Lifting the Lid on Some Mysterious Money

In West Africa it is known as dash, in Latin America as la mordida (the bite), in Italy la bustarella (the little envelope). By whatever name, bribery and associated tactics--outright payoffs to clerks and customs inspectors, "contributions" to political parties, the hiring of government officials as "consultants" --have long been accepted in many countries as the normal, natural way to get any business done. U.S. companies operating overseas must somehow adjust to that atmosphere. But the biggest scandal in American business right now is that too many seem to have become a part of it.

Remarkable Record. In recent months headlines have been filled with charges of payoffs overseas--and some damaging admissions. United Brands has admitted paying a $1.25 million bribe in Honduras to get a banana export tax reduced, and Gulf Oil conceded making illegal contributions of $4 million to South Korea's ruling political party. Last week the Senate Subcommittee on Multinational Corporations took up the most eye-opening case of all, that of Northrop Corp., the Los Angeles-based aerospace giant, which has a remarkable record of selling warplanes to foreign governments. Its tiny, efficient F-5 Freedom Fighter is flying in 17 countries; Chairman and President Thomas V. Jones foresees a global market for 2,500 Cobra II fighters, priced at $4 million to $5 million each.

The subcommittee amassed a wealth of information about payments that Northrop made overseas. Much of the information came from a 530-page report prepared by Northrop's auditors, Ernst & Ernst, which started to investigate to comply with a consent decree that settled a Securities and Exchange Commission suit against Northrop. In their testimony, Jones and Executive Committee Chief Richard Millar sought to justify most of the payments as legitimate. In many cases they failed to convince skeptical Senators, who expect similar revelations from other companies. One danger is that in the public view, innocent multinationals will be clobbered along with the not so innocent. Said Idaho Democrat Frank Church, chairman of the subcommittee, to the Northrop executives: "Your case is to be regarded as representative."

According to the Ernst & Ernst report, Northrop since 1971 may have spent as much as $30 million overseas for which it did not properly account. Ernst & Ernst described 17 arrangements as questionable enough to warrant study. Some seem legitimate, but others are open to grave objections. They range from the petty--$4,400 to an Iranian tax assessor to settle "a minor tax matter"--to the serious. Some examples:

> Northrop passed to Adnan Khashoggi, a wealthy Saudi Arabian entrepreneur, $450,000 designated for two Saudi Arabian generals, Hashim Hashim and Asad Zuhair, who served at different times as chief of the nation's air force. Khashoggi denies the generals were bribed to buy Northrop planes. Nonetheless, Northrop did not defend the payment. Millar apologized last week to the Saudi government "for any embarrassment caused by this matter."

>The company has had French General Paul Stehlin on its payroll as a consultant, at yearly fees ranging from $5,000 to $7,500, since 1964. Stehlin was once chief of staff of the French air force, and in 1973 became a vice president of the French National Assembly. Last fall, while quietly getting money from Northrop, he touted American fighter planes, including Northrop's F17, as superior to French aircraft.

> Northrop paid $705,000 to Iranian Prince Charam Pahlavinia, a member of the imperial family, for services such as helping the company find a good Iranian architect. At the time, Northrop was part of a consortium that received a $200 million contract to build a telecommunications system in Iran. Northrop maintains that the payment was a legitimate business expense.

> Northrop, after some haggling, paid $500,000 to a company believed to be controlled by Saudi Prince Khalid bin Abdullah, a registered commercial agent for several companies, for advancing Northrop sales.

The auditors' report also revealed that Northrop runs a far-flung network of semiautonomous intelligence and sales agents who collect information, pull strings and distribute money in countries as diverse as Brazil and West Germany. Some of the agents operate entirely legitimately. But John R. Hunt, a former Northrop executive, was quoted in the Senate subcommittee hearings as telling the auditors: "The role of the agent is primarily that of influence peddler; that is, he knows whom to talk to and whose pockets to line in a particular country to get the job done."

