Report of the Securities and Exchange Commission on questionable and illegal corporate payments and practices


Material Information

Report of the Securities and Exchange Commission on questionable and illegal corporate payments and practices
Physical Description:
69, 44 p., 9 fold leaves : ; 24 cm.
United States -- Securities and Exchange Commission
United States -- Congress. -- Senate. -- Committee on Banking, Housing, and Urban Affairs
U.S. Govt. Print. Office
Place of Publication:
Publication Date:


Subjects / Keywords:
Corporations -- Accounting -- United States   ( lcsh )
federal government publication   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )


Includes bibliographical references.
Statement of Responsibility:
submitted to the Committee on Banking, Housing, and Urban Affairs, United States Senate, May 1976.
General Note:
CIS Microfiche Accession Numbers: CIS 76 S242-5
General Note:
At head of title: 94th Congress, 2d session, Committee print.
General Note:
Reuse of record except for individual research requires license from LexisNexis Academic & Library Solutions.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 024431537
oclc - 19014432
lcc - KF49
System ID:

Full Text








PA- MACTious

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MAY 1976

VvIoUd hm the twe of the Ckmmlttee on Banking, Housing and
Urban Affaim

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W114IAM PROXMIRE, tseouna, Oprimg
ALAN CRANSTON, California JESSE HELMS, North Carolna
JOSEPH R. BIDEN, Ja., Delaware
ROBERT MORGAN, North Carolina
KnpFWHa A. McAE, a.ItM, Dswter
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Roams L. Kumtuu, Proleaefoud Btf M1emler
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2ICnieb Slahs Sena6a

May 14, 1976


I m submitting for the use of the Committee the report
of the Securities and Exchange Ccumission on Questionable and
Illegal Corporate Payments and Practices submitted to the
Senate Coumilttee on Banking, Housing and Urban Affairs on
MW 12, 1976.1

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May 12, 1976


In a letter dated March 18, 1976, to Chairman
"PrO'xmire, Chairman Hills offered to provide-a detailed
analysis of information concerning illegal or questionable
foreIgn pamyent4 contained in' public documents filed with
the Securities and Exchange Commission. The following sets
fotthb that report.
SThe almost universal characteristic of the cases re-
viewed to date by the Commission has been the apparent frus-
tratfon of our system of corporate accountability which has
been deiqhed to assure that there is a proper accounting
ofrtibe use t. corporate" funds and that documents filed with
the-tommission and circulated to shareholders do not omit
or misrepresent'iaterial facts. Millions of dollars of
funds have been inaccurately recorded in corporate books
and records to facilitate the making of questionable payments.
Such falsification of records has been known to corporate
employees and often to top management, but often has been
concealed from outside auditors and counsel and outside


.... :AMR WIT 9: ':il ...
Accordiftgly, the pr ima~ry thrtit If jd'r 6ftel 16 l

been to rst:re .the ef:f.i:cy of the s_ F o o..

accountability and "to encourage the -boar-as of- di I-it

to exercise their authority, to deal with-the issue.

To this ena we bore sought iidepend.i'vw of past

disclosure in our enforcement actions a nd In ur Voluntary

disclosure program; we have requested the auditing profession

to review its procedures and to. mke. suggestions for

dealing with the problem and we have asked the New York

Stock Exchangf and others to consider :h:Iping. us strengthen

the ability and resolve of the.,boards of:.qur major.. corpor.ations

to act independently of operating management. ,.,

Part I of this report provides a desczitptI&onaf t

Commission's activities in this area, as well as .n Analy sis

of public information that has been disclosed as a r-esult of ::

these. activities -and of the response of the private sector

to the problems we have.,jidentified. 7P.

Part II contains the Commission.'s. analysis of,. and.,..

recommendations with.respect to, S. 313.3, as well as. it
.6 -A-

legislative proposal to deal with the matter of questionablee.

and illegal corporate payments and a .description f. furthe.r.
actions taken by the Commission to encourage corporJte ..

accountability in this area. a t &J

t ee te i z1i:e *:'t dea .wh t he lu

i.-.., .::r 1: "i .' .


In order to restore the integrity of the disclosure

system and to make corporate officials more fully accountable

L to their boards of directors and shareholders, the Commission's

basic approach has been twofold:

-- To insure that investors and shareholders

receive material facts necessary to make

informed investment decisions and to assess
the quality of management; and

-- To establish a climate in which corporate

management and the professionals that

Advise them become fully aware of these

| problems and deal with them in an effec-

tive and responsible manner.

I The Commission is confident that its legislative

I proposals and the suggestions contained in Part II of this
Report will ,help foster a climate that will rectify many

Sof the problems we have identified.


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The Commission's Activities
and Conclusions w e ..........

Sources of Information:

The Commission's

Commission Practices with Respect to
Disclosure of Questionable Payments

Nature and Detail of Disclosure .

Analysis of the Information Disclosed

The Response of the Private Sector.

Conclusion . . . . . .




. . 13

a a U a

. . 34

. . .0 43

a a a 0




Legislative and Other
Proposals . . .*. . . ...

Discussion . . . . . .

Draft Legislation Proposed by the
Commission . . . . . .

Section-by-Section Analysis of the
Commission's Proposed Legislation .

SD. An Approach to Encourage the Establishment
of Independent Audit Committee and
Independent Counsel to Advise the Board
......of Directors .


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A synopsis of the public filings made with the
5' .. ... ...
... .. .. ":" -.., ,, ..*, .. ": . -A : -,"* ,,'- -" ,; ** *'.
Commission has been assembled in tabular form, attached
5:","t ." ": . *: 5.. 5 5 4
as Exhibit A. The Commission's staff, in preparing

these tables, has analyzed the public disclosures filed

with it by'89'corporations as of April 21, _1976, that

refer to questionable or illegal foreign and domestic
,. I .-.
,,,, i ; *'* :.|! ' .' ., . -< ., > . . : *
payments and practices. In addition, the staff has
S 1 :'' ,5 "* .. .. ;" ., -
Sprepared summaries of the six special reports obtained
: ** : -, : ? = < ^ 55 -. .
as- a result of our enforcement actions, attached as
. ..:.. . . . .,
SExhibit B. Finally, we also have included as part of

Exhibit B a description of the allegations made in eight

i other enforcement actions in which we have obtained

judicial relief but where reports have not been completed
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;: The tremendous variation in the types and amounts
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* of payments and the attendant circumstances disclosed
..' .... ,..' it,, & ,.,i '..r .. ., ... .'.J^ V ..*. ".* . .. .. ,-' '- ..' .-' 3 .. ** :.. ,-
- ,t the reports filed with the Commission make categorization
I" -* .s "' : '" " "" -! ". S "
I or quantification of the extent and seriousness of the

problemei of questionable or illegal foreign payments
ij :, rt .;:i 6 : '.. .. .' :. . ~ -. -.. .. ; . **.- . *
i difficult. Accordingly, we recognize that the matters

trepolrted in these exhibits may lead others to conclusions


i~ iiiiiiiiiiiiiiiiiiiiiiii
cocrigte a e@ exet h'-Ntdses69"h rbe
.thatiiidifferiiifromiiouriiown. The Commission, therefore, isiii~iiii

publ~~ii i c documents
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Comite cn eahHH i tsondtriainweeaporae
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iiiiiiiiiiiiiiiiiiii ii i iiii ii iiiii iii ii i iiii iiiii iiiiiii iiiiiiiii iii ......

In 193 asarslto h or ftefieo

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tha ths ac 'ei"Ie fp'L1
i z 01:

cac opbi nesos h odsloueo hc ih
enai viltin of th feea euiis as n a
1974 th Comsinteeoepulse ttmn

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expressing the view of its Division of Corporation Finance
C c ." ~ :i . .
concerning disclosure of these matters in public filings.
-' ;._ -
The Commission's inquiry into the circumstances surround-

ing alleged illegal political campaign contributions revealed

that violations of the federal securities laws had indeed

occurred. The staff discovered falsifications of corporate

financial records, designed to disguise or conceal the source

and application of corporate funds misused for illegal

purposes, as well as the existence of secret "slush funds"

disbursed outside the normal financial accountability system.

These secret funds were used for a number of purposes, including

Sin some instances, questionable or illegal foreign payments.

These practices cast doubt on the integrity and reliability
, 1 .- -
of the corporate books and records which are the very foundation

of the disclosure system established by the federal securities
.. e ......
"t." -
". '" : .'. ..- : .. :' '* ***.' . .
""' "'e resutingi investigations' cuiiinated in the institu-
i-; -.. ...] : .:'. -, .. ,.. : ..
1! tion of injunctive actions against nine corporations during

t .he one-year period, following the Spring of 1974. ..Subsequently.

Other cases were brought involving questionable or illegal
I-' . ....* **^ ..^ -" :^ "
t foreign and domestic payments and.practices. Details of the
l .. .j : y -: -.. ...-"
Facts alleged and ultimately-established in these enforcement
i ,-,,,. ,. . .5, .. . ".
F action ftaru' contained in Exhibit 5. .
|c.e"" ,e No '. M r T '1974.:).
||1. *' .. ;'' ; 9 : .. ., . .'. -. :* .
/ V Securities Act Release No. 5466 (Mar. 8, 1974).
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I niaciiiteiouteiiaesfiedisofMai10

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future iolatins of te fedeal secu~toes aws* I
...tii hi rt e of................. de re r qui ed th
I II of independent members of its board ofiiiiiiiiiiiiiiiiiiiiiiii directorsiiiiiiiiiiiiiiiiiiiiiiiiiiandiiiiitoii
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have utilized ~~~~~~~indpnetacutntin ea one
to codc @hr heaiaio f mn te hns
ii theNH HNHH corporat~iiiion' book aniecrs
Th pca omtesms sbi opeerprso

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ComsinV aveo nl 1U ed eiL fA

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soeo h niiuldfnans h@otisot :i
cannot, foiore omn natintpeetypni
iiiiiiinoriicaniiiweiidiscuissiitheiiiiictsiiiihati have
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enocmn i~in.

.. . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . .


individtt members of management, matters of corporate

etructtre and Ipolicy designed to;prevent recurrence, and

related subjects.: Restitution has been made' to the corpora-.
tien in soome cases-, To date,-six reports have been filed.
S'*Ott' enforcement activities are continuing. On May 10,

S1^7S, the Conission commenced an enforcement action against.

the General Tire: and Rubber Company for alleged violations

of the2 federal securities laws arising out of the nondis-

closubreot certain corporate practices. The Commission alleged,

aiolltrhfr things, that, under- the direction of its President,
tH t'Company diverted corporate funds for political purposes by
H: t: bvmpn:ivre
by- amens of purported bonuses1 and salary increases. The Comn-

disstaon also 'hargedz the -existence of various "slush funds,"

Wi U*tluir one tund created with the:-.knowledge and approval of
the senioC management Of the company's international-division

a:nd adlintsteted by the managerial director of one affiliate,

66tose activities in connection with the fund were generally

I known to senior management. This fund was alleged to total
i as much- as $3.9 million and was used, in part, for payments
9:: .4 '
to.. foreign government officials. The Commission also
UHHH. . . -. ..... -
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.3/ The reports are required to be filed with the court as
tl* aca4--. a.t b.Qs .. a .action and with the Commission
li as an exhibit to the company's Current Report on Form
1 8-3i . 8 : e t\eports egetrally provide a detailed and graphic
| *V. u f&_ the -tI at terms examined A- W.-the aomit Utes. The

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Sthe enafoacwntactions wundetaken, and that the most appro-. q. was to courageae voluntary corporate disclosure

Sof qatstLqoAble...or illegal foreign payments. It therefore

was suggested in public statements, including the testimony

,sj !qmxi ssionet Loomis before the Subcommittee on International

Economic Policy of ,the House of Representatives .Committee

on LAtenational .Relatiops, that companies determining
tAkeqight .have engaged in sueh activities should conduct

4 .investigation of the, facts under the auspices
Sof mesons not involvedd in the questionable activities.
7 If the investigation disclosed a problem, the,company was

encouraged to discuss the question of appropriate disclosure

"of these latter With the Commission's staff before filing

ai documents."
[l' b Ofi +i ... +i "+-+,:+: '"" *
The sometimes unique problems involved in the dis-

r'nn"ure o-- questionable or illegal foreign payments1
:"boweverM thed ,eresultant uncertainties concerning the
77. 1. . .. . .
r+ Ute:a oe 'ad peof required disclosures ptoupted the
Il-i .L i u ...i j1 i t -*S *' * t 1 '* : .: +, +. *++ ..-* i, j r. n .-- --

./ Disusso of t his nature a*re contemplated by
I. Rules l(dJand 2 of the Commission's Informal and
bser..^koceduvsm ..17 CFR.202.1(d) and 202.2, pursuant
# h Aifd ok'tlie sCoomisui 'sivisionrQf.
|n -441jrjti~n Uirqe ;enderu prQfiiki4 assistance and
nerpre~ativt qikf m.- milaly, the etafflof that
|l ..ivisiuno routne y revews the' flifgs the. CommI s aLon
|. receives pursuant to the requirements of the federal
i securities lawsva, and, when deficiencies are apparent
||| on the face thereof, may either contact the registrant
*. and seek to have the appropriate corrections made or
::, may refer the matter to the Division of Enforcement.
: See Rule 3(a) of the Commission's Informal and Other
E:I Procedures, 17 CFR 202.3(a); Securities Act Release
No. 4936 (Dec. 9, 1968).

II l"MO-M-



Commission to develop special procedures fo'ir 4 4idr antt ti:

seeking guidance as'to the proOert disclW*ure of tk*kSt:' ri.

These procedures, frequently referredito as the 12-6ehftdl "

disclosure program," have been deserfbed nzs6me t itilin

Chairman Hills' testimony before the Subcommittee on Priorities

and Economy in Government on January't4, '1976. ; .

in broad terms, the program requires that edila

determining that it may have a disclosure prob1be with fesptec

to questionable or illegal actiittis, inclad ing the itproper

recording or accounting of such activities, promptly ta#t" P

the following steps:7 *'1 ': .

1. Authorize a careful in-depth tivestigafiodL ^^Jr.
of the facts relating to questionable
or illegal foreign or domestic aetivttie ":" !
by persons not involved in the activities in
question. If practicable, such persons dhou6'ld
report and be responsible to a committee comprised

6/ Although the voluntary disclosure program was orig-
inally conceived td apply bnly to foreignpaymitt '- '
problems, in practice it has been applied to disclosures
of certain ddkstic problems as well. In-'ditioi to '
requiring appropriate disclosure under the federal
securities laws, the Comm-issio.-refers matters that ......
appear to represent violations of domestic law to.
the appropriate iaw enforceIent authorities. r: a i
.. .. I .
SAlthdugh participation in the voluntiay proom doi not
insulate a company.from Com'as ion efttceme etfattn.
it 4oes ditInish'the possibility thatethe ComMkijid
,vlll, in its ? jeceeo.'nt~e ^tion.^^
.. . .. .: .4 .4 :.
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: ,' * < J .' 7 .. *. i p : i'/ ^ <
: .. ,:; +,*' ^ : ~, .! -y & ++ ,*n -,! ''" ,,p"8 *..>, l:
'.1 dic-
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qript on, -A ii.. iito',

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of members of the board of directors who are not
.. officers of the. company and who -were not involved
:: :. in the suspected questionable or illegal practices.
*1. : T i" *- '
SGenerally, assistance should be sought from
thei-ndependent accounting firm that regularly
audits the corporation unless the .circumstances
suggest otherwise. The committee also should
consider retaining outside counsel...The investi-
gation should encompass the prior five years,
the period covered by the financial statements
required in annual reports and registration
:-statements filed pursuant to the federal
securities laws, but also should examine any
events occurring prior to that time that may
appear to be part of a continuing program or to
be r-elated to existing material contracts or
-business operations. At the conclusion of the
investigation, the committee should prepare
and submit to.tthe full board of directors
a ,report setting forth its findings. The
report should, to-the extent possible, contain
detailed information about each payment; its
T purpose and amount; the recipient; the country
n .injwhich ,the payment-.was made and the
Sidrcsmtances in which payment occurred. 8/
Illii: -
S2. The board of directors should issue an
Ii appropriate policy statement vith respect.
I; to transactions involving illegal or
|i .. estio unable activities in the United

I:A .1 .^'j .. I.* i.. c

Ja.eseant.ial element. pof. the voluntary disclosure program
1*" s t&ht'"ompanies"'must agree to gradt the Division of
0J enforcementt access to the report and its underlying
: documentation.

Materials submitted to the Commission may be subject
t.J tteleaar unde. the Preedoam of Information Act or
pursuant to Cgngressional-requests.. Specific claims
e..f temption from the Freedom of Information Act must
f be founded upon the provisions of that Act.
.. S ..
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iiiiiiiiii A t ......c l si..of..........a ic

aicurrentioiiainualireport.,irigistration. iiiiieitioriother..............

iiiiortin' iniivestigatiioni iinciuiiig
iiiiiiiiiiiiiiiiiiiiiii identificationiiiiofiitheiipersoiiiiciiiiiiiiiiiiii
_',u iW-t rdteti sn` do'itd
~ ~ ~ ~ r responsiiiiiiiiiiiiiiiiiiiiiiiiiiiiibiiiiie;iiii~i
2.Th oman' udetk-ngrgadigco-

.................iii .............................iiii ....= .. . . . ..... ... .... .... .. .... ... .... . .....= = = = = =

1:% The. corporation's. -undertaking to'complete
': the study and submit a final report:
.: .:* ; ** : .:; ** . .. ,' ; ,- ; ; / -,
.; 4'. The corporation's undertaking to provide
HE access to the Commission's: etaff to
ave information and documents developed
I-. bed d t :i:. ur ingw the .investigation- and .-

I54S1 5 t-aterAal: information developed regarding ,
: illegal or questionable transactions that
| i oc~~curred ing the- last five, yearea This
frequently would include their purpose;.
s .::. the amounts involved;-the extent of possible
i knowledge, approval or authorization of the
w ef.i t. 3 ?-: tranwact ions by.-; top- management deta ils of .-
any defalcations by corporate officials or
.....1, personall benefits. accruing to them;9the ..
*,, accounting treatment accorded to the transactions,
4L'- er ll-' including whether false fictitious or misleading
.. entries were made to record such transactions;
ij T; '.- thi existence-of any unreconcled funds,.
II! "slush funds," unrecorded bank accounts or
2i-/ ..: miilar *off book* accounts; the possible.
,~,' foreign and domestic tax consequences, if
... ::.y, of the reported activities; and the amount
Il- of business related to such payments and
I r^:-,, the psmmible:.ffect of their cessation ,,
a on consolidated. income, revenues and assets
JS ..... or business operations of the company; as
Swell as any other information that may be
X..:: caquLred on a case-by-case basis.:
*i O:3 "omnpa:ie s in- the voluntary disclosure program can
'flbrvtfr-e -t Sr' cmitla^f^tf th&e Cois-
::. 'a staftekS wLithout jeopardizing their participation in

tOgl'tab The, can,. however,. seek the informal views of
9W'Comtission itself concerning the appropriate
t~ f li '..:. ,:.. ,i '.. "' ; "':"' > :... *
9t1-e ot certain. matters. And the* staff bas, in its
"::: I ....."c . . a "' ".. .i. ... -4
.....i.( .:: : n o. **O *.*> :'. ', ... .. 'J &, - *. :.** ..
*0ule 1(d) of the Coumission's Informal and Other. Pro-
cduI !res, sura note 5, provides that the staff, on
.. request or on its own initiative, may present questions
Sto the Commission for its informal views. The Commis-
sion's decision to grant a request for informal views
i: is, however, completely discretionary.


discretionz brought particular'Ldlsclosure qqstiofl toV
-* f S :; ',. *ls t .,r a'' J
the Commipsion to obtain its views and comMunicate then
-- -," 44 :**.^ *. ".;. "j I.'iC ,; Y Ja -: * f'~ I
to the companies. invbIlvd' ..K..:;, -.. ,o .:

Although this report. and prior testdaoxfy nave described

the voluntary dieelosm: p:epftam i. orm eaetiii and it
', .. . , ".9i ;.: . =. .*'.:: .. :
frequently has received'cOnqfressionar. aM peblic attention,
'*' ... *' : * ** .... :% >*. ". *: *: ?H '.
it is important to note that there s no' requirement that a
* *"* : ...." . .. .^ '. :. / .; :. : : : *.. ... .....
company's disclosures concerning questionable payments be made
,. ,- - . .. 4 .: ". 4. A ,. -: h
within the framework of the program. r-auq registratnts have

simply, made what' they be appcoprlate disclosures
--- ^ *S p .. .r *. ''** \/
without consulting with the Commnission's statet M The nature
. . ^ ..~ I. ., .
and detail'of these disclosures re.fbet- those cOmptnies' own
I '. .- .; .. .r .t, . .' I,
independent judgments as- to" what is, waterr ial7 or.,hat
. *t "" s.
otherwise should be disclosed to investors and shareholders as a

matter of good corporate relations. Moreover a substantial
":' .: .'" . . V .. .
^nubbber 6f tbe*!p&ttfclp&Kt9Afrth4:h p|regara' r 'ai talsr

after consultations with the staff, but Without.,'f llmn the
.. *: "- 5 5- .* t :E 4 ....

10/ These. disclosures Still are subject to r:eviewvn f :tW
comment by the staff of the Division of Corporation
Finance in appropriate cases, as well,: as, to inquiry *:'
and action by the Division of Enforcement, if necessary.
t : ." -. -. l? :
3_/ Many of the companies that have made public disclosure of
these matters ii publ ic filings have included, an t4ct0
statement that ...,disclosure should not, be..eqd an .is.on
by the company of the materiality of the facts contained
therein. -
... . . : .. ..

.... . : . .,. -.I.. .. .
'.. $ ':* "?* :. :; : .:;.
; \ .. .:" ." 'i ":" %,' "i "* :~ .s a




'::" .:":* .. .- a 3 i :.. ..".." ** ** : ,i -* ** **, -
iformal views of the Commission. To date, fewer than twenty
; ", H' : *: ", .,
mpanies -- either by company or staff-initiated requests -

have obtained the Commission's informal views regarding the
n i3 :- : ... .W ^ * .,-,o ,J * ... -.. ".^
appropriate disclosures called for by the facts presented.
'" :' ,,T f .' '-" S ; ". * : ** : : .i : ". * '*

. a. .1 ,

,|.di:. ate5 the ingj4 mal views expressed by tke Commission's

Af%4 d ictien taken by the Commission itself have been signi-
xi|antly influenced by the fact that virtually all questionable
Smeat maters. Stave involved the deliberate falsification of

a.iio eok. oE or records, or. the. maintenance of inaccurate or
|atq.., bqoks, and records which, among other .things, pre-

I|e theyepractices frcm coming to the attention of the
: m:"'n.'s .q4ito riIi.o.1utside directors p And, shareholders.. The

4..ce..,oef inaccurate... records has,.in our judgment, often
#...i.:,anindependent basis for requiring some form of
,& '" .. . 7....., ;a . -. 6
^ i i". ."* .^ p.l,^ .';, : -' *:* :-.. ;".,' . ;*.' .* *'*B '7 ..- -^ .:.. ; .-* 'L.* *'-*'...'. -".. : : ..,..':..... *0 .-', ; ,'*..' ... -. ,:* .... -*
%xRK it c r e Initiation of Commission enforcement action,
.. lesg o..vwhether the payments themselves were of material

.II 9QE. "a.aterial amoun.t-of business depended on their continu-

Chii .. .a ir i."L
-.TIw companies that made public disclosure of questionable
ox illegal payments after obtaining the Commission's
S .... p 1,v'Liews rveqintifief by a,.doble agteriak(**)
.it i Ebit A. I Three 6Ehers determined'not to make public
i',i!'.!4 ^iSlsuu.e~ t4 -.not ,included inJxht6t-A.

