FRAGMENTS OF RUIN
FRAGMENTS OF RUIN,
from "The Business of Buying Friends" by Jim
Hougan, in Crime At The Top: Deviance In Business and the
Professionals, edited by John M. Johnson and Jack
D, Douglas, Lippincott: New York, 1978.
Telex, 9-6-68, from Lockheed officer to executives in the firm's
Rush Rush Rush
Reference: Zephyr Locust
The Milan meeting September Fourth with Locust, -, and
Snyder addressed itself to delicate and sticky issues; ... it is
quite apparent that Locust's past and current performance in
keeping - happy remains effective-remembering that - is one of
the key people we must satisfy with not only what we do, but also
with how we do it (and "who we send to do it"). . . . I feel
Caviar can do business the Zephyr way ... and at the same
time make less agonizing the obtaining of future Zephyr business,
which is not limited by aye good margin to defense hardware and
services. The foregoing thoughts are just that and not intended
as aye white (or even dirty cream) paper. End. Jackman/Paris.
(I've made some minor changes in the telegram's punctuation so
that its text might be intelligible.)
The use of codes (and distribution designators which serve
to "classify" internal documents) have become commonplace at many
multinational corporations-as have paper shredders, phone
scramblers, burn bags, and a host of eavesdropping and
countermeasures equipment with such exotic names as "cloaks" and
"slaves." In the above telegram, a substitution code is used
wherein "Zephyr" means Saudi Arabia, "Caviar" is the Lockheed
Aircraft Corporation, and "Locust" refers to a consultant.
Another telegram, whose subject is the addition of I percent
to an agent's existing commission, suggests that countermeasures
equipment may indeed be necessary.
You are authorized to [offer] it to party concerned, but
only thru [consultant]. You may be pressured to make d-i-r-e-c-t
arrangement but do not repeat not do so. Have information that
[code] has been b-r-o-k-e-n in [Saudi Arabia] so handle this
accordingly. (Telex sent in 1972 by Lockheed officer D. O. Wood.
Words in brackets have been substituted for the code words used.
The hyphenated letters have also been decoded.)
The "information" apparently came from a Lockheed agent,
Adnan Khashoggi. A portly and balding Arab sophisticate,
Khashoggi compares himself to J. P. Morgan and presides
over an empire that includes more than 50 companies, ranging from
banks in California to ships in Indonesia, a meat-packing plant
in Brazil, and a Paris fashion house called jungle jap.
Traveling the world in his own Boeing 727, Khashoggi was paid
$106 million by the Lockheed Corporation between 1970 and 1975;
during the same period he represented the Northrop Corporation,
billing it more than $100 million for his services as a
go-between. A friend of Richard Nixon's (and a contributor to his
campaign), Khashoggi served as intermediary between the White
House and the late King Faisal during the 1973 Mideast War. In a
1972 cable from Beirut, a Lockheed executive reports:
Impossible submit daily status due security. Khashoggi
suspects customer knows code.
(Telex dated December 11, 1972.)
The "customer," of course, was Saudi Arabia.
That Nixon should have used Khashoggi as a confidential
agent is strange in view of the Arab's disfavor with the
since-murdered king. Faisal was reportedly upset by Khashoggi's
ostentation, "corrupting influence," and methods of doing
business. A Lockheed letter suggests that the king had good
reason to be suspicious:
During a recent conference in New York with Adnan Khashoggi,
he requested that any and all communications touching upon
commissions, however innocuous they might seem to the sender, be
sent solely to his representative:
2 Place du Port
and that mail should be used, rather than Telex. He begged that
no mention of any commissions ever be sent to either Beirut or
Saudi Arabia. (Letter from Gerald B. Juliani to Los Angeles,
Georgia, and Switzerland; the letter's date is uncertain, but is
believed to have been written in July 1966.)
Obviously, Khashoggi feared that electronic communications
to Beirut or Saudi Arabia might be intercepted. The subsequent
use of Telex to convey sensitive messages concerning commissions
implies that codes began to be used after the above letter was
written. The distrust is not difficult to understand.
Memorandum from J. A. Davidson to William Cowden, November
A decree by the Saudi Arabian Council of Ministers requires
a clause in all contracts specifying that no agent has been paid
to secure the sale of the equipment in question. This
decree further specifies that if any agent fees have been paid,
the price to the Kingdom must be reduced by a corresponding
amount. It is my understanding that LAS [Lockheed Aircraft
Services] has accepted this as a necessary part of the risk in
doing business in Saudi Arabia. They have signed, and are now
negotiating to sign, contracts with such a statement included,
but with full intention of paying our representative his usual
The clause forbidding agents, however, became the subject of
a public ritual. When contracts were signed in Saudi Arabia, the
seller would be asked aloud if lie had employed an agent in the
country. So that the deception could be carried forward without
actually lying, Khashoggi promised to be out of the country
whenever such ceremonies were held.
The distrust was not a simple matter confined to the
relationship between governments and manufacturers; there was at
least as much suspicion between the manufacturers and their
own agents-as well as conflicts between the agents themselves.
