporate foreign
payments.   The task force will be studying all available in-
formation  to  determine if violations of existing criminal
laws have occurred.     Particular emphasis will be placed on
possible  violations   of the mail and wire fraud statutes, the
securities  laws,  the  Bank Secrecy Act, as well as statutes
prohibiting   the submission  of false statements to Government
agencies.

Task Force on Questionable Corporate
Payments Abroad

    On March 31, 1976, President Ford established a 10-member
cabinet-level task force, headed by Secretary of Commerce
Elliot Richardson, to investigate overseas bribery by U.S.
corporations.  While the task force does not have any punitive
or enforcement powers, it will seek to develop a comprehensive
Government policy on the problem. The task force was instructed
to come up with recommendations by the end of 1976.

    President Ford sent a message to Congress on August 3,
1976, outlining his proposed "Foreign Payments Disclosure
Act" (S. 3741, H.R. 15149).  The bill is not limited to firms
subject to SEC regulations, but apolies to all U. S.
participants in foreign commerce.

    The proposed legislation would require reporting to th-
Secretary of Commerce on avyments made "to any other individual

                               17
APPENDIX                                         APPENDIX

or entity in connection with an official action, or sale to
or contract with a foreign government fOL the con.drcial
benefit" of the individual, company, or foreign affiliate.
By requiring reporting of all significant payments, whether
proper or improper:, the bill avoids the problems of definition
and proof of bribery or extortion abroad.

    Because of its late submission, the Administration's bill
did not receive serious consideration before the congressional
recess, but is exPec'tz to receive a full hearing in the next
Congress.
    In mid-January 1977, S-    .ory Richardson sent a memorandum
to President Ford summarize. _, ie task force's activities and
accomplishments.
Department of Defense
    The Defense Contract Audit Agency (DCAA) has been heavily
involved in audits of improper transactions and sales agents
fees through its responsibilities for insuring that improper
and inappropriate costs are not reimbursed through Government
contracts. Although DCAA has no investigative responsibilities,
any irregular contractor activity found during an audit is
reported to the appropriate military department or agency.

NON-GOVERNMENTAL ACTIONS
International Codes of Conduct

     In early 1975, the 24-nation Organization for Economic
Cooperation and Development (OECD) established a committee to
draft a proposed code of conduct for multinational corporations.
The code entitled "Declaration of OECD Member Governments on
International Investment and Multinational Enterprises" was
adopted by the OECD foreign ministers on June 21, 1976. The
code   (1) opposes the payment, solicitation or expectation of
bribes by multinational corporations to foreign officials, (2)
calls on business firms not to make political contributions,
unless legally permissible, and (3) directs enterprises to
abstain from any improper involvement in local activities.
However, the ( de is not internationally enforceable and must
depend on the cooperation of the multinational corporations.

    The United Nations Commission on Transnational Corporations,
a group of 48 nations reporting to the United Nations Economic
and Social Council, has begun an investigation of the bribery
issue.  This inquiry was necessary since the OECD code, by and
for the major industrialized nations, would not meet the
expectations of non-industrialized third world nations.


                                 18
APPENDIX                                      APPENDIX


    On December 15, 1975, the United Nations General Assembly
adopted a resolution to develop measures against corrupt
practices c transnational or other corporations, their inter-
mediaries ana others iLvolved. Among other things, the resolu-
tion (1) condemnb all corrupt practices, including bribery,
in violation of the laws and regulations of the host countries,
(2) calls for intergovernmental cooperation to prevent corrupt
oractices and to prosecute violators, and (3) requests the
Economic and Social Council to direct the Commission on
Transnational Corporations to include in its program of work
the auestion of corrupt practices of transnational corporations
and, subsequently, recommend measures to prevent such corrupt
practices.

Accounting Profession
    The Auditing Standards Executive Committee of the American
Institute of Certified Public Accountants issued two new
"Statements on Auditing Standards" (SAS) in early 1377.

    SAS No. 16, "The Independent Auditor's Responsibility for
the Detection of Errors or Irregularities," discusses the
auditor's responsibility for detecting errors or irregularities
in an examination of financial statements in accordance with
generally accepted auditing standards.  It specifies that an
independent auditor should plan his examination to include
those auditing procedures that will provide a reasonable basis
for believing that the financial statements, as a whole, are
not materially misstated as a result of error or irregularity.

    SAS No. 17, "Illegal Acts by Clients," sets forth
guidelines for the appropriate conduct for an auditor where
acts by a client, that appear to be illegal, come to his
attention during an examination of financial statements. For
example, if the illegal act is material to a company's finan-
cial condition and isn't properly accounted for or disclosed,
the auditor should issue a qualified or adverse opinion.




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