Big Profits in Big Bribery

By Christopher Byrons

aIn many foreign deals, under-the-table payoffs are aboveboard

When the forces of virtue rise one foot, the forces of vice rise ten feet.

--Chinese proverb

At a table in Mexico City's Camino Real Hotel, a foreign businessman and a middle-ranking government official are talking quietly in a corner. Midway through the conversation, the foreigner casually places an envelope on a chair next to him. When the foreigner rises to leave, the envelope remains behind. The government official slips it into his coat pocket a few minutes later and departs.

That is the way all too much of the world's most important business is done these days. From the shrewdly sophisticated kickback schemes of the Middle East and Latin America, to the virtual Mafia-style and shakedowns of sub-Saharan Africa and Indonesia, the universal game of bribery in the pursuit of profit goes on and on.

Is this a game that U.S. businessmen should be allowed, and even encouraged, to play? Or should they instead be compelled to wash their hands of it entirely, leaving the spoils to competitors in other lands? Those are some of the difficult questions that were addressed last week when the General Accounting Office released a detailed study of the impact on American business of the 1977 Foreign Corrupt Practices Act.

The act sprang from the nation's Watergate-era revulsion at the global bribery excesses of such well-known American companies as Lockheed, Northrop and Gulf Oil. During the mid-1970s those companies, and others, made headlines almost weekly as sensational disclosures surfaced about their roles in paying megabuck bribes to high foreign officials to clinch deals.

In an effort to stop such corruption, revelations of which rocked the government of Takeo Miki in Japan and disgraced Prince Bernhard in The Netherlands, the Foreign Corrupt Practices Act made it a criminal offense to pay bribes of any sort to foreign officials to secure or retain business abroad. Punishment could be a prison sentence of up to five years and fines of as much as $10,000 for individuals and $1 million for corporations. The legislation also set up accounting procedures designed to make it virtually impossible for companies to disguise such "sensitive payments" or to hide them elsewhere in the corporate books.

There is little doubt that the passage of the 1977 act has made U.S. businessmen think twice about bribing abroad. At Lockheed Corp., whose very name was synonymous with payoffs and freebies for foreign officials in the 1970s, the company now no longer picks up even hotel bills for customers visiting its California headquarters for contract talks.

By contrast, "caution" to some U.S. companies simply means figuring out clever new bribery schemes that are harder to spot. One way is to join up with a foreign company that is not prohibited from making the necessary payments, and let it do the dirty work instead.

The major problem of any law on bribery is that in much of the less-developed world what some Westerners might regard as commercial corruption of government and business has always been looked upon as an inescapable fact of everyday life. The stylized arrangements for giving and taking payments are often perfectly normal and legal under local law and custom.

Nevertheless, foreign officials usually design schemes to hide the transactions as much as possible, since few, if any, are willing publicly to admit taking the payoff. Likewise, foreign businessmen are equally queasy about being discovered offering the gift in the first place.

One reason for the generalized embarrassment is the sheer magnitude of the funds involved. In recent years, the worldwide explosion of oil prices has sent hundreds of billions of dollars cascading into some of the poorest nations on earth. These countries have set out on instant-industrialization programs and often spend money as quickly as it is earned.

The typical major case of bribery involves a large project in an industry that is highly competitive, but with little significant difference among the products. The size of the project allows both parties to hide the payoff in the price without undue notice. The number of competitors means that the seller and the buyer can more easily bargain for deals. These conditions, for example, are found in contracts for the sale of telecommunications equipment or aircraft and for most construction programs. Says Jules Kroll, a New York-based consultant on white-collar crime: "If there's only one or two companies bidding on a deal, it might go down very straight. But if you've eight guys who can do it, then people are going to get creative."

The Persian Gulf has now become a romper room of business corruption. In Saudi Arabia, a key government minister is widely reported to have collected upwards of $500 million in "commission fees" in connection with foreign business ventures in the past year alone. To do business in Saudi Arabia, it is essential to be connected, via an agent or middleman, to a member of the royal family, which controls not just the government but business as well. Says a veteran U.S. businessman bluntly: "Everyone needs a prince." Finding one is not hard; there are 5,000 princes in the royal family this underpopulated nation of 6 million.