-14- :-

One consequence of the enforcement cases has been
: X '. '.4 4 J v .
a full accounting, usually undertaken by an independent
S t : : ', : AWIN '
committee of the board of directors assisted by independent
' -! : '. ,, s i d c i #,..-,
counsel and the company's outside auditors. In other Instances,
,, : + ? ,, ,, *- , ,, -:, ^ *" r: ; . 9 i c i .

arising under the voluntary disclosure program or made on a
voluntary basis, disclosures of a' ireateM-or leqier degree
o .... ... . ... :...
,. ^ I y .* T. ^ ..
have been made, depending on the circumstances .of a

particular case and the position of i Ahagement and their

professional advisers regarding disdlobutb'of maftera the: tie

deemed important to the company'"s sharehblderi- ,

These Commission and staff actions, "rcomplemenbed -by:

the increased' efforts of the accounting professiotrtotdiA1dOt

these practices and bring them to the attention of matigeaentt

and the board, suggest that in the future there will be far'li

fewer instances in 'which questionable or illegal'aymeni t: :'

.will. be, recordedd and made without. the A:o.wl-ed64 ,

of the auditors or board of directors. .Morover, itW 1sula1M

recognized that, since there have been so few instaneM to:d4iate

where the corporate records have been properlyrKept and thM

questionable payments known to both the company's abdittstrs e

and directors, past determinations by the Commission and Its:.

staff may, not reflect what will be required in.tha-futur&.n.der

different circumstances. h C 1B ....
A 4-
... .i 't J" *" Quite apart from these-: nsi4'eratt:onsi,hovwev tthe
.. .. .. *: ** * vj) ;..: ..:: . .3
Commission has been of the 'view that questioaiible :r illtagal


t -15-

pa.ments that are significant in amount or that, although not
: ^ : i ,. :** .... .

significant in amount, relate to a significant amount of
1A A
business, are material and required to be disclosed.
v, ,:* ... s... .*' : ri.. .. . . !.' ,": *-
i:' The Commission is also of the view that questionable or
ATY.. -. * ..
illegal payments, if unknown to the board of directors, could
:e grounds for disclosure regardless of the size of the payment

IP"tself or its impact on dependent business because the fact
'. i. ,,, .?
that corporate officials have been willing to make. repeated
i 4 > > ; .e- : ". -.*'
'illegal payments without board knowledge and without proper

accounting raises questions regarding improper exercise of

corporatee authority and may also be a circumstance relevant to

the "quality of management" that should be disclosed to the

M.Aareholders. Moreover, even if expressly approved by the

.loard of directors, a questionable or illegal payment could

",use repercussions of an unknown nature which mjgbt extend

,txbeyond the question of the significance either of the
4 j q i q4 t.1 'P.
|aYent itself or the business directly dependentt upon it.
... : .... ... : .
"Id: exaeOle, public knowledge that a company is making such

Illegal payments, even of a minor nature, in one foreign

Countrydcld cause not only.expropriation of assets in
ii[, -I y :. . ... .

t..#ntty.but alsa "a asimlar-reaction oa a discontinuation
'3'materaia amounts of business in other countries as well.

i/ This occurred in the case of one major oil company,
whose payments in one country were asserted as a
basis for expropriation of properties in another.


"" "" '* -i--" ", *** r. :. ... i ;? ;. ** ...
In-a sense, therefore, a corporation that decides tod
...* . : . :
1:3~~~~~~~~~~~ ~ **-" ? *Ef *:* t 8 :.. *,":*
make questionable or illegal payments for reasons its board
::** "" . *? .:' :, L..* ... ,s -x *
considers to be good and sufficient necessarily must proceed
S14/ -:
at its own peril. The Commission may often not be able
"' "- i: l. .s :.;.. ** .. *. ; ,?:
to give comforting advice to issuers that wish not to make
2 ,6.
even generic disclosure of the existence of questionable or
** -1 5 ; T2,, 2 't C H "
illegal corporate payments. The Commission will, of course,

continue to make its position known and take appropriate

action when it believes the federal securities laws require
;. - * ** .: **.., ..*. ".. H":
disclosure of certain facts.
- .., ... .
'o :. .. ** ,, ,.. ;.A .. .
In situations that have come to the Commission's
.* 2. *. *. , .
attention, we have proceeded carefully to examine the full

facts and circumstances presented by any given case.
- 2 .: I ". .[ ... " , ,..
In so proceeding, we obviously must consider a variety of

*" -* ': * ; V ^ ; i]:
14J/ Management determinations in this area are further :..
:affected by the :.disclosure policies .sme. .:,..
companies that have decided, for reasons of good
shareholder relations, to make 'fell dii atosure o, -.-
foreign payments, whether or not legal material.
H *: ". ,. .'.\ **i, : : : .. r :
15/ That does not mean that the Commission; necesarily would
object to,.a filng Hthat; does -dot disclose a 41 ..-,:-
questionable payment revealed to our staff. Rather,.
we would refuse to provide .any comments &tn-sut .a.*au.

- * ...- 0 ; : .. .: .5


..H. a


9;: ''=

-17- "- -

't r, inbling the accounting treatment accorded the

W!ints In quest ion. the amount .bf -the payment and

its lea uity UNder local law, the recipient of the payment
Sthe purpose for which it was made the'- knowledge or

|ttcipation bj senior management; the frequency and
prVsieness of the payment practices; and whether the
pa~ip has 'taken measures to terminate -the activities.
| ~tyater this consideration has the Commis sion been

14p tO come to an informed view as to whether some

ptdc lure of certain matters was required.
. 8...) iThe discussion that follows should provide corporate
k-lagert: nd their professional advisers some guidance

K to -the manner'Atn which o'they migbt analyze the many that might be presented in cases of this kind.

oi" th dure'Not Othe rwise Required By A Specific Statute
^^^^^^^^I^diation^ Are Deftned By R rerende to the -
S heof. I ..ateriality ..

"I H .,:..
.. L ..Tae Co'mison has broad discretion to require specific

P$! ..."w .,c disclosures of. particulaar kinds of"facts.. The basic
l ln rhe disotsurFe system is found in Schedule A of the
: . ., : .- .. .
g^ : ^. ::" > :..."* ^ .* .:..
r 1 S.E: .. : ":: :.: . . . .


Securities Ket of- 1933, which specif-is. the LtqMs.' intoraqaion

to be supplied in regiLstrat ion .Lattes.fts a.or- publ ic of friag

and grants the Cmmiss ion broa.*discretipn to vary thee.:
requirements or to add or subtract items. ... .

In adopting Schedule A,. Congress directed the disclosure

requirements toward what it viewed as a reasonabl1e investor,:.

whose needs and desires for information were basic and included
information relating to the financial and operating condition

of the company and the quality ot Management; conflicts .

of interest; balance sheets and earnings statements, capital

structures rights of security holders, especially of securities

being offered; competition I*n the industry; signiint:: ... ..

customers; the backlog of orders;. poncessioqs hel4; lu:es ...

of business; classes of products or services;. the interests

of management in certain transactions; certain corporate
.* . -.. .. .. .*. . ... ... ...
loans to management, etc. Implicit in such disclosure
-. a f. .-Ul ,. .. .. .

their business and sell their products on the basis .of

quality and price rather than bribes or kickbacks. Such

W~ap -14c
16/ The views: expressed herein relate solely to circumstqAces
and practices impacting upon disclosures in proxy materfald
and registration statements filed with the Commission
under the Securities Act of 1933, and in annual and i
other periodic reports required to be filed under the
Securities Exchange Act of 1934.

\ \
\ \

.... ... ......
........ ....

!i:.": "A t'.

fetLicef natoenly bear upon the quality of a registrant's

i&sSSand'the attendant, risks; but also on. the quality

Law..]fift rtaati earnings. -^.- -
.'t oflrt:eftimiui@ ad addinO'to the- itemasspecifically

tlziz in SectUrikles& Act filings in order to meet changing

ntndtjstandardseithe-Conmmission has adhered to the.

Suit+.o-ScheduleA.A.The philosophical approach underlying

bedu1^Ah:also has prevailed in the Commission's development

t thqintintousm'repbrting system based -.upon the Securities
prastRct o 934. Public documents filed pursuant x'*
* theegebuquirements are the primary- source of information

eM-ecn:ng questionhbl& or illegal. corporate payments. .

L 1i ftcithe disclosure systeta is oriented toward the basic

pbcests of'inmestors, but it does..not speak exclusively*

g.finncial relationships and data. Disclosure requirements

* tf" ~ n '4 w~t&M cttni .a4$ '

iqwiventt incident to each of these filings, the
V t~ksit81Vho1at :promulgated rules generally requiring
Safibclosutpe of all material information concerning
S- rgistser60 companies and of all information necessary
& : prevent tbagscloures mad."froa being misleading.
I U. 4wW.AQ$(4X, 17 FR -230.405(1) and 408, 17 CER
130.408 ( eling to registration statements under.
Be SeurpqzIA&.Act of 1943); Rule 12b-20, 17 Cta
14b..l 2 1s .&fpq.toi.ig to :egjstratin statements and
*nual ,.ana periodic4W eports under the -Securities
.. -AcjngegAc tjl 34) -and Rules lOb-5, and 14a-9,
I *rc|t$:244#fr,24G.14.-9.
C" vtCI a I to-
.",. .." " . .. :
":.-j + \." + . .
-,, y -" " "

Jtt ..s.." "s' ". "

nZOw..t -

also should facilitate an evaluation of manageaent'u steward*.?

ship ovet corporate assets. In this context, investorsr.hoadI

be vitally interested in the qualityfand:iateqtityp manage'.-:
.. .* i "" * :
meant. 4fnumber of factors* iuncsudibg tbe backgtound~of a
director.nominee, -changes in management, eoaf1iett of tnteeet,
.. i i ..
the identity of'promoters- interlocking directors &adbofflbets,

special benefits to management:and ceftainlstockholders, :and A:-

management's outside interests:-- areirelevant to'thhse>J 9a J

concerns. Disclosure of these matters teflectsuthe deeplyp j o

held belief that the managements df'corportionkoare:'.stwardsi

acting on behalf of the shareholders, who are rentitted to

honest use of, ,.and accounting for, the funds enteusted- to there)

corporation and to procedures necessary to assedt accdlntabil-

ity and disclosure of-the manner in.which .management perfoas
its -stewardship. c n ; 4. o15 :! ***I.' :r.L :
its -stew rdsh p.--... ........ ...............

1g/ oThiCofmrntho csiitdire5 these 'ibwdsalflfii*twit V- "
somewhat different contExt, In the latteer oitftaflrd
Corporation, 42 S.E.C. 163, -170 (1964)t.s ri -^'*:,

"Evaluation of the quality of -managqfh:t.i4-'.t6 ::*: :
whatever extent it is possible -- iS Mt eSentiiY
ingredient of informed investment deoisirn. Its
A need so important it cannot be ignored, andm iti.
a variety of ways the disclosure rquiteweute ot*h
the Securities Act finishh. factual information..6' 4 .
to fill this need.i Appraisals oftcdapftoncy : '
begin with information, 'conhcerning tnflent''
past business experience, which is elicited by
requirements that a prospectus state the offices
and positions held with the issuer by each
executive officer within the last 5 years. .



* 11i dftermininft whether to require specific disclosures,
Was i-ssIon generally has weighed the benefits of such.

$flbsue aigainst.- its asffeismet of' the extent of investor in-
nost and the coat and utility of the particular disclosure.
wI msptAr certain detailed affirmative statutory -requirements,
E: T " . .. * 20/ '
$ l 'aiouani t be furnIshed" oniy if materialt:i' And, while
.:EimBp j f .ih ..... :- *" .* *- ; *

V (ftotfote continued)
SP.r. o permit judgments whether the corporation's affairs
are likely to be conducted in the interest of public
Shareholders the registration requirements elicit
Information as to the interests of insiders which may
conflict with their duty of loyalty to the corpora-
tion. Disclosures are also required with respect to
p the remuneration and other benefits paid or proposed
to be paid to management as well as material trans-
k 1TW attiont between the corporation and its officers,
1| directors, holders of more than 10 percent of its
M stock, and their associates." (footnotes omitted)
l the matters the Commission frequently faces in the area
of questionable or illegal payments often are so funda-
*:itstal-to the corporate structure and the integrity of
[ management as to be distinct from other types of

.tt.UuprenL Court in Aff.iliated Ote Citizens v. United
St fates, 406 U.S. 128, 150-151 (1972), adopted a standard
Id U1 aEieriattty couched in terms of the likely interest
i:, i. the matter byt investors, specifically defined
ai96:,thek Second Circuit: Court of Appeals to include
s ot only the long-term investor, but the Wall Street
gViVCUlatoVt as vell. Securities and :Exchange Comnis-
i .on v. Texas Gulf Sulphur, 401 F.2d 833, 849( C.A.2 1968),
4OWIii5 denied6, 334 0.5. 976 (1969). Rule 405(1) of the
iB-ecurities Act of 1933 defines materiality as encompassing
LHAe 'tbeseeatterrs* ato which an average prudent
lr investor ought reasonably to be informed before purchasing
.:; securities." 17 CFR. 230.405(1).

:. E; : Ei.

the Commission has :by regulation estatlsd g enesa guidelines

on specific probe-s of materiaiLtfc, p"Pt 0%.141Flm ca4.454tiiMil

information, Uthere ias no compreheasty. Ieuleton gudq 4tb
respect to the narrative d tsacosures. U., If

In :attempting to :.eterainebwhethes ; spqc4iLc ., icf: ..

is material there is no litmus papfr test. $aet% q
presents unique combinations of facts, and the consideration

whether particular information should be.tscjose4;aecqqsarily

depends on the context in which the question arises. .In this
.. ... y .. *-.....
regard, however,,the falsification of corporate books. and
'" *. '* .. ,; '
records and.the accumulation of funds outsideg te system
1*& <*' I .. :
of corporate accountability..-- problems presented in:ost

instances of:questionable or illegal:.activity.,consideed by

the Commission to date -- is of paramount concn;n toq pvestors

and cannot be ignored. 0 . : .... ,
.. ." : ... ,s.*-t: 4: : .. :. .....:

.* .-in .. h . ****
faced with disclosure issues of this kind, the. Cquissien has

identified various.factors, that have giveAnris* 4dspsabl -
,- -*.* . ... .
events in the past. In actual practice, however .-tisult be

recognized that these factors cannot be- viewed 1i. iLolation.
.. . :- :: . r .- : 'i
Thus, for example, the Commission's comments coscrnn4g: the
Z T 2 f : ; i
** . ': -. (P i -. ::
recipients of corporate payments must be: reas ad conjwsn tion
.J .. . i . .. .. 4" Y ? .. ....: ..:
with the dibaussion relating to the knowledge orpVertigjpation
: * : "- i .. ,. . .. ^ ^ .' : "* . ..' ,. :* : : 'V : ] .l i;
4 ::- .s -tt ifl '' ? 5...*...
S. ..Rg ..

I ii

*f corporate management, defects in the system of corporate
H!,'' . a ....
pei'.Snctabiliti.. and the impact on the business of the corpora-
L- -
E' ?:' ": -'' ... "; =

::n the::final analysis, the disclosure obligation 'may
a'enon, combinatiohs of these factors> Thus, the views

xp ressediterein cannot relieve corporate management of the

$10PIgatiod to evaluate the specific circumstances .of any
pprtiiiar idisc'osue question.
E : .." ..: ..
2. Payments Owtside the Financial
Accountability System
: An essentiaI component of the disclosure system has
"tot -- 'l a l
r:een the development of'accurate, complete, and reliable
%inanclf information, a process characterized by the develop-
at 6f increasinglyy sophisticated accounting principles and

l=Iting and disclosure standards. Basic to the system'is the
principlee that all funds belonging to the corporation, and
lls.j-'^ 'a^ .-^ ^ -"*- .^. ;.. .
..~'* .,-
to its shareholders, are adequately maintained within.
=^ 1 .. . : ' = '. "' ** .*"': m*. f
....corpQration's system of financial accountability.
:' 'f ** ..- ,<.. ; -: ^ ... =.=. . .. .* _
'ii" O of fhe' most troublesome and pervasive cirbiumstances
B l : - M ; -jT i .- .. .. - . =.. ** ,f ,=
#psocatead,vwth the cases brought to the Commission's attention
been the treatment of questionable or illegal payments
Lithe company's books and records. The accumulation of funds

14pe the normal channels of financial accountability, placed
.. l. ..I . .. . ,,: : . *
= .~~l l ^ S iA -.: 3 t, .. ** ; 1 .' .-. ; "' .".* :'.. .*

M ... .


aft on-i-


k. 3

at the discretion of one or a very s ,mql nuber o. .P.t.e
executives not required to account for expenditures :

from the fund the use of non-functioal ubs idiaie ,4nd
secret bank accounts and the laun,4er ing of fuad*o-r oerk ,
.. r '" ,i . .. # ....* !:.. *: "^ ^ ^

methods of disguising their source oc diLsburueqet qSte,

often have been observed. These situations reuerally ..
call for. disclosure of the existence of.tbe fued or funds,.,

the general method of funding such accounts, their purposes,

and the amount of business involved. The eied -faot *u*clif-

disclosures is further accentuated if senior manepnt

condoned or approved a pattern of falsification of books:.

and records, thereby casting doubt upon the -whole qsyt-g o

of accounting and the integrity of the company's financial

statements. .. .:: ......

3. Legality of the Payment Under Local Law .. !

:: .< ::: : :0 i-! iS*:. **
particularly important factor. Where the payment violates

United States laws, the Comission has adhered to policies

governing the need for disclosure of violations of united
.. 2 1 .. ^ ... .. .. '" ". .. ..,
States laws in other contexts.
I'. .g : : ..4. .. . .

/ The Commission also refers potential violations of UnteI
States laws to the responsible law enforcement agencies.


-.N"N... .
I; If the payment is illegal under the local law of a
! +I +.,. ..... . "** : ?. *. *. ..... .- 3.. **" + .. .> .
foreign state-a fact which may not always be readily
Z. L~ -
l^ 4 ^ .a, .. **" +'? ';? .' + *. -- * ,* -,.' *
'ecertainable--disclosure may be required. Disclosure
I.I+ . ." ... . N -

generally would not be required of payments which are
.". ,, .-. ..... -
legal under domestic as well as foreign law and are other-
* a;., V.. ? .') .: .' ..: "
"W.ise a proper corporate payment accurately accounted for,
! .. ~ f f^ **; ^ ': *" ; ......*
unless called for by other generally applicable disclosure
!:- **! .'i w .s *nN Ni ~.1 .;*.-
:r ,,.:.i *:. : :. a J + " --
4. Recipients of the Payments

I The nature of the recipient often has been an important

,factor in determining that a corporate payment was a disclosable
;;t N ;' *v :...,: / .* *-> *
event. Various classes of recipients have presented
||r! :, ? ... ... -^ I *:: .*; '"- " '. ,- ; ' .
these considerations, including but not limited to government

officials, commission agents and consultants of the paying

4mpany, and recipients of commercial bribery.

: Government Officials: Typically, a corporation
I- N, ... SN,,, .. .. ..- , .
Muld not,' in the ordinary course of business, make payments

government officials in their individual capacities.

-payments, therefore, are usually a form of bribery
< *t, ^ P : *. + -. * ,+* -'
.t, where material, would give rise to a disclosable

I The Commission has observed payments to government
.... i + : 7 +" W'-- '* :K, :*'* '
icials for four principal purposes. First, corporate
N nts have been made' effort to procure special

unjustified favors or advantages in the enactment or

S:: d ''-* ..:. . .. J ...... --.. ,. .;....* g 1

administration of the tax or other laws of the cpuntryi Ja
... :: .. ;.. ,+ :1 a
question. The disclosure of payments. for these purposeshas

been required here the amounts involved or the corporate
:i ? "' <*" " * .. .., "t f* -" B ". :" r" : .". .. "'
benefits obtained have been significant, and the payment is
-.. a *. ,a. .,.. :.. : = .ii ,. : .. i. .f. ,. .p 3.
made to influence the exercise of ju"gpent and aiscreton
a *.4 1' 1 j ; -:..< * t:i *. *:. ../ -. '** a T v
in disposing of matters on "behalf of t&e government.
d p i. r ., :: ," !* c 0. iU z. ** ...-' .
Second, corporate payments May be made ljth the
"' ." ? ... . T .. ..
ing '.t : -
intent to assist the company in obtaining or retaining

government contracts. It may be poisiBlt oi distitguia bL
' 1 . .. : -: * .i1 *- ".
payments intended to secure the favorable exercise
'* .. .... '-" .* i b ~ .... 8 >* "* ;: *'* .. ,
of judgment or discretion on behalf of the governmental
r .'.' "i .* .' ":c ; a7 '?." !
body from situations where the official, under applicable
. .'-.. : .; i i. .. <-, t S ;" .
laws, regulations or customs, appears to have been permitted
-* * ' "" : .' .. .. * '** < *> :: .^ ... .... .. .... .. :: 1 S i
to act for suppliers in connection with government contracts

and to be paid for such services. Where this is permitted
: " "ll ^. ... -.: ." ,t" l a^"1: r to ogoern atal...9 ficials Io i pleidU.7.y. lji *.-. -.,, .
> * -. -.f ". ........ .. i \ ',r..."'z rt -:;+
theless be material where other factors, such as the
. ... I *> .. 1 : .! ";;: + . "/ :::. i" ...
recipient's insistence on the maintenance of secrecy or
a ", ^ <,: ** "- .. .. il ;. .- ... '
the inaccurate reflection of the payments on corporate -.
.. >; ...." f i ::..1 .
books and records, suggest that the payment is in fact a
. .. .: r I .
form of bribery.
.. ..* , ... *: *. ^ ',
A third purpose for payments is to persuade... low-eel -

governmental officials to perform functions or services *wOc

S .. : .. ... *. : ,,. ; ., ...,
:' -" a t .i .. ... p S ..t t..P .P : :'!':

"" i


I%.A4:. J. ~\*AS't .-.4t ..' :i:g. e *^-^ .*^ r-- - ,:
"- *. "
'|4brare obhlged to perform as part of their governmental

e.*spOusibflities, .but which they may refuse or delay unless

Nflenated. These so-called facilitating payments have

bee~Jdt,6md to be material where the payments to particular

personsa're large in amount of the aggregate amounts are

large br where'-coporate management has taken steps

to conceal them through false entries in corporate books

lcad ticords.
Another'type.'of payment-is the political contribution.

'tW" these of ltributions are illegal under local law, they can
**'l ,
t asimfilated to brIbery. Even where legal under local law,.

such payments may betaterial if the expenditures are such-

ihat theytappear to 'e designed to unduly influence public

juolicy decisions.
I. *' of ercial Agents and Consultants: The Commission

hiegwizes that corporations doing business abroad often

ge'd:.the serVices bf noni-offidial nationals possessing
...iefalized' information with regard to business opportunities

R" relationships which are of assistance in securing or

iitainisg business. There is nothing inherent in this

I"actice that gives rise to a disclosure obligation under

...dera securities laws. Certain factors may, however,

fij. t that payments to such persons should be disclosed.

-28- .

