13. In the Name of Uncle Sam

The domestic practice of legal bribery in the US arms business is supplemented by an external dimension of support for the industry in relation to foreign weapons sales. It takes various forms, including subsidies, American aid specifically for the purchase of US weapons, generous loans to purchasers and overt and covert pressure on foreign governments and companies to buy from American arms manufacturers.

Export sales are important not only for geopolitical reasons but also to bring down the production costs of domestic weapons systems and to increase profitability. Overseas sales are more lucrative for weapons manufacturers because the R&D costs have already been paid for with taxpayer dollars and they can charge whatever the market will pay for follow-on maintenance contracts and upgrades to the weapons sold. Some Pentagon critics contend that the armed forces and prime contractors also lobby for arms sales abroad because they artificially generate demand for new weapons at home that are better than those sold.1

In the case of the US, loans are made not only to the contractors, but also to their customers. For instance, during the 1970s, US government loans to Chile bankrolled a tripling in military spending under the authoritarian General Pinochet, whom the Americans helped bring to power in a brutal coup against the elected government of the leftist Salvador Allende. The General maintained a web of 125 secret, personal foreign bank accounts, most of which were unsurprisingly held at Riggs Bank, where he secreted $27m.2 It is no wonder the Merex network benefited from his regime.

In Argentina under its military junta in the 1970s, $10bn of the money borrowed by the generals went to military purchases, most from the United States. Transcripts from a meeting between the Secretary of State, Henry Kissinger, and the junta’s Foreign Minister make clear that the administration knew loans would be used for weapons bought from the US, in the midst of a campaign of terror on its own people.3

In the 1970s, Japan was again the site of flagrant violations of ethical business and government practice. The lengths Lockheed and Rolls-Royce went to in order to secure deals for their TriStar plane illuminated the darkest aspects of interaction between business and government and the central role of bribery in it. It led to a political upheaval unparalleled in Japan’s post-war history.

Japan was a country in which the relationship between money and politics could not be ignored, for money was politics. Corruption in Japan had always been closely associated with deals with arms companies, as Basil Zaharoff discovered to his advantage. But the nature of the deals and the power of the middlemen were concealed behind what the Japanese called the kuromaku, or ‘black curtain’.4

The key agent used by Lockheed in Japan was one Yoshio Kodama, aka ‘The Monster’. After spending three years in prison on war crimes charges after the Second World War, Kodama was set free by the US occupying forces on the grounds that he would make a good ally in the Cold War fight against communism. He then took his fortune – earned by supplying Japanese troops during the war and looting diamonds and platinum from areas conquered by Japan – and put it to work in his country’s politics. Variously described as an organized crime boss and a CIA asset, he helped found and fund the dominant Liberal Democratic Party.5

In the late 1950s, Lockheed paid bribes of about $1.5m to $2m to various officials and a fee of $750,000 to Kodama to secure an order for 230 Starfighter planes. The details of the bribes were passed on to the CIA, which confirmed that every move made was approved by Washington. Lockheed was seen to be conducting a deep layer of Washington foreign policy.6 This marked the high point of the Starfighter. It was sold to the German air force, and over a ten-year period crashed 178 times, killing a total of eighty-five German pilots. It earned the nickname ‘the Flying Coffin’, and a group of fifty widows of the pilots sued the company.7

Over ten years later Lockheed again utilized Kodama to fend off four other bidders and secure a massive deal to sell TriStar planes. Kodama was paid $5m for disbursing $7m of bribes including $1.7m to the Japanese Prime Minister, Kakuei Tanaka. Richard Nixon intervened personally, as did the British Prime Minister, Ted Heath, on behalf of the TriStar’s engine-maker, Rolls-Royce. It was later alleged that Lockheed donated a million dollars to Nixon’s 1972 campaign within weeks of winning the contract. Five years later, after leaving office, Tanaka was jailed for accepting the bribe.8

Lockheed executives claimed not to know or care where their money went, as long as they won the contract. Dan Haughton, the CEO, had the following to say under questioning by Senator Proxmire:

THE CHAIRMAN: Do you or don’t you have accurate information as to payments that have been made, where your money goes, the officials who receive it?

MR. HAUGHTON: We have accurate information that we paid the commissions. We do not have accurate information to the point as to where the money finally went.

CH: You pay out millions of dollars from your corporation without knowing where it goes?