Bribery in that part of the world, though, can still be a complicated affair. According to a Justice Department complaint, in 1976 two U.S. businessmen, Roy Carver and R. Eugene Holley, co-owners of a tax haven oil company in the Caribbean, allegedly paid the Oil Minister of Qatar a bribe of $1.5 million for exploration rights in that country.

But when the lease expired, a new minister had taken over and he refused to renew it. The indignant oilmen thereupon protested to the local American ambassador, who informed the Justice Department. The department in turn obtained a federal court injunction in 1979 preventing the men from violating the Corrupt Practices Act, which was by then U.S. law.

Mindful of the spreading Islamic disgust at the sort of corruption that helped topple the Shah of Iran two years ago, the Saudi regime has recently begun a well-publicized clean-up drive. The campaign, though, is largely cosmetic; payoffs continue unchecked. One method is fifty-fifty partnership arrangements between foreign companies and Saudi locals. Complains a Dutch industrialist: "It's all very well arranged, with profit-sharing arrangements set up for this purpose. But it is still bribery."

In the developing nations of Africa, foreign visitors have been bestowing gifts on local potentates since time began. Nothing much has changed except the value of the trinkets, which these days are more likely to be yachts and sports cars than beads and mirrors. In many subSaharan nations, a favorite scheme is to create a lucrative job in a project for an official's relatives or friends. For years the British-based Lonrho Ltd. trading house kept its Kenyan operations running smoothly with President Jomo Kenyatta's son-in-law as its head. When Kenyatta died in 1978, that connection no longer counted for much. Complains a foreign businessman in Nairobi: "Now there is a whole new set of people to deal with--and they all are asking for far more money."

In Latin America corruption is pandemic from the Rio Grande to Tierra del Fuego. Bribing in Mexico is handled with the stylized flair of a Latin seduction, beginning with dinner at an expensive restaurant like La Hacienda de los Morales, and climaxing with a weekend jet-jaunt to Punta Cancun or Acapulco. The target of such lavish hospitality is most often the head of purchasing in one of the Mexican government's state ministries, who oversees procurement and importing.

In Brazil bribery is often not just figuratively but literally a matter of seduction. Says a top West German businessman there: "Lavish entertainments with women--that is very effective." In the booming industrial megalopolis of Sao Paulo, a favorite spot to nurse along a deal is La Licorne, a discreetly mirrored nightclub with a striptease show, where call girls cost $120 a night, and foreign businessmen pick up the tab.

By contrast, love objects in Argentina run more toward postimpressionist paintings from pricey Buenos Aires galleries like Wildenstein, or jewelry selected by government officials for their wives from a famed jewelry shop like Ricciardi, a favorite haunt of the late Evita Peron. Those bills too, of course, are paid by the deal-hungry businessmen.

For really big South American deals, one Italian-based construction company is building an entire luxury real estate development on Uruguay's Punta del Este coastline. Yet none of the development is so far for sale to the public; instead, plots are being doled out like candy drops to favored Latin-American officials.

Leading European electric companies reportedly paid as much as $140 million in payoffs and kickbacks to win a share of the business in the construction of the $10 billion Itaipu Dam that is being built jointly by Brazil and Paraguay. Reports a U.S. business executive who watched the bidding unfold: "The European managers had unlimited authority. They paid cash into half a dozen Swiss bank accounts, and the money trickled down."

While the goal of bribery is the same in Asia, the style is often very different. In Malaysia, aspiring foreign businessmen reward government officials by making use of the Malaysian mania for gambling. A common approach is to invite a minister or government official for an afternoon of golf, bet heavily and then spend the next three hours swatting the ball into sand traps. An only slightly more straightforward method is to get into an after-dinner poker game with a key civil servant and lose heavily.

In Indonesia, corruption is so family-oriented that in the early 1970s, President Suharto's wife Tien was known as "Mrs. Ten Percent." These days scandal surrounds one Haji Achmad Thahir, a drab Indonesian government employee who never made more than $9,000 per year in salary in his life. But relatives fighting over his estate discovered him to have a bank account of nearly $35 million. The Indonesian state oil company, Pertamina, has charged in court that two German companies, Siemens and Klockner Industrie, paid Thahir the money in connection with the construction of a $500 million steel mill near Djakarta.