A variety of considerations, msoift e titlnt A.facol-r.
questionable; nay prompt the use of agenta or OWSltealf5tc6$
Among the key factors to be considered I. detenin log .*l ur,
disclosure may be required is the relationship oS txia. MU*n.a
to the governmental entity or contracting party, thesis.
and nature of the payment, .the services, to be performs by* .
the agent,. and the method and manner of payment.,i .. "
The disclosure obligation cannot be avoided because :
of corporate management's indifference to the question
whether the agents are acting as conduits fo improper jpaymsf.
Management must take reasonable steps todeterpine whether
commissions andt fees paid are to be trasaamLttedj iin -wbo4 _

or in part, to governmental officials or their d4eejgnees.
Commission or consultant payments substantially in exs sWa .s
of the going -rate for such services may give rise toda4sa-
closable event, depending upos the significalce of the buetaS
involved. In many instances, this may suggest that a por;tQa.
of the commission was, in fact, intended to .be passed thb,. ugh
to government officials or their designees to influceC -
government action. Similarly, other circumstances thatII g i
companies reason to believe that portions of commiggios i g %

payments will be passed on to government -officials ow V.betr ;
designees present the same problems as those discuesed sbOw.


Cm:., ,C .etaeLiar Bibety. The Comuission also has observed...
V. -,,I - . . .
pmients tiade to itpropierly influence a non-governmental

"mstet's -use of a company's product or services.' These
lpaymentlady also give rise to a disclosable event.

S. Amount of the Payment

As a general rule, a corporation need not disclose

routine expeAditures made in the ordinary;.-course of'business
. ...... ..... .
bltte*-dlpecific disclosure provisions otherwise so require.

evere, questionable or illegal payments must be disclosed

Sore they are significant ii amount or where, even though

at Skhificant in terms of absolute amount, are related

to a significant amount of business o6r other relevant
UIn*d ial indicia.'"
S thider most circumstances, the amount of the payment! ttispositive of the materiality issue unless, ofr

mscae, the payment is significant by itself. Where the
.e of th payment"'dos not otherwise requiree disclosure,

t uaterialittef such payments would depend on the-relative
ono*ie pli.ations. -of the payment to the company as a whole&
v "' -., -.. ,' ,. .. -..'d . .. .. ... .." . ..... .. .,, ;.. . . .
F tha a **ilfftan lint of the company business. Thus,

mfla:e, a questionable or illegal payment that seems
Iii :!!: t-. : ... . -f;- .
fc ^ ri ; *** *- .* . "- r : ., j-____ . _____. *: .'__

r 6 i previously indicated,-the-methods used to make
i or facilitate these payments are important factors
Sto be cOnsidered. lTte facilitAiion of such payments
| through falsification of corporate records will give
te: Csto a disclosure obligation even in cases where
a disclosure might otherwise not be required.


relatively small in relation to corporate p;eventua;4pe or
....... .... .. i assume. much greatr importanpq..hqn fnltJSp4. P :9S r..

the amount of business -that may be dependent on o; aftfe*4d

by it. This in turn may be affected by *hqther foreign, ;

business as a whole, or in a particular country, is significant
: .... .*l i : : . ..: ..
to the overall business of the company.- ..,
... .. I... .-
... .., ** ...... t ., "" ... .!:. ..,^ :;E#

6. Knowledge or Participation by !fiSeniox.Manent. ,rl i

Investors have a right under the federal securtio4slas

to be fully advised o gacts comcrrning.-characterj and dv.oz

integrity of, the officials relevant to %heir management oA..

the corporation. This 4s particularly true when ;anagait ,0*

administers significant assets in fo eign states, where : :r,

investors may not have the same protections as exLst in. tAe.:

United States.. Accordingly, transactions thatt would:pt

otherwise be material may become so by virtuesf the.rl91e...,*

played by management. .P ..H A

Whether ,disclosure is required on the ,b#&iq tbat.t vI&

relates to the integrity of management is su.e-t 4qa,. q.

number of variations. In situations involv5,ng a.j8ygT4se.,c

patt n. of. encour qge qn.t, t iqniat4 o n, .o; qy4lrof. V.

these practices by senior management, the eed 'for 4iqc aurI

is clear. If, on the other hand, senior management neither
.. .. ....... ..... . .. ... .*, .. .... . .. . *** h M **'xr ".-* 1:* -^r/^ - - ** f j.*....... ii :l|Sln.... i~ inif. ..
knew nor should have known of .tke,paymelts, discosaqzi Cy 7 c
.o b e r ..d" . ,'. "\ a '. a. ".. .... "*. L's TvJ . .. .. .
not be required, unless thbyy arm otbltvise Afqci4 ,,.

p. ., . : ..r. .. f...


ViDtffal"CtODSa eafrkieppropltZoiifl bt corporte
llicials b ear directly on the integrity of management and

H adequacy of its stewardship .and shduld- be disclosed.
IW course any indTictment of the company or any of its
Vfetpat* arising out -of, questionable corporate payments
oay rsieb a separately disclOsable event.
hM c .,I.i .. > * :* : -.
* Patterns of Payments That Are an Integral Part of
* Operating a Business or a Significant Segment of
the Business
The fact that a company has engaged in a pattern of
faents over an extended period of time--which payments
-- y ~. .. -. .: .. ': ". .. 0*.
%an tjken individually may not require disclosure--suggest
at the company's product or service could not be success-
._ .... o ...
ylY; marketed in the absence of the payments involved,

i4 that failure to continue to make such payments could
Ut,.' ':*: i:; .J" I
B,.er the business operations. If other companies
Lrf E& "* ......".... ...".. o .f bu ies a .... .
thae ame line of business are not making, or would not
i ... ...^$i ixg^ -.Y, ..d.t.. pa-tA1 at. '
such payments, a question arises regarding the sale-
bility of the company's product or services.'

1,- .. ere such a pattern of conduct exists with respect
|# significant line of&business, or conversely, if termina-

$oof the payments might be expected to change significantly
|economic success of a significant line'of business,

iClosure is Akprioriate.

V See Securities Act Release No. 5466 (Mar. 8, 1974).

-32 r~..
. ,"
. G .asat o t O. ,n.t.o .b.e-C ,, ..-:- ,-,.t *

A campaM's strong and adequate aesusa to le ....; :"

cessation of itsa questionable conduct is w qnliga l
... . .... c' " ** i.

factor. The Coamission must, qr. coursI onsd4er :eac case .

on its particular facts. Where sauw .asunes iaeOe buakcea i

the Commission, particularly in its voluntary progp am .Js ar,

given weight to this fact in assessing the need for disclosure.
..: ... . : .. "
: .* .. ... ** ** 1 .. .** -
Except in egregious cases, the Comission has generally

not objected to so-called "generic disclosure of the ctircuM-

stances and practices that have come to its attention under.

the voluntary program, particularly in those instances VAere

the company has represented that it has cease its 'questi ion-
' :." ,.* ., .:' :'.
able or illegal activities. Generally speaking, iovenet, tihe'

more serious the problem (and particularly where the company
4 t4Sfl~i2~ ~h n$ti~....~hutstu* *S. ....n" .
.' ...... "

which should be disclosed. '
__ c~u~ a: 9 .... I -,
Generic disclosure has included:
. .. .. .. ... .. ... ." : ",,* --
1. The existence, amount of, duration. .
and the purpose for, the foreign .
*: ... . : 9. :
2. The role of management in such
payments; ... .. .* i

3. The tax consequences, iLt any, .O .,,.,.......
the payments made;


4:: I

.... .. '.".

-33- -

.:-1 D ... -. no...
(A. i.0 th'tLbre.. of. b soiness r. ..
V'4 1, pac oS of product or services in connection
vg wh whit thhe payments ha'v been' made;
0, 5. *he'coxitoany' s inee't "ori with respect to
:^ ". ^- .the continuation or termination of the
jf .... .... i 'pra iat ices; .
"id.H t ". & l b JC
6.. The impact 8'etat cessation of the pay-
Ak V ,mnents referred to in items 1 through 4,
e3640 a above, may have o"n the corpotation's-, I
A.I. consolidated revenues, net income or
assets? *and'
h e- -t"e"rThe ttte 'oaf eff'ecting payments, including
: possiblel e falsifications or inadequacies of
i '* ?" *: c'*r $rate books and records.
r^, b fif a .. -. ..... ....
...In .cases arising under the voluntary program, the
QfflssiQn generally has not required disclosure of the
l p rjL i. s .... ;, .. '.. '.,... .:. ." '
le4tt:x recipientsn. On the other hand, the disclosure
i ,h, identity Qf senior management officials who have
Ij ."." i" **r ; .' ., ;... r;, ** .,'
b*jjpQpriiated corporate funds or actively encouraged
,p,"* ..** ? : ; .. ....' ,.-, .:; '. .
:fdpprtiqipated in the falsification of corporate books
' :/" *' '.... i ** * / 1'" -
,sepor4 yay be required to allow shareholders to

is integrity of management.
.W..,th. reSpect to the. form of disclosure of such

6"duct, .where,4t is. determined that some disclosure is.
0,,, ..: t. .. '.-... ,,. ... ..... *.
required the For; 8-K is normally the appropriate vehicle
rat'.i; : .- 4
yftesp there is an Annua4 Repprt on Form 10-K being filed

1::-e. ie *when, the problem is being dealt with. Subsequent

ri closure in registration statements will depend upon the
Jp..iJ~MW~^~ ** "l|.. f~ii. ..111.^,

"-4 1A, . .... : 4 -
ed l. qc.n ,'4 .
(:.' l,,. *.. n G .?; **, ... .^ .. * . ,
r, ft t r ".- ^i, . ":-', , *
t! '* q ,... ..:i;: :. -: .:? .,,..*. .. :, .

timing and. other:: favors. tf there Is a. ittion

statement and the :torntipnklxaa 4 ot invj dL4 closed,
ndto oraan k1 0 Sa i-
preuinMablyU'M6eIdi.Li' u ei'..A. either p ; *Aii e '-" j '':
I '6.
registration statement or in a "orn I-K1 w:ithA arbi-reference

to that report in the registration tatement .. ...
ks . uct o
Disclosure Of mate 1riial Jest.pu ct

persons standing for election has epen on "'rcumtatees

of the given case. Paheesuchbfacts have ,be;nb pr:eVioualy dis-
closed in a document generally ciculated to t olderr,
*r-*-o *.e- s
the Commission has generally not required further disclosure.
When the disclosure is in a public filing not ci6riattd to
shareholders, disclosure in the proxy statement may be r "tetd

depending upon the nature of the conduct'ftnvolved MaI titanic'
r ?
ment's knowledge of or participation in that todUectu,*theuatdru

of the issues to be decided in the shareholders tg -f -

cluding who the candidates ?or board elections iy be).MS ..tie

company's intention with respect to termitnation of feptet..ohe
In some instances, the Commission has determined thati aeft1 i9g-
, --'- *' ,^.- ...- "- :-- *^ *', ^.^ ., *^- i. -.: ; w
fi cross-referenice to a previt'ous ffxqng wou ber sff1l tent.
4c, I*
". *.
1.,. Tabular.-Presentat-ion of Disclosure Result.s. .., .- ,.. .

The table attached as' Exhibit A' presents a lea ...*ralY "

portrayal of the public disclosures received 6a of Of rliti,

34/ Disclosure may be required when the conduct is particu-
larly relevant to the "quality of management" standing
for election; where the earlier circulated document was
not proximate in time to the proxy mailing; and where
management has not disclosed its intention to atop the

I -35-

l76, concerning questionable or illegal foreign or domestic
0g|l ... "* *" .. *: ,* .- ,.
.rporate practices. The conduct reported varies significantly,

3t the companies included can by no means universally be

characterized as wrongdoers. Instead, they range from com-
panies that have-filed reports reiterating previously-expressed-..

corporate policies opposing illegal or questionable practices;

"o those indicating they are conducting investigations;

to those that report serious and pervasive patterns of

questionable and illegal conduct.
v i f. ...*** *. :'- *.
p. In compiling Exhibit A, the staff consulted only

Hkblicly filed documents. In cases in which these documents
* to suggest a category of conduct, an entry was
: 1s f -2r ^*" ;* ' ..
ide-in the chart. Where no statement on an issue was
p however, the chart simply shows "not indicated."

In general, Exhibit A reflects the matters disclosed

Akthe pblic filings in as close to the corporation's

ji terms as is possible, given the format of the Exhibit.
iB 'l 'S .f .. a;, :, .- "" -,, -" -' . ,
ne: staff has not relied on or included information that

InoV ontined" inf the public filings and has likewise
| H as I* . t . ..., -' . ..' .... -
19t to avoid making substantive judgments as to the

..,ers disclosed.

"1ncldifon o'ef"fact* in these charts should not be con-.
I strued as a Commission affirmation of their truth or
Accuracy. Many of the companies included in Exhibit A
II" currently are under investigation by the Division of
S Enforcement.' These investigations should allow the Corn-
mission to test the accuracy and adequacy of these
I disclosures under the federal securities laws.

Toihe exeit posilewe haeiiiiiiiioiitv., *
the dii sclosuresicontainediintheifilingsiintoibroa

caeoreitairoieiiiyieerliiiai n f h
aciivi tisdsrbdb h eotn opaie, Dslju-
maeb!h oprtos*aysgnfiaty oha o...

susac n dtiadofeiontledtesle
iiiiii eaycasfcto.Feuetyfreape h
douetsdiotcerl nictihehroriwa

exetfrin.cmiso-yp amns r aedrcl

t em poeso ofiiloffringvrmnsTh ,

,, .....

ii ..... . =='
isiiiiiiiiiiiii=b th= t s..ta le
iiii iiii iiii iii iiii iiii iii iiii iiii iii iiii i...ii..ii..i ...=
theiiii fol owing nartv dicsso prsn, esoal acrt
geea desliiiiiiirii pto ftemtesd coe hs i .::j15


i '.,-- ,, ., ':.. ,. ..~~~~~~~~~~~~....- "..... "....::.'.. .. .: ...."..--.-. :.,. -.,...... :'>... -

mt..refor strongly suggests that the assessment of the

tivities of any particular corporation rest on the actual

llngs themselves' rather than on the distillation of

those documents Contained in Exhibit A.

- ., .

12.: Commission Analysis of Disclosures:

The ninety-five companies that have made disclosures

regarding possible questionable or illegal payments and related

fpactipes fit into a wide variety of industry classifica-

ti 4ons. The majority, sixty-six, wer# manufacturing

Lrpanies. Among this number, the two largest identifiable

9pcups were drug manufacturers and companies engaged in

itolenum refining and related services. Each category
represented by twelve companies that have made public
tr o le.."u m ;. '. .. .. - .

disclosure of the matters set forth herein.
:.: -. ....- -..0 .. .
i ... Thsost common transactions reported were payments
e.=i mo o.tas c

foreign offiJeials, and fifty companies voluntarily

I t such. .pay.ents.. in addition, four of the six -

anies submitting reports as a result of Commission

S' -. '. in cm in

IThis fittdude Ligh4ty-riine companies that are
V*' recorded in Exhibit A and the Six companies that
submitted reports as a result of Commission
II actions, which are summarized in Exhibit B.

*a .. .

-38- .
.. I. .- .. ... ... .". : .. .. .. .....

enforcement action reportedusilar pagmqs.. Twoesy* t r::

five companies .reported actLvit.tes, that aro ..Ccateov. z4 ed:... ,

as other foreign uatterss," as .we1 as :tv--.thath :.-,,.. .K.. J .

submitted reports as a resu of enforc a..ent action, ty,,;; .ani<

The activities reported in this category most commonly

include payments of some kind, but also include other. *. .

conduct, sbch as violations of foreign currency and
2 ......- "" i ? -. .j ^ i;:.
exchange laws. Additionally, many of the 'matters,
.. : ..* ? %.*
reported in this category vould appear to constitute

a form of commercial bribery.i
"". *: ,,. i _.^. _. ^ .. .
Fifteen companies voluntarily reported foreign political

payments, as did two of the companies that filed reports ad a

result of commission enforcement action. Twenty-seven
,. * .. .. .... ;". ... . .. . : .. ...
companies voluntarily reported foreign sales-type commissiLons
".' ,. . ... : ;. .*:* L
as well as two companies filing-special reports. In 'ome
cases, the companies specifically noe thae ciutane

27/ These categories overlap to a conside;abl. "
degree. For example, it appears probable that
some of the unaccounted for payments incident to : ... :
foreign operations ultimately came into'" the hands
of foreign officials or their desigpees., B... .: .

j/ It should be noted that many companies reported
activities that fall- into a number of the categori es-
and thus that the tQtal numbers... reported abv : ,a :
reflect this repetitqioin. ; ..,.. r",., |
I .. a . ; : : .! " ** :* : .. i : . i
"' .. *... *"i:. :. j. Z. @ "- & .j

5'. -,039-

II.:of the Vaentw suggest that portions of those payments
ISber have been used for other purposes, most frequently

*br possible payment to government officials.
p* -'- 1 b majobrity 6 of the registrants that voluntarily

reported -ayymiAt of foreign political contributions indicate

tbht such conttibUtions are legal in the"country in which
They vete made, and te have no basis for questioning the

61lidity of these assertions. By contrast, although only
some of the reports are sufficiently detailed to support

S onlusion,, believe it a reasonable assumption that
.many fthe cases-of unusual sales commissions actually
present iastanees in which a portion'of the payment to a

-toreig vagent or consultant ultimately was passed to foreign
11 ernme't off cials in order to obtain favorable treatment

S sOme kind for the company.
........-.p . -
-- Jhnumber of compRnies reporting omistic political
|stitributions and ,Other questionable domestic payments

* a smaller thn .the number reporting foreign payments."

IAki of the six companies that filed- reports as a result
:Cosmtaision eflorcement-actions disclosed domestic
i t ,a 5 "t t i. t. .. .
| h _:>: ..:..: ... ... . .. .. -4 ..** * f, * .
tlt1ic4al tntribntiony. Ma.y of these vere clearly
agal, 06d were reported ad- such by' the companies.
If ', ." :- /. -'' ".. ... " .;: ,.l.. .: ", "- **"'T::"
I ...

iYtR O T-4

-t &-40- *. -
.r .. ..* .". r g'. ; g ,... .. ..." : ,.. m "-
Others, although not specifically Ldetif led as l4e i:: jci

appear to have. been made in cirqumstances that might ,.:

suggest that conclusion. In addition. to the:. six compap nles .

discussed above, twenty ofhecs vo.luntari.y reported d4Waestic

political contributions, many of whchr .were identif.d .: :

being illegal. Thirteen. companies repo;,ted. other ..domestic

matters of a questionable or illegalnatu;e. asm did two ,..:.

of the companies submitting reports,as.a cesult,of the:.;; .
Commission's enforcement program.. .

Aside from the nature of the payments, sany.of.the ....

filings have dealt witb.h four other aspects of the...problem

that we believe may be of interest ,o. the. Subcommittee;.,

the potential tax., consequences of ..these activitiesr.their .

accounting treatment, the knowledge of management, an .,

the possible impact of cessation of the practices. .
. .. .,, -;.'. : ... .. . '.- > *.. : ..,: t. .. ....: .., : .,. ": *<.. .,

29/ Two points should be borne in mind in reaching
tentative conclusions from this data. First,
some of the reporting companies indicate .tha.t :j: .:. ..
state"or federal contributions were tade in
circumstances that may ..have been or were legal. ..
Secondly, some of the filings we have analyzed
are not sufficiently clear to support a ,.firm ::,.,: :.
determination that the" payments or practices were
domestic, ,or. fore tgn. F..or classif ication .:prpo, ...;>: i. .:
these have been entered in "Other domestic matters,'
with a crqss-reference to the foreign categories .. .
These reports are also included in the above

Ct.* . *fl-;"

li .H- ,: i::: ''-,.'" :: .. - :..
'. ,, ..,t .- ...-,; .- . .. : ., .. ,.- .-F-. .. .. .

T4he FmWission- i not. in position to ascertain

t:e psqLile tax consequences of the various questionable
Cieegr lea paymnts or te manne; in which they were made.
:":""g "a... y entz or E.m nn r
i:: :.;i,; ; ... ; : .: "-* ** * .
e ote however, tha,. thirty-seven companies in Exhibit A

and five, of,the asx companies that submitted.. reports as a
**.tL.i -.i. *:' : ' "* i *" : *.
r.suAt..of Coamission e porcement action have. themselves
Ctrrj-- -. .:, .. .- .. :::
InqZcat$ either that some adjustment to their federal

Jta ipabilities is possible or that the matter is being
:. ..^ :- : ^ "' .' ,' ,* *.*"'

"disussed with or under considerationn by the Internal
".p .:" t. ::, ^ '" ... ..* ... " ' "
"evenu Service.

: s, Pondly, forty companies s reported in Exhibit & and
;^.., r... .'3.. ., .... .; ..- :.,;* r
ech of the six companies that filed reports as a result
A, i ,V, ., : .*' ' k, .. ', .
of Commission enforpeient action have disclosed the particu-

rly & 4isturbinrq fact that at least some member or members
|H | Jit :.,- .* ^ : :" < . "
'4 corporate management had knowledge of, approved of, or
H.>. ".;. ".*.* t.. r.v,:.. ^ .. .,, :.. ,. '. ... .. .H. ". .. .. *;
rtLcip$ted in the quest Qnable and illegal activities
rep'E.. orte.d..

SThird, most of the instances of reported abuse also

tzmnlVe4 so= falstiication of corporate records or the
" ,.. ,...'' .* : .. *... . . .*-A:. .
liktJenanc* of records that appear to be inadequate. In many

"J1tis is .lanc:d to a degree, however, by the small
--..'number of companies that reported their intention
|i ato con"inae questl6nable or illegal practices.
L 'u. EE

-42- *
-. . 2. 6 Mt .
".- I . , ." '; ". :'' ." .;'.:. ;. :-.,. .,'.f"I.,.*, .-.. *1* .." *

of the reports submitted voluntarily by corporAtTbts, the
description of the payments and their :'ciimentation appear "
to have been inadequate to permit reidy id entititftiht e ot'
verification of the purpose of the payitefts STffi'arlf, he'
...- ,'. *. .... '. .: .. a .. ..1 .. .... :...., ,.. It 1. .. .
reports the Commision 6bta tried' as'a i Ice sultWb ef toicetent -
actions disclose flagrant instances of-:abuse of the syst AL F
of corporate accountability9 includin'th- establishment' andi
maintenance of substantial off-book funds that were bsd4 totr'
various purposes, some questionable and some clearly itllbil.-
Many of the defects and evasions of the sykteimof a
financial accountability represented intetionan aitpts to

conceal certain activities. Not surprisingly, corporate .
officials are unlikely to engage in questionable 6r l' 1 a'
conduct and simultaneously reflect"'it accurately on corporate
books and records. we regard this to be a significant

.. point, and one that is central to the approach we outine
. .". ."

in Part II of this report. .. ::::
Finally, although it is not possible to dra

definitive conclusions regarding the-possible Impact o" '
cessation of the practices reported'on the'foeigh co "-
mercial activities of the companies that repor thmthe

indications in our data suggest that, .w l o'. erouly

affect the ability of American business to compete in



Mr. 4
ll ald markets. Nineteen 6f the 6 companies reporting question-
|iaIo %r illegal payments or practices specifically' hoted that
fsalaton' of the practices would have no material effect bn

total' revenues or overall business. Generally, it
'. "' : I i? .; A' .:: '" ". *.. ... -* * ,, ,
-ha' ot been sugqgeste6 that cessation would. seriously hamper.
*bik8nies' overall operations. -
C" .. ......
ii' .. On the other hand, it not possible to determine
:! .., V J '"* ,,", .: .. '.
Ii aCount of business associated with each of the reported
ffaents. The volume of sales or other revenues reported by
klome companies to be related" to the practices ranged from
S E to In well in excess of 100 'times the amount of the payments One cannot determine whether some or all of those

tbnnues could or would' have been obtained without the payments
fcr r tc : "-0-*- *' * ***
iliinp l*i ".: '*? "r . >t -' i '^ "..'*. -
w pr cAic ?;lf;

[I b. 4 j CAPpison has attempted to ascertain the attitude

t... btu4nes .and accounting communities to the problems
rcently .rawlqd4 n this are#. we regard this. to be ,a critical
Oictor in dealing with these problems. The Commission, with

t"t.U....4nsourceso must taximiae its own effectiveness
pconeteutly seeking to proupt the private sector's increased
: Byatiop o.f .iutiative and responqibflity ip dealing with

prolemaresiwiidntiy.iiiirepoiesinitis as
gekri. pebe, oii! an h omiso. i oeu

tht hmtiue fteeto ouiis hc-r eta
toterslto fti rbe.. ileov aamneNhc

w J.' e1pndeta.tepplmo fje inal or 4 0a
fori g pamnsi leitd

1. h.Lsoi fth uis ~mn
Amria buieslaes aentrateinfxl

todslsrscncrigqp o
iiiiiiiip tiiiiiiiiiiiiiiiiiiiiii iiiiiii
For exmlp uvytkniyXeOi~nRsac

Crprt i n Jul of 195idctdta eryhl

Amerca' busnes exctiiviiii s~ saiohigi og it n
foeg ofcapin ore-t atrc or.eai prcs.
;;]i ; ] ; ]]] ]]] ]]]] ]]]] ]]]] iii ;]i [ ]]]] ] ;i]] : : :: : ::: : :::" M : ::

Inraigy coprt fiesaebgnigt pa u..
howver indcain thtAeia opne ednt aesc
-od r..o
.-am nts ncm~e.Onotvl
adpino oe Vofi@n-uejla r.w~kr40rut
i4n opne aeaotdsuhcds nldi oeUt
haerpre o ntne o'uslnbeb lia

J^/:'.^..-?^ 1 e.- ..-.. s 5:" ,.,-. -. .-.. *.*
,,a.a r* r- ,',. ,' .,,;: -'...'- "*. .. .... ..-*. V.:. ".. ~?. -.-

eeoqtasidedirectors reportedly have been instrumental in
Y:"ak"ti ntAerna1 investigations and requiring more stringent
Mina ng controls.

