160. Telegram From the Embassy in Saudi Arabia to the Department of State1
6254. Subject: Prince Sultan Discusses Northrop Corporation, Raytheon, and Agent Fees. Ref: Jidda 5639. Department pass SecDef for action; USMTM Dhahran for info.
Summary: During a meeting with MinDef Prince Sultan September 10, Ambassador pointed out that problems related to Northrop Corporation’s F–5 projects and payment of agent’s fees had been postponed but not solved. Unless Northrop’s agent Adnan Khashoggi could be persuaded to relinquish his agent’s fees, Northrop might have no choice but to go bankrupt, or cease operations in Saudi Arabia. Either way the SAG’s interests would be hurt. Sultan said Northrop’s problems were not his fault; he had a contract with the USG, and he expected the USG to stand behind it. He suggested the replacement of Northrop personnel by Blue Suiters, or that the USG—which had started the problem—change its laws or pressure Khashoggi to give up his claims. Sultan was impressed however to learn that appeals by governments of Jordan and Iran to Northrop agents in their countries had been successful. He said if USG could provide him with a letter giving details [Page 538] of the successful action against agents in Iran and Jordan, he was willing to have another crack at Khashoggi. Sultan also intends to promulgate a comprehensive ban against all agent’s fees for military sales, either by the FMS or government to contractor route. He and his lawyers wonder if such an order—if issued by a sufficiently high and authoritative Saudi Governmental body—would give the Northrop Corporation and other companies an out before U.S. laws on grounds of force majeure. His legal advisors and Min State for Foreign Affairs Prince Saud are working on such a SAG statement of policy. Would this work? Could Dept provide a letter giving details of successful pressure against Northrop agents in Jordan and Iran? End summary.
1. Ambassador met with MinDef Prince Sultan bin Abd al-Aziz in Taif afternoon September 10 to discuss numerous US/Saudi military questions (septels). Following the six month extension to February, 1976 on Peace Hawk III, the Ambassador said the problem Northrop Corporation faced with Agent’s fees in the Peace Hawk Program had been postponed, but not solved. The total amount of fees due to Adnan Khashoggi under the subsequent phases of the Peace Hawk Program, could total well above $80 million. These amounts—as had previously been pointed out to Prince Sultan—would exceed the company’s profits in any operating year. Since company lawyers had concluded there was no way Northrop could avoid payment of Khashoggi’s fees on the Peace Hawk Program—whether or not these fees were allowed by the SAG as part of the total cost of the Program—the company faced either bankruptcy or a need to withdraw from its Saudi Arabian operations. The Ambassador noted that Khashoggi was extremely rich, and he had thought that Khashoggi might be susceptible to an appeal from the SAG to his Saudi Arabian patriotism. Surely Khashoggi would not want to harm the well-being of a country that had furnished him the basis for his present financial well-being, and could continue to be important to him in the future?
2. Prince Sultan said the U.S. must be fair, and recognize this was really not his problem. He was in no way to blame for Northrop’s difficulties. He had been dealing for years on this program with the USG and had never been told by any Ambassador or USG representative, before Asst Secretary of Defense Ellsworth, that agent’s fees were involved in FMS cases. He noted, moreover, that all of these sales cases included a statement to the affect that “no agent’s or commission’s fees had been paid to obtain the aforementioned contract.” He said that his contract moreover was not with Northrop but with the United States Government, and he expected the USG to stand behind its commitments. The USG therefore could pay the agent’s fees itself, or take over the operation of the contract with Blue Suiters, or change the law under which Khashoggi had a hold on the Northrop Corporation. The trouble [Page 539] all came about because of the Department of Defense and Congress, and they should try their hand at solving it. If it was the intention of the US to harm its political and military relationships with Saudi Arabia, it should speak more plainly. In the meantime, he was in no way to blame for Northrop’s debacle. At this point Sultan called in his legal advisor Dr. Ghazi Nuseibeh and reviewed for him the preceeding discussion.
3. Ambassador Akins said that from the standpoint of equity there was something to be said for Prince Sultan’s position. On the other hand, as a practical matter, and as a matter of realism, he could assure the Prince the US Government would not repeat not pay Khashoggi’s agent’s fees, nor would it take over the operation of the Northrop contract. He asked again if there were not a possibility that Khashoggi might forego his commission on succeeding portions of the Peace Hawk contract? It seemed to the Ambassador he could be asked to pass up this particular opportunity for profit. Alternatively, the Ambassador, who thought Sultan might have been looking for ways out of the impasse, asked if he (Sultan) had ever thought of considering Peace Hawk IV and V as part of the overall Peace Hawk effort, and therefore part of an old case. In these circumstances agent’s fees might still be payable notwithstanding the strong and clear position his Royal Highness had taken last spring against future payments of such amounts.
4. Sultan said he could never do that. Such an attempt to get around the clear dictates of law and morality would be wrong. It would never be accepted by the Council of Ministers nor by the Saudi public at large. He would not even wish to mention such chicanery to any Saudi official. Sultan asked why the USG didn’t try to put pressure on Khashoggi? Khashoggi’s corporation after all was not Saudi but American. Khashoggi had many business interests in the United States and Sultan thought the US Government could easily let Khashoggi know that his stubbornness was hurting US interests, and that as an important American businessman he ought to withdraw his claims against Northrop. It seemed to Sultan that an approach to Khashoggi by the USG would be more logical, and also more likely to get results.
