The Second Half of Watergate Was Bigger, Worse, and Forgotten By the Public

David Montero | an excerpt adapted from Kickback: Exposing the Global Corporate Bribery Network | Viking | November 2018 | 16 minutes (4,298 words)

In 1975, Peter Clark was a young attorney in the Enforcement Division of the U.S. Securities and Exchange Commission. Founded three years earlier, the Enforcement Division was tasked with investigating possible violations of federal securities laws. One morning, Clark was in his office when the division’s director, Stanley Sporkin, appeared, greatly vexed. Sporkin, tall and corpulent with deep-set eyes, was waving a newspaper, Clark recalled. “How the ‘bleep’ could a publicly held company have a slush fund?” Sporkin asked.

Two years had passed since the Watergate scandal broke, and less than a year since President Nixon had resigned, but the reverberations of the scandal were still rocking Washington. Its revelation that multinational corporations, including some of the most prestigious brands in the United States, had been making illegal contributions to political parties not only at home but in foreign countries around the world would later be described by Ray Garrett, the chairman of the SEC, as “the second half of Watergate, and by far the larger half.”

By 1975, Frank Church of Idaho had convened a Senate Subcommittee on Multinational Corporations to examine, as one of his colleagues said, “U.S. corporate business practices abroad” and to “ascertain the impact of these practices on U.S. foreign policy.” Each night Sporkin would return home from work and watch the hearings on television. One evening in mid-May he listened to Robert Dorsey, the chairman of the board of Gulf Oil, testify before the committee. Dorsey admitted that between 1966 and 1970 Gulf Oil had paid $4 million in bribes to the Democratic Republican Party of South Korea, funds principally intended to support the party’s re-election campaign in 1971. Dorsey went on to explain how Gulf funneled the money: “Although each of the contributions came from company funds in the United States, the transfers were recorded as an advance to Bahamas Exploration Co. Ltd., where they reflected on the books and records of Bahamas Exploration Co., as an expense.” (In January 1976, Dorsey and three other officers of Gulf Oil resigned.)

‘It was inconceivable to me,’ Sporkin recalled, ‘that companies could be bribing all over the world, and the shareholders not know how they’re making their money.’

Sporkin was beside himself. In addition to being an attorney, he had also been trained as a certified public accountant and wanted to know more about how Gulf’s slush fund worked. He got a member of his staff, Robert Ryan, on the phone, and told him, “I want you to go to the company and find out what happened here, how they did it.” Gulf Oil executives candidly explained to Ryan that they had moved the money by transferring it from Gulf to the bank account in the Bahamas in amounts small enough to avoid suspicion from the IRS and external auditors. Most important, they confirmed Dorsey’s testimony that they had falsely recorded the payments as deferred charges that were written off as expenses.

At the time, there was no law that specifically prohibited a U.S. corporation from bribing a foreign government official, although several existing statutes, including the Bank Secrecy Act, the RICO laws, and provisions of the IRS’s criminal code were applicable to how a bribe was paid and how it might be covered up. But what really struck Sporkin was that whereas businesses had to keep books, there was no federal law requiring publicly traded companies to keep honest books and records. “It was inconceivable to me,” he recalled, “that companies could be bribing all over the world, and the shareholders not know how they’re making their money.”

The SEC filed an injunctive order against Gulf Oil on the grounds that their bribes were material information that should have been disclosed to investors, and that by failing to disclose them, it violated existing federal securities laws. The SEC soon investigated other large corporations and discovered that many had established subsidiaries, often domiciled in distant countries, and opened accounts in which hundreds of millions of dollars were hidden. In many cases, these funds were withdrawn as cash and delivered directly to foreign officials or transferred to their bank accounts in Switzerland or Singapore.

This was, in fact, standard procedure for some of the largest corporations in America. Lockheed, the aircraft manufacturer, used a company called Triad to bribe Saudi generals, while Northrop, an aerospace giant, paid off various foreign officials through a company called the Economic and Development Corporation (EDC). The template for modern-day bribery had been established by multinational corporations sometime after the end of the Second World War. In the case of Gulf Oil, its chairman, William K. Whiteford, had set up Bahamas Exploration Co. in 1959 to “serve as a conduit for illegal and questionable payments.” By 1976, Sporkin and the Enforcement Division had filed injunctive orders against sixty-five large corporations.

As the investigations unfolded, Northrop revealed that it had paid $30 million in just two years to foreign agents to win business deals. Exxon admitted to paying $46 million to political parties in Italy, while Lockheed had paid $200 million to foreign agents and officials around the world, including the prime minister of Japan and Prince Bernhard in the Netherlands. As Senator Charles Percy of Illinois observed, “I am convinced that creative minds in the name of greed can concoct schemes faster than we can get legislation against them.”