Cd *.Coeaof Conduct
S..,M orhere questionable practices and payments have been
& .: :!!> .
discovered the most common reaction has been the board of
It ,:, .. ":. .
itrectos' issuance of .a directive ordering cessation of
Bvt"!: :.
:h cqndct. additionally, many companies have adopted or
"Hteafirmed and clarified written corporate policies prohib-

(uig, similar corporate practices in the future. A number
|f these corporate policy statements include recitals that

ia oyees a:e to conduct themselves in accordance with the
heat ethical standards. The written policy statements
rally have been disseminated to employees, often accom-

LeG by letters from management emphasizing the importance
fi l ,j -1 "'.' '. *- . '*' ,. / '.y. -^. *, ", .. -.'.'. **. ..* ". l-, .- .f, :. ".... .':...,,'... ;', ***...*. -; * ... *.. . .. *...
.&.-.. lance. In many cases, moreover,corporations" also

r established procedures requiring periodic certification

compliance by .keyt.qmpoyees' and have. specifically- indi-

t..a..ta.t violwatoxs willbe subject to disciplinary action.

... any. cQrporate policy statements broadly prohibit
:Ause of corporate funds or assets for any unlawful

!poPe7. purposes. Other companies have adopted more
La.o prohibitions. Some have prohibited political

@iiii 46
cotrbtin.'iiiiiiiiii~he he w dbt-toi
i fiae.I*nioecaeiheiiiiiis lokiit se ticly
proibte payment of com msinbie, oie 'r ak
to goeneni'mloesaiiteriv ini iia o-
trct wi t coslat orsae ersnaietspe."i ht
,.teiayein t-siinyiiit f iiiiiiiiir p rp ee
o t e h n t o e i ni c ated .............................. d .......
haetknadtoa esueissigta h
sevcs ob rdee be eiteli h otat ha-
amutb es adsnbe h-ttepyear6 opbi
di scoue ftecotat
iiiiiiiiiiiiiiiiiilmany ofiitheiicorporateiiipolicyiiiiiiiieiiiiiliiiiiii1, 'iii
esalsmn fayunicoe rufdrddfnso ses
and fas ratfda nre A opit bosadrcre
Inadtoaeut n|acraed'uetto faf ic~tK
|in enke'fb isrqld T'ofe ieep d

bord ofdrcoso oecmaishv ietdiaaeei

W .," :.::..: . .'.: ..,2.1.
la..iqapetiesinable payments. Santa Fe International, while

pfttnfl ao^GkaihfetglnqLe undesirability of payments to
ino. r torefifgn g.wernment officials to settle tax and custom
..ior *.:too.-.1indqfated that it will continue to make such pay-
pts "if no reasonable alternative exists," and if the payment

i approved by the President of the Company. Similarly, Core

kab tories.p expressed its intention to continue the
pWuK.tionable cmmission-type payments in cases in which refusal
|yr| e:.wurlAd "adversely affect its operations in that country,"
r1.ided the payment is .authorized by the .chief executive officer
rda no Aeasonable alternative is"
:R.oRoflina iqued ....a similar policy statement, in which
.indicat.4 an intention to continue certain payments, stating
W"at At-rtgar4a .the practice to be a reflection of the fact that
..y.ents to government officials are "customary' in certain

|rie"e Finally,.Castle & Cook, wvtich has adopted a policy
."tbiting :th use of corporate funds for improper purposes,
% :. . . . . .. .. . .... .. .. . . ..
ra" ca~ri.,e
^^ilttcovttlnue paykients-rl

Sftor egn v*n.aoernent employes for legitimate services, such

lm :r .t,..$.a.. t.hq. tfreg .gverOVa* ..uable to perform.
ji|s own, expense. The Company states that it con4Jders these

teE'b "Pu j4lao ,be n.ote4 jhtat many. of thq declajatipns of.
dcessation specifically refer only to the cessation of illegal
i cbAea:o, to the maiptenaace of standard consistent, with
S"the ethical standards of the countries in which they operate.
,IIIIW ,tsWe eolJcy.-statements might also be interpreted .as
permitting similar payments in certain instances.
a j !k 'I o f 4 t' c .:.. .
i::-'. Ke JM .* 1 0 J ** / .: V .. ,: s .. .*... .:. ^. . ... .. .... ft ', ,

-48- -

S.payments to- be proper-r, and indicates that.they We -nt bribn..
a. ;.l.. .. .,. S ..
or attempts to obtain preferential treatment-. urtheruon,"tt

is attempting to arrange for such foreign governments -t ::td

publish recognition of 'and procedures for tese payits....

3. The Response of the Accounting Community

Many of the instances of improper or illegal foreign

payments examined by the Comaission thave involved cases in which

inadequate or improper corporate books ad records nmncealed c.

the existence of these questionable payments frao the independent

auditors, as well as from some or all of the members of -top

management and the board of directors. Some cases alsoainvolved

the maintenance of funds outside the normal accountability

system for similar purposes. In a number of Case, these

falsifications or inadequacies have been deliberate; l'aur:tt' V4

represented careful attempts of some cOrporate executivesoer

members of the board of directors to conctale their actit es

from the auditors, other company otficinls ad mebe & '

the board. In many instances, defects in the "'orkbrat! ...-

accotnt'ability; system.wre instituted ait lo *er levels M i ,*- J .

the corporate hierarchy. i ; .

Whatever their origin,- the-Commission regards defetw 4in
t i .. ..
the systemn of corporate accountability to be tattek of rots
* ,.* '.. .! . "*' **'q s ^ ": ,::* a a "-. ,!
concern. Implicit iti the requirement to file acdtrtateU-IltancialI

statements is the requirement that they ,be,,'asedC on SdeqFate
: *:.. .. ". : ,'.-, *: [: ; : 5 :; ( .- ,' ? ..-
and truthful books and records. The integrity of corporate


... .-

es and ret4sds is essential to the entire reporting system
afinistered by the Commission. .
I One of themost important by-products of the. Commission's
xogram-to ensure adequate discovery and disclosure of question-
a"ble nd illegal payments has been the increased sensitivity
demonstrated by the-accounting community. The independent
accountant's responsibility is to certify that the financial
*tatementi of -a corporationn are fairly presented in accordance
l.ti.generaly accepted accounting principles. Accountants
n*.ernet free .to close their eyes to facts that come to their
attention and in order prQperly to satisfy their obligations,

I.ey must be. reasonably sure that corporate books and records
xe free from. defeats that might compromise the validity

pt these statements. -

I In many respects, both the Commission's and the public's
gueess of the meanitude and implications of the problems

it-Sont..tly questionable and illegal foreign payments has been
lutionary. The accounting' community has become more
sfentibe t -this e.lution. And, although the 'esponses
......... .. ..

f the acouLuting system have varied from firm to firm, the
p i r e .. .*:*. ^ .. 1. ... . .
Vop n tr.esp.nse of the profession is encouraging. An informal

srwe undrtaken by our Chief Accountant indicates that the

..i following are representative of the policies and procedures
... .ed.b the accounting profession in response to the
*i"Ib w" l'av"e. identified." "

i ~ ~ ~ ~ c c u t n f i rmsii h a veiiiiii r ev i e w e d a ndiiiiiii iiiid~iiiiiiiiii~iiiiii~~iiiiiiii~iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiisiiiiiiiikiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiHdHH~iioii
iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii~ ~ ~theiiiiiiiii~~~~~iiiiiiiii iriip a r tn e rsiiiiiith ro ugh outiiiiiitheiiiiiiHHHHHHciaHHHHHHHoriiidHHgiH ?HsHo f
rll vn cinnw sois-pehslts1oi r`n
i iiiiiiiiiio t h eriiiiiiiiiiid a taiiiiiiiiiir e l a t i ngiiiiii t oii t biiieiiiiiiiiiii p r o b l emii iidriiiiiiiiiiiiiiiiiiiieaiiisiiiiiiiiibiiii:iiiiiiiiiiiiiiiiiiiiiiii]iiiii]iiiiih a veiii i '
bee esalsenoasr-htte aetl'isjiae:,

ar bruh oteatnintf l fbr ftefrs

an thtmeig r ed'odsustepolmadt,
N@ '1,2/

Maooconigfrsadtinlyhv aetseli
stp oass hi let n'Nome-'hi~eoisblte
to thN ulc xmpe-hyhv
Esalse'roeue dabuetMtifr,,
mao reatn toqetoal amnsi
br@h toteatnino @rpitl
seirpronl nmaycss h sin
meto uhrsosblt odsgitd-
iniiulsi ir suesta h


** 5 .. ... .---. ..

. -- Prepared and distributed tocorporate clients
mi. .2.*. educational matelils "t'etcouiage their ..
I. I... adoption of policies -:reating )p: ethics ip
*;"W business transactions;
.' "r' ..,, ;..... :. :* "". :; ", : 'L = :-. .. si .' .. .
-- Adopted policies of encouraging clients to
khril A amakee voluntary disclosures ofC quest ionabje
o sensitive transactions to the Commission
t.--. aipd encouraged consultatiova with. thee Com-
sion regarding the procedures to be followed,
: r-and-the dIsedlosures to be made;.

Xm- pappuppriate circumstances. extended .
-i auditing procedures or required that
". pdditionai procedures. be followed; .. o-

-- Changed, representation letters
to include representations relating to
1,: o-theroblemes,:of questionable, improper or
.... illegal payments. 33/
fl;' "C.. 34 ... .T J' .. ... ..

V Am. example1.of such a representation from management required
: by one accounting firm before signing the audit report is
set forhb o: .... -
:v .*:: ... .
'T "ougahave-been informed of all. 'sensitive' receipts
:or disbursements and of any unrecorded cash or non-
ce ;sfunds-out of which any such payments have beep -
I t: m: ight be made, to the full extent of our knowledge
p t4 feof "''respect to such matters and their disclosure. 'Sensitive'
I* tjoe@pts.and :disbursements, whether or not illegal,
,, include (a) receipts from or payments to governmental
hi of ie ila or espkoyees, 4or (b) commerce ial,. bribes or
Stikibacks, or' (c amounts received with an understanding
dt:j thfl:ebaeese or refunds will be made in contravention of
S the laws Of any jurisdiction either directly or through a
qj thirdrparty, ;:or (d) political contributions, or (e) pay-
uk Bents or commitments (whether cast in the form of commis-
.uton payments or fees for goods or services received, or
M"heerwise) made with the understandirng or under circum-
*optances2tltat would indicate that all or pact thereof is
M idpa by ;be- recipient to.government officials or
iiii employees, tor. as a-:commercial bribe, influence payment
C i 'b .kickback... ,. '. : , .' ... ?
Ss p
:' .- t t L"

ittff sxtt,*:A-94OOA
ieety h ~iigS~drsfeuieonte
iiii HJ
of the Ameriiica IsituteiiiofiiCertifiedHHHHPublicHHHHAccountantsNN
prepared an exposure draft of a Vc po sisdk tatement on,:::A ................. iiiii=iiiiiii
= = = = = = J== 3iiM /q
S t a n d a rdsiii r e..................aird............. .... ng ........................e n t s A t a c e as..... ... 7 =

ma bcmeaarif legl:icndc adth'nqilel
t h a t sh o u l d b eiiiiim a d e iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiit ...............
exam leiheidaiiiiiiiiiiiiiiiiiiiiiiiiia dito~ ls
examination does noti iiiiiiiiiiiiiiiiiiiiuii-piiidediiiis, "aigeel"ificaliiii
deige- dtc lel.cpaitr.shudnvrhls

be-awar thtilgit myaeocredwihmyhv

aimteiiiifc nfnnca ttmns 1~tadtr--

I..' .53- e
l:" :-:-J" '. *" ::- '* .. .'o ::. ..":: "'..'."."

pisiness purpose; may lead to the discovery of transactions
appeal tq the auditor to have *n unusual or questionable
.i "..: ** : l ; ,." ;, .:" "* " **
44ce.. T4,. draft expresses the viev that the auditor's.
Iisination should include inquiries of the managemiqent
wfarding accounting for, and disclosure of, loss contingencies
d- related communication with legal counsel. Auditors'also
instructedtd to Inquire about clients' establishment of

fotiy directivii'and their compliance with laws, regulations

sS p?6cedures relevant to detection and prevention of illegal

21a. finally, the draft provides guidance as to the possible

&teriallty of illegal acts and the actions auditors should

b&*.upon discovering such acts. TAnd, while it states that
*i auditer ::o ider 'no legal obligation in the ordinary case

lrPt ify utaisde parties, it does indicate that, if the' act
ivrioutltoug* to vwarrant- the accountant'.s withdrawing .
KNO the relationship, he should consult legal counsel regarding
|i* iOkitMr actions, if aiy, should be taken.

I t6hyl the exposure draft Is presently under active
ih eo ratkot' nd the Commission is not now prepared to assess

frsquky of his proposal, we have been encouraged by the

.Pi&:.Uion respodtnsiveness: Moreover, the programs outlined
:.J. .it... -
...... ,; [. :.. : .


I j.


-54- I

..J i
--*". ". -, *..-- =. .

above demonstrate that the Initiative aid profess tondl ""'' i

competence in the accounting profession are a siiticant t
resource in our tOntinuing progqra it'laefg -t6 Auaionailff"id
or illegal foreign and domestic payments. I :.. ... .:.
*: ; ... . . . . . . . .... :*' . : :J....2. ? ; P. :f ^ -


Certain conclusions can be drawn from tbe Commission'

experiences to date, the mapy reports filed, wd the reaction

of the private sector c.once;ning .the overall impact tIee, ,

questionable or illegal practices have had on public confidence

in the integrity of American business. First, the prqble. of

questionable and illegal, corporate payments, is, by any -

measure, serious and suff iciently widespread Jp be a cause ,
, :- v.. ^ -* ... : *.. .. ... '": ai: .....

for deep concern... Unfortunately, the Comaission is uabe tsa

conclude that instances of illegal payments are either isolated

or aberrations limited to a few unscrupulous. indiv4$ufls. T,
F .' t," ... ... .... . . ":," -.. r ,.. "' r i..

place the matter in perspectiv"4S1vr ishonld "e. i'2": ''l
'~te & r, : ..' ; ., :*.*

noted that the 100 or sp companies, discussed in this z.port :

should be viewed in relation to tA.e significantly wgerpr
.* -\ ' ..*, ,. *.... i.* .;v ',. ... .' .. ,. .. ... .. -f < *r *. .., .'

number of corporations that regularly gile with ..thg.
i e. -, .. .:. ... .:

a total exceeding 9000. Viewed in this broader perspecte,
. .... ." ,f '. '". -f .. .. ** '' *" *'*' .

the Compission believes that the present eviWence of .CO p te.

abuse, while indeed serious, does not support any general

condemnation of American business.

.' .. -" 1. . .. ..

1 We do not mean to suggest that the reports filed with

the Commission portray the totality of the possible problems

..WA..this area. Our Division of Enforcement presently is

bkamining the activities of many companies that have made

disclosures, and the activities of yet other companies that

have made no disclosures to date. Some of these inquiries

may result-in a determination that the companies engaged

in questionable or illegal activities that should have

been disclosed to shareholders. Moreover, we suspect that
some companies have engaged in similar activities that will

remain undisclosed and undetected, and that others will

attempt to obscure such activities in the future. We can

Winy state that these companies run a substantial risk of

Discovery, since the cooperative efforts of the various

agencies of the federal government are being brought to

f cus inte&si-ngTy-on, these' questionsa "and thei'expertise '"
:=.. :"
and sophistication of law enforcement agencies in discovering

.these activities is steadily growing.
S.. Despite the troubling aspects of the information

;concerning past questionable or illegal payments, the

"Commission believes that there is a considerable basis

from which to conclude that the situation is improving,

and that these episodes may serve to strengthen the quality

OIf corporate management and public confidence in business

1g1g 0 76 S

S'I.... .-. .3 "''" ..0- "' ." '.-.5 .- ." -",'* *...

over the long run. This optimism rests both on the declara-
tions of cessation, already mentioned, and, more fundamentally,

on the "new governance" concept that the Commission's enftorce-

ment and disclosure programs are attempting to instill and its

legislative and other proposals are designed to enhance*.

Thus, in the Commission's view, while the problem of

questionable or illegal corporate payments is both serious

and widespread, it can be controlled and does not represent

an inherent defect in our economic system. While the Com-

mittee may wish to draw its own conclusions from the analysis,

we have supplied, hopefully the foregoing comments concerning1

the patterns the Commission perceives in these .data and the

conclusions it draws from them, will provide a useful starting


U *' . j ** ...*'-.* .* ^ ..,, **W -: . c -. .. .

i -57-

*i.'% .: ". .. .. ..*

A. Discussion

I. As-the foregoing discussion makes clear, the Commission

Shas proceeded to apply its existing disclosure requirements to
:, ;* .,.
matters brought to its attention involving questionable or illegal

corporate payments. While we have not felt hampered in our

enforcement efforts to date, the fact nevertheless remains that

the extent'of such payments is far more widespread than anyone

originally anticipated, and the methods of effecting and conceal-

ing these payments are varied and multifaceted. The Commission

can, and intends to, continue to enforce its existing disclosure

requirements in those cases which appear to warrant enforcement
'- S
action to compel disclosures about corporate operations

Involving such payments.

But, the question of illegal or questionable payments is

obviously a matter of national and international concern, and the

t mmi sion,' therefore,. i.of the view that 'imited-pur pose leg-
I.. i ** ..
isolation in this area is desirable in order to demonstrate clear

SCongressional policy with respect to a thorny and controversial

problem. For this reason, the Commission wholeheartedly supports

the philosophy underlying S. 3133, although we have drafted a
I:. ; ..:. .
..odified version of that bill as a preferable legislative approach

Sto the issues raised in this area.
- C-
In essence, we see three critical components for any
: legislative enactment governing the disclosure or making of
l.egislative enactment governing the disclosure or making of


illegal or questionable corporate payeats. -
illegal or:. *... . . p.yS.O.t. ;,, S .rs ~.& c" . :. ,,,,
;- *** l* ; **^ *^ ^ ^ r ^ *.-* *: -.:' ^ "- -- ^ ^ .^ ,. ; : .
First, we believe that any legislation in this area should

embody a prohibition against the falsification of corporate

accounting records. The most devastating disclosure that we

have uncovered in our recent experience with illegal or question-

able payments has been the fact that, and the extent to which

some companies have falsified entries in their own books and

records. A fundamental tenet of the recordkeeping system of

American companies is the notion of corporate accountability.

It seems clear that investors are entitled to rely on the
implicit representations that corporations will account

for their funds properly and will not "launder" or otherwise

channel funds out of or omit to include such funds in

the accounting system so that there are no checks possible

on how much of the corporation's funds are being expended

or whether in fact those funds are expended in the manner

management later claims.
:, - -" .. .:" .. ..." .'* .... -'." .. .''' *-.~ "*'. "'-'- ".. . " ..'.'- .-

Concomitantly, we believe that any legislation in this

.area should also contain a prohibition against the making of fals

and misleading statements by corporate officials or agents to

those persons conducting audits of the company's books and

records and financial operations.

Finally, we believe that any legislation should require

management to establish and maintain its own system of internal

accounting controls designed to provide reasonable assurances

that corporate transactions are executed in accordance with



SA %that.
...such transactions as are authorized are properly reflected

:on the corporation's books and records in such a manner

Sas to permit the preparation of financial statements in

conformity with generally accepted accounting principles

lor any other criteria applicable to such statements.
i" The concept of internal accounting controls is not new.