5. The Ambassador again argued that surely Khashoggi would not and could not remain indifferent to an appeal to his patriotism and to his business future from the Saudi Arabian Government. He noted that when faced with a similar situation the Shah and King Hussein both had forced—in the name of their country’s defense interests—local agents to stand down from their legal rights. Surely claims of national interest were just as binding upon Saudi citizens? Sultan said this was of course true, and asked the Ambassador whether the situations in Iran and Jordan were actually comparable to the one they were discussing [Page 540] in Saudi Arabia. The Ambassador said to the best of his knowledge they were. Sultan then said he would be willing to have another go at Khashoggi, and would again try to persuade his fellow ministers to support him if the USG could provide him with an official letter stating (A) the similar nature of the Northrop contracts in Iran/Jordan/Saudi Arabia, (B) the action the other governments had taken—either via royal order, a parliamentary decree or some executive order against the agent, (C) the response of the agent and (D) an affirmation that the agent’s fees were subtracted from the previous total of the government to government contract. Sultan also said that because he would have to cite Khashoggi by name, he would like the USG’s letter specifically to mention the identity of the agents in the other countries. The Ambassador said he would see what kind of a letter along these lines he could obtain from Washington. Minister of State for Foreign Affairs Prince Saud here joined the discussion.
6. Sultan told Saud the question of agent’s fees had been a bothersome one and all these fees must be stopped. He asked the Ambassador if all other US companies had paid large agents’ fees? The Ambassador said, that of the companies now being investigated in the U.S., Raytheon paid large agent’s fees on its contractor to government sales, but he had been assured by the company that it had paid no bribes. The Saudi Government therefore probably should not expect hostile Congressional attention to be given to the Hawk missile and the improved Hawk missile contracts with Raytheon as with the Northrop or Lockheed contracts where alleged bribes were also involved. He also told the Prince, that as a result of the SAG’s stand on FMS cases, US regulations had been changed to require a clear statement of the amount of the agent’s fees. The regulations would soon also require a similar statement of agents fees on all contractor to government sales as well.
7. Sultan thought this was excellent and should have been done long ago. He had been discussing the agent’s fees problem with Crown Prince Fahd and Prince Saud, and was preparing a government instruction that would (A) prohibit payment of any agent’s fees for any military-type sale, from any nation, be the sale FMS or government to contractor. (The Prince was confident the Council of Ministers would agree to apply this ban to para-military organizations such as the National Guard as well), and (B) prohibit any non-Saudis from functioning as agents for any projects in the civilian sector, and (C) prohibit non-Saudis from receiving any portion of agent’s fees. Sultan spoke indignantly about the numerous Lebanese that were benefiting from the lucrative agent’s practice in Saudi Arabia. If this continued, he imagined the only jobs hard-working Saudi citizens could find in a year would be on the government payroll. [3 lines not declassified]
8. Going back to Northrop’s problems, Sultan wondered why his earlier prohibition of agents fees—which he noted had been publicly [Page 541] read throughout the Kingdom—did not allow Northrop to plead force majeure in the courts of California. Could the SAG strengthen the ban? Prince Saud and Dr. Nuseibeh thought this might help Northrop. Saud did not believe it would be necessary to go as far as issuing a royal decree on the subject; Dr. Nuseibeh agreed. Sultan said he might, as Minister of Defense, address such an order to the chairman of the Council of Ministers, Crown Prince Fahd, and ask the Crown Prince to promulgate it in his name, or in that of the Council of Ministers. The legal standing of such an order would be identical to that of a Royal Decree, and—faced by the prospect of official displeasure and an absolute ban against payment of agents’ fees any place—the company would have an effective basis on which to make a force majeure argument in American courts. Prince Saud and Dr. Nuseibeh were instructed to get to work on the project immediately. Sultan said he would provide the Embassy with a copy of whatever was promulgated, and in the meantime he hoped the Ambassador would try and get as soon as possible from the Department a letter along the lines mentioned in paragraph 5 above.
9. Comment: Khashoggi made a strong case for himself with the Council of Ministers, evidently overriding Sultan’s earlier decision. His victory, equally evident, was not repeat not complete. If Sultan had been looking for ways to continue payments to Khashoggi he surely would have considered the exit raised in paragraph 3. Not only did he reject vigorously the possibility of continuing some agents fees in this particular FMS case but he proposes stopping all agents fees on all military contracts—including the National Guard. If these new regulations are actually promulgated Saudi Arabia will have taken a long step forward; it will have removed a major irritant to the young or more honest in the officer corps, and hence have enhanced chances for continued stability in the Kingdom.
10. Action requested: (A) A letter to Prince Sultan from Secretary of Defense Schlesinger in which we detail our success, and that of the Governments of Iran and Jordan in persuading the agents in these countries to relinquish their legally authorized fees from Northrop Corporation projects, and (B) Department’s view on whether an absolute Saudi ban on agents’ fees would constitute valid basis for force majeure argument by Northrop—and other companies. It should be emphasized that the new Saudi orders will apply to government-company contracts as well as FMS cases and that as a result of the publicity surrounding congressional investigation of Raytheon, and especially Lockheed, both those companies will soon face the same problem as Northrop i.e. Saudi prohibition of all agents fees regardless of valid U.S. contracts requiring them to pay vast sums to their agents.
Summary: Akins met with Sultan on September 10 to discuss the possibility of strengthening Northrop’s case against Triad, in view of Khashoggi’s refusal to relinquish his commission.
Source: National Archives, RG 84, Jidda Embassy Files: Lot 79F80, DEF 12–5 Agent Fees. Secret; Immediate; Exdis. Drafted by Horan; cleared by Murphy; approved by Akins. Repeated to USMTM. For telegram 5639 from Jidda, August 12, see footnote 1, Document 154.
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