Mysterious Functions. Certainly, the roles of some agents are shadowy. Khashoggi is an example. Another is Frank DeFrancis, a Washington lawyer. He set up the Zurich-based Economic & Development Corp. in 1971 to promote sales of the F-5 round the world; it operated on an understanding that Northrop would ask no questions about what it does to obtain contracts. Northrop is committed to pay EDC a sum estimated as $3.1 million, representing commissions on aircraft already sold.

Whatever comes of the Northrop revelations, the story is not likely to stop there. Ever since the Watergate prosecutors began investigating illegal contributions by more than a dozen U.S. companies (including Northrop) to Richard Nixon's 1972 re-election campaign and found clues that some of the same companies had also made suspiciously large, undisclosed payments overseas, a probe of multinationals' operations has been widening. The SEC has already accused Phillips Petroleum, Ashland Oil and General Refractories of making overseas payments not properly accounted for on their books. Senator Church indicated that his subcommittee will call chiefs of other companies besides Northrop to testify. One likely target: Lockheed Aircraft. Last week Lockheed officials admitted making a $22,000 political contribution in an unnamed foreign country where, they say, such payments are legal.

Overseas, the Northrop revelations were greeted largely by an everybody-does-it yawn. Said one French official: "That American false puritanism makes Americans really think everything is pure in business. Clearly, oil, arms, electronics and telecommunications deals are usually fertilized a bit." The use of agents and consultants is not peculiar to Northrop. Khashoggi has represented Lockheed, Raytheon and Chrysler, and General Stehlin is still listed by Hughes Aircraft as a consultant.

Many American executives in the U.S. and overseas expressed off-the-record indignation, not at Northrop, but at the Church subcommittee for airing the firm's dealings and embarrassing U.S. companies abroad. But to hear some American businessmen tell it, the United Brands, Gulf and Northrop revelations have barely scratched the surface. In several countries, bribes must be routinely passed out to minor functionaries just to get licenses or even make sure that an American executive's household furniture clears customs. Payoffs to government officials to influence their buying decisions are also common in such countries as Argentina, Indonesia and almost any place in the Middle East.

In some countries--even those with strict laws against bribery--questionable practices have become institutionalized. Saudi Arabian law has stern penalties for bribe takers, yet some American executives say that any company seeking a Saudi contract must count on adding 10% for graft to the stated price. One U.S. executive tells of paying $3 million in bribes to win a $7 million contract in Iran. In Indonesia, the President's wife, Ibu Tien Suharto, is widely known as "Ibu Ten Percent" for the rake-offs she has reportedly demanded from businesses operating there. The South Korean government lately has openly asked foreign corporations for contributions to national defense in lieu of raising taxes; Herbert Telshaw Jr., senior vice president of General Motors Korea, last week openly delivered a check for $104,000.

Inquisitiveness Needed. What can be done to stop these practices? Congress could pass a law forbidding U.S. corporations to bribe foreign officials. (Surprisingly, that is not a violation of U.S. statutes now, although concealing the payments on a corporation's books violates SEC reporting requirements.) A new law seems unlikely to do much good; those corporations paying bribes do so in the hope that their payments will never be discovered. The Internal Revenue Service, however, could become more inquisitive about the fees paid by U.S. companies to foreign agents. If the IRS accepts them as legitimate business expenses, then any bribes passed out by the agents are in effect half paid by the Federal Government, since they count as deductions from the earnings on which American corporations must pay a 48% tax.

The most effective solution may be the simplest: for U.S. multinationals simply to say no to foreign demands for bribes. Unquestionably, they would lose some contracts to French, West German, Japanese and other foreign competitors and perhaps to some U.S.-based rivals too. Yet despite intense pressure, such big U.S. companies as W.R. Grace, Phelps Dodge, International Paper and IBM have established reputations overseas for refusing to go along with bribery and generally find they can sell on the appeal of their products and services.

Ultimately, foreign bribery is a self-defeating tactic. Once word gets out that a U.S. company is a soft touch for payoffs, it becomes a target for all kinds of ripoffs. Moreover, when a company pays off a corrupt government, it makes itself a target for nationalization if an opposition party comes to power. In less developed nations, further, bribe-giving corporations contribute to an atmosphere of corruption that adds to the appeal of puritanical leftist movements.

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