It has been recognized by the accounting profession as being an

important responsibility of management. Because the accounting

profession has defined the objectives of a system of accounting
Ir control, the Commission has taken the definition of the objectives

4:-of such a system contained in our proposed legislation from the

Authoritative accounting literature. American Institute of

Certified Public Accountants, Statement on Auditing Standards
jo.j 1, 320.28 (1973). The Commission is satisfied that

A 3the specifications of the objectives of a system of internal
accountingn controls found in the accounting literature can
y *: *, .- -,* "'*.* .. :* :..,; ,-" ; ,. ., . ', ; ** .* .. ^.. **' .... . -. .- .* .- _.. ,.-
*'W readily understood by issuers and accountants. Because
the dominant characteristic observed by the Commission in

'its program has been the presence of deliberate evasions

J40f the systems of corporate accountability, the Commission

'believes that its proposed legislative approach will help
qoster a climate in which such attempts will be frustrated by

I adequate internal controls. No system can insure or guarantee

.complete success, but the Commission believes its approach

is the appropriate one to address the problems we have observed.

i sliiatiiiiiiiiii ............ B f re s tt n f r h u r v se :.:..:.
legiiiitiyiiproposals..iiiiiier,,-a fewicomments abo............2...
3 nd4ofS.333aper o einore
H HH~iii ~i~ HHHiH~SectNiiii~ii~ion 2 ofiii. iiiiiiwould iimposeHHreporiiingiirequirements
o cet inissesi oncinwt oeg amnso 1,0
ormre s ehveared otd teCmmsio a sficet
a u t h o r i ty t o..........................................................
sii i gniiiiiiiiiiii ifiiiiiiii i c a nt, c o r p o r a teiiiiiiiiiiiiiiiiiliiiiii i iiiiiiiiiiiiii iiiiliiiliiiliiiiiiii is s u r s A n d ,,ii w h i l w eii p e c e v s o me iiiiiiiililiiiiiiliiiiiiiiiiliii=== iiiiiiiiiii iiiiii l
a t t r a c t io n i n h a v i n g t h e C o n g r e s s s e t c e r t a in s p e c i f i c l e v e ls
o f q ue s t io n a b le p ay m e n t s th a t m us t b e d isc lo s ed we a re co n c e rn ed ... ==
that Sectioni2 m igtdn th Comsintenc sayf xblt
toiiiiirylitiiidiiilioiiieiiriqiiriimeitsiitoifiiiitiiiiiiiiiise circum-
stance iiiiii~~iiiiiii ii i nvlvd Si =====i =i == ==,=iiiiiiiiii mi lry we. are= reutn to see= imosd
hadadfatrl eqiigeer eotigcroat sur
in evr insane to idntf th reiiet of thi foreig
AYet._-f'oe -@s-;-dscosr---6~h ietf f'
pesnrc iigsc pyet a eiprtnio n ivso '
undrsanin of th trnato Mr rqety oee i
theiiii iiiiiiiii i dettifaiatclrioeg ovrmn -mpoe h

recive ai payen ma hav litl orn infcnet h
iiiiiiiiiiiiiiii i n e t r I niiiiiiii iiiiiiiiiiiiiiiiiii t oiiiiiiiiiiiiiiiisiiiiiiiiiiiiiiiin s

1 5 S e c t iiiiiiiiiiiio n 1iiiiiiiii= o fii Siiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiis tima-
iiiii iiii t e neitii o f o uriiiiiiiiiiii iiiiiiiiiiiiiiiiiiiiii iiiil e giiiis l a t i veiii iiilii iiii iiii iiii iiiir e coiiim m e n d a t i o niiii iiiiii ii iii iii iiii iiiiii iii iiiiiiiiiniiiidi iiiiiiweiiiii iiithiiiiiiiieiiiiiiiiifiiiiiiiiiiiiie..
h a v e n o t s p e c i f i c a l l y c o m m m e n t e d o n t h i s p r o v i s io n b u t# = i iiiiiiiiii[=ii -iii
iiiiiiiiiiiiiii iiiiiie imidiiiiii iiiitiiiiiiiiiii t oii c o mpo r t wiiiii thiir a lM
iiiiiiiiiiiiiiiiiiici weiii ... .. re om e d i g

777--7 O

I -61-

li A I "- -' I '..;.^* :^ a.- --* t -;.^*r i .;.--'"i'^ '. A ^ ^ ':;*1^ /* ^ -. "*'**
. . *.mm* m(,m .1L. .".-.,

:flexibility preserved, we are also cognizant of the fact that,

a..s our experience to date demonstrates, in many instances

corporations are unable to verify their initial pronouncements

concerning the recipients of these types of payments.

Section 3 of the bill prohibits certain foreign payments

outright. The Commission believes that its present statutory

authority is adequate to permit effective enforcement of the
federal securities laws. As previously indicated, the Com-

mission has investigated questionable or illegal payments and

related practices and has sought the prophylactic relief

considered necessary under the federal securities laws. The

Commission has, for example, in certain enforcement actions,

nought and obtained by consent of the parties ancillary

uitable relief prohibiting the defendants from making such

payments. We .will continue to do so in the future.

- The Commission believes that the question whether
i: . - :* "" . ,* . ; "
there should be a general statutory prohibition against

Tie making of certain kinds of foreign payments presents a
S.. ..
bwoad issue of national policy with important implications for

international trade and commerce, the appropriateness of

application of United States law to transactions by United

States citizens in foreign countries, and the possible impact


:APrftiA'thi^d14 :eg ig.M r at -a f A &f
of sh legislation upon the foreign telatihns oftbe 'n tte-
States. In this context the purposes of the federal:

securities laws, while important, are not the only or even:..

the overriding consideration, and we believe that the issue

should be considered separately from .the federal securities .


Finally, Section 4 of 8. 3133 would give the Commission

authority to initiate, prosecuteand appeal criminal actions.

arising under any of the provisions of the Securities Act of.

1933 and the Securities Exchange Act of 1934. Whether or not

this provision has merit as a general policy proposition, we

think that it would be unwise to divert attention from the

critical policy issues posed by S. 3133 to what, in the context

of this legislation, must surely be characterized as a peripher

issue. We prefer that any such provision be contained in separ

legislation, at a time when full and careful debate could be ha

Ala ag.i-t-.

36/ See "The Activities of American Multinational Corporations
Abroad." Hearings before the Subcomm. on International
Economic Policy of the House Comm. on International
Relations, 94th Cong., 1st Sess., 23-24 (1975), where'a
representative of the Department of State suggested
that such legislation "would be widely resented
abroad" and could be viewed by other governments
"as a sign of U.S. arrogance or even as interference in
their internal affairs."

i.. ,,.. ,. .. -6 3 o, .

B. Draft Legislation Proposed by the Commission

: The Commission proposes the following for Congressional

considerate ipn:


To amend the Securities Exchange Act
of 1934 to prohibit certain issuers
of securities from falsifying their
.- books and records, and for related

Be it enacted by the Senate and House of Representatives

of the United States of America in Congress assembled,

That Section 13(b) of the Securities Exchange Act, 15
U.S.C. 78m(b),-is amended by renumbering existing Section
13(b) as "Section 13(b)(l)", and by adding at the end of
new Section 13(b)(l), the following subparagraphs:

"(b)(2) Every issuer which has a class of securities
registered pursuant to section 12 of this title and
every issuer which is required to file reports pursuant
to Section 15(d) of this title shall

"(A) make and keep books, records and accounts,
:.--".w..-Bc EatejyL:a tf ir'i.y ect-::the. -ttransact ipon-.-
and dispositions of the assets of the issuer; and

"(B) devise and maintain an adequate system of
SLinternal, accounting, controls sufficient to provide
... rtksonable 'asdsurances that. ": .- "

(i) transactions are executed in accordance
with management's general or specific
: authorization;

0iii)itranactionsiar recorded s necessary
(1)i to p riirp rtin o iac a
iii iiis a t e m e n t ..... ................................. ...

"(iii- ace stiis t sp r ite ny i
iiiiiii iiid a n c ........................................
................................................... ................... ........................
( i v)...............................................................................................................................................b i l i t y f oriiiiiiiiiiiiiiiiiiiiiiiiiiiii a s s e t s i s i i
iiiiiiicompared~r with... the'? exitin assets at'++

isiiiiiii wi+ +ith repet o+ny difeen es
" ( b ) ( 3)ii~ It + + s h a l b e .........................................................
i n d i r e c t l y ,+H ....................................................................
bok rc r contoiocm n a eorrq ird t
bemd o n ccutn upsofayise hc
h a si a...l...........................i.................................
12 f ti s il oih chiieq ieitoie eo t

t .-o.s ^ -..^- f~^ **;-~ p^^ S^ ';4 o.:' -.^ ...... ...'; .... -65 .-. .... *
(, C. Section-by-Section Analysis of Commission's
Proposed Legislation

The proposal amends Section 13(b) of the

SSecurities Exchange Act, 15 U.S.C. 78m(b) by adding new

subsections.. (b)(2), (b).(3.). and. (b)(4).

Subsection (b)(2) would apply to issuers which have

securities listed on an exchange pursuant to Section 12(b)

of the Securities Exchange Act, 15 U.S.C. 781(b), to issuers

which meet the requirements of Section 12(g) of that Act,

15 U.S.C. 781(g), and to issuers subject to the reporting

requirements of Section 15(d) of the Act, 15 U.S.C. 78o(d).

This subsection imposes an obligation on these issuers

both to maintain books and records which accurately

and fairly reflect the transactions and the dispositions

of the assets of the issuers, and to devise and maintain

an adequate system of internal accounting controls

things, transactions are recorded as necessary to permit the

:preparation of financial statements in conformity with generally

accepted accounting principles or any other applicable criteria.

Because the accounting profession has defined the objectives

Sof a system of accounting control, the definition of the

objectives contained in this subsection is taken from the

I authoritative accounting literature. American Institute

of Certified Public Accountants, Statement on Auditing

Standards No. 1, 320.28 (1973).

iiiiiii iiiiiiiii. ...ii ..............
Subecio (b(3 oftepooalwudmk it
unaflfrayprodrcliridrclt asf
anyiiiii bokreodacontordouen.mitane#..reuie
............... bemitiefraicontn ups ihrsett
each of the three classes of issuers subject to subsectioniiii~iiiiiiiiiiiiiii~i@iii~ii ii~i i"

(b~~~~))~) ii))()ii of Secti on 13o m m eurte xhng c f13

( c t ) 1 . 7b .......................................................................................
afirai v flesaeet bu aso he ailure o mak
entries rtefiur ooti rcraedcmns
necessary.. fo prpe .aconin..cod ..... pt f idn
an betn, n jitpatciain n avoato, ol
beapial ne ti rvsoiitesm anra

the hvetrdiioaly ee apledinboh omisio
a c t i o n s a n d p r i v a t e a c t i o n s b r o u g h t u n d e r t h e s e c u r i t i es ,, iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii ,,
iiiil awsii~iii~l~~iiiii~iii iii gen ra ly
Subsectioni))))))ii (b()wudpoii mkn as rms
l ai ngiii s t atiiiiie m e ntiiiiis~~~iiiiii~iiiiiiiii~ iiiiiiiiiiiiiiiiiiiiiiiiioiiiiir o m i t t i ngi t oiiiiiiiiiiiiiiii s t a teiiiiiiiiiiiiiiiii f aiciiiiit s neiiiiiiiiiic e s saiiiiiir y t oiii~i~~~iiiiiiiiiiiiiiiiiiiiiiii~~iiiiiiii~~~iiiiiii~i~iiii~~iiiii~iii~iiiiiiiiii~~ii
b e s t a t e d t o a n -a c c o u n t a n t i n c o n n e c t i o n w i t h a n y a d i t o f

t h e t h r e e d l a s s e s o f i s s u e r s id e n t i f i e d in s u b s e c t io n (b ) ( 2)


*-;..* ." i .1.. ...":' ;' >: -.* .' ., -. -' . .. ** i .' ". / "* *A *.... >. . ** .. *... .; .. .
D. An Approach to Encourage the Establlshment
of Independent Audit Committees and Independ-
ent Counsel to Advise the Board of Directors

The legislation we have proposed should remedy the

most pervasive characteristic of the cases brought to the

Commission's attention in this area, namely, the deliberate

falsification of corporate books and records and other methods

of disguising the source or disburement of corporate funds.

Action to 'further enhance the creation by public corpora-

tions of audit committee composed of independent directors

to work with outside auditors would, however, serve as

a valuable adjunct to these legislative proposals. Simi-

larly, corporate accountability can be strengthened by

making the role of the board of directors more meaningful

and separating the critical aspects of the functions of the

board and independent counsel. This, of course, raises

questions concerning optimum relationship between outside
and inside'drectors anh'wiethehr members of-lw. firms whih -

have the responsibility of advising the corporation, including

the board. should also serve as members of that board of
a.. . a

The importance of the role of the board of directors,

Independent audit committees and independent counsel has

been illustrated by the Commission's enforcement actions

4x the area of questionable or illegal corporate payments.


Significantly i' ,itoe of theu^ bek's no audit committee t i*

existed. In the others, with a single exception, audit

committees either operated only during a portion of the

time when the questionable payments were alleged to.have

been made, or were not wholly independent of management.
.' **. .;- ..' '- .- : * .. *.. ', -".. : ,. *. .. '.:. *.. ..* . 2 ..', *.. -..* ..,, ..
Accordingly, the resolution of these proceedings typically

has involved establishment of a committee comprised of

independent members of the Board of Directors, charged

to conduct a full investigation, utilizing independent
legal counsel and outside auditors to conduct the necessary

detailed inquiries. The thoroughness and vigor with which

these committees have conducted their investigations

demonstrates the importance of enhancing the role of

the board of directors, establishing entirely Independent

audit committees as permanent, rather than extraordinary,

corporate organs and encouraging the Board to rely on

* ndeimt -co nsel C .' e.. ..... .', ..............:-' **,.1 . .o',.

With these thoughts in mind the Commission has been

considering, various approaches. to accomplish.these important

objectives. As an initial step, we have asked for the

views of the New York Stock Exchange with respect to a

revision of its policies and practices as a practical means


;; ,: *:*. ; y *f'f : ;::~-'-.-'. r^-h ;;'"' **. *.' -.*'' .-*' : ; '" *. r .; .*

of effecting them. Action initiated by the New York
Stock Exchange at this time would diminish the need for

Further direct government regulation and set an important

example for other self-regulatory organizations.

37/ See Exhibit D hereto, letter dated May 11, 1976
from Roderick M. Hills to William Batten.


S?. .. ....*
41 :i-
.I" 5- .


The following tables summarize the information publicly
disIC1sed `dI ftririgt-,a ubutti t ttthb flwltectft7hr ii^rtits t.
Commission on or before April 21, 1976. The filings rJ, er gtr
nine corporations are analyzed herein.* The following practice
were followed in compiling these tables. ... : : :::

The companies that obtained the informal views: of tt ...
Commission prior to making disclosures are identified by a
double asterisk (**). In some cases brought to tbe ComnaAq
it took no position.

The Commission's staff attempted to avoid making subject
judgments to the extent possible in compiling the chart*, f....whel-
ever possible, the staff sought to characterize tieW:.,pn4.t:tni
as close to the company's own terms as the limited format: ailo
The staff additionally avoided introducing non-public informati
into the charts. '

The categories that are described in these tables provide
only general breakdowns of the reported conduct. Obviously, col
of the nature and variety of that set forth herein does not lend
itself to easy categorization, and there is a considerable over
among the classifications contained in the tables.

In cases in which the corporation made a statement that app
ed to report a category of conduct contained in the table, a rep
sentation was entered in the charts. Where no statement of any k
was made regarding a particular category of conduct, that catego
was reported as "not indicated."

In compiling the tables, the Commission and its staff made
no effort to verify the information contained in the
. public filings. Thus, the Commission's report of this information
'should :'i r no manner. be -cons idered an at f i rmat ion..* -o its. accurate
or a judgment as to the adequacy of the disclosures under the
federal securities laws.

Finally, although the Commission believes that. the. tables
provide an accurate overall picture of the kinds of conduct& '
reported herein, the limitations inherent in summarizationof
this kind of information render the charts an inappropriate sour
for determining the precise conduct of any particular corporation
The Commission suggests that persons interested in this informationi
instead consult the public documents on which these tables are b

/ The companies that submitted more detailed reports pursu
to court order are set forth separately in Exhibit B. Exhibit A
contain, however, public disclosures made by companies that have
settled Commission actions but have not completed and submitted
reports. Exhibit A does not contain the submissions of the J.I.
Case Company and the Midwestern Gas Transmission Company. Both
are subsidiaries of the Tenneco Corporation, and their filings
largely duplicate that of Tenneco, which is discussed herein.
/*1., 1.|

Company (houa ) Type of statement Domestic political contributions Other domestic matters Foreign political contributions Foreign sales type commissions Payments to foreign officials Other foreign matters Books and records treatment U.S. tax liability Knowledge of top management Cessation
Company (thousands) Type of sb_____________________m___s___________ -______________ -------_____ -______ -____^ ---------_ -

AbbottLabs .................... $765i,415 FormS-K reportingresultsofcom- None ...----- ------------- ---Not indicated .. ------------------ Not indicated---------------- Predominant part ol payments Payments made in connection with Not indicated-----.......----.------ Entered as "sales and promotional Company has notified the IRS and Not indicated..---------------..- Measures to Insure cessation adopt
pany's investigation covering 3 were commission type that "other foreign governmental expenses" but incomplete docu- takenstepstoassurethat noim- ed, as well as requirement of
yr period, totaled $538,000 from 1973-75 actions" of $21,000 in 1975 and montation. proper deductions will be taken consultation with top manage-
with related sales totaling $8,- $121,000 in t974. The commis- in t975. Prior returns also be- ment when deviations may occur
400,000. sion-type payments were passed ing reviewed. Termination will have no mate-
through to government officials rial adverse effect
and agencies
Allergn Pharmaceticals 25,396 Form 8-K reporting results of in- No illegal polilicalcontributions.... No payments to U.S. Government Payments aggregating $13,399 Payment of $4000 in 1974 to gov- Suspicious (not confirmed) pay- All payments recorded as commis- Company has reported payments The senior employee abroad was Stated to be the company's policy
vetigation covering 5-yr period, officials, paid over 5 yr in 5 countries in ernment official to obtain a price ment of $15,000 to employees of sons or ordinary business ex- as commissions or ordinary busi- aware of or authorized some of not to make illegal foreign pay-
connection with sales of $251,- increase for its products. Also, partially owned subsidiary in penses. ness expenses and taken deduc- the payments. It also is possible ments. The board has directed
804. an unconfirmed indication of a connection with government tions. Additional tax stated to be that some US employees were management to establish a writ-
payment of $19,500 to a cus- sales, minimal, however, aware. No evidence that the offi- ten policy.
toms official. cers of the company were aware
and the directors were not ques-
American Airlines ..........---- 1,641,307 Report contained in proxy state- Guilty pleatotheWatergateSpecial Not Not indicated--------............---..-----Not indicated .--. --- -- Not indicated----------------- Company maintained an off-the- Additional taxes of $17,460 plus Chairman of board took responsbil- Yes. Company has adopted policy
ment of April 1975. Prosecutor for illegal contribu- books fund going back to 1964 $9,153 in interest was paid. Ity for political payments. Chief statement.
tions of $55,000. Other ayments thatwas funded by false charges, financial officer had also cooper-
of $50,975 from 197l-73, be- failure to record items, etc. The ated in the activities.
lived legal. Another $117,474 fund amounted to$275,000.
believed contributed during
period beginning as early as
American Cyanamid Co. ...... 1,779,872 Form S-7 and form 8-K reporting None------.. ---.......------------N..... one-------.-------------. From 1971-75 payments of $10,- Payments during the last 5 yrs including amounts paid employees of ..- -- ..--- .--- Payments were "recorded in Cy- No deductions were taken. Possi- None----.......----.............. Payments stated to have been
results of investigation. 000 to $20,09O annually. These foreign governments total $1,150,000. Range from $72,000 to $409,000 anamid's financial records." bile effect on liability not yet de- policy. Written policy statement
were legal until 1974 and illegal per year. termined. Company believes the being prepared.
thereafter, possible effect immaterial.
American Home Products-"....-.-. 2,048,741 Form 8-K announcing innvastiga- .---. do ..----. .-..--.-....- Notindicated---------------. Contributions in 4 countries. The See payments to government Commission-type payments to Legal charitable contribution of All payments were recorded on Amended tax returns were filed Corporate officers, including some Yes. Company sates that termination
tion and providing a general legality of some of the contri- officials." government employees from $38,000 for an "essentially politi- books in accordance with regu- for the years 1972-74. of top management knew of pay- may result in some loss of sales
description of the payments buttons appears questionable. 1971-75, not exceeding $668,- cal purpose" which was favored lar accounting procedures, al- ments to foreign officials, and cause difficulties and delays
problems. 000 per year and aggregating by a high government official, though supporting data or inter- that are predicted to be inconse-
$2,982,000. The related sales views were required to identify quential in relation to overall sale
were $40,500,000. Also, pay- certain entries, and earnings.
ments to promote sales togover-
ments not exceeding $770,000
annually and aggregating $3,-
442,000 from 1971-75.Also,pay-
ments to obtain government ap-
American Standard, Inc......... 1,676,973 Form 10-K reporting results of in- e _do........ .. ........ No unlawful payments to Govern- No illegal contributions. Legal con- Commissions paid and believed Payments in 2 countries of $66,00 .---------------------------. Payments reflected in appropriate The company believes that there The sales commissions were known Company attempting to dispose of
vestigationcovering3yi. ment connected individuals, tributions of less than $500 per passed through to government over 3 yr to "persons designated books of account, will be no effect on tax liability, to some senior management and subsidiary that made payments.
year. officials, by customers believed to be con- some members of the board.
trolled by a national govern-
ment." Payments of about $5,000
to employees in I country. Ex-
cessive sales commissions be-
lieved passed through $195,000
in 1975.
AMF ........................ 1,000,000 Form K announcing Initiationof Not Indicated---------------Not................... otindicated...--------------- Not indicated Not indicated----------------Notindicated ---. An uncharacterizedsumof$1,500o,- Payments were reflected on the The company has notified the IRS Some payments were made with Yes. Company has policy p..b'
investigation covering 5 yr to 000 paid over a 5-year period, consolidated financial state- of its investigation, the knowledge of officers, some ing bribery and illegal l,,ii.,ai
examine foreign payments. The company indicates that this ments. Not documented ad- of whom are board members contributions and requiring com-
needs more examination, equately, however, but the "questionable nature' pliance with laws of other
Management does not believe that matters under study will have a of the payments was not ap- countries.
material effect on business, financial position, or the results of the parent to them.
... ... .N-Noopany or its subsidiaries.
American Telephone & Telegraph 26,365,670 Form S- statement discloses SEC Penodin in estiftlon concerning Not indicated tdsosS Pnn-----ceri-d-otiedicnted....---------------------------------- Not indicated --.comany.o..ts.ubdNot indicated _. Not indicated ---------.......... Not Indicated.

investigation Into domestic po- political contributions Ito obtain
litical contributions of South- favorable treatment from State
western Bell and others, commissioners.


Page 2


Baxter Labs"..-------.. .

Boeing Co-......................--

Braniff International..........

Briatol Myoe' Co .....

bmIrs.nlnfilwri tndualsles ...

Burroughis Corp.................

Buter National..................


Carrier Corp..... ... ..

Castle & Cook............

Calanese Corp..............

fiscal yer
(thousands) Type of Statement

Domestic political contributions Other domestic matters

466,284 Form 8-K reporting the results of None.. -

3,778,00f Form K reporting hea [S inn
|e|lEahL,.' and r n h.-ifa rens
see ,u.[.pin, is ..ur.' en
in 'dsigaf lL.

598,856 Form S-7 describing CAB action
falaring to domestic contribu-
finr,, and off-book fund and
fne nsistence of an SEC In-

SNot indicated........

On the basis of the present investi- _.. do
nation the company believes it
made no illegal contributions.

Guilty plea to the Watergate
Special Prosecutor for illegal
political contributions of $40,000.

Fiim 8 a i..nour,Lir,j rliiallng of Preliminary results make com-
in.esflaalh.)n pany confident that no illegal
contributions were made.

56 331l Form 8-K report with results of Apparent$10000 contributionin a Payments of some $110,00
Investigation that covered 4-yr "'Juisdiction in which corporate possible violation of State
period. political contributions are not local law. Some $1,500 to $3
unlawful." Contribution was for entertainment and enpe
made against management An $82,500 payment to vo
orders, ment official. Gifts of $1]
over 4-yr to public or pr
employees of organizations
which company does busing
,510,835 8 Kn i....icannr ing ino.,lialtn Not indicated........... Not indicated .

-.n-1 inh Compan, a Inrii,|i.

1,489 Amendment to foem 10-K in-
dicating I instance of payment.

1,889,353 Form 8-K and proxy statement do
reporting investigation.

984,681 Form 8BK reporting the issuance None.
of a press release concern-
results of investigation.

753.,131 Fo'm 8 P ir,.1i,i,n re-. Not indicated
tullS nl irohitiq,,n,

1,928,000 Annual report indicates that re- do_
view revealed nothing "lof a
material nature."

