The Economics of Extortion

...Pulling Out of Markets The fear that the new law and the further threats from the SEC and Justice will handicap American corporations trying to compete with foreign companies extends to the Commerce and State Departments...

...During the height of the furor two years ago, when new disclosures of “improper” payments abroad seemed to be breaking daily, over 100 corporations reported to the SEC that they had made some sort of questionable payments to foreign officials...

...That is why forbidding U.S...

...We were more interested in exporting morality than in exporting American products, a futile gesture since it won’t bring about the kind of reform we would like but will instead give business to our trading competitors...

...Unlike his predecessor, Arthur Burns, he was not a distinguished scholar...

...The tone of the Proxmire and Church hearings was one of shock, or indignation, of moral outrage (Senator Dick Clark: “Do you think the management of your company was wrong for having done that...

...The committee did exactly that, but the grilling did not consist of questions about Miller’s background or his qualifications for the job...

...But overseas that is clearly not the case-we don’t control the game, and we can’t control the players...

...Minor civil servants, for example, generally have petty but potentially destructive authority over all sorts of business activities, and they use i t to e x t r a c t t r i b u t e from businessmen...

...Proxmire berated Miller for the better part of a morning hearing session, finally demanding Miller’s withdrawal...

...That did not stop the SEC or the Justice Department, who stretched every available statute to crack down on payoffs...

...Businessmen naturally worry about how the new law will be enforced, particularly since its prescribed penalties are unusually severe: fines up to $1 million for corporations, up to five years in jail and $10,000 fines for corporate officials...

...Unilaterally banning American payoffs is a lot like unilateral disarmament...

...another requires firms receiving assistance from the Export-Import Bank to swear that they have not bribed anyone with its funds...

...Americans Not Alone This is a time when our economy is in trouble-inflation is rising steadily and the dollar is sinking almost daily...

...During the congressional hearings, business leaders complained that if American companies weren’t willing to meet the payment demands, there were plenty of foreign companies that were...

...How the System Works In most countries in South America, Asia, and Africa, one can hardly operate a business without paying off someone...

...Says former SEC chairman Roderick Hills in defense of this ambiguity, “It keeps people on their toes...

...Gulf Oil, for example, gave $3 million to the ruling political party in South Korea in 1970 after the partyxhief told Gulf chairman Bob Dorsey that the company’s “continued prosperity depended on our coming up with a $10million contribution to the party...

...But his experience before the Banking Committee was nothing new for corporate executives in the last few years...

...Did Proxmire really believe it when he said: “The recent revelations of foreign b r i b e s . . . threaten to undermine public confidence in our free enterprise system...

...Miller, of course, declined the invitation to step aside and eventually was confirmed by the full Senate...

...The congressional committees chose to ignore the practical realities of payoffs in their misguided effort to make the world a better place...

...And out of them came the Foreign Corrupt Practices Act, passed last year, outlawing all but the smallest of bribes...

...By trying to do so, we are only wounding ourselves...

...Our trade competitors do it too, and the fact is, payoffs American companies don’t make, foreign companies will...

...Corporate payoffs are an important weapon in trade-morally repugnant, surely, but important nevertheless...

...We should be outraged at the extortion, but we also should admit there is not much we can do about it...

...Or this, from Rep...

...Few of these customer We know now that our economy is not strong enough that we can afford to keep cutting off our nose to spite our face in international trade...

...it seemed like the right solution to a serious problem...

...They will use whatever statutes are available to prosecute corporations that make such payments, and do not feel constrained, in the words of one official, “by the intent of Congress...

...Nor is all of it so petty...

...One of the obvious answers, every economist agrees, is to do everything possible to close our massive (approaching $33-billion) trade deficit...

...The statutes have been applied to corporate bribery under the flimsy theory that such bribes deprive foreign citizens of their right to honest service from their government representatives...

...From the start, SEC officials made it clear that they disapproved of such “bribes,” and that they intended to stamp them out by any means available...

...Instead, the senators chose to question Miller about a $2.9-million payment Textron made to a sales representative in Iran that eventually went to an Iranian general...

...We know now, and should have know then, that Solarz and the others are wrong-our economy is not strong enough that we can afford to keep cutting off our nose to spite our face in international trade...

...Most of the examples of corporate b r i b e s uncovered by newspapers and the SEC were not like that at all-in fact, many of them weren’t even bribes...

...But what we should not be doing is unilaterally disarming American corporations at a time when we have to increase exports...

...government wants to discourage corporate payments it should be looking for ways to stop them with the cooperation and agreement of other nations...