HA: We know where it goes. Insofar as the contracts with the consultants are concerned. Where it winds up finally, we do not know.… If payments have to be made and you are doing it to get a contract and payments are made and you get the contract, it is good evidence that you needed to make the payments, I think.9

Japan may have been the costliest front in Lockheed’s bribery operation, but it was far from the first. Going back to the late 1950s, the use of well-connected agents who could sway the decisions of key government officials was already a common practice.

In Germany, Lockheed deployed a huge lobbying force with the aim of winning over the German Defence Minister, Franz Josef Strauss, who would later work with Merex’s Gerhard Mertins. In 1958, Strauss recommended the Starfighter to the Bundestag. It was widely assumed that Lockheed had paid off Strauss and other officials or made contributions to their political parties, but nothing could be proved, as Strauss destroyed all defence ministry documents related to the deal. Ernest Hauser, a Lockheed representative who had been hired because of pressure from Strauss, claimed that the company contributed $12m to Strauss’s political party. Fred Meuser, a Dutchman who was then Lockheed’s director for Europe, received a commission of almost $1m. It is assumed he passed some of this on to German officials.10

In the Netherlands, Lockheed aimed higher. With Meuser’s help the company recruited none other than Prince Bernhard, the husband of Queen Juliana and father of the current monarch, Queen Beatrix. He had started commercial life as a salesman for IG Farben and was supposedly always kept on a very tight financial rein by his wife and the Dutch Parliament. His financial needs were great as he attempted to keep a mistress and their love child in comfort in Paris. Importantly, he was Inspector General of the Armed Forces and a director of the state airline, KLM. With Bernhard’s help, Lockheed sold the F-104 to Holland in late 1959. After the sale, the Prince requested $1m from Lockheed’s CEO, Robert Gross, with the money to be paid to him via Switzerland.11

The link between Bernhard and Lockheed continued into the mid-1970s, when an investigation by Senator Frank Church’s Subcommittee on Multinational Corporations revealed the relationship. From 1964 through to 1974 Bernhard claimed to be working hard to persuade the Dutch to purchase the Lockheed P-3C Orion aircraft. Just as the company seemed to be well placed to win the deal, Bernhard wrote two angry missives to Roger Smith, the company lawyer, seeking a commission of between $4m and $6m to be disguised as a donation to the World Wildlife Fund, of which Bernhard was the founding president. It later emerged that Bernhard and Meuser had simultaneously been working for Lockheed’s rival, Northrop.12 Clearly, there is little honour among arms agents.

In Italy, Lockheed hired a well-connected agent, Olvidio Lefebvre, who told the company president, Carl Kotchian, that he was ‘embarrassed’ to say that he would have to ‘make some payments if you want to sell aircraft in this country’. He suggested $120,000 per plane. A handwritten letter from Roger Smith that emerged at the Church Committee noted that a contact referred to as ‘Antelope Cobbler’ would provide the final figure on what Italian officials would require to ensure the deal. It was established that ‘Antelope Cobbler’ was code for the Italian Prime Minister. Unfortunately for the subsequent investigation, Italy had three different Prime Ministers during the two years that negotiations took place. Ultimately, bribes of $2m were paid to secure the contract, including $50,000 to the Defence Minister, with much of the balance going to his political party and its leading members.13

During this period, the company also paid bribes in Turkey, Indonesia, Colombia and, of course, Saudi Arabia. In Indonesia in 1965, Lockheed disbursed bribes of $100,000 per plane. However, soon afterwards the CIA assisted the right-wing General Suharto to overthrow the Sukarno government. Lockheed worried that its agent, Isaak Dasaad, might not be sufficiently well connected to the new regime to be of use. Illustrating the extent of US government complicity in controversial foreign arms sales, the company’s marketing executive noted that a Lockheed official ‘went to the US embassy in Jakarta and asked them specifically whether Dasaad could continue, under the new regime, to be of value to Lockheed’. The embassy said yes, leading Lockheed to record that ‘apparently Dasaad has made the transition from Sukarno to Suharto in good shape.’14

The company continued to use Dasaad for a few more years before it was instructed by the Indonesian air force to pay directly. This raised concerns within the company, not about the ethics of paying bribes, but the practicalities. It was noted that using a third party established ‘at least a nominal buffer. If such payments should someday become public knowledge, the repercussions could be damaging to Lockheed’s name and reputation.’ The company was also concerned that without a middleman it would ‘have no legal means of charging off these commissions. Thus, they may not be considered allowable deductions by the Internal Revenue Service.’15