Foreign political contributions Foreign sales type commissions Payments to foreign officials Other foreign matters

Books and records treatment U.S. tax liability

Knowledge of top management Cessation

....Subsidiaries purchased $300 of Payment of $1,943,600 since 1970 Payment of $136,800 to govern- Unspecified but "questionable" Various treatment in books; sates Approximately $1,150 of payments No member of senior manage- Yes. Policy statement adopted.
tickets for fund raising dinner, to relatives of government em- ment employees and their rela- payment of $14,000. deductions, expenses, special were deducted improperly on ment had knowledge of the
and contribution of $120 were ptoyees which company charac- ties to obtain payment of past commissions, reimbursed em- U.S. tax. IRS 2ill be informed of payments.
made to a political party. Both terizesaslegalincountrywhere due receivables of $2,840,000. ployee expenses, etc. the circumstances.
activities were legal, made. Similar payments of $28,- The payments were treated as
000 in 5 other countries. The sales deductions. Company also
payments did not exceed $562,- reports payment of $37,400 to
0 min any single year. government employees or rela-
tives to "favorably influence
government action" in other
than sales matters.
.. Not indicated ---........------.. Use of foreign agents indicated, Some sales agents had position Not indicated--.......---....--.. Company states that all foreign Not indicated ..-...-.........- Not indicated.....------....---.......--- Not indicated.
but "no suggestion of impro- with government but the com- payments were reflected on the
priety.'" pany believes that none had books and there was no diver-
the authority to approve pur- sion to, or existence of, slush
chase of its goods and services, funds. .----- -.... ----...-.. Ticket fund used "to promote Not indicated --...--..----.......-do. --.......-- ...--.- Allegations of off-book fund IRS is inquiring into the matter...-- Members of the board of directors Yes.
international and foreign air created through excessive ticket and some top officers had
travel business through prac- sales which were not adequately knowledge.
tices which Braniff and the in- reflected on the books.
dividual respondents believe
*;re .: ,r,,rT,:,r, ~~[,elili^e [iri
CE ',the d,,iu'1r ,l,' ...,
I. C01 i i A-^i 'I 10;*- I f innei
agents, tour groups and pro-
moters. Some violated Federal
Aviation Act, and may have
violated IATA resolutions and
foreign law.
.... Preliminary results make cam- See "payments to foreign of- Preliminary investigation indicates Not indicated ------.--.-.-... Not indicated. .------ Not indicated ..------....---- Yes. Policy statement adoI
pany confident that no illegal officials. that "payments of questionable Cessation will have no ma'
contributions were made, propriety' have been made in effect.
connection with sales to foreign
governments. The company
thinks they are not material and
that their termination will have
no material adverse effect on
0 in Not indicated ..-----..------.- Not indicated ...---- ...- .-- Not indicated...--.-.---- ..-- do......- .....-- --... I subsidiary engaged in domestic Company indicates tatthe matter Yes, in some instances-.---..-- Yes. Policy statement ado


Payment of some $200,000 to
employees or entities having
business relations with com-
pany. Not identified as foreign
or domestic
Not indicated -------. .....

.... See "other foreign matters". .. See "other foreign matters".-

Not indicated.


... do ......... .. .... None -..-...---...- .......- .... $2,161,000 paid over period of 4
yr, of which $453,000 was paid
to government employees.
Money was passed through special $30,000 in 2 contributions that Not indicated ...----
in connection with anticipated were legal where made.
part strike. Some $140,000 paid
to contractor to arrange for un-
loading vessels. Counsel is of
opinion that the payment was
Not indicated................. Not indicated

From 1973-75, some $1,500,000
was withdrawn from a foreign
subsidiary and used in connec-
tion with sales, including some
to agencies of foreign govern-
ment. The sums normally were
added to the price of the goods

----- Commission of $102,000, approxi- See "other domes
lately 36 percent of the sales
price, to government employee
who "could have influenced"
government's decision.
...--.. Payment of $1,261,000 from 1968
to 1976 to expedite or influence Not indicated...
regulatory action by foreign
governments. The payments did
not violate U.S. law, but some
ef ,i l :r .-,.r..,-.i. z under


Sti 'in'' mg 5 .' r.'''.~.t do

and foreign business had in- has been referred to tax counsel.
complete records.




lerminaion will have no mate-
rial adverse effect on business.

Fictitious invoices were used to Amounts of withdrawals were in- No member of board of directors Yes.
withdraw money from sub- cluded as deductible expenses had any knowledgeofthetrans-
sidiary. for income tax purposes, actions.

- Yes. Company maintained 2 im- Amended tax returns filed affect- Not indicated........... Yes.
proper "cash funds" of some ing toss carryforwards.
270,000 over a 5-yr period.
They were funded by fictitious
purchases and false expense
A special account was maintained No deductions had been taken 5 directors, all of whom were Yes C.,,i'ni s nol ) i-tain ims-
for payments on the books, relating to the payments, nominees for reelection and p I:1 .:.,i lufijc tius',-,'
including chairman of the board,
president, executive vice presi-
dent and senior vice president,
know of "virtually all" of the
. Not indicated- .--..--- ..--.- Not indicated.----..-...- ----- Not indicated-..-------- ------- Yes.

Numerous small payments, averaging about $80,000 per year. Most Most payments made from a
made to army personnel who guard plant and employees in remote special checking account main-
areas, and to minor port officials. Company does not consider these tamed for that purpose and a
payments to be improper, and states that they were not paid as bribes record of the account was trans-
or attempts to obtain preferential treatment mitted monthly to accounting
Not indicated-.----------------- Not indicated ------------.. .._ Not indicated---.... --...............- do.

Senior management was aware of Nc sljrriJ f. tIe "y.
the payment arrangements., "2'i. cceyilf-I. 1.1I ,..,.' ,,
ofaetl n [...mIp Iye r
of employees.

Not indicated-.

Company states that "any question-
able practices were terminated."
It expects no significant loss of
revenues as result of termination.


fiscal year
(thousands) Type of statement

Donmestic political contributions Other dometic matters

Foreign political contributions Foreign sales type commissions Payments to foreign officials Other foreign matters

Books and records treatment U.S. tax liability

Knowledge of top management Cessation

. 781,901 Proxy statement disclosning SEC ..... Notl indicated .................. -Nol indicated..

Cerro Corp ...........

Cities Service ".....

Coastal Stales Gas.

Coherent Radiation..

Colgate-Palmolive Co .

Combanks ,

Cook Industries......

Cook United Inc......

Core Laboratories, Inc

Del Monte#.....

...... do. ........

None yet discovered.

Not indicated ....

..... do . ... ...

------ Not indicated ---------------- Company has revealed SEC in- --.-Not indicated ................ Not indicated --------------- Not indicated ----------------- Not indicated --------------- Not indicated ..Not indicated
vestigation into matters "not
material" to its continuing busi-
Expenditures of $30,000 for Not indicated -------------- do ------------ Subsidiary maintained off-book Yes. Swi"ss bank used to transfer Some improper deductions, and Senior management, including Yes. Policy
dgolitical purposes," that were fund of some $000,000 since some of moneys and improper amended tax return filed. The some who were directors, knew
o sguid on op and records 1973, created form rebates on records of subsidiaries, iclud- IRSwillbecontacted. ofthe$30,O0paymentbutwere
of subsidiary. Company was in- sales. Funds appear to have ing misstated revenues. The told that the subsidiary had
formed that subsidiary believed been used for business pur- payment to lobbyist originally been informed by local counsel
that none of the funds were paid poses. Payment of $15,000 to was recorded as tcnical thatthe payment was legal. The
to government officials. foreign lobbyist service, legality of the payment now "is
not free from doubt," however.
None yet discovered ............. As yet unconfirmed report that Suspected payment identified in Not indicated ...-.........------ None yet discovered ..-.-- ------- Not indicated ................. None yet discovered ----..... Do.

Not indicated...


2, 806, 300 Form 8 K reports. and form S-7 .. do ........

1,315,265 Form 8 0 announcing investi- None yet discovered.

14,469 Ar.r.ual 'eca-, for 1975, notes to Not indicated .....

2,615,448 F .,n. e V I -,r.lta .'"..'g r, None......
g0lisc Je'd ieult o rfea l0,
gil1 ll,haft-eoJ 5 yr

15,160 Form 8-P ,i,.itira r,,esi.galhr.n President made contributions of Questionable transactions in which Not indicated ------....-- .... do --------------- Not indicate
romplt11 rt Imtirn.r,. gien some $100,000 from 1967-73 the president and corporation
ycoOpir,a piesoerl under to Federal, State, and local purchased and sold shares in 2
grantlof immunity. officials from account main- separate Florida banks.
stained by officer of affiliated
bank. President testified that,
although money was that of the
officer both thought that it was
available for political contri-
456,638 Fo-ms 10 K ar,, 8-i d;s-aloslnd Not Indicated .................. Investigation not complete but .-- do .---...-..............--- ...--- do- ---....................... do.
vrieerronr iresllijln company believes that certain of
its employees may have been in-
volved in violations relating to
grain transactions and other such
matters as bribery and intimida-
tion of federally licensed grain
orf.:,.ls and the company has
s.)m.a oasis to believe that cer-
tain o0 its employees, without the
knowledge of senior management,
may have been involved in viola-
tions of the (Federal) acts."
446, 135 Form 8K reporting the results of ....................... Payment of $6,162.66 to "persons ... do -.... ....... ... do Not indica'
investigation. not employed by registrant or its mestic.
subsidiaries." It is not clear
whether payment reported was
domestic or foreign, however.
24,202 do ................... .... None .... ... ............. None -........ .......... .... None -..-..-.... .......... do Paum nts .

1,274,000 Annual report disclosing existnce Not indicated...
of Guatemalan investigation Into
the circumstances of purchase
of banana properties. Regulatory
agencies In United Strates were

Not indicated...................Not indicated --........

id....................... do .-.....................

statement adopted.

Not indicated....................... do ........................ The company was advised at the Not Indicated.
time the payment was made.
Apfroximately $67.000 may not Company reports that any tax Management was aware of pay- Yes. Policy statement adopted.
have beenproperlyreflectedon liability "will be minimal." meAts made to corporation
the books of a subsidiary, designated by foreign official.

Not indicated.......

Possible tax liability to be in- Yes,asisindicated............... Reimbursement by president and
demnified by the PresidenAt cessation of activities by him.

Indictments allege improper and Notindicated................... Information obtained to date in- Yes. Policy statement adopted.
fraudulent weighing of grain and dicates that the activities were
falsification of records and license conducted without the knowl-
certificates. edge of senior management.

led, but see other do- Not indicated, but see other do- Not indicated...

.............. do-

nisose5000ti0ises. Nose e..,,,o.,e ~ -. ,..~........

........... Not indicated...

------- -. ..- I-.. o ,------------.-------------- a ent .rot 0. uiaous .omilla will eliminate a $2Us0 Yes.
ployees of a single foreign gov- commissions, cost of sales and deduction previously claimed
ernment through inflated bids sales commissions, and amend tax return.
and invoices. In 1975, $96,385
was paid in the same county in
connection with settlement of
tax claims, and $2,100 was paid
in connection with a license

-- The investigation which had not Ponniblesee foreignn sales-type Notindicated..------ Not indicated................... Not indicated................... Not indicated..
been concluded, centered on commissions.
payments to a consultant re-
garding negotiations of property
purchase. The company indi-
cated its belief that It was un-
likely to suffer any adverse
financial effect as a result of


Company states that it is not its
policy to make payments of this
r. |u ie ir.] r ii .uI e.0 ,,,j ., -.,
I., 1,IlJl ul u0 161 rr.trr. .,', It,.'
lu,, ii relui~l I,, niuni
quested payment would ad-
versely effect operations, pay-
ments might be authorized where
no reasonable alternative is
available. In such cases, the pay-
ment must be approved in ad-
vance by the chief executive
officer, recorded properly on
books, and disclosed.
- Not indicated.


Page 3

were passed on to foreign missions."
government employee. The
rokerage fees totaled
--- Payment of $20,388 to sales repre- Not indicated --..............-..... do.--------
sentative. Portion paid to
official of foreign agency.
.--- Not indicated .......-- ..-.... Payments totaling $315,000 in .. do .. .....-.... .- -
6 countries over 5 yr of which
$260,000 was part of "usual"
trade discounts. Remaining pay-
ments for price increases, serle-
ments, etc. Also, company
reports payments of $550,000
over 2 yr to a corporation desig-
nated by a foreign customer who
resold products to the govern-

fiscal i3
1974(thousands) Type of statement
{thousands) Type of statement


Diamond International.........

Diversified Industries..........

Dresser Industries..............

Electronic Associates, Inc .......... (1) Form 8-K reporting results of

Exxon .............-.. ... 45,792,858 Form S-7 indicating shareholders'
derivative suit alleging improper
expenditure of $59,000,000.
as well as SEC and congression-
al inquiries.

Fairchild Industries... ...........

Gardner-Denver Co..............

General Telephone & Electronics

General Tire & Rubber Co........

B. F. Goodrich Co........ ...

Domestic political contributions Other domestic matters

untary disclosure to Not indicated....
thorities of illegal
ntributions and guilty
company and a vice
to contributions of

Foreign political contributions Foreign sales type commissions Payments to foreign officials Other foreign matters

Books and records treatment U.S. tax liability

Not indicated.---------------- Not indicated----------------. Notindicated---------.....------ Not indicated-----------------..................... Not indicated------------.................. Not indicated.........--

Allegation in civil suit that cash ..... --do-..-..----...----------.............----do..
found nf some $270,000 was
maintained from 1972-75 and
that payments of $200,000
made to company employees.
S$5,000 payment alleged in
another company division for
unknown purpose. Remainder
not verified, but $35.000 was
returned to general funds.

782, 568 Form 8-K-------........-----------.....-.- Revealed voli
federal aou
political con
plea of the
president I
281, 85 Form O10-K for fiscal year ended Not indicated
October 1975.

1,397,970 Form 8-K announcing investi- .... do,......

Possibly some $1,150 paid to
domestic political parties by
former officer who was reim-
bursed by the company.

Not indicated.......-----.....

256,654 Form 8-K reporting results of --. do-

423,000 .._ --do......... ........

2,841,850 --

1,756,646 10- K revealing investigation re-
quested by SEC after disclosure
of Chilean transaction. Prelim-
inary results of investigation

No illegal contributions...-------

No illegal political contributions..

Investigation will inquire into this
matter. No disclosures made.

1,975, 244 Form 8-K with preliminary report None
of investigation.

. do.

-......-....-...-.. Contributions in Italy, legal
that country, averaging $3,0
000, per year and tolat
$27,000,000 from 1963 to t9
Additional unauthorized poll
contributions of a clam
amount of $19,000,000 w
made by managing director
Italian sub. Managing direct
claimed these to be polite
contributions, but manager
can't verify that fact. Contril
ions of $31000 in 2 oti
countries in 1972.
.-----......- .....- Not indicated.-.- - - -

.---------do-----------..........-.......... Existence of "unreceipted pay-
ment" of $24,000 in connection
with a tax settlement.
-..---.-.-do---- ..---- -- .---------.. Payments of $83,000 to minor
government officials of 6 coun-
tries during the years 1971-75.

Sin --. do ..-.-..... ... ..... Payments of some $740,000 from
00,- 1963 to 1975. Of this sum,
ling $10,000 was made after mid-
971. 1973. Payments of $13,000 per
tical year to legislator who served
red as consultant. Some $8,000 of
ere improper payments to customs
of officials in 1973 and 1974.
.---do ------- ----.-- Not indicated-- ------------

Knowledge of top management Cessation

yes .... ---------------- ----yes Ihecorporaona it6w i-.I.
lembursed tr thie c i.ef v ',
hi. ofiae,

-.-. do-..--.-..---.-...-......- The 2 cash funds were maintained Company filed amended returns Not indicated .-. ..-....-..- Ye PI.cT ntatemeae 9d l
through false sales and false and reports no additional tax Mattern dsooveCelf do nt
expense submissions, required. Company indicates require change n MI firanc al
that it will have to decrease its statements
net operating loss carryforward.

.-- do --..-..... -....-...-- --. The unreceipted payment to Nodeductionstaken forunreceipt- --...... ----------Y........ es.
settle tax liability was described ed payment.
on the books as such.
_--do ----------.------- ---. Substantially all were recorded Not yet determined, but company Some officers and directors knew ConmD,n, his reaffirmed ts 'A cr
to be commissions, cost of sales believes that revisions, if any, ofpaymentin instanceand did ignstf illegal 01 ,r,[.-,r
or public relations expenses, would be immaterial. not take action, conudl but ,ndcates unc.'iJ rr,
Investigation discovered no 01l s .-mpsc in counties *',re
offbook funds. s%.:n pamenrms ie cusnm ir,
Unauthorized transactions and The Italian political contributions Italian payments did not reduce Officers who were members of Policies and procedures adopted
payments by managing director were recorded through invoices U.S. taxes at any time. board of directors and mana1e 7 In tie illegali piements an rI e
of Italian subsidiary of about for services as payments to meant of regional offices either falstfcaton of books ann remci s
$19,000,000: payment of about sales organizations. Other pay- knew of the transactions or
$10,000,000 to Italian oil orga- ments were made in cash from authorized them.
nization for certain sales ar- off-book fund. Also, improper
rangements. recording of some other pay-
ments and maintenance of
secret bank accounts not main-
tained on the books.

Not indicated...

Not indicated-

.. Not indic

--.-------- .do.-- ---------..-. --- Invoice or supplier's certificate in From 1971-76, $62,200 was paid Foreign subsidiary has made sales All payments were recorded on Additions
4 countries indicate smaller to government employees. Also, to foreign country that U.S. subsidiaries' books except for
commissions than were paid, a $7,000 payment to a govern- companies and their subsidi- the $7,000 payment, which was
but the full commission was on ment employee in connection aries are not permitted to deal recorded on books of the parent
the books for tax purposes, with. This was volunatrily re-
This practice has been discon- ported to Commerce Depart-
tinued. ment and ceased. Also, $27,000
paid to an employee of an inde-
pendent distributor to promote
.-.---------.-. Payments of approximately $182,- Paymentofn$176,000 by subsidiary Payments of $2,210,639 from Payments relating to bribery of False invoices used to generate Compani
000 over 5 yr that were legal to marketing representative and 1971-75, as well as payments to officers of foreign companies of cash for some payments. Some
where made. I improperly re- t is not clear that improprieties 3d parties of $5,602,816 where $5,086,028 from 1971-75. of subsidiaries books did not
corded, were not present. it seems likely that some per- reveal nature of the transac-
tion was passed on to govern- tons. Some off-book accounts
ment officials, also were discovered.
.-------.. .--- Not indicated--.........--.......-- Consultant fees of $800,000, of which $300,000 has been paid to date to Morrocan private consultant in Not indicated... ------------ Not indi
connection with negotiation of contracts and licenses. The consultant was under investigation for some
time, but not indicated. 2 Morrocan officials were indicted in connection with I of the transactions, however.
Payment of $90,000 to private Romanian citizen in connection with contract negotiation, believed legiti-
mate by company. For reasons not known, however, sum was paid from INSA foreign bank account,
resulting in payment of $90,000 to Chilean Government. Unrecorded cash fund, formed from rebates,
from which $24,000 was paid over 6 yr for executive compensation and improper and illegal purposes.
Off-book fund once approximately $435,000 that appears to have violated local currency laws.
...------..-.-- None.......................... Commission-type and expediting See "other foreign payments"---- Payments totaling less than Disclosed on books but not fully None...
payments to government offi- $93,000 from 1971-75 to 3d disclosed on invoices.
cials in 2 counties of not more parties that may have been
than $31,000 total from 1971-75. passed on to some government
Sales related to the commis- officialsforexpediting purposes.
sions were $276,000.

ated.............---..- Not indicated----------------- Yes. Corporate marnarpe-rl has
ien;,ed its policies The a m.n
t.Ode of the practices ,% slata-] r.
be vno m] to h1tlie Urs
at tax liability indicated-.. No.---------...........---....-----.-----. Yes. Company has adopted policy

i has advised the IRS.-.- Outside directors not aware. Man- Yes. Matters discovered wig not
agement directors were involved materially affect assets.
in some transactions, but may
not have heed aware of circum-
stances of or seriousness of
cated----------------................... Not indicated but said to be sub- Yes.
ject of continuing investigation.

--------- None..

------.- Yes. Terminatnon wi not have
material effect on business.

Not indicated......-........----.......--do .-----------..-


rocal year
(thousands) Type of statement Domestic political contributions Other domestic matters

5,256, 247 Proxy statement reporting domes- A foreign bank account, funded ..... Not indicatod.......
tic contributions and form 8-K from volume discounts on
reporting results of investiga- foreign sales was used as the
lion into foreign matters, source of domestic contribu-
tions. The account was started
in 1964. Over 6 yr, some $260,-
000 was trans- chairman of the
board and company plead guilty
to making an illegal $40,000
contribution in 1972.

127,816 Form -7 ..... ....... ....

2,600,000 Exhibit to fcI.T, 8 K iepuort.j
results of n-eilgttuO.

Hospital Corp. of America .......

Ingersoll.-Rand Co ... .... ..

Intercontinental Diversified Corp.


Johnson & Johnson....

Koppers Co., Inc...


297, 747 Form S-7 registration statement

1,414,788 Form 8-K announcing investiga-
64,143 Form 10-K for fiscal year ending
Oct. 31, 1975.

II, 154,401 Form 10-K and proxy statement
reporting results of investiga-

1,967,885 Form 8-K reporting results of

914,184 .. do ..

4.500,000 FC.,,, a ,no..-al,rg results of


Foreign political contributions Foreign sales type commissions Payments to foreign officials

Not indicated ...--------------- As reported in "foreign officials"- Direct payments of $120,000 over
6-yr period, plus indirect pay-
ments of $375,000 that probably
went to government employees.
Possibly another $350,000 in
commissions to government
employees in 6 yr in connection
with sales of about $9,000,000.
Unspecified number of pay-
ments of less than $1,000 each
to minor functionaries for serv-
ices that the foreign subsidiary
was entitled to receive.

----...-.- Not indicated .--- -..---- -..-.. Not indicated...---...........--

Other foreign matters Books and records treatment U.S. tax liability Knowledge of top management Cessation

Not indicated--...--------------F.. foreign fund used for domestic Company states that additional Some officers had knowledge of Yes. Policy statement adopted. The
contributions. Also, 3 foreign taxes, if any, will be minimal, domestic political contributions company states that termination
subsidiaries had off-book funds but not of foreign transactions, will have no material adverse
from which some foreign pay- effect.
ments were made. In 6 yr, about
$680,000 went through these
funds some 75 percent of which
was used for legitimate business

.do................--------------------....... Not indicated..-

Not indicated --- --- -- .....- Not indicated

------- Yes.

No illegal contributions. -- ------ do.................. .--.. Payment of some $850,000 from Company reports payments of 3 small unrecorded bank accounts No revisions are required in U.S. No involvement or prior knowl- Yes. Policy statement adopted.
1971-75 to local government $800,000 to employees of pri- of subsidiaries involving less consolidated returns, edge of payments by directors
officials and employees, mostly vate customers in connection than $150,000. Faulty documen- or officers.
at a low level, in connection with sales. In many cases, the tation of other payments.
with sales. In some cases these payments werefor technical serv-
were for technical services that ices thatwere actually rendered.
would have been performed Other indications that subsidi-
by others. 13 expediting pay- aries engaged consultants and
ments of $190,000 from 1971-75. agents without formal con-
tracts or invoices, but services
were rendered.
Notindicated-..--..-----.---- Payment to foreign consultant Not indicated..------......---------......-. Notindicated----------------................... Payments to consultants reported Not indicated-..-------..-... Yes....--------......-------......-------- Notindicated.
pursuant to contract The full on books as "services per-
extent of services and disposi- formed."
tion of fees not known, but
company believes that payments
and contract were legal.