These discoveries convulsed both Washington and Wall Street. At eight o’clock on the morning of February 3, 1975, Eli M. Black, the founder and CEO of United Brands, the multinational fruit company, went to his offices on the forty-fourth floor of the Pan Am Building in Manhattan. Black had built United, and its Chiquita brand was responsible for nearly one third of all bananas brought into the United States. The SEC had discovered that United Brands had offered $2.5 million in bribes to foreign officials, including the president of Honduras, Oswaldo López Arellano. Using his briefcase, Black smashed out the windows facing Park Avenue and, still holding the case, leaped out the window, plunging to his death.

“We kept bringing these cases. The companies would not contest them. We would get consent decrees,” Sporkin recalled. “And the reason they would not contest them is they didn’t want to have to lay out the facts of the bribery.” Eventually the SEC’s inquiry into overseas bribery encompassed more than 200 U.S. companies. While this represented only a fraction of American concerns doing business overseas, the list included 117 members of the Fortune 500, the biggest and best of American industry. “None of us dreamed there were the millions, the tens of millions, the hundreds of millions, that we have found,” Ray Garrett told Newsweek at the time. “This is bribery, influence-peddling and corruption on a scale I had never dreamed existed.”

Sporkin’s team did not have the resources to investigate all the implicated companies. “It was a task force, really like a pickup baseball team — ten sharp people,” Peter Clark explained. Sporkin discussed the matter with Garrett and others, and the team devised a plan. In early 1976, the Enforcement Division announced a voluntary disclosure program. The SEC stipulated that if multinationals wanted to settle injunctive actions, they would have to agree to certain terms: They would have to publicly disclose any possible bribe payments they had made; they would have to set up, at their own expense, an independent committee to fully investigate the bribes; and they would have to demonstrate that they had taken the steps to ensure that such activity would never happen again. This system of credit for cooperating is a bargain that has defined corporate overseas bribery settlements to this day. “It promised nothing — you weren’t guaranteed immunity. It didn’t say you would not be charged civilly or criminally,” Clark, who helped oversee the program, noted.

“I don’t think anyone was prepared for the number of disclosures that came forward,” Clark added. The official number reported at the time was between three hundred and four hundred companies, but Clark believes it was closer to six hundred. The companies admitted to having paid the combined equivalent in today’s currency of more than $1 billion in bribes to officials overseas; in many cases, top management was aware of the payments. “The bribes and payoffs associated with doing business abroad represent a pattern of crookedness that would make, in terms of its scope and magnitude, crookedness in politics look like a Sunday school picnic by comparison,” Senator Church observed. The problem was, even when Sporkin’s team identified solid evidence of egregious corruption, there was no law under which to bring the charges. “We could prove bribery, but we couldn’t prosecute it as bribery,” Clark explained.

‘None of us dreamed there were the millions, the tens of millions, the hundreds of millions, that we have found,’ Ray Garrett told Newsweek at the time. ‘This is bribery, influence-peddling and corruption on a scale I had never dreamed existed.’

Senator William Proxmire of Wisconsin, chairman of the Senate Banking Committee, had led the investigation into Lockheed’s alleged bribery in Japan and the Netherlands, and so was certainly aware of the existence of corporate bribery. But the magnitude of payments uncovered by Sporkin and the SEC shocked him. “This bloodletting, unfortunately, is continuing. It is the disgrace of our free enterprise system,” he said in public remarks at the time.

Proxmire believed that although the SEC had done all it could under the disclosure program, what was really needed was a law specifically prohibiting foreign bribery. The existing laws were not sufficient, as they addressed only the means through which a bribe might be paid, but not the act of paying a bribe itself. Proxmire was encouraged in part by Robert Dorsey, Gulf’s chairman, who told the Senate subcommittee that such a law would be welcomed by the companies themselves: “Such a statute on our books would make it easier to resist the very intense pressures which are placed upon us from time to time. If we could cite our law which says that we just may not do it, we would be in better position to resist these pressures and to refuse requests,” he observed.

Proxmire had his staff contact Sporkin and asked how he could help the team’s efforts. “And I said to him,” Sporkin recalled, “ ‘Well, we’re doing pretty well with what we have, but we could use a law.’ He says, ‘What kind of law?’ And I had been thinking about it. I said we need a law that requires a public company trading in the United States to keep accurate books and records.” That alone would not go far enough, Proxmire replied. “He wanted to have a bribery provision. It would be against the law for a public company that makes filings with the SEC to bribe a foreign official to obtain business,” Sporkin explained. “I wasn’t keen on bribery because I thought it would be too hard to prove bribery overseas. That was his choice.”