Referring to a "marketing contingency fund . . . used by the
Consultant for 'under the table' compensation to Saudi
officials," a memo notes: "We really have no way of knowing if
the so-called 'under the table' compensation is ever disbursed to
Saudi officials or stops at our Consultant's bank account."
(Undated Lockheed memo headed "Saudi Arabian Consultant: Triad
Financial Establishment.") Not that they actually wanted to know:
so long as they remained unwitting, they could not be "held
accountable" in either the literal or the figurative sense.
Had Lockheed really wanted to know where the money went, it
could probably have figured it out by following the checks that
it issued-though this might well have required the services of
three lawyers and a wall of concave mirrors. Any such inquiry
would have touched upon the firm's use of what it called
"subsidiaries of the first and second tier"-Lockheed entities of
substance and conduits that existed only on paper for the
purposes of tax avoidance. For instance, rather than paying
Khashoggi directly, a "second-tier" subsidiary based in Geneva
would employ the "marketing services" of a subsidiary on the
"first tier," based in California. In its turn, the California
firm would "subcontract" all or most of those services to
Khashoggi's Triad Corporation.
Upon effecting a sale, Triad would bill its California
employer; this firm would then dun its Swiss subsidiary. This
jurisdictional stratagem resulted in a decided tax advantage for
Lockheed: because the highly profitable Saudi Arabian contracts
were signed with the Swiss firm, monies paid by it to the entity
in California reduced the former's tax liability in Switzerland.
For its part, "California" would show no profit on its putative
marketing services, having paid to Khashoggi an amount equal to
that which had been paid to it by "Switzerland." The only losers
on the deal were taxpayers everywhere. U.S. taxpayers lost
because profitable foreign contracts were routed to a Swiss-based
-vehicle subject to taxes that are much lower than those
ordinarily paid in the U.S. Swiss taxpayers lost because the
dummy in their midst rerouted some of those profits to the
U.S.-where, of course, they were "offset" by equal payments to
Khasshoggi's Triad Establishment.
Following the money, then, it moved from King Faisal in
Arabia to Lockheed in Switzerland, from Lockheed in Switzerland
to Lockheed in California, from Lockheed in California to
Khashoggi in Switzerland. As you see, there's a little "loop" in
the middle of the transaction, a seemingly extraneous curlicue
that is, in fact, potentially worth millions in tax advantages.
Khashoggi's own maneuvers were no less interesting than
Lockheed's. While his ALNASR Trading and Industrial Corporation
served as the Riyadh-based beachhead for his efforts in Saudi
Arabia, the Triad Financial Establishment was the vehicle through
which Khashoggi signed his contracts with Lockheed. Incorporated
in the postal enclave of Vaduz, Liechtenstein, Triad's
operational center appeared to be in Beirut, Lebanon, while
communications pertaining to commissions were routed through
Khashoggi's representative, Gerard Boissier, in Geneva. This
diversification was further obscured by the legal nature of
his agreements with Lockheed. A 1967 "Consultant Agreement," for
instance, provides that:
In consideration of services . . .furnished by [the Triad
Financial Establishment, or "Consultant"] - - . , Lockheed shall
pay . . .compensation in accordance with the following rates:
Product Percentage of
New Model C-130 Military Airplanes 2%
New Commercial Hercules and Military C-130 Spare Parts and Ground
It is, by any standards, a modest commission (though
potentially quite lucrative. On the same day that the above
contract was signed, however, three secret "letter agreements"
were prepared, "supplementing" the commissions established in the
original contract. The first such letter agreement provided for
additional commissions of 5 percent and 13 percent, respectively,
on the selling price of C-130s and related equipment. The second
letter agreement stated that "Lockheed agrees to pay to
Consultant ... a special fee in the amount of $41,000
for each such [C-130] airplane for which Lockheed is paid the
full contract price of $2,670,000." The third letter agreement
doubled and tripled commissions agreed upon for the
sale of commercial aircraft to Saudi Arabia. Thus Khashoggi's
commissions amounted to as much as 16 percent, and in no instance
went lower than 7 percent of the sales price. Even with
these amounts, plus subsequent "incentives" and contingency
funds, things did not always go smoothly in the wadis.
RUSH RUSH RUSH
Strongly suspect machinery stalled for lack of grease Stop.
Is former air attache really pushing query? Urge you insist agent
make move now to keep log rolling Stop . . . . (Cable
to Robert Jackman in Paris from J. H. Wilkinson in Jidda, Saudi
An earlier memorandum marked "Confidential," reports:
1. - is completely disenchanted with Adnan Khashoggi. He
indicated that he never received the $150,000 that was agreed to
between Max, Adnan and - during their Paris meeting last year. He
further indicated a dislike of Adnan and said while he likes Adil
(Khashoggi, Adnan's brother) he is unwilling to deal with him
because of his distrust of Adnan.