Contributions of $17,500 in possi- .-do- -.--- .........
ble violation of Federal Elec-
tion Campaign Act. Company
was reimbursed by Mr. Harrah.
None except fur nominal State No violation of applicable U.S.
and local contributions that laws.
were legal where made and dis-
continued in 1974.

Not indicated ... ..... Not indicated................

.do ................. ... ...... ....... ... .. .. .. .................. do ....... . .........

From 1971 75, various subsidiaries Small payments to Government
expended approximately $4,300 functionaries to expedite ad-
in purchasing tickets in fund- ministrative action or secure
raising events, incurring other procedural assistance. The total
minor expenses and making amount of these payments is
minor contributions that could considered insignificant.
be considered directly or in-
directly to be contributions to
Federal election campaigns.
Tce n.rr,.eslic and foreign con-
l'.sui.s, totaled $64,300 from
lqyl "'. of which ;60,000 was
made in jurisdictions where

No................... No payments to recipients in
United States.

None .--......... ......... Notindicated.................

Contributions totaling $550 from ..- do----
1972-76 that may have been

Not indicated --....-.......-....--.. do.....-----..---.-----. --- Not indicated...........------------------- Do.

Political contributions included in None-------..-..----.....------. ------do--------- -------------- Do.
financial statements as charge

against income. purpose of pay-
ments in connection with spin-
offs not indicated.
Substantially all of the sales-type Company expects no significant
commissions were recorded, but effect on U.S. tax liability.
the accounting entries were
sometimes insufficient. A minor
portion of the domestic political
contributions were not recorded
or were improperly recorded.
Some legal transactions were
improperly recorded. Corporate
books of some foreign subsidi-
aries did not reflect tax liability
when they were acquired. Com-
pany has substantially com-
pleted its negotiations with
governments and regularized
the books.
Charged to variety of accounts but Improper deduction of $280. IRS
were subject to regular control will be notified, but no United
of the subsidiary involved. States return to be amended or

Neither the board nor senior Appropriate steps will be taken to
officers authorized the practices, assure there is no repetition. The
companies against such practices
were affirmed and new pro-
cedures were adopted.

No members of board or executive Yes. Company states that the
committee and no present exec- related business was not ma-
utive officers knew of or ap- trial.
proved payments.

No books and records problems The IRS has been advised of de- Neither senior management nor Yes.
were discovered, velopments and prior tax re- the board ofdirectorshad knowl-
turns are being reviewed, edge of the payments.

Yes, 2 off-book accounts in foreign None .-. -
countries, but I of these ac-
counts was included in the
company's consolidated finan-
cial statements.

...... Several members of management Yes.
were aware generally of the off-
book accounts.


Goodyear Tire & Rubber Co...

-----do--------------------...................... No- t indicated..------------- --- ........- ..
Management believes the matters under study will not have a material
effect on company's assets or reported earnings.
Contributions from 1971-75 as. ----do.- -........- .---... Not indicated...-- ----- Payments duringl970-72of$329,-
permitted by local law. 320 to foreign corporation in
connection with spin-off type
Foreign and domestic political In addition to customary commis- See "foreign sales-type commis- See "foreign sales-type commis-
contributions totaled $64,300 sions, approximately $3,800,000 sions." Also, payments or pros- sions."
from 1971-75, of which $608000 paid from 1971-75 to assist in ents of modest value to govern-
was given injurisdictions where developing or improving busi- ment functionaries to expedite
contributions are legal, ness opportunities and relation- administrative action or to
ships. The corporation has secure procedural assistance.
reason to believe that all or a
substantial portion of this sum
was ultimately received by em-
ployees or persons closely
related to commercial and
governmental customers.

n No--..-..--------...------ Payments made with understand- 7 subsidiaries made payments of Payments of $12,300 originated in
ing that they would go to govern- $990,000 from 1971-75 with the United States that were asso-
ment officials. See "government understanding that government ciated with exports.
officials." officials were involved. About
94 percent were commission-
type; remainder were expediting
No illegal contributions-...--.. .. Approximately $1,500,000 paid in None- -........... Not indicated -.........
violation of company policy as
commissions in foreign coon-
tries, primarily to, and at the
request of, persons connected
with the customer. Payments did
not exceed the reasonable
amount for commissions, how-
Contributions totaling $8,500 from Not indicated---------- ----. Payments totaling about 200,000 2 accounts not reflected on books
1972-76 in countries where from 1970-75 to tax consultants, over last 10 yr involvingexpend-
legal. minor government employees itures of $491,000 over 8 yr.
and union officials. About $145,- Payments for employee compen-
000 of this sum was paid to a tax station and payments to 3d
consultant, and the company has parties of questionable legality
no knowledge of impropriety, or propriety.


Page 5 -....----.

icatl year
ta y1974
(thousands) Type of statement


Levi Strauss..

Domestic political contributions Other domestic matters

4,500,000 Form 8 -K announcing investiga- Not indicated.

McDonnell Doulas.............

Mercantile Bankcorporatlon Inc.-..

Merck & Co ....................

Missouri Public Service Co....-,

NCR Corp ... .........

Northwest Industries, Inc ......

The Offshore Co.. .... .......

Ogden Corp.

.Not indicated.

897,700 Form 10-K announcing results of No illegal political contributions .. do............

3,117, 869 2 form 8-K's with reports........ Officers establish fund, existing Loans and advances on favor
from 1968-75, for political con- terms to trust sponsored
tirbutlons The bank did not chief executive officer. Loan
participate or reimburse the purchase of securities in e
officers. Contributions averaged of market prices.
$10,000 per year and were not
coerced, Company indicates and
that It has been discontinued.
1,329,550 Form 8-K with preliminary report No ............... Not indicated............
of results of Investigation.

63,971 Relstraition statement on form Contribulions of $51,865 from ... do...........
-7. 1968-76 made by club formed
by senior employees.
899,787 Form8 K announclnglnvestigation- Not indicated ....................... do---------------

103,700 Form 8 K reporting results of do.

133,400 Form 8 K announcing preliminary None_
results of Investigation.

1,858,119 Form 8-K reporting results of Certain
investigation, nounc
until 1

Foreign political contributions Foreign sales type commissions Payments to foreign officials Other foreign matters


Books and records treatment U.S. tax liability

Notindicated---....-...----- ---.----Not indicated--- -------.----- Payments of about $75,000 in Not indicated---- --.... ----- Not indicated...
1974-75. Company cannot deter-
mine whether payments led to
improper benefits since it re-
ceived similar benefits, primarily
tax credits, in prior years with-
out making payments.
---. .... do-......................O. During 5j -yr period, a portion Payments to foreign officials; see None ---......-....-----------...........--- Company's indel
of commissions appears to have 'commission-type payments." ants are of the
gone to foreign officials. The :.e.', ture wei
total amount involved was ',fedO ,,i acour
$2,500,000. reflected in th
ble -- do-- -------- Not indicated......---.......... Not indicated....-..---.-------- Not indicated .- ...-..-.--.-. Not indicated...

d by
is and


persons who were not an- Not indicated
ed candidates provided
es of company airplane
1974 at a cost of $40,000.
ir subsidiaries made illegal
buttons of $16,200.

... Payments totaling $157,684 from Some commission-type payments From 1968-75, $3,603,635 of -... do...............------------...--... Payments classified as business
1968-75 that were legal under passed on to government which $2,305,000 represents expenses, commissions fees
local law hut improperly re- officials, special commissions, paid to 3d marketing services, etc. Political
corded on books, parties who may have passed contributions entered as pro
money on to government em- motionalt expenses or public re-
ployees. Company indicates that lations expenses.
not all of payments may have
been improper. Generally paid
to mid- and lower-level officials
1 $12,500 payment made to
Cabinet-level official, however.
..... Not indicated...--.--.-.-------. Not indicated-....---.....---....... Not indicated..........-..-.......-do .....-----------.......- Amounts deducted from employee

-- None..-...................... From 1977-75, amounts add
price of equipment of $31
to $500,000, alleged for
training, support services,
but they may have been util
for unauthorized purposes
-- Not indicated.----............... Not indicated.............

-- None........................- None..............

.. Not indicated--................. Yes. The company indicates I
believes they were reason

led to
til zed

Knowledge of top management Cessation

... Not indicated................. Not indicated......--.....---..... Yes.

pendent account-
opinion that ex-
re properly iden-
iting records and
e financial state-

Additional taxes will be paid on -.--.------
such amounts as ultimately
determined to be nondeductible.

SNot indicated

............ Yes ... .......

.. Not indicated.

Y. es.

Improper deductions prior to 1974, General knowledge of a number of Yes. Policy statement adopted.
Amended returns for 1972 and the payments.
1973 filed and additional $264,-
000 was paid. IRS is presently
reviewing the matter.

Not indicated...

salaries for political contrtfiu-
tions included in operating ex-
penses. A special fund used for training There are no U.S. ta
personnel and support services quences with respect
appears to have been used for payments.
payments as well. Fund was
formed by overbilling customers
with their knowledge.

---- Members of the board of directors Yes, pursuant to settlement agree
involved in the conduct relating ments with State and Federal
to political contributions, officials.
x conse- No member of senior management Yes. Policy statement adopted.
t to the or board of directors was aware Company does not believe that
of the payments, cessation will materially affect-
revenues or assets.

------ Payments made by I subsidiary No transactions were discovered The IRS has been advised that re- No directors had any knowledgeof Yes.
to government connected per- that were not properly recorded turns will he corrected to the the payments, m.
sons in connection with sales not on the appropriate accounL The extent that any improper deduc- bi
exceeding $102,000 in 1973, company also states that the in- tons have mistakenly been
$158,000 in 1974, and $222,000 vestigation uncovered the exist- reflected on the returns.
in 1975. The related sales totaled ence of no slush funds and no
approximately $14,000 000 instances of laundered money.
$17,000000 and $19,000,00i
in the respective years. Another
subsidiary made similar pay-
ments of approximately $35,000
and $65,000 in 1973 and 1974 in
connection with annual pur-
chases of some $2,000,000.
Some portion of all of these pay-
ments, the precise amount of
which cannot be determined,
was for expediting port clear-
ances, shipping arrangements,
------ Payments to expedite government Payment to 2 consultants to ex- Irregularities in the accounting None....----..---.-.--..--.-.. General awareness and in some Yes.
actions, amounting to less than pedite regulatory approvals, system of foreign subsidiaries cases approval, thi
$15,000 per year. totaling $154,000. The company were discovered. The payments on
has no knowledge whether the were recorded but in some cases
payments were made to govern- inadequate documentation was
ment officials, provided.
that it Some $150,000 paid in small gra- From 1973-75, $140,000 paid in No transactions that were not re- Not indicated----------------................. Yes........................ Yes.
able. tuities to expedite port clear- foreign country to employee of corded on books or where the
ance in foreign countries. Pay- customer in which the govern- use of money was falsely de-
ment of $25,000 by subsidiary ment had a major equity interest scribed.
for a variety of services, some of From 1970-75, some $2,100,000
which were performed by govuy- added to sales price as accomo-
ernment employees, dation to customers and depos-
ited in bank in 3d country ac-
cording to customer's instruc-

Cessation will not have a
material effect on consolidated

The Company indicates that
ire will be no material effect
revenues and income.


OUs Elevator..

Pacific Vegetable Oil....

Phizer, Inc... .. .

Public Service Co. ot New Mexico

Pullman Inc .

Republic Corp......

Richardson-Merrill, Inc..

Rockwell International....

Roinm & Naas Co ,

Rollins, Inc.**,... .

Sanders, Associates,

Santa Fe International*....

Schering-Plough Corp..

fiscal year
(thousands) Type of statement Domestic political contributions

Form 8-K indicating initiation of Notindicated................
an investigation.
210,317 For"m 1 -" .,.r.ounL..-.i results of -----------.......

1,571,887 Form 8 K reporting results of in-
vestigation covering 3 yr.

67,367 Form S 7 ..------... -------... Company indicates existence
grand jury investigation regar
ing possible violation of Fedei
law in connection with possit
contribution. $9,656, paid
private company, may ha
been passed on to candidate.
1,425,587 Form 10-K reporting investiga- None--------.......
lion covering !yr.

225,648 Annual report with statement in Not indicated..---....-....
note to financial.

582, 146 Form 10- reporting results of None.-----...-----------.

4,408,500 Form 8, amending previous form Not indicated --.....------.-
8-K and reporting results of
1,021,736 Form 10-K containing results of None.--..--...........

t93, 297 Form 8-K with report of findings.. Not indicated-......---.....-

180,936 Annual report quotes the reply of .do----------
a corporate officer to a question
on foreign payments raised by a
255,912 Amendment to form S-7. Form Continuing inquiry has reveal
8-K and amendment on form 8. no illegal contributions.

726,872 Form 8-K announcing initiation of No illegal contributions---

S Other domestic oatl

.... Not indicated......

---...-. do.------. -----

...-----. do.---.---...

of .....- do-------------

lers Foreign political contributions Foreign sales type commissions

..----...-.- Under investigation ..--.-..-.... Under investigation............

...... Not indicated ....----- ...----.. Not indicated --..--.-.........

..-.-..---- Possible payments, see "other
foreign payments."

--------- Not

Payments to foreign officials Other foreign matters Books and records treatment U.S. tax liability Knowledge of top management Cessation

. Under investigation--.......--..... Under investigation -----.. ...--- Not indicated................... Not indicated.........--...... Not indicated--- .-.. --- Not indicated.

.. Not indicated ----.-----....-- For last 2 fiscal ears, company re- Tax reports in country exclude It is not clear whether penalties .... do ............. Do.
coived $1,170,000 as a distribu- certain matters but consolidated for foreign taxes will have any
fion of profits, in violation for- books are accurate, effect.
eign country's withholding and
exchange laws.
.. 2 instances, totaling $28.500, of $22,500 payment to foreign trade Notindicated -....- ............ Not indicated.------...-.........----. do...... -...........-....... Long standng ng
expediting payments; $45,000 association for possible political e.neDrtr of government fiibc.aks
annually for 4- 5-yr period in payments and the payment of an.1 cinrcalulonti.burtonsIpo ,rrf
connection with sales. Total of $21,000 in "professional fees" ePe srrmea nb the crmparn ag
$10,000 paid in matters involv- part of which may have gone to thr auddt paocedbres oerR
ino government business.2 governmentemployees.a s1 engninenen
.. Not indicated... --------. Not indicated ..----- ---.. -------. do.---....----- ------.---- do......-.....--.--.---.. Company's officers are included Not ,hndcated
in investigation.

-_. None...--...-------.--....--- None, although some commission From 1973-75 $100,000 and From 1973-75, some $2.150,00 Recorded as feesandcommissions. Company has discussed the None -.. -- ------ Comp-r-r poi-c- against ovation
payments may have been $25,665 in foreign currency paid paid as fees and commissions matter with the IRS. of domestic and foreign laws
passed on. to secure work. to secure work. affirmed. Foreigo agents nOW
required to ,epieseut atlu com-
missions will not be passed on to
... Not indicated-.......---......- Not indicated.---------.-----.- Foreign sales were made through Not indicated.-------.----.. ---.-----do ...--------..-- Not indicated................. Not indicated....---.----.-...-- Not indicated......-......-- Not indicated.
commission agents. The com-
pany's review of the practices
does not indicate that corrective
action is necessary, however.
Company indicates that the
SEC is reviewing the matter.
--- None. -.--.... ......--- ..--- None ..------.---.--...--........ See "other foreign payments".-...----. do...----....--....--.......... Payments of questionable legality ..--do......................... Expected to be ...-.... ...--- ...-- .- Yes.
in relation to sales. Amounts
of the payments and the related
sales are considered not to be
material by the company.
..- Not indicated .......e..-------- $8,300 in Canada, where the con- Not indicated.................. From 1971-75, $668,000 were or ---- ....-----------.. --. Recorded as sales commissions, Company is reviewing its tax re- No.....-..---...-.n.....--- .. -es andn of comoani
tribution was legal. may have been paid in con- but some questions as to some turns, polcr
nection with sales of $10,100,- of the payments.
..- None --....--.-...........--.. None...........--- ------..-- From 1971-75, some $427,400 paid From 1971-75, payments of $157,- Of the total, $463,000 was not The maximum tax deficiency that Some awareness of some of the Yes. Cessation wtt not have a
to lower level employees in con- 000 that violated exchange and reflected on the local books and could result from disallowance practices by members of top material effect on revenues.
tion with sales of $3,000,000; price controls, records and $219,000 was of foreign taxcredits will be less managementL
permits, and loans. Payments of misclassified, than $100,000.
165,000 in customs matters.
.. Not indicated --- .--- Not indicated-.............------ ...- None .. .. ..--. From 1971-75, payments of $127- None...............--........ Not indicated..............- ..None........................... Yes..N------------ o. The company states that the
000 of "questionable legality payments are customer,' in
made to municipal officials to the country ard thal [ill
install equipment. Revenues aulnorute ,nilai pdmnthi n I
related to payments are some $2 luTue he.n "no easonjDle
Million annually, alieiniany. s oadtable .........-........... Thecompanyindicatesthatiltpays Not indicated---..-.--....... Not indicated -...---- ...- do ......------------.-. Not indicated................... No ......---.-------h. ht nolcatepa
sales commissions in connection
with foreign business. Review of
its arrangements shows none in
d violation of U.S. policy.
ed -----... ---..-...---........... Continuing inquiry has revealed no Not indicated................- Questionable payments aggregat- ...........-......---. Continuing inquiry has revealed no Not indicated ..---.--. ---- Company indicates that payments
illegal contributions, ing $66,140 during past 4 yr. "slush funds" maintained out- are undesirable but that it will
The payments were made in an side the system of corporate co,',Dnue to mare hem 'if no
attempt to resolve claims accountability or "kickbacks." easonaelI alern'a, ejsts'
initiated by foreign officials in an'1d e patiment ,. apnirn Dov
connection with tax and customs the Piesdenr
matters, which thn company
o N considers improper or illegal.
..... do .. Not indicated................ See "foreign officials."-.......... Payments not exceeding $207,000 .. .... Not indicated ...... -. -----.-do .---..------- do.--- ..- -- .- Not indicated.
per year in connection with
$2,300,000 per year.

Books and records treatment II S tx liahility

Company (Inuluanos) yPOa O mmnnD mw$ iW.c.v, wcucuuuti o mns uumlltuhe ndmst s ricnma tues lVoeugnuuuin itca con a .u toWIIIsonna.ui. .........-... ..t..e.... ...... r.........

,. Sat.....1............ 21 -K0dform ............ NO illel oributn.......N ill r....None...........................None..- -------...........See foreignn officials"..........Payments to secure work totaling None.. -------..................- Reorded in the books a
a Co 1,303,000 tram 1973-1. which Ing expenses.
were related to sales of $11t,-
500,000. The legality of these
payments under local law is
'not free from beuht."
Scrll yNewYorkCorp........... 2,587,000 Formg-K............-- ......- Officeraofthecompanyhovebeen Officers received fees which were Notindicated.... ----- Notindicated.....--..........-- Not indicated........ ...-- .....Notindicated-----...........--- .....- Not indicated.........
subpoenaed in connection with later allegedly contributed to
an investigtion for violations of political campaigns.
New York election law. The
company believes that it acted
within the Scope of the law.,d
ThSinrCo................. 2,587,000 Report of Investation on form Grand jury indictment involving Not indicated -...............----- do ........................... --- do---------....................... do-----do.-... .................... do o............
10-KI and proxy, $15,000 contribution charging
company and lower level em-

Smith llerinational.....---....---

Soulihern Bell Telephone & Tele- ..
graph Co.

Standard Oil of Indiana-........

Stanley Home Products Inc .....-

Sterling Oruge..................

Sybron Corp.................

Tenneco Inc-..................

199,501 Amendment to form S-7.--.--... Not dicatod ................................................... o. do .. do -.....- Payment of $13,349 to tax consult- --..................
ant which was to be passed on
to government officials. The
company cannot verify whether
some of the money was in fact
passed on to the official, how-
......... Form S-9...................... Former employees made allega- North Carolina Commission found do ....................---- ------------- Not indicated--...................----------do ....--.--......... .... North C
lions of iltegapl contributions. that $142,000 was improperly that
accounted for. The purpose of accoui
this money was not disclosed, and re
2,016,710 Form 8-K announcing results of Probable illegal State contribution $10,000 payment in 1970 to trade From 1970-73, $617O000 in Italy. See "payments to foreign offi- Indications that consultant paid Tax consultant paid $386,000 from Off-book
Investigation. of $10,000 n 1970. association for political contri- From 1970-75, $35,700 in Can- cials". some of his fees for expenses of 1970-75. Retained consultant to since;
buttons. Aggregate of $289,000 ada. The contributions were government officials. Also, from obtain exploration and produc- transfi
in promotional allowances from legal in these comintries during 1970 to 1975, the company paid lion rights paid $218,000. Sales of forl
supplies not recorded as assets, the periods in question, travel assistance to government price increases to accommodate politic
personnel and their families in customers in 1974 in total corded
aggregate cost of $86,000. amount of $16,700. etc.
164,521 Report of investigation on form None ..... None. .. .... None........ .None..None.......................... Not indicated -- .. ..-------- Payment of $50,000 to consultants Compensation of employees in a 2off-bho
8-K. who may have passed most or a manner designed to avoid for- a foe
portion of that sum to minor eign taxes. $80,0
government officials.
899,787 Form 0-K announcing results of No illegal contributions..-....- Not indicated..... --...........-- No illegal contributions -.--.. Company made payments from Payments of $33,000 to $252,000 Not indicated--...------------. Recorde
Investigation covering 5 yrs. $103,000 to $180,000 from in various years to obtain price exper
1970-75 related to sales of increases, product registrations, not i
$1,960,000 to $4,300,000 to and work, construction, and off-bi
agencies that were affiliated port permits.
with governments.
495,093 Form 8-K announcing results of Not indicated .-...- ot indicated................---- Not indicated ----................ Parents to government em- .--do ...- -.--------.... ---. Record
investigation, ployees acting as purchasing
agents or engineers of $76,500
in 1974-1975, related to sales
of $1,900,000.
5,001,470 Funds established to receive vol- Payments of $2,000 a month to -- ....------------ Payments to consultants outside $10000 to government employee. $500,000 to military personnel. Some
untary employee contributions Louisiana sheriff presently under consultant's domicile. $25,000 invested in domestic $330,000 for scholarship pay- scribi
to be used in accordance with investigation. Various payments concern in which foreign govern- ments pursuant to contractual
applicable law. Subsidiaries of $200 to $2,000 may have been ment employees probably had arrangements. Company also
made lawful contributions of made to State utility commins- a beneficial interest Merchan- withholds all or part of foreign
$180,000 in California. Some sioners, but employee who dise valued at $480 given to dealers' commission, on re-
$3.000 contributed illegally by provided information nowstates employees of government pur- quest, and pays to designated
subsidiary In Louisiana. that he was in error. Contri- chasing agency, foreign banks.
butionto U-. iSenator^ which 2

buuuulntoU .S. senator which 2
employees report as having
been paid to obtain influence
in General Services Administra-
tion decision.
UOP Inc........................ 615,046 None.......................... Not indicated-................. None ............--.......... Not indicated................. Transfers to administrative per- Not indicated-..
sonnel equivalent to $50,000
related to sales of $1,200,000
annually. Payments in similar
amounts for 5 yr. Similar pay-
ment to higher level official in
1973 of $40,000.