In December 1977, after a hard-fought battle, Proxmire got the law he wanted: The Foreign Corrupt Practices Act was approved by the House of Representatives by a vote of 349– 0, approved by the Senate, and then signed into law by President Jimmy Carter on December 19.

Today, more than forty years later, enforcement of the FCPA has become a critical focus of the Justice Department, the SEC, and the FBI. It is one of the largest white-collar crime concerns of the private bar; it has resulted in veritable upheaval and dramatic reform in corporate culture, not to mention international law; it has yielded billions of dollars in corporate fines and penalties. It has, in short, fundamentally changed what it means to do business around the world— and what it means to be a business in the world.

The question is: What exactly did this curious piece of law stand for? What did it originally hope to accomplish? And is modern enforcement of the law living up to its original intent?

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Why did it take modern societies so long to outlaw these practices? The early history of corporate activity abroad, particularly with regard to corruption, is spotty at best, but given that the East India Company indulged in the practice, many other companies probably did as well, especially since no laws in any land prevented them from doing so. The law proscribing corporations from bribing officials overseas was a peculiarly American response, one that came at an especially dark and unstable moment in the nation’s history. Not only had corruption been exposed in the White House, but corruption overseas was undermining the image of America and what it hoped to achieve in the world. To understand why this was the case, it is instructive to recall the period of reckoning that gave rise to the Foreign Corrupt Practices Act.

Two years of congressional hearings preceded the passage of the FCPA in 1977. Never before — or since — had Congress and the American public looked so deeply and unflinchingly into the most alarming aspect of commercial bribery: its destructive impact overseas. Throughout the congressional deliberations, senators, speakers, and expert witnesses all stressed that bribery was not just a business transaction or an economic matter. Joe Biden, then a young senator from Delaware, captured its greater significance: “I get really very upset and concerned about not just the bribery, but how it directly flies in the face of our foreign policy and the best interest of our government.”

As investigations by the SEC and the Senate revealed in minute detail, Lockheed had not just bribed officials in Japan, but paid tens of millions of dollars to democratic political parties in Italy. In both cases, the company was negotiating sales of military aircraft. When these payments were exposed, the two governments involved were shaken and nearly toppled. The Japanese prime minister, who had allegedly received $1.6 million in bribes, eventually resigned, while in Italy, the Communist Party won spectacularly during elections in 1976 on the grounds that they were less corrupt than the democratic parties that had received bribes from Lockheed. The repercussions in Japan led Representative Stephen Solarz of New York to conclude: “A relationship which is at the very heart of our foreign policy was potentially jeopardized.” He added, regarding Italy: “It is not inconceivable that as a result of these disclosures, our whole foreign policy in both the Mediterranean as well as the southern flank of NATO will be ultimately undermined.”

The cases examined by Congress exposed the profound power of bribes to affect political development overseas… After Gulf Oil bribed South Korea’s Democratic Republican Party, it won by only 51 percent… Congressman John E. Moss then counseled: ‘Surely the public expects more than to have foreign policy made in the boardrooms of United Brands or Lockheed.’

The hearings conducted between 1975 and 1977 opened another dimension in this discourse: The greatest fallout from the bribery cases was borne by the foreign countries where the payments were made. In a Senate hearing in 1975, in an exchange between Senator Church and William Cowden, the chief international salesman of Lockheed, Church pointed out that Lockheed’s C-130 plane had no direct competition, yet Lockheed had paid bribes to government officials in Indonesia in order to sell it. “Why do you even pay commissions or kickbacks or bribes when you don’t even have a competitor for this plane?” he asked. Cowden replied, “Because we are frequently competing not necessarily with another airplane just like ours but we are competing for the sales dollars that would be spent on something else” — effectively acknowledging that the company had bribed foreign officials to buy military equipment that Indonesia might not even need and could have spent on something else, like schools. “That is an extraordinary argument,” Church responded, adding, “If you base your sales on payoffs to government officials and make them rich, then you force these governments in the direction of military sales purchases when other purchases might be far more beneficial to them and to their people.” He concluded: “The bigger the bribe then the bigger the profit for the company and the greater the diversion of resources from poor countries to the purchase of this kind of stuff.”

