140. Memorandum of Conversation1
SUBJECT
- Commissions Paid by Northrop to Middlemen in Iran and Saudi Arabia
PARTICIPANTS
- Northrop Legal Advisers—Mr. Lloyd Cutler
- Mr. Howard Willens both of Wilmer, Cutler and Pickering
STATE
- D—Mr. Ingersoll
- T—Mr. Maw
- L—Mr. Leigh
- L—Mr. Feldman
- D—Mr. Pendleton
- NEA/RA—SEPalmer, Jr.
Mr. Cutler said Northrop wanted to give State and Defense a status report on the question of commission fees, now being investigated by the Church Subcommittee and the SEC. The Northrop representatives were calling on Defense (Hoffman) May 23. Cutler asked Willens, who recently visited the area, to take the lead.
Mr. Willens said Northrop viewed the situation regarding commissions in Iran as “tolerable and survivable”. Ambassador Helms had [Page 476] agreed with this assessment, according to Mr. Willens. The Acting Secretary wondered if the worst cases of commission payments had occurred before the Shah took steps to rectify the situation. Mr. Willens agreed; thereafter Northrop had taken appropriate steps to avoid commission payments except for actual services rendered. (Later in the discussion Mr. Willens said Northrop was looking into allegations that “some very minor payments” were made to tax collection officials by one of Northrop’s Iranian agents.)
With regard to Saudi Arabia, Mr. Willens said the situation was “very difficult”. In 1972 Adnan Khashoggi (Triad) had sought and received from Northrop a payment of $250,000 which Khashoggi averred had been demanded by the then Commander of the Royal Saudi Air Force. Six months later the then Deputy Commander (now Commander—Lt. Gen. Zuhair) of the RSAF had demanded $200,000, according to Khashoggi, and this amount was paid to the latter by Northrop for transmittal. After these payments were discussed with DOD, they were deemed not allowable in the context of the pertinent FMS case, and they have now been “netted out”. Mr. Feldman noted that this $450,000 was peanuts compared to the $45 million which Khashoggi was reportedly obtaining as his 5% of Northrop’s Phase IV program in Saudi Arabia. Mr. Cutler said the $45 million cited by DOD was inaccurate. Khashoggi was due 5% only on the Northrop portion of the program, i.e., only a $20 million fee.
Mr. Maw said State would be working out with DOD in the near future a policy with regard to payment of commissions and agents fees in Saudi Arabia. Tentatively we had concluded that no commissions should be paid in connection with FMS cases, except of course for actual services rendered. There followed an exchange on the Church Subcommittee’s investigation, with focus on Section 4 of the Ernst and Ernst audit report. Mr. Cutler noted that the report cites the name of Prince Khalid (presumably, Khalid bin Abdullah’ bin Abdul Rahman, who holds no official position in the SAG). It was acknowledged by the participants that much of the information which the Church Subcommittee has or will soon have will be made public.
Mr. Cutler said Northrop plans to send Thomas Barger, formerly head of ARAMCO and now an outside director of Northrop, to Saudi Arabia in early June to consult with pertinent Saudi officials. The Acting Secretary and Mr. Maw agreed it was wise to inform the Saudi Government in advance of probable publicity regarding commission payments. (Note: See also Jidda 3378.)
Mr. Willens asked the Department to consider whether Northrop should make an effort with the Church Subcommittee to withhold the names of the two Saudi generals as well as information which would enable their easy identity, and whether the Department might make [Page 477] such an effort. Mr. Cutler thought that the USG’s foreign relations interest would be the only basis for confidentiality and that the Government should raise that concern. The Acting Secretary opined that disclosure of the names would be of no value, and noted the possibility of unfairness to the individuals concerned, particularly in view of the uncertainty whether they received the payments.
In response to a question Mr. Cutler said that in Saudi Arabia, Northrop normally included a 5% commission in FMS cases, and a 10–12% commission on direct sale cases. The French paid commissions up to 20%, and if US companies were forbidden to pay any commissions, other parties would likely get most of the sales. Northrop favored the disclosure to the local government of all commission payments and diplomatic efforts to encourage other exporting countries to join us against payment of commissions. Mr. Cutler noted that Khashoggi reportedly was peddling the story that Northrop itself had instigated the current controversy over commissions, in order to wiggle out of its commitments to him. Mr. Willens returned to the question of the broader US/Saudi bilateral interests, not permitting this commission question to disrupt such important elements of our relationship as Northrop’s extensive involvement in Saudi Arabia. He thought the SAG might react strongly against disclosure of high level corruption. Mr. Leigh said we regarded the United Brands case as a precedent, i.e., we cannot be in a position of giving advice on disclosure and cannot intervene. Granting this, Mr. Cutler said, Northrop wanted to be as helpful as it could, in the interests of our bilateral relations and its own self-interest, and therefore would like to have the Department’s and Ambassador Akins’ thoughts on how to minimize damage in Saudi Arabia. The Acting Secretary said we would seek Ambassador Akins’ views now, and agreed it would be well if Mr. Barger called on the Ambassador before informing SAG officials about the probable forthcoming disclosures.
The Church Subcommittee expects Northrop’s report June 9; Barger plans to visit Saudi Arabia the first week of June. The Subcommittee plans to hear testimony on Saudi Arabia in executive session about mid-June.
Summary: Officials of the Department of State met with Northrop’s legal counsels to discuss the developing problem of Triad’s commission fee, under investigation by the SEC and the Senate’s Church Subcommitee on Multinational Corporations.
Source: National Archives, RG 84, Jidda Embassy Files: Lot 79F80, DEF 12–5.13, Northrop. Confidential; Nodis. Drafted by Palmer; approved in D by Miles Pendleton. Hoffman is not further identified. The time of the conversation was not indicated. An untitled paper summarizing Northrop’s relationship with Triad and a description of the Peace Hawk IV and IV programs are attached but not published. (Ibid.) Telegram 3378 from Jidda is published as Document 135.
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