Lockheed Is Implicated in Bribing Foreign Officials

Date February 4, 1976

A U.S. Senate committee heard testimony that implicated Lockheed and other major American manufacturers for bribing foreign government officials and other key figures overseas to secure sales contracts. Those accused maintained that such payoffs, although considered unethical in the United States, were essential for success in business dealings in some countries around the world.

Locale Washington, D.C.

Key Figures

• Carl Kotchian (fl. 1970’s), president of Lockheed
• Kakuei Tanaka (1918-1993), prime minister of Japan, 1972
• Frank Church (1924-1984), U.S. senator from Idaho, 1957-1981, and chairman of congressional panel investigating Lockheed
• Bernhard, Prince of Lippe-Biesterfeld (1911-2004), prince consort of the Netherlands

Summary of Event

On February 4, 1976, the U.S. Senate Subcommittee on Multinational Corporations announced that it had found that Lockheed Aircraft Corporation had bribed Japanese government and corporate officials and intermediaries. The committee, chaired by Senator Frank Church of Idaho, had been formed in 1972 by the powerful Senate Committee on Foreign Relations to investigate so-called slush funds used by American corporations to finance the campaigns of political candidates they favored. The committee was tasked with looking into two cases: the Watergate burglary by henchmen of the Richard Nixon administration and the subsequent cover-up, and the involvement of International Telephone & Telegraph (now ITT Corporation) in the overthrow of the democratically elected government of Salvador Allende in Chile. The investigative committee also focused on subterfuges that corporations employed to siphon funds to the Republican National Committee. What the committee found fueled its interest in learning about other possible under-the-table transactions, including the Lockheed bribes, which flouted laws regarding corporate financial behavior.

Reports and rumors of corporate bribery of foreign purchasers led the committee to question Carl Kotchian, the president of Lockheed, the largest defense contractor in the Western world. Kotchian, on February 6, was asked about the payment of bribes and the purchase of twenty-one L-1011 Tri-Star Lockheed planes by the Japanese-government-controlled All Nippon Airways. The alleged arrangement was for Lockheed to add the bribe amounts to the price of the airplanes. Kotchian defended Lockheed’s payouts by noting that they constituted but a small portion of the total price of the business deal, and that the profit to Lockheed translated into income for its employees and their families and communities, and for stockholders. He admitted that Lockheed was desperate when it began negotiations in Japan. The company was on the verge of bankruptcy because of cost overruns on government contracts in the United States. Kotchian resigned on February 13.

The major Japanese political figure involved in the illegal transaction was Prime Minister Kakuei Tanaka, who had been elected to the Diet, the Japanese national legislature, and served for sixteen terms that stretched more than forty-three years. Tanaka’s career was marked by several missteps, none of them significant enough to detour him on the road to political power. In 1948, he was convicted of accepting bribes from the Fukoaka mining interests in exchange for a vote against a bill that sought to nationalize the industry. The conviction was overturned on appeal. In 1974, he was implicated in a scandal in which he used a geisha to camouflage his investments in shady land deals.

Lockheed had paid an intermediary, Yoshio Kodana, a regular fee and sizable percentages that ultimately totaled seven million dollars, for taking care of the details of bribery transactions. Kodana, it turns out, had strong ties to organized crime. Another intermediary had approached Prime Minister Tanaka on behalf of Lockheed, requesting that he use his influence to swing the deal to Lockheed from a competitor. For doing so, Tanaka was paid $1.7 million.

Tanaka was subsequently arrested and charged with bribery and violating Japan’s Foreign Exchange Control Law. It took seven years, until 1983, before the court returned a guilty verdict and imposed a fine and a four-year prison sentence. Neither penalty would be exacted, however. Tanaka’s appeal dragged on until his death in 1993. Meanwhile, he was reelected to the Diet by landslides until he retired in 1989 because of ill health. In the United States, Lockheed pleaded guilty to defrauding the Internal Revenue Service by falsely listing the bribes as “marketing costs.”

Lockheed also was implicated in an episode that involved the payment during the early 1960’s of more than one million dollars to Bernhard, Prince of Lippe-Biesterfeld, the Netherlands, for his assistance to the company in the sale of 138 F-104 fighter jets to the Dutch air force. Testifying before a Dutch investigatory commission, Bernhard maintained that he no longer remembered his dealings with Lockheed. National affection for Bernhard’s wife, Queen Juliana, who threatened to abdicate if Bernhard were jailed, along with concern over creating a political crisis, induced the commission to treat Bernhard lightly. He was made to apologize to the Dutch people and to resign from the board of directors of more than three hundred companies. He also was stripped of his position as inspector-general of the Dutch armed forces. In an interview published after his death in 2004, Bernhard had told a reporter, “I have accepted that the word Lockheed will be carved on my tombstone.”