The cases examined by Congress exposed the profound power of bribes to affect political development overseas — even the course of history. For example, after Gulf Oil bribed South Korea’s Democratic Republican Party, it won by only 51 percent. Senator Dick Clark of Iowa asked Robert Dorsey: “It is conceivable, it seems to me, that your contribution may have made the difference. Do you think that is possible?” “Statistically,” Dorsey replied, “I would have to admit you are right.” Congressman John E. Moss then counseled: “Surely the public expects more than to have foreign policy made in the boardrooms of United Brands or Lockheed.”

Senator Percy, who, with his keen and articulate observations, often served in these deliberations as the voice of the American conscience, admonished: “The means we use to achieve our objectives in this world define the type of world we are going to live in.”

The adoption of the Foreign Corrupt Practices Act thus represented a response to bribery’s impact on American foreign policy and security goals, and on the democratic and economic development of foreign nations. Its emphasis on transparency in business transactions and on safeguarding free markets was not its ultimate goal: “At its inception, Congress understood the FCPA as an instrument for promoting democratic values in developing countries,” Andrew Spalding, an assistant professor of law at the University of Virginia, has written. The framers of the FCPA, working during the height of the Cold War, worried that bribery would play into the hands of Communists, as it had in Italy. The fight to eradicate corporate kickbacks was a key policy concern, for if something was not done to address them, “this country and its major allies are going to wake up one morning and find that the basis of stable democratic government has been eaten away,” Senator Church observed.

Spalding describes how unprecedented an effort the FCPA was: It was not just that the statute criminalized the bribing of an official — many existing laws did that — but it forbade bribing a foreign official in another country, and as such represented an assertion of jurisdiction never before attempted in the fight against bribery. The law effectively sought to punish an extraterritorial crime, committed by both American and foreign companies, whose ultimate victims were the citizens of a foreign nation. “Congress enacted a statute in which U.S. taxpayers would pay to protect non-taxpayers from the harms of bribery,” Spalding wrote.

“For the first time in the history of the world, a measure for bribery was introduced into law that was universal as far as those subjected to the law were concerned. For the first time, a country made it criminal to corrupt the officials of another country,” John T. Noonan writes in his exhaustive work on the subject, Bribe: The Intellectual History of a Moral Idea. Noonan’s point is that for more than three hundred years, corporate bribery has endured as an inevitable global evil. It was no small feat the United States took it upon itself to prohibit bribery, at a time when other governments essentially looked the other way regarding kickbacks and their impact.

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The Foreign Corrupt Practices Act is a deceptively simple statute composed of two parts. The first, which owes its existence to Stanley Sporkin, requires that any corporation that trades on a U.S. stock exchange keep accurate books and records, and implement a system of internal accounting controls. In other words, it addresses the issue of how bribes can be hidden through falsified financial accounting. The law applies not only to American corporations, or corporations headquartered in the United States, but to any foreign publicly traded corporation that issues stock on an American stock exchange. The United States had effectively granted itself the power to police foreign corporations, even though the home countries of those entities did not outlaw bribery themselves, and in some cases tacitly encouraged it. (Until the early 2000s, corporate bribes in Germany were actually tax deductible.) These extraterritorial provisions gave the FCPA controversial authority, which would later be reinterpreted and then extended to dramatic effect. Private corporations headquartered in the United States are also subject to the law.

In 1998, when Congress held new hearings… almost no mention was made of bribery’s impact. Instead, the rhetoric was reframed to focus on how kickbacks being used by other countries were undercutting American competitiveness.

The second part of the FCPA, which owes its existence to William Proxmire, criminalizes the actual paying of bribes to officials of a foreign country. The law states that a company needn’t actually pay a bribe to a foreign official to fall afoul of the law — the promise of a payment or “anything of value” is enough to trigger a violation. The statute also ensures that corporate entities do not avoid culpability by using the financial chicanery that Gulf, Lockheed, and others had employed in using a middleman, agent, or hidden subsidiary to pay a bribe. The law makes clear that corporations are liable for the bribery of their subsidiaries and their agents.

Proxmire had to fight for this provision, as many of his senatorial colleagues did not believe it necessary or feasible to criminalize bribery. Some argued that requiring corporations to disclose their bribes would be sufficient — that multinationals could be counted on to police themselves, to turn up evidence of their wrongdoing, and to implement the necessary changes. “Certainly, there are subtleties and complexities in the foreign bribery issue,” Proxmire said, “but we should be able to agree after more than a year of investigation the time has come to provide a remedy for an act as simple and outrageous as bribery.”