...They were payments made at the demand of foreign officials or agents, with the u n d e r s t a n d i n g t h a t they were necessary to get a contract with the government...

...Most corporate officers prefer silence to the possibility of arousing the ire of the Justice Department, but others have spoken out...

...But the SEC, which more than any other agency made a scandal out of corporate payoffs, now refuses to answer business questions about how the new law will be applied to various situations, dismissing such legitimate inquiries as “asking us how to get around the law...

...enterprise abroad reflect on the United States as a nation...

...nations feel that the American way is ‘the only right way’ or that they must follow our rules in their countries,” Ingersoll Rand chairman William Wearly recently told his stockholders...

...On the issue of our economy being damaged if payoffs were banned, there was this, from one of those who favored the bill: “For a limited time span some American companies might lose certain business opportunities, but that is an expense we should be able to tolerate for the good health of our political and economic system...

...Getting an audience with a head of state to make a company’s case can cost a lot of money...

...That is called extortion, not bribery, and the difference is not insignificant...

...If the U.S...

...One foreign official told The Wall Street Journcl: “If the Americans don’t do it, somebody else will-the French or the Germans...

...In another case, United Brands was threatened in Honduras with a doubling of the taxes on its bananasan amount that would have cost the firm $20 million, almost as much as its previous year’s net income...

...When the SEC began investigating the payment, Black leaped from a 44th floor window to his death...

...United Brand’s head Eli Black offered the president of Honduras several hundred thousand dollars to reduce the tax...

...He had been president of a huge corporation, Textron, and his ties throughout the corporate world might have been regarded as a liability, since he would be charged with making decisions affecting every American business...

...companies to make payoffs overseas is such an insane policy...

...The football equivalent would be to make holding illegal for our team but not for any of our opponents...

...By keeping American companies out of markets where bribes are a part of doing business, we are only hurting ourselves...

...Nuclear weapons, we would agree, are morally offensive, and the world would be better off without them, but we are not about to disarm ourselves if other countries refuse to do the same...

...there is much more involved than a few dollars...

...The SEC, however, feels t h a t Corporations should be kept in the dark about the new law’s meaning, going so far as to praise its “delicious ambiguity...

...The company had signed an agreement for a 99-year land lease in Haiti and was planning to build a complex of hotels and entertainment facilities...

...One law, for example, prohibits taking more than $5,000 in undeclared cash out of the country...

...But to mentally link all cases of corporate bribery with ITTis a mistake in scale and, more importantly, in intent...

...It is estimated that $10 billion in exports is being lost every By keeping ~ American companies out of markets where bnbes are a part of doing business, we are only hurting ourselves...

...They are common and necessary in foreign markets we ought to be in, that we need to be in with the economy in such sad shape...

...They had been making these payments for years, as a matter of necessity, all the time...

...Total estimated loss to Translinear: $3 million...

...Even in areas where the anti-bribery bill made exceptions, in the so-called “grease” payments to low-level bureaucrats that are still allowed, Justice officials have made it clear they don’t intend to allow this exemption to stand...

...Frank A. Weil, assistant secretary at Commerce, has acknowledged that many businesses are pulling out of export markets-markets we badly need-because of the new law...

...The questionable payments problem,” he said, “may turn out to be one of the most serious impediments to doing business in the rest of the world...

...Why, then, are we so willing to disarm ourselves when it comes to trade...

...Without the money, they implied, so much red tape would be put in their way that the construction would never be completed...

...The committee was expected to give Miller a thorough going-over...

...A special committee made up of several directors of Gulf and chaired by John J. McCloy concluded that neither the $3-million payment nor an additional $1-million donation in 1966 “was in any sense initiated by Gulf or treated by Gulf as anything other than a distasteful effort on the part of the government or the party to obtain a contribution which Gulf had no desire to make...

...A typical example, taken from the Proxmire subcommittee hearings, was the case of a Texas company called Translinear...

...It didn’t matter that our trade deficit was growing worse by the day and that we ought to be finding ways to make it easier, not harder, to export American goodsthe Foreign Corrupt Practices Act passed in a landslide...

...This is something the business community understands, even if no one else is listening...

...It was an important part of doing business in many countries, a business expense that was not paid gleefully or with any sense of satisfaction, but one that was paid nevertheless...

...One corporate chairman complains, “One of the good things in favor of laws is that they tell us what is right and what is wrong...

...Delicious Ambiguity In business circles there is widespread concern about the new antibribery law...

...After the president’s initial refusal, the Economics Minister approached the company and said he would cut the tax in exchange for a payment of $5 million...