The biggest commissions were paid on sales to Saudi Arabia, which was at the centre of the early-1970s arms-buying spree driven by increased oil revenues. Lockheed’s agent was the flamboyant Adnan Khashoggi. Just twenty-six in 1964 when Lockheed hired him, Khashoggi was already a slick operator with extensive relationships with key Saudi officials. Khashoggi’s father had been one of the personal physicians of the Saudi King Ibn Saud, and Adnan had been at school with King Hussein of Jordan. Khashoggi was also close to Prince Sultan, the future Defence Minister, and Prince Fahd, who would later rule the kingdom.

He befriended influential Americans as well, including Richard Nixon, in his years of political exile, during which Khashoggi not only wined and dined him in Paris, but ensured too that he was well received in Arab capitals. This all paid dividends when Nixon was elected President in 1968, after which the friends continued to have private meetings. Khashoggi was rumoured to have funnelled millions of dollars to Nixon’s 1972 re-election campaign.16

Khashoggi represented Lockheed on numerous sales worth billions of dollars. Between 1970 and 1975 he was paid $106m in commissions, although how much he passed on or kept is unknown. Lockheed’s vice-president for International Marketing at the time described Khashoggi as ‘for all practical purposes a marketing arm of Lockheed. Adnan would provide not only an entrée but strategy, constant advice and analysis.’17 Khashoggi regularly demanded increased rewards for his role. He pushed up his commission on the sale of C-130 aircraft from 2 per cent to 8 per cent, claiming he needed the extra money ‘due to more players getting involved, and the necessity to meet their requirements’.18 A Lockheed executive noted that ‘we have no way of knowing if the so-called “under the table” compensation is ever disbursed to Saudi officials, or stops at our consultant’s bank account.’19 For instance, in August 1968, a Saudi official was ‘completely disenchanted with Khashoggi … [as] he never received the $150,000 that was agreed to’.20

As with Prince Bernhard in the Netherlands, Khashoggi became an agent for Northrop as well in 1970. He was recommended to the company by Kermit Roosevelt, the grandson of Theodore, and a key player in the 1953 US–British coup that brought the Shah of Iran to power. Kermit also successfully represented Northrop in the sale of Tiger aircraft to the Saudis. Both companies knew that Khashoggi was working for the other, but quietly accepted the unusual arrangement, as there was more than enough business for all in the Saudi kingdom.21

By the early 1980s, Khashoggi’s personal wealth was estimated at $4bn, making him one of the richest men in the world. He was thought to own twelve homes – including a house in 2,000-hectare grounds in Marbella and others in Paris, Cannes, Madrid and Monte Carlo. His property on Fifth Avenue, Manhattan, was sixteen flats knocked into one. He had a stable of Arabian horses and 200 exotic animals, 100 limousines and a $75m yacht, the Nabila, which was used in the Bond film Never Say Never Again. He also boasted a South Korean martial arts-trained bodyguard, named Mr Kill. His lifestyle certainly brought him into contact with the rich and famous. His sister married Mohammed Al-Fayed, the tycoon and former owner of Harrods, and was the mother of Dodi Al-Fayed, who died in a car crash with Princess Diana.22

This lifestyle was largely funded by the Saudi commissions – and the bribes flowing from them – which were well-known to the US authorities long before the Church Committee. The Pentagon was aware of them as they were being carried out. In 1973, Northrop arranged for Khashoggi to meet key Pentagon officials responsible for brokering and monitoring US arms sales. He explained the commission system in some detail, suggesting the payments were meant to build up the kingdom’s limited economic infrastructure. Money for the princes, he claimed, was not for material gain, but as a sign of loyalty. By the end of the meeting, David Alne, the Department of Defense’s Director of International Sales Negotiations, described Khashoggi as ‘an honest and astute businessman [who was running] an inexpensive economic aid program’.23

When, as a consequence of the Church Committee and SEC investigations, the defence industry’s bribing habits were exposed, Lockheed’s president, Carl Kotchian, and the CEO, Dan Haughton, saw no problem with their behaviour, believing that it was quite justified to pay bribes in pursuit of increased sales. Lockheed’s initial reaction was to provide as little information as possible. Eventually, under pressure from the SEC, the company acknowledged paying $22m in bribes, but refused to name the recipients, as to do so might hurt future business opportunities and damage foreign officials. Haughton would not even use the word ‘bribe’, describing them instead as ‘kickbacks’, on the advice of his lawyers.24