However profound the FCPA’s ratification, the subsequent history of its enforcement has been disappointing. During the congressional hearings, Senator Proxmire and others made clear their preference that the SEC be in charge of enforcing any new antibribery law. This was not only a practical decision, given the SEC’s history of securities regulation and its investigation of corporate bribery after Watergate, but also one driven by a deep skepticism, held by Congress and the public alike, of the U.S. Justice Department at that time. “If we learned anything in the Watergate affair, we learned that the Department of Justice is not a department we can always rely on, especially when you have top influential corporate officials that are involved,” Proxmire said. “They prosecute the hoodlums. They haven’t got such a good record on white-collar crime.”

The problem was that the SEC did not want the job. The commission’s chairman, Roderick M. Hills, testified before Congress in 1976 that it “would prefer not to be involved even in the civil enforcement of such prohibitions.” The SEC recognized that enforcing a foreign bribery law, ipso facto, would necessarily involve it in matters of U.S. foreign policy and national interests — an expertise far beyond its official mandate “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” as Barbara Black, a professor of law at the University of Cincinnati College of Law, has pointed out.

In the end, the solution was a division of responsibility: Roughly speaking, the SEC was tasked with enforcing the books and records provision of the FCPA, and bringing civil cases when and where necessary, and the Department of Justice was tasked with enforcing the criminal prohibition against bribery, and bringing charges when and where necessary. In truth, neither entity was adequately prepared, from either the perspective of resources or proficiency, to prosecute large corporations. It is perhaps not surprising then, that between 1977 and 2005, the Justice Department brought only sixty-seven FCPA cases — an average of less than three a year.

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By 1999, the leading industrialized countries of the world, following the United States’ example, finally banded together to outlaw commercial bribery. This was achieved through the Organisation for Economic Co-operation and Development. The OECD, an intergovernmental economic organization, was formed in 1961 to help administer the Marshall Plan for the reconstruction of Europe. Its members — who today represent thirty-five countries, including the United States, Germany, Canada, and Japan — collectively account for 70 percent of the world’s exports and 90 percent of foreign direct investment. Many of these countries had continued turning a blind eye to bribery long after the United States had outlawed it, but following a decade of intensive negotiations, each of them pledged to reform their respective laws so as to outlaw commercial bribery, and to empower their law enforcement agencies to cooperate on international corruption investigations, including by sharing evidence. The agreement was known as the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

The OECD Convention was a political and economic victory for the United States, which had been lobbying its major trading partners to implement the law. “We put all our eggs in the OECD basket, and it paid off over time. The U.S. really got what it wanted,” Peter Clark, who traveled countless times to the OECD headquarters in Paris, said.

Ironically, by the time the industrialized world committed itself to outlawing bribery, communism had collapsed, and with it the FCPA’s major motivation to protect democracy and citizens overseas. In Spalding’s reading: “With the collapse of the Soviet Union . . . the foreign policy implications of antibribery law gradually grew obscure.” In 1998, when Congress held new hearings on the FCPA to amend the statute to better conform with the OECD Convention, almost no mention was made of bribery’s impact. Instead, the rhetoric was reframed to focus on how kickbacks being used by other countries were undercutting American competitiveness.

The perceived victim was no longer poor citizens overseas, or democracy, but American business itself. Throughout the 1990s, under a pro-export Clinton administration, corporate bribery had effectively become a trade and commerce issue, not a foreign policy matter, and the FCPA, an instrument for protecting American corporate power. Andrew Pincus, then general counsel for the Department of Commerce, told Congress that, according to estimates, U.S. businesses had lost out on $30 billion worth of international contracts because their foreign competitors were still resorting to bribes. The new mind-set of “leveling the playing field” meant assigning the FCPA to monitor the market system. A disconnect between the spirit of the FCPA and the DOJ’s actual enforcement began to harden into a misguided policy.

Corporations, meanwhile, simply ignored the new law, evading law enforcement while paying lip service to tighter accounting controls and antibribery measures. They succeeded in bribing one of the most dangerous dictators on earth, Saddam Hussein, directly under the scrutiny of the United Nations, despite one of the most comprehensive and seemingly effective sanctions regimes in history. Iraq was a wake-up call, as it revealed that corruption remained rampant despite the FCPA and the OECD Convention, that merely having a law on the books was not a sufficient deterrent, and that bribery remained a critical foreign policy concern.

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David Montero has documented the impact of corruption in South and South East Asia. Formerly a correspondent for The Christian Science Monitor and a regular producer for PBS’s flagship investigative series, FRONTLINE, his work has twice been honored with an Emmy Award nomination as well as the South Asian Journalist Association’s Daniel Pearl Award. Montero has also written for The New York Times, The Nation,Le Monde Diplomatique, and many others.

Longreads Editor: Dana Snitzky