While the U.S. took a firm moral stand against corruption with the 1977 legislation, the governments in most leading West European countries either openly condone bribery or look the other way. A confidential West German memorandum by the Federal Office for Foreign Trade Information advises companies to be prepared in difficult deals to fork over as much as 20% of the contract price to corrupt foreign officials. All such expenditures, which can run into the millions of dollars on large engineering and construction projects, are completely tax deductible as a necessary cost of business. Italy passed a law in 1980 stating that payments to foreign officials to get business are perfectly legal for Italian companies. France has no law at all on foreign bribery. Explains the head of a medium-size French company doing extensive business in the Middle East: "The French authorities know quite well that you cannot deal in those countries without payoffs."

The attitude is similar for leading Asian exporting countries. In Japan, paying off foreign officials to secure business is regarded as normal. Likewise, in Korea, the government takes the attitude that businessmen should not be hamstrung in their efforts to develop export markets and get overseas contracts.

Corruption exists, and probably always will, in this obviously imperfect world. But should the U.S. participate in it? Bribery on the global scale that is now occurring is costly, saps political vitality and can eventually undermine a people's trust in government. The regimes of the Shah in Iran or General Anastasio Somoza in Nicaragua are testimonies to the problem.

Last week's GAO study, however, makes plain that the current American law is riddled with complicating ambiguities and shortcomings. Many of the problems arise from confusion over what constitutes a bribe. So-called grease payments, such as fees to get low-level civil servants to perform their bureaucratic duties of stamping documents and processing licenses, are specifically permitted on the grounds that petty corruption is unavoidable almost anywhere. But there is a large gray area between that sort of bureaucratic paper shuffling and the discretionary authority of local officials to withhold approval for a project or license, and thereby extort not $50 or $100, but perhaps $10,000 or even $500,000 from a victimized company.

American businessmen also complain that the complex law keeps them out of many profitable deals. Says Robert Malott, chairman of Chicago's FMC Corp., a leading manufacturer of chemicals and machinery (1980 sales: $3.5 billion): "The law has American export companies thoroughly confused. We simply cannot get clarification on what is legal and what is not."

Dubbed by one Wall Street wag the "Accountants' Full Employment Act of 1977," the legislation has forced companies not only to beef up their internal auditing staffs but to check and double-check the propriety of even the most inconsequential payments. Example: in Xerox's Cairo office, local staffers had to get permission from a senior corporate officer in the U.S. before they could pay $8 a month in tips to Egyptian telex and telephone repairmen.

More confusion surrounds a company's liability under the act for the actions of its foreign agents. If the local representative uses even a part of his commission, as often happens, to bribe officials to keep a deal on track, the act asserts that the U.S. company is responsible if the executives had reason to know what the agent was doing. The GAO study recommends that Congress rewrite the law to give clearer guidance to businessmen as to what they can and cannot do to curry favor with foreign customers. It suggests that Congress repeal the criminal penalties connected with the accounting provisions of the law and that the Department of Justice and the Securities and Exchange Commission clear up the ambiguities in the act's antibribery provisions.

Senate Republican John Chafee of Rhode Island is expected to re-introduce a bill this week that would make some such changes in the Foreign Corrupt Practices Act. Chafee lauds the law as an "important step toward the objective of prohibiting bribery of foreign government officials." But he also says that it is "difficult to decipher, hard to implement, and its ambiguities have bred confusion."

The Reagan Administration has already signaled its dissatisfaction with the act, and particularly its tendency through loose wording to cast a chill over the willingness of U.S. businessmen to push into foreign markets and thereby help boost U.S. exports.

Instead of taking the politically foolish position of calling for repeal of the act, and thus appearing to be in favor of worldwide bribery by American business, the Administration seems to be indicating, whether intentionally or otherwise, that it is prepared to let enforcement of the act languish. Indeed, the President's transition team on the workings of the Securities and Exchange Commission, which shares enforcement jurisdiction over the act with the Justice Department, has recommended decriminalization of bribery.

Such a stance by the Administration toward foreign bribery would itself cause problems. By failing to enforce the act as written, the Administration not only would leave the legislation's ambiguities unresolved, but would show a disrespect for the law, which is itself corrupting. Since the U.S. has adopted a moral position with regard to foreign bribery, neither the Administration nor Congress can now afford to let the subject wither away without compromising its principles in the process.

--By Christopher Byron. Reported by Jonathan Beaty and Gisela Bolte/Washington, with other bureaus

With reporting by Jonathan Beaty, Gisela Bolte/Washington

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