The company’s lead legal representative was William P. Rogers, former Secretary of State and Attorney General in the Nixon administration. Rogers urged his former colleague, the Secretary of State, Henry Kissinger, to intervene on behalf of the company. As Sampson records, Kissinger obliged, sending a note to the Attorney General, Edward Levi, in which he argued that the information in the Lockheed documents was ‘uncorroborated … and potentially damaging’ and would do severe harm to US relations with the countries concerned. The Church Committee proceeded to release all the details it had anyway.25 While the media published the revelations, they were largely treated as just the latest examples of corporate and political malfeasance in the post-Watergate moment.

In Japan, however, the revelations were their Watergate. More than 3,000 investigators were deployed to the investigation, searching two dozen homes and offices, including those of an ailing Yoshio Kodama, senior former politicians and Lockheed executives. More than a dozen officials and agents were indicted for their roles in the bribery schemes. The US, following Kissinger’s lead, was uncooperative, refusing to make available all the documentation on the scandals. The Japanese were furious, with one observer commenting that ‘the United States has told us we have a thief in the house but won’t tell us who he is.’26 The former Premier, Kakuei Tanaka, was arrested in July 1976, becoming the first Japanese Prime Minister to be indicted for bribery that occurred while he was in office. Seven years later he was found guilty and sentenced to four years in prison and fined $2.1m for accepting $1.6m in bribes from Lockheed.27

Surprisingly, given Italy’s reputation, two former defence ministers were indicted while efforts to lift the immunity of a former Prime Minister failed by only a single vote, thanks to the support of the Socialist Party.28 In the Netherlands, Prince Bernhard faced a threat to his reputation, but not his liberty. A Dutch government inquiry failed to find evidence of criminal wrongdoing in the Prince’s dealings with Lockheed. It criticized him harshly though, stating that Bernhard had ‘allowed himself to be tempted to take initiatives which were bound to place himself and the Netherlands’ procurement policy … in a dubious light.… He showed himself open to dishonorable requests and offers.’ Bernhard was stripped of virtually all of his business, military and government posts, and was no longer allowed to wear Dutch military uniform. He was widely seen to have brought shame on himself and the Dutch royal family.29

In most of the other countries involved in the bribery scandals, there was no accountability of any sort. Adnan Khashoggi continued to make lucrative deals as a middleman between the Saudi government and its major customers, and government officials in Turkey, Indonesia, Colombia and Singapore faced no consequences for their actions.30 In the case of Indonesia, Henry Kissinger, serving President Gerald Ford, who had replaced the disgraced Nixon, authorized the sale of arms to the Indonesian dictator, Suharto, which were used against the people of East Timor, in direct violation of Congress’s Arms Export Control Act. And despite the litany of scandals the head of the Pentagon, Donald Rumsfeld, still wanted Lockheed in business and continued to go to great lengths to persuade foreign governments of the company’s credentials.31

Daniel Haughton and Carl Kotchian were forced to resign their posts in an effort to keep the company from losing too many contracts in the wake of the bribery revelations. Both men were offered lucrative consulting arrangements with Lockheed after they stepped down, but the offers were rescinded two months later in the face of a public outcry. Neither of the men expressed remorse for their actions. In a July 1977 interview with The New York Times, Kotchian described himself as a ‘scapegoat’ in the affair, comparing himself to Richard Nixon: ‘My experience has some of the elements of Watergate. I can compare it because a lot of the things that came out in Watergate were things that were going on previously – and all of a sudden there’s a different set of standards.’32 Not only had it gone on before, argued Kotchian, but any reasonable person would have done what he did in the same circumstances: ‘For any businessman who is dealing with commercial and trade matters, would it be possible to decline a request of certain amounts of money when the money would enable him to, like myself, get the business award?’ He even dismissed the language of bribery itself: ‘Some call it gratuities. Some call them questionable payments. Some call it extortion. Some call it grease. Some call it bribery. I looked at all these payments as necessary to sell a product. I never felt I was doing anything wrong. I considered them a commission – it was a standard thing.’33 In the defence industry it certainly was, but that didn’t make it ethical or correct.