In the wake of the revelations before the congressional committee, the Securities and Exchange Commission in 1976 held its own extensive investigation of overseas bribery transactions involving American corporations. Some four hundred companies confessed to spending $300 million to bribe foreign officials and to finance overseas political campaigns to facilitate sales contracts. In addition to Lockheed, the roster included Bell Helicopter, Exxon, General Tire & Rubber, and Gulf Oil. U.S. president Jimmy Carter expressed the nation’s moral outrage when he labeled the acts of bribery “ethically repugnant.”

For its part, Lockheed admitted to having paid two million dollars in bribes to Italian authorities during the late 1960’s for their assistance in a deal for the purchase of $100 million worth of aircraft. Lockheed also admitted to making similar kinds of arrangements during the 1970’s involving “commissions” of at least $202 million with officials in Germany, South Africa, Turkey, Greece, Nigeria, Mexico, and Spain.

Impact

The bribery scandals involving Lockheed and other companies illustrated how major reforms typically are put in place only after serious episodes of wrongdoing galvanize public outrage and pressure lawmakers to take action. The Lockheed bribery scandal led to the enactment of the Foreign Corrupt Practices Act (FCPA) in 1977, which prohibits individuals and businesses from offering, promising or authorizing either directly or indirectly the payment of anything of value to any foreign official, government employee, or person acting on behalf of these entities. The act also penalizes the failure of an organization to keep accurate financial records. There are two major loopholes in the law, however. One allows payments for promotional expenses, such as travel and lodging for foreign officials visiting the United States to view domestic products. The second permits payments to a foreign official if such payments are lawful in their respective country.

Corporate representatives criticized the FCPA because, they claimed, it made it more difficult to compete with enterprises from other nations that do not have similar restrictions. They maintained that “greasing” was essential in some countries to obtain business deals.

Lockheed did not learn its lesson. In 1995, the company, at this time called Lockheed Martin, was fined $24.8 million after a guilty plea for making unlawful payments of $1.2 million to an Egyptian legislator. The vice president of Lockheed Martin’s Middle East and North Africa regions, after evading capture for almost a year, was arrested and served an eighteen-month prison sentence, the first person to be imprisoned under the FCPA. Lockheed Martin paid the bribes to persuade the Egyptians to purchase three of its C-130 military transport planes.

Bibliography

Bialos, Jeffrey P., and Gregory Husisian. The Federal Corrupt Practices Act: Coping with Corruption in Transnational Economies. Dobbs Ferry, N.Y.: Oceana Press, 1997. Two Washington, D.C., attorneys examine the antibribery provisions of the FCPA, its requirements for disclosure, and the practices of foreign corporations.

Boulton, David. The Lockheed Papers. London: Jonathan Cape, 1978. Examines overseas bribes by Lockheed from the 1950’s to 1977. Published in the United States as The Grease Machine (1978).

Brancato, Carolyn Kay, and Christian A. Plath. Corporate Governance Best Practices: A Blueprint for the Post-Enron Era. New York: Conference Board, 2003. A study that examines corporate leadership, ethics, and responsibility at a time of increased public awareness of corporate fraud and mismanagement.

Brown, H. Lowell. Bribery in International Commerce. St. Paul, Minn.: West, 2003. Provides details on the FCPA as well as other U.S. laws and international covenants and agreements concerning bribery in commerce.

Hunt, G. Cameron. The Tanaka Decision: Tanaka Kakuei and the Lockheed Scandal. Hanover, N.H.: Universities Field Staff International, 1983. A short but incisive review of the conditions surrounding the bribery of Prime Minister Tanaka by Lockheed interests.

Hunziker, Steven, and Ikuro Kamimura. Kakuei Tanaka: A Political Biography of Modern Japan. Los Gatos, Calif.: Daruna International, 1994. Considers the personal and political background that played a part in Tanaka’s role in the Lockheed case.

Jacoby, Neil H., Peter Nehemkis, and Richard Eells. Bribery and Extortion in World Business: A Study of Corporate Political Payments Abroad. New York: Macmillan, 1977. Explores the historical role of bribery and extortion in cultures around the world and suggests possible remedies.