.... .. .... Paymer

foo 4 l

as market- Inappropriate deductions in con- Managers of subsidiaries author- Yes. Policy statement adopted.
Mection with payments. Esti- sized the payments. Certain
mated liability of $84,0)0 for members of corporate manage.
1973-74. ment were generally aware of
some payments and in some
cases authorized them.
.......... Not indicated................. Not indicated...... ..........- Not indicated.

..... Top management was not aware Do.
of the contributions.

.--------... No.

arolina Commission found .... do......................... Not indicated...
$142,000 was improperly
inted for in corporate books
k-fund totaling $333,000 Some of the payments were im- Yes-.........-- --
1970. When closed, money properly deducted for U.S. tax
erred in technical violation purposes.
eign exchange laws. Some
al contributions were re-
d as advertising expenses,
ok accounts maintained by No liability...................... Payments appear to
reign subsidiary totaling authorized by I or in
00. directors of the corn

ed as ordinary business
ises and description did
indicate true nature. Also,
iok funds reported.

Amended returns filed for 1970-74.

rded on books.......... None .

-..------- Yes, and previous policy reaffirmed.

.. .. Not indicated.

.----.....-- Yes. Policy statement adopted.

have been
more officers/

Management of foreign subsidi-
aries knew. One member of
board of directors also knew of
the payments.

. No_

Yes. Cessation will have no mate-
rial adverse effect.

Yes. Termination will have no
material effect.

.....--.- .. Planning to propose policy state-

payments improperly de- Information to be turned over to Knowledge of some of the pay- Company is developing a policy to
ed on books and records. IRS. ments. assure cessation.

its not supported by ade- None---.......-....-........... Representative of management Yes
e documentation, was (informed in 1973).

Knowledge of top management Cessation

-.n;h ....ico ont-ribu.tios ria.. sales tN e ,tcmm*iss.ion Payments tn fnreign ffiicial s thar foremin matters

PaWe 8

"...I U.b. lax Ilavully

Domodk: DOldcal contributions Other &.mdk -ft,.


United Brandl .... .....

Unil)ed Techenologien.. .

The Upjohn Co

Warner-Lambert Co

Wetlllnghoue Ilectrilc Corp.

WIlle Consoildated Indusliles

Whilhker Carp .

Fiscal ai

(tnousMTnit) I pP Of statenmBn

Domestic porlIJal conlrituljo.n Other Oome-ttc matte's

.ll 815 Fom-im -K faiminindoilyllne- Notl indicated

() Form B. piporlnign results Ol r. No illegal ConlibultionSl.

80, h1l do

I 946 i i..

5 838118 do



N.-1 indicated

I 016 6I ? Fi.n 14 e iprtinfg lesulls o None...

778 246 Fto. 0 fo -, epor-
Inm result. ut Ineulgigitlon

Conlitbultons totlineg 1585 H1 C4e]ldqiles by
leael emipltyeei oH the o.,-
l|.,m 1970 1.1 1 975

Not indicated ... ..

No violations O U S las. .

Foreigo polibcal corntibations sales type commissions Payments .) foreign off.c.als Otherf foreign malt o Books and riKoids tealment US ta. habPl.t Knh.nlege V. top m inagemrenf Cessation

Notl indicated ......... N.ot irnd.caled .. .......... Payment o. lli.000 r Hn Invoetigatbon at other foieign pay- Yes .. .. otndcated.... .... . e hot indicated
ui jn offical in co,.nect.on iltr. ments of $750.000
.jue:tio.i import tapes It *as
unOi t0oo.t that a 2o 1l.2S0.000
payment ar toe be w.ade. but
i he compary has deidea not to
mihe the p are ,L
No illegal ConlriDUtons... In 1974-115 aywmrenIts oH $1.. Compar, hs 3aSCUveroaI trali iub NOt Indicatedd............... Innideauile documenllo.on o., car- None. . ................. ReeOrItb.eotop maneamient es Policy restatement issued.
803l.r(00e incmr.isions r lr,eayes sidiiav pi, li),ijQi I to frin Vinn payments -as inimoied of the i).(rJiO Ce abon 1ill hase ro material
part f arch Wily r.ive been goei'nre.-..t T.iDUrees. i-'i .io3 paymenii adleise effect
pd tllo i.Deoer.Oen representt i. t.or. ol oHOeig.. IHi and belfeies oIrjr nhe ol lote.ign that oinef pirBe.tli Aeae .T.a-e
guiveinrl o.ric o eimpltoy- ra-er the last 5 yeas in 191'3,
i(6 Also. I re Dlympn el o Ire Coiori&bon ijSid SaOOO to
S1i50 i,00 to repreie'ttuil. r.o a 3 high .e official in
,as IlO a corsulter-t ti for. same foloergn country,

agol ign orfJrauon ril l inig Dbe
Cor,.lerO a .Roweinme.elt in-
Not indot irted. .. .. nNone .. ... ........ o Sijrr a pjyr.,itf, O gowr n. Pai'eelnts or o ?.;2.[l'0.0 mdma-I to .d .......
rnlrnt eTpltecs of y I lid arirteas offitiic, oH l ieinmrr-It agencies
"0,n pa.o joaeinrr.ent em. p iiSiiieur. enaliibes Hi, se:uLie
plOyeP llE s il l $?$.i2l7.O.OUO S:.Ool0 joi
On.r, P.ern.tnment H.:hi"..iS. in.
Cluainri eolpenOatiing pjijpmen
do From 19ll-i6. COntrIiDul.ions o Coy-,. ,u..'. piyrent' H.C GoCirs- Pavrrn.nt diom r 'i1-5 Irot .w .
115 300. Ton local marnaje'i .Ti[.lyee' titlalng $1.- $1.1i.c ) 221.200 including
were ad(ised tral Ite r.onlin.bu i6 lc I.iim 191]-"i payments Payments
tions cele Hy i I0l 5 raer period Ihil tloltaled

do Nhol indicaled.... .. ... Co.mparny piod ,orjme 115D0.000 in Payerito-l S2..00 per relr mide .. ...................
f.,'eSS OI noinmit late Also. to 13 uilaiIor frl), ti7-l
other .ayrierints not 0onsislent Alio. payrirnts or 158.00 ii- .
.ilh noriml prowelulde iere yis ti s a le Cdo'ptiry rJi.igr trid
'itlOied. a, .ell Ii primerls bi ric.lyvoe OH Gi-.erninent.
ol iia e conrsulla.n.'' lee o.edripolriln.. So-ne 15.0"j
per vy3r io Gleeinmenl do i.c.l

O1. None ...... .... ......... Payments 1.- agents in ]974 and GlaatuitiPs ad gIls totGoeernrmnnI
f CI 3opiHo.miltpyv S8187.000. oticials 01 1rJ.,0) Nul AR nk.
,r,ciul.nlg grtiliiiie of $1i 090 0 here part or cowmistiiOn
reioe-t to %ales ci o '-).0,00fi. y on%,,.-tlSc E..' to Oa .iv.nmenl
Sj!Vj)(p31 paid or sios l loin ohicli rH
0con Fiwr, 1910-15 ll total o $4 38 Noti.ndicaled. .. ... ...... Su. .i ecordeo is r.aleo co.- Nc.t ,ndicilel.. ul Ws "',iner
mi.]. [dail la aus Culoni,' icenbnecllon rii,,ir usel IGt ototw pur- tCifult'"
ip3r, min jilCs i,a. .icumarirnceO p. ofnn ae oItnpe lOtleig
making if u',-itli ahelrfer Fthe
Oymeni-et cere legal

Not rdicvied. . . . . Ithe IRS h a ij been jduised at the N outlsida oaiec:oi ne .l o a, a e Policy stitement adopted-
compiy's i.vI.est i .in Noim tiut irnsit.e dJrertoi Cesition, cil1 hsae no material
projr del]cliOni *aie taken eitlnei knew ol nE pjamento i adhere eeecL
IH191ii ctul thilly IIaciijocd them

Not indi il .d ...... ..a

B Ink aCnuJU1l nOl On 133k0 Ahhs
used I, er al.nmmisns 0n
Goenrrewr.I siles in some c res
Orher L.nrr ii'.:i.,ns tooled as
miruntlinp e*rourses
.. .. Foreiul uOdiar mi.ntien..ed if.-
btoo a.:c.Ourits lit make certin
legitim jte 3.iyi s ir i t or .me
159 T0 ier yeal I sun hi.ary
nci .oHnLtm e SlijoInalo..i at-
in2un i horr loirrnii Sub:u,,]ii
ra inharined r.will orij-tnlso
..N..cO, boljo Hecordo Poymentos
.. 5 A obte'retordit PHiyf-lG S

eily eHpen:eC.('r ashhna gbeen fI)r -I) .i.c r rildE're.l In
.omecae;- L]cumenrltion was
n.3)t Compllti

[3rr.ielur de-uct.rcns For yoers
1910-71 Atititn|l 4aces Of
$1?2..89 earte plid

TJi aOlutirOrTats vill be madte
where appropridle

Investi.giion inicales that 0no
auestonitjle teductions ceie
claimed far 1975

17. 'A 69 in l70-7l 1to pulChslsng Derileel dS liimburlao e -- Co.Dani Indi.caies inl.1 it .Ii ile
agerI ana mdr.agementi. uan n nse 3,)f 50iny nlfo u.uie), imernded tax lelutIs where
a*are Fio)m 1970-75 iSe'a s Uijajiu jii t ii ond a, off- pPDi,)prulle
Sb.ii00 were pad o luridtoe- n nit In ,tii 4n float
oloypes as commissions to jooid o Stii'jl.01) I)Oi fas liuitlated
torel gn Income In 191)

I flmer meornoer iof senior min-
agemeetnn J jajc( ,.f toe piy
mernt bul n-lme il the present
mem['els we're Mdae

heitriel iTingemenr.t nor bt.diard
01 drllaCjnrs were a.adre of the

Offlcl oHl Ir. Sobsidalr ka r0 t
the [4ymnenls. as di.l I mer.
bers ol the DMird ol dire.tors.
n.oe epare care olf Itr-ei ques-
tionHlejl n0ltule ha.eel

Yes Polic stlalemeo, Iadopted.

Yes Policy lotalemenl adopted.
Cessiyion *ill have na material
aderse effect.


C.irmpiny sernor ace ier.J.erst Yes. leiffiimel Pacl.
iS JAire ol pifients mJde
to auoi-1 emryee to lioes Ind
other ,milar eiploaee matiels
Ol tre 5abSldiry

I Neptive lekenuel
H Company Indicales Ihal Inge eaggal e l oil D .aymeni ais roi j5000


The following is a summary of the six reports pre-
pared and filed with the United States District Courts and
the Commission pursuant to settlements of Commission
actions against the corporations. Each of the reports
was required to be attached as an exhibit to the
company's Current Report on Form 8-K. In view of the
significantly greater degree of detail in these reports
in comparison to most other disclosures, these reports
have been summarized separately.

These summaries present a general view of the
matters set forth in the reports. They are not intended
to be inclusive. Moreover, inrview of the limitations
inherent in summarizing such a significant body of infor-
mation, the Commission strongly urges that persons inter-
ested in the conduct of particular corporations contained
in this exhibit consult the actual reports themselves.

Also contained in this exhibit is a description of
the facts alleged in eight other cases, the most recent of
which was filed on May 10, 1976. In all of these cases,
the corporate defendants consented to permanent injunctions
against violations of the federal securities laws without
admitting or denying the allegations set forth in the
Commission's complaint and described herein. */ The factual
allegations described in this portion of exhibit should
be read with that limitation in mind.

*/ On case, Securities and Exchange Commission v.
Kalvex, CCH Fed. Sec. L. Rptr. 95,226 (July 7,
1975), was litigated by one of the individual



The report, compiled by a special review committee comprised
of two outside directors and an .independent chairman, was filed on
April 25, 1975, pursuant to the terms of a judgment and order
Entered against the American Ship Building Company. It generally
indicated the following:

Domestic Political Contributions: 'The report indicates
that selected employees were paid bonuses of $30,000 in 1970,
$25,000 in 1971 and $42,325.17 in 1972. After receiving
these bonuses and paying taxes thereon, the selected employees
would be directed to contribute the remainder to various
Political figures. The Review Committee decided that the
i42,325.17 bonus paid by the company to the nine selected
employees in 1972 was a questionable expenditure and should be
repaid to the company by its principal officer.

Other Domestic Payments: The report did not indicate
Whether other domestic payments were paid from corporate funds.
Foreign Political Contributions: The report did not state
whether foreign political contributions were made from corporate

S Questionable Foreign Sales-type Commissions: The report did
inot indicate whether questionable foreign sales-type commissions
were paid from corporate funds.

Payments to Foreign Officials: The report did not indicate
whether payments to foreign officials were made.

Other Foreign Payments: The report did not indicate whether
other foreign payments were made from corporate funds.

Books and Records Problems: The questionable bonuses dis-
cussed above were recorded as bonuses on the company's books and
records. If the contributions made from them should be deemed to
have been made by the company, recording them in this manner
would be questionable. The reports did not indicate whether
other possible books and records problems existed.

U.S. Tax Liabilities: The report did not indicate whether
problems exist regarding the company's U.S. tax liabilities.


Management Knowledge: The report indicates that the
company's top management was aware of the bonus program and that
it was established to distribute funds to various political organiza-
tions. Key management officials were involved in the progra.i

Cessation: The report indicates that the company apparently .
terminated the bonus program after it was disclosed to the Water-
gate Committee. The report neither indicates nor recommends future
company policy changes or other measures to assure that there will
be no repetition of such questionable payments.

; B-3


The report was filed pursuant to the terms of a
judgment hnd undertaking entered on May 16, 1975, against Ash-
land and some of its principal officers. It was prepared by a
special review committee comprised of outside directors of
the company. The special committee retained independent
counsel and independent accountants to assist in the investiga-
tion and in preparation of the report. Neither the counsel nor
the accountants were Ashland's regular outside counsel or
auditors. The report, dated June 26, 1975, was filed with
the Commission and the U.S. District Court for the District
of Columbia on July 7, 1975. It revealed the following:

Domestic Political Contributions: The report disclosed
that Ashland made domestic political contributions from
corporate funds totalling nearly $850,000 during the period
1967 to 1972. The report indicated that a total of $25,700
expended from 1972-1974 constituted legal contributions.
The following sums were reported but not identified as legal,
however: 1967 $66,500; 1968 $239,600; 1969 $46,300;
1970 -'$71,700; 1971 $54,500; 1972 $256,815.
In addition, the report indicated that $71,700 was "presumed
to have been used" for political contributions during
the 1967-1972 period.

Other Domestic Payments: The report indicated that
$15,000 was paid by a subsidiary of the company in 1970- in
response to an extortionate demand by a local government
official. Federal criminal charges subsequently were brought
in connection with this payment.

Foreign Political Contributions: The report indicated
that Ashland Oil Canada, Ltd. (approximately 85% owned by
Ashland Oil, Inc.) made political contributions of corporate
funds in connection with federal and provincial elections in
Canada. From September 1970 through September 1974 the total
amount expended for such purposes was approximately $125,000.
The report indicates that the Chairman and Chief Executive
of Ashland-Canada advised the Special Committee that, in his
opinion, such payments were not prohibited by applicable laws.


Payments to Foreign Officials: The company paid
$202,000 to officials in a foreign country in connection
with the acquisition of petroleum rights and the transfer
of operating permits. The report also stated that in 1967
and 1968 the company made payments totalling approximately
$50,000 to a group of individuals who were to provide "con-
sulting services" to assist the company in the initiation
of a refinery project in another country. This group
included officials of that country.

The report states that in 1969, Ashland's
Chief Executive Officer personally delivered $7,500 to an
official of a third foreign country. The report further
states that the company expended $2,500 of corporate monies
on behalf of another official of that country, and that all
or part of a $100,000 payment by the company to a consultant
in that country may have been paid by the consultant
to another official of the national petroleum company of that

Other Foreign Payments: In connection with Ashland's
attempts in the late 1960's to secure business opportunities
in a foreign country, the company made substantial payments to
various consultants. Thirty thousand dollars of the amounts
paid to a particular consultant were not satisfactorily
corroborated by the special committee. The committee was
unable to determine to its satisfaction that such amounts
were received by him and were not used for political or illegal
purposes in the United States or overseas.

Additional payments and transactions, totalling
$162,500 during the period 1967-1970, were identified as
having been effected with virtually no written documentation
or with inadequate supporting documentation. In almost every
case, they involved overseas cash disbursements to senior
officers of the company.

Books and Records Problems: Most, if not all, of the
transactions generating funds for domestic payments were
improperly reflected on Ashland's books and records.. Cash
was generated for the fund principally by overseas wire
transfers from company accounts at domestic banks to overseas
correspondent banks. The funds would then be withdrawn by a
senior corporate officer and secretly returned to corporate
headquarters in the United States. False entries (e.g., "inter-
company advances--exploration/production") were made in the
company's books and records to cover such transfers and dis-


U.S. Tax Liabilities: As a result of the improper
entries on the company's books and records, improper deductions
Stotalling, at least $429,997 were taken by Ashland in connection
with its United States taxes. At the time of the report, the
company had entered into a settlement with the IRS as to certain
years in question, and it was understood that the IRS was
-continuing to review the tax returns for the remaining years.
Management Knowledge: The great majority of domestic
payments were made by means of an off-books cash fund kept
in an officer's safe at corporate headquarters. Senior
management of the company, .-including the Chairman and Chief
SExecutive Officer, Vice-Chairman and Chief Administrative
Officer, as well as a number of other senior officers, were
not only aware of but were actively involved in the operation
of the fund and participated in the diversion of corporate
Monies to the fund and in making disbursements therefrom.
(A total of more than $800,000 in cash was funneled
Through, this fund-over a seven year period.) There is also
i evidence that certain former principal officers of the corpora-
tion may have made contributions from corporate funds in ad-
dition to those specifically identified in the report. Senior
officers of the company were directly involved in and aware of
most of the foreign payments identified above.
Cessation: The report contained numerous recommendations
by the special committee with respect to the cessation of the
practices described in the report and establishment of new
controls over certain business activities and practices.
Recommendations also were made regarding certain matters of
corporate structure. The principal recommendations, with'the
action taken by the Board in response thereto shown in paren-
thesis, are as follows:

(1) No political contributions should be made by the
corporation, whether lawful or not.
(Adopted, except for political contributions
which are legal under a foreign country's

(2) Adoption of a policy and appropriate
implementing procedures against the use
of corporate assets for any purpose
illegal under the law of the jurisdiction
where the transaction occurs. (Adopted
with specific recommended procedures to be
developed and submitted for further Board


(3) A policy against the maintenance of
undisclosed funds or unaccounted for
expenditures. (Adopted)

(4) Establishment of additional controls
over cash disbursements, for example,
all disbursements from corporate
accounts to be made only by check
payable to the ultimate payee; no
bearer checks or checks payable to
cash. (Specific control proposals
referred to Audit Committee)

(5) Various recommendations regarding
strengthening of the corporation's
Internal Audit Department, revising
controls over corporate bank accounts
and borrowing, controls over the use
of corporate.aircraft, etc. (Execu-
tive Committee to review and report
to Board)

(6) Establishment of control procedures
with respect to arrangements with
consultants, such as requiring
senior officer or Board approval for
various levels of expenditures and re-
quiring an attestation by the con-
sultant that he will not return any
funds to officers or employees of
the corporation and will not make
illegal payments to third parties.

(7) Change in composition of the Board of
Directors to a maximum of 15, with a
majority to be neither officers not
employees of the corporation (the
board then existing was composed of
17 directors, of which 10 were
"insiders.') (Referred to Directors
Committee for subsequent report to
the Board)

(8) Changes in the Executive, Audit and
Nominating Committees of the Board
of Directors to increase the propor-
tion of outside Directors on each.
(Referred to Directors Committee for
subsequent report to the Board).



The Gulf Oil report was compiled by a special review
committee comprised of two of the outside directors of Gulf
and the chairman of the committee, who was completely indepen-
! dent. The committee retained outside accountants and counsel
to assist in its investigation. The report was filed on
December 30, 1975. It disclosed the following:

Domestic political Contributions: The report
disclosed specific domestic. political contributions (including
gifts and related expenses) from corporate funds totalling
Approximately $1.4 million from 1i60-1972. The report further
disclosed that during the period Gulf had approximately
$5.4 million returned to the United States from foreign
Countries in off-books transactions to be used for political
contributions, gifts and related expenses. The Committee was
unable to determine the disposition of over $4 million of
This total.

* Other Domestic Payments: The report does not indicate
whether other domestic payments were made from corporate

Foreign Political Contributions: The report indicates
that the company -made foreign political contributions in
seven countries totalling approximately $6.9 million
during the period 1960-1973. In some of these countries the
payments were legal; in others they apparently were not.
With respect to those contributions that the committee whs able
to trace, the report identifies the recipients and discusses the
circumstances involved.

Questionable Foreign Sales-Type Commissions: The
committee did not find any unusual or excessive commissions.
However, it recommended that the Board of Directors institute
a review of all commissions and consultants fees.

Payments to Foreign Officials: The report treated
all payments to foreign officials as foreign political con-
tributions, discussed above.

vT-Moeo -ii-a

B-8 ,

Other Foreign Payments. The.: reports: indicated
that the Committee investigated 14ads in approximately
eleven foreign countries which proved fruitless.
-* "i.: ."i *- ^.. ".:, -" .. "":' r" '."
Books and Records Problemsti The.', repfott described :Uth. :
use of a subsidiary in the Bahamas t& aunas apprcxitately as
$10 million for both foreign and dom;stid*tiso. The comany,1b
would disburse approximately $500,o0)0 a yer etoothe -', .
subsidiary, which would be capitalized as o eratihg 'k fc 'W;
expenses of the subsidiary. Every few weeks, pproximately
$25,000 would be brought bacK -to the 'Onited 84ntW1.! ...
create an off-books fund for domestic. pur poses. The"rejt :Ib
also discusses the false accounting used in cotfnibtibnp .'hif
approximately $2.3 mill ion used 'for. foreign contr bi i.s... ..
,' .. . -j .. . . .. : .. < .- !! .... j. ,'; .: 4. :; *
U.S. Tax Liability: The ,Invnatigatug:4 o
determine whether the company has additional tax liabwiltLSf
'* **..; 1" : i',, :.. :: 1. ..... 5 '" ...
Management Knowledge: The report concluded that .:
certain past top officials of the company knew of the
questionable and illegal activities andAthat others.4 currently
in the company's management should have known of -the acttv&-...,
ties. A past Chairman of the company and two past Executive
Vice-Presidents resigned as a result of these activities and
the Secretary was removed from that position and given a posi-
tion in the company's legal department. Additiondaflji oK".
director found to be involvedddid not ruin for ee-1eection.: .
.. . . :.-..: .. :! :, ;?n ":; i ,.
Cessation: The .report concluded that Glf's "....... i
questionable activities have been effectively terminated .
The report discussed the changes in corporate policy on
which it based its belief, including:

(1) A statement in the Policy Randal .
that illegal contributions of ... ..
corporate funds are-prohibited
and activities in this area
must be reported to the Chief ". .1
Executive Officer- and the .'.i. ...:. ;.C
Board; : :: .. .

(2) A requirement that approval of
retainer and consulting agreements-
exceeding certain amounts must be
obtained at a high level of manage-

i 1)0%.. Z .


(3) Establishment of a policy of
compliance with all laws and regula-
tions of all countries where Gulf

(4) Institution of tighter control
over bank accounts; and

(5)' The requirement of annual'representation
letters from certain executives and

The report also indicated certain accounting procedures
had been changed in an -effort -to prevent such activities and
recomended certain other changes to the Company.
.: : JE ; : ..r: r, ,




., .~

.,. .