...There was some of that, and no one can in good conscience condone or tolerate it-the most obvious case being ITT’s attempt to undermine the Chilean government primarily through bribes and illegal political payments...

...Reserve chairman...

...Payoffs go on at both high and low levels in the bureaucracy...

...Rather than being the criminals, many corporations were actually the victims of a system over which they had no control...

...By thinking of corporate bribery abroad as a purely moral issue, which is how most of us think of it (and certainly how most of the Senate thought when they voted 86-0 to pass one version of the anti-bribery law), we have saddled ourselves with a particularly self-defeating application of the post-Watergate morality...

...Meanwhile our European and Eastern competitors are laughing all the way to the bank at our nation’s arrogant attempt to dictate U.S...

...These pious pronouncements helped get the bill passed, but they didn’t do much to face squarely the harder question of what American companies should be doing to promote exports in a world where bribery is a fact of life...

...It’s fine, and proper, to outlaw bribery where we can make the rules apply to all the players, as we can in this country...

...After construction had started Translinear was approached by local officials who wanted a $500,000 payoff...

...The United States cannot stop international bribery single-handedly...

...Members of the committee were clearly upset by the revelation-even though they had no evidence that Miller knew what the payment was for-and no one seemed more incensed than chairman William Proxmire...

...standards to customers abroad...

...If we permit bribery to become a regular policy of United States corporations doing overseas business, it will only be a matter of time before our domestic economic system will be affected...

...Or this, from Leonard Meeker of the Center for Law and Social Policy: “Corrupt practices by U.S...

...That is how the system works in most of the world...

...But it’s worth noting that the wire fraud prosecutions have yet to bring a conviction: the Justice Department so far has used them only to bully and harass firms that have made overseas payments...

...Bribery is plainly wrong...

...year because of a variety of government measures, and leading that list is the ban on payoffs...

...It is not as if American companies were alone in making payoffs...

...In that time, dozens of corporate executives have trundled up to Capitol Hill-primarily before committees chaired by Senators Proxmire or Frank Church-and have admitted to paying large sums to brokers or politicians or officials overseas in an effort to compete successfully for lucrative contracts...

...Despite the lack of persuasive evidence implicating Miller in the so-called bribe, which wasn’t illegal to begin with, Proxmire argued that public suspicion would impair Miller’s effectiveness as Federal Jatnes North is a Washington writer...

...He had no background in government or monetary policy...

...A firm that wants to obtain an operating license, to get a shipment of goods unloaded, to lower an arbitrary tax assessment, or simply to cut through the government’s layers of red tape will often be denied until it greases the palm of a bureaucrat...

...So can political “protection,” another form of foreign extortion...

...This sort of strained interpretation of federal laws to prosecute actions offensive to the Justice Department is what one Justice official had in mind when he said the list of possible laws to be used against such corporations “is limited only by the ingenuity of the prosecutor...

...The Justice Department even used the threat of mail and wire fraud statutes, laws that have been used in the past to convict politicians on the grounds that they have deprived constituents of honest representation...

...At the time there was a widespread feeling that corporate bribery was just one more example of the venality of the multinationals, and t h e fevered rhetoric stimulated by the revelations was inflamed by a presumption that American corporations were exporting their own brand of shabby morals...

...The Economics of Extortion by James North When Federal Reserve Board Chairman G. William Miller went before the Senate Banking Committee for his confirmation hearings last February, people wondered about his credentials...

...Such attitudes have been characteristic of the SEC and the Justice Department since they first began their investigation of overseas payments...

...Steven Solarz: “Leaving aside the question of whether bribery is necessary to win contracts...

...We should frown on the practice, do everything we can to persuade the world community that bribery and extortion have no place in world trade...

...Ever since the Lockheed scandal first made headlines, corporate bribery abroad has been an issue-and a big one-for Congress, for two successive administrations, and for a host of federal agencies, led by the Justice Department and the Securities and Exchange Commission...

...For most Americans, the visceral reaction to the new law was one of approval...

...Yet we were so busy accusing American corporations of immorality no one seemed to care...

...But when the corporate payoffs were being disclosed, there was no American law forbidding them (the Foreign Corrupt Practices Act didn’t become law until December, 1977...

...During the Church and Proxmire hearings, the evidence that the “bribes” were solicited by foreign officials was overwhelming...

...The money was paid by Textron’s subsidiary, Bell Helicopter, to help get an arms deal with the Iranian government...

...The company declined to pay the money and was told to leave Haiti...

...We outlaw it because we live in a society that believes choices should be made on merits, not on who can provide the largest kickback or bribe...