FEBRUARY 1980 - VOLUME 1 - NUMBER 1
ISC: Corporate Bribe Factory
The SEC case against International Systems & Controls Corporation undercuts the arguments of U.S. businessmen demanding an end to legal curbs on overseas bribery. Businessmen have claimed they are forced to bribe to remain competitive with foreign firms, but the ISC record of illicit payments suggests other reasons for overseas bribery.
by George Riley
In the midst of a broadside attack by U.S. multinationals on the 1977 Foreign Corrupt Practices Act, the Securities and, Exchange Commission (SEC) has won a settlement of its massive bribery suit against International Systems & Controls Corporation (ISC). According to the complaint, filed in July 1979, ISC engaged in over $23 million of "questionable and illicit payments" between 1970 and 1977. The case against ISC, settled on December 17 by consent decree, undercuts the protests of U.S. businessmen now seeking to weaken the act, who claim that bribery is an unavoidable part of doing business overseas.
According to the SEC charges, ISC made illicit payments to government officials and members of ruling families in Iran, Saudi Arabia, Nicaragua, Ivory Coast, Algeria, Chile and Iraq. The Houston-based company made the payments in connection with contracts for engineering and construction projects. Although the payments were made before the passage of the 1977 act, the commission claimed that ISC violated U.S. securities laws by making false and misleading financial statements concerning the payments. The settlement follows a three-year commission investigation and repeated SEC administrative attempts to force ISC to disclose the questionable transactions.
The unique look inside this global corporation, contained in a 56-page complaint and 763 pages of exhibits, provides a sharp contrast with the arguments of business opponents of the 1977 act. Multinational executives have maintained they must bribe to remain competitive with foreign companies and that host country governments condone and even encourage illicit payments. Confidential company documents obtained by the SEC, however, show how agents of ISC used bribes to win contracts after offering higher bids than those of competitors. In some cases, ISC apparently made bribes in an attempt to win payments to recoup the financial losses due to former bribes. In two countries, illicit payments were carried out despite host government investigations and warnings, and despite assurances by ISC officials that the company had paid no bribes.
An inter-agency task force impanelled by President Carter recently adopted this leading business position on foreign bribery. It recommended a watering down of the act, arguing that "many people in many countries accept as given that extra payments often grease commercial transactions." The task force estimated-with no evidence to support the claim-that the Foreign Corrupt Practices Act has caused an annual loss of $1 billion in U.S. exports.
Behind the recent efforts to undermine the anti-bribery statute are a number of corporations who publicly advocate changes in the law. Such open corporate pressure is new to the issue; fearing adverse publicity, no business representative testified against the bill during the original hearings. Today, _ however, multinational executives hardly cower at being portrayed as defenders of overseas crime. They have been emboldened by government officials who lend a receptive ear to their pleadings, as well as by a growing safety in numbers: more than 570 corporations have now admitted questionable payments since the start of the SEC's voluntary disclosure program in 1974. Now it is possible for a Lockheed executive to unabashedly declaim on the problems of moral imperialism posed by the anti-bribery measure: "The U.S. brand 16f [anti-bribery] morality hasn't been successfully sold to a lot of areas yet," he commented this summer on the act. Perhaps Lockheed was more successful in selling another brand of morality to Japanese Prime Minister Kakuei Tanaka, whose 1976 acceptance of a$1.6 million Lockheed bribe led to his arrest and the downfall of his government.
Much of ISC's "grease" was applied to projects in Iran, a country that in recent years accounted for 20 percent of ISC's sales. On two forest projects, the SEC estimates that ISC paid $11.3 million of $22.3 million promised to "agents and consultants." More than $250,060 went to the head of a government corporation for a project that ISC's subsidiary, Lang Engineering, eventually dropped. The official, originally promised $650,000 if Lang received the contract, threatened to make trouble for the company if he was not reimbursed for the "loss of oppor tunity" to take bribes from some other company. After some hesitation, Herman M. Frietsch, later senior vice president of ISC, settled the matter in a curt note to his representative in Iran: "Let's stop soul searching and just tell him we are going to pay the money."
In January of 1972, another ISC subsidiary, Stadler Hurter, sought to rescue an Iranian contract that company officials feared was almost lost to a low-bidding Japanese firm. The president of Stadler Hurter, A.M. Hurter, flew to Iran to discuss the proposed forest-industry project with a member of the royal family, Prince Abdul Reza. About a month after the meeting, Stadler Hurter agreed to pay an associate of the Prince 3 percent of the total contract price. Another 4 percent was to go to a Liechtenstein corporation; some of this money was later designated for officials in the ministry of economics. On April 21, 1973, Stadler Hurter was awarded two contracts for the project. The SEC estimates that ISC paid $5.8 million in
commissions for the project, $2.4 million to the Prince's associate, $3.2 million to the Liechtenstein corporation, and an additional $100,000 to Dr. Max Mossadeghi, the head of a company owned by the Ministry of Agriculture and Natural Resources.