*   *   *

A litany of scandals came to public attention in the wake of the political fallout from Watergate, uncovering slush funds for domestic and foreign bribery.34 The SEC offered an amnesty for companies admitting to questionable or illegal payments; over 450 US companies admitted making such payments worth over $300m to government officials, politicians and political parties.35 Over 117 of the self-reporting entities were Fortune 500 companies.36 Many of the payments were justified as ‘facilitation payments’ or ‘commissions’.37

Despite the lurid accounts of not only Lockheed’s activities around the world, but similar schemes by scores of other companies,38 there was no re-imagining of ethics in the violent, corrupt world of the arms dealers, but there was a dramatic recognition of the scale and damage of corruption in the US. The demand for stronger regulation and banning of bribery was resisted by corporate interests which argued that it would put the US at an economic disadvantage.39 The protestations were largely ignored and the Foreign Corrupt Practices Act (FCPA) was passed by unanimous vote in 1977.40 The Act was intended to force companies to police themselves into a cleaner capitalism, to compel them to avoid bribery for fear of the shame of getting caught. The focus was on transparency towards shareholders with anti-bribery penalties as a back-up. A commissioner of the SEC, A. A. Sommer Jr, said in 1976, a year before enactment of the FCPA, that:

there are moral problems as well as legal problems that go far beyond simply the question of illegal payoffs to foreign officials. There are questions concerning the role of multinational corporations, the extent to which they have obligations to the countries in which they conduct their business, the extent to which they should seek to raise the standards of conduct there, the respect which they should show the laws of other countries.41

Until the 1990s the US was the only country to ban overseas bribery.42 In America, opposition was substantial and corporate interests, including the defence sector, still work against the strong enforcement of the FCPA today: Forbes magazine published a cover story in May 2010 effectively accusing FCPA prosecutors of imposing numerous and high fines in order to create a good market in the private sector for themselves when they leave the Department of Justice.43

The FCPA contains anti-bribery as well as record-keeping and accounting provisions. The former prohibit payments to foreign officials or political parties to ‘obtain or retain business’. Payments seeking to obtain ‘an improper advantage’ are not formally outlawed, though the effect may well be the same with the courts applying the definition widely. However, ‘facilitation payments’, or grease payments as they’re sometimes called, are allowed in an exception to the law. A facilitation payment is defined as a bribe for ‘routine governmental action … which is ordinarily and commonly performed by a foreign official’.44 This somewhat lessens the moral force of the statute.

The record-keeping and accounting provisions are intended to create a paper trail and prevent concealment of bribery. However, this second part of the FCPA only applies to corporations registered in the US which have to file periodic reports with the SEC.45 The anti-bribery clause applies to all issuers, domestic concerns and related individuals. Therefore privately owned companies, ones not listed on the stock exchange that is, do not have to comply with the record-keeping provisions. It is, therefore, likely that a great deal of foreign bribery goes undetected, especially among smaller companies.

Another weakness of the Act is its limited scope when it comes to foreign subsidiaries not wholly owned by a US parent. A foreign company or person is subject to the FCPA if they play any role in a corrupt payment while within the US.46 The Act only applies to the bribery of ‘public officials’. Pertinent to the BAE case, the term includes members of the royal family.

The legislation, which is primarily enforced by the DOJ and the SEC, undoubtedly changed the behaviour of US companies abroad. However, the loopholes left in the Act were exploited. For example, the use of non-majority-controlled joint ventures overseas is a major method for US companies to pay bribes in Saudi Arabia. While American companies have instituted a culture of compliance plans domestically, international surveys suggest that often these are not communicated to foreign subsidiaries or implemented where bribery is most likely to take place.47

For many years after the introduction of the Act, enforcement seemed minimal amid significant push-back from both corporate interests and the administration, especially during Ronald Reagan’s tenure. As the Act went through Congress and in later 1981 hearings, corporations argued that the SEC should not have any enforcement role in the FCPA, fearing intervention in global trading norms.48 The executive branch under Reagan claimed that the SEC was improperly using the FCPA ‘… as a Trojan horse to get an extension of accounting standards to all companies when they do foreign business at all or not [sic]’.49 The administration attempted to highlight examples of lost trade and increased costs of business caused by the Act. However, these arguments were contradicted by trade figures supplied by the Department of Commerce showing that US exports had increased in the years following the promulgation of the FCPA. In a 1981 survey by the GAO, of the 200 Fortune 1000 company respondents, two thirds said that the FCPA ‘had little or no affect [sic]on business’.50