But Stadler Hurter began almost immediately to experience major problems with the Iranian project. First, the Prince began to complain about delays in his payments. Commenting on requests for advance payments, an ISC executive asserted in an internal company memorandum that the Prince's payoffs must come out of the "cash flow" of the job. "Anything else is a stick-up," he noted. "Even in Iran. We can go to the local cops there too." Additionally, the company sought to secretly commission agents to obtain $9 million in "escalation costs" from the Iranian government. According to a memorandum by ISC executive Harlan M. Stein, Stadler Hurter sought to recoup $3 million, the amount by which the company had to reduce its original bid to compete with the Japanese offer. In addition, the company saw the escalation costs payment as "a potential means of increasing the gross profits on the project." The memo adds that at least $2.5 million of the payment was needed to cover earlier payoffs and the new bribes,, necessary to win the $9 million award.
Algeria provided another source of ISC contracts between 1971 and 1975. 'ISC's subsidiaries were awarded $320 million in engineering contracts by the Algerian government. Despite warnings from the government that ISC should not employ agents or influence peddlers-and despite contract provisions expressly forbidding the use of intermediaries in any way-the corporation commissioned Munib R. Masri as its "sales representative." According to company memoranda, by August 28, 1972 Masri was paid $820,000 for two of ISC's contracts. -
The Algerian government, acting on rumors that Masri was attempting to influence contract negotiations, sought assurances that ISC had not engaged an agent. Investigators finally requested an affidavit declaring that ISC had not employed an intermediary. Although the local manager refused to sign such a declaration, ISC's vice president and general counsel, Raymond G. Hofker, completed the document. At this time, ISC had commissioned not only Masri but had paid what the company called "secret commissions" to a Belgian national, Hubert Renault, for contracts awarded to ISC's subsidiaries in Algeria.
Another example of ISC's mode of operation in the Third World was its attempts to win a $375 million project in Chile. ISC executive Alfred Lerner traveled to Chile in December 1975. Shortly after his visit, Lerner filed a detailed report describing his contacts with government officials and recommending a course of action.
The Lerner memo begins with a brief history of Chile in which he describes General Pinochet's military regime as a "stern father with a benevolent attitude toward the majority of the population." He then assesses ISC's opportunities to influence the junta. Early efforts to influence certain young army officers, failed; according to Lerner these officers "act like men with a mission, and are not susceptible to gift givers." ISC's "gift giving," Lerner concluded, would have to begin at higher levels of the military-government bureaucracy.
Lerner found a more grateful recipient in David Fuenzalida, the chief economic advisor to a junta member, Air Force General Gustavo Leigh. Lerner urged Fuenzalida to form a company, CHILC0, to represent ISC's interests before the Chilean government. Because Fuenzalida was a member of the government, another Chilean would serve as President. Lerner pledged that "everyone will be justly compensated if the project is approved and signed."
Although the exhibits submitted by the SEC give a thorough look into some of ISC's operations, the full story remains hidden. For example, the SEC alleged that ISC paid two agents $288,000 in connection with a contract for a grain storage facility in Nicaragua. Apparently this money went to two companies controlled by the now deposed president. Anastasio Somoza. But the SEC filed no public exhibits to substantiate these claims.
The SEC's failure to reveal the extent of ISC's activities in Nicaragua may have resulted from quiet pressure by the executive branch. Several days before the SEC filed the charges, news reports suggested that the State Department had urged the agency not to reveal material dangerous or embarrassing to U.S. allies. When the charges became public, the U.S. government was involved in an eleventh-hour struggle to save the embattled Somoza dictatorship.
In the consent decree, ISC agreed to appoint a special agent to investigate the o undercover payments and other questionable transactions. With the prior approval of the SEC, the company will name three new directors not presently affiliated with ISC. Two of the defendants in the suit, Director and former chairman .1. Thomas Kenneally and Herman Frietsch, are prohibited under the terms of the court decree, from making certain agreements and transactions, without the agreement of the independent directors.
The final arrangement with ISC represents a significant step back from the remedies originally requested by the SEC. The SEC had sought the appointment of a court receiver to take custody of ISC's assets and operations, as well as to investigate the bribes. The agency had also sought the removal of Kenneally and Frietsch, not merely a restriction on their activities.