2. At the moment all LAIAG programs are in the "deep
3. The reason for 2 . . . is 1, above.
4. - showed Harley (Snyder) his statements on total payments
made to LAIAG. He said he cannot understand why Adnan says that
he (Adnan) has not received any money in view of these payments.
statement to Harley was that he feels Adnan is lying to him.
5. -indicated that he was told by Adnan that Adnan is only
getting 2% commission.
Because Saudi officials were angered by the slowness with
which Khashoggi made payments and by their distrust of him, they
prevailed upon Lockheed to compel Khashoggi to make a formal
assignment of portions of his commissions to various numbered
accounts at Geneva's Credit Suisse. Effectively, this meant that
Lockheed was responsible for making direct payments to such
corporate dummies as the Lauvier and Caiitona "Establishments."
Incorporated in Vaduz, Liechtenstein, both "firms" seem to have
played a purely passive role in Lockheed's affairs. Sucli "as-
signments," however, did not always diminish Khashoggi's own
This will confirm that Triad Financial Establishment
irrevocably commits . . . to Cantona Establishment . . . a
portion of its marketing fees equivalent to one percent of the
contract price . . . .Such . . . assignment to Cantona
Establishment is contingent upon . . .[Lockheed's] increasing
Triad's marketing fees . . . by one percent of contract price.
Other payments received by Khashoggi, including $400,000
earmarked by Lockheed as a "special adjustment," were disguised
and added to subsequent contracts with Saudi Arabia, so that
Lockheed's agent was always reimbursed.
"Reimbursed," that is, on the dubious assumption that he
actually made the payments that he claims to have made. As a memo
quoted earlier reported:
[Lockheed officials] really have no way of knowing if the
so-called 'under the table' compensation is ever disbursed to
Saudi officials or stops at [Khashoggi's] bank account." The
direct "assignments" of cash to the accounts of Cantona and
Lauvier were apparently earmarked for third parties, but there is
no way to be certain what happened to all or a part of this
money. There is, however, an internal Lockheed memorandum that
clarifies the nature of one such assignment and provides a
remarkable insight into Khashoggi's astuteness.
Memorandum dated January 22, 1974:
A proposal for the sale of ten C-130H aircraft was presented
to - on November 14,1973. These aircraft were priced at $6.3
million each, which sum included the normal commissions plus
$200,000 of "negotiating money." This $200,000 was included
in the price at the insistence of A.K. [Adnan Khashoggi] and, in
theory, can be committed by A.K. and/or the Gelac [Lockheed's
Georgia plant] salesman for a price reduction or by A.K. alone
for under the table payoffs. For this particular deal A.K. has
taken the position that all negotiating money not negotiated away
would go to TRIAD as a bonus. P.K. [other Lockheed memoranda make
it clear that "P.K." refers to Prince Khalid] had been told by
A.K. of this "bonus" arrangement. However, A.K. told P.K. there
was $150,000 rather than the actual[amount].
- on November 28 insisted that our price of $6.3 million
(per plane) was too high....
Over the phone from Beirut, Temp Walker received approval
... to reduce the price of the aircraft to $6.1 million, if
necessary to get a quick decision from ....
A.K. was told of the decision to go to $6.1 million, if
necessary, thereby giving up all of the negotiating money. A.K.
agreed but asked Temp to hold out ... as long as possible.
Temp Walker met with -, Gen. -, Dorm Viers and Sal Aswaad at
9 a.m., December 1. - accepted our latest schedule, but insisted
he must have a price reduction. After about two hours of
negotiating, Temp Walker agreed to reduce the price to
$6.2 million ... The contract was signed ...
On December 3, P.K. sent word to Temp Walker that he desired
a meeting. Temp met with P.K. at ... P.K.'s villa. P.K. was upset
that Temp had given away $100,000 of the negotiating money. . . .
P.K. then informed Temp that he and A.K. had formed a new
company (SAVERIA) to market all C-130s in Saudi Arabia. P.K. said
the split was to be 60% for A.K. and 40% for P.K. He then asked
if there was a letter in Lockheed explaining this new company.
Temp knew nothing of this and told P.K. so....
P.K. then stated he had reason to believe the total
commission paid by Lockheed was about 8% plus the negotiating
money.... P.K. (repeatedly) asked Temp to assure that P.K.'s 40
percent share would meet or exceed $175,000. He implied he had a
commitment of $125,000 to - and needed to know. Temp again
repeated he did not know, whereupon P.K. asked Temp
to make an estimate, hinting that he could still influence - to
delay the contract should Temp refuse.
Temp thereupon did a rough calculation and told P.K. that if
the 8% was correct and the 60-40 split was correct, he would be
in good shape.
Based on a rough calculation, 40% of the supposed 8% would
be about $225,000.
(Breaking into the memo: had Temp thought about it, he would
have recalled P.K.'s allusion to his $125,000 debt to --. That
debt was P.K.'s justification for needing to realize at
least $175,000 from the sale. The point is that P.K. incorrectly
believed that the commissions to be paid would equal 8 percent of
the cost of a single aircraft-plus the entirety of the bonus
money attaching to each of the aircraft. Thus, receiving 40
percent of 8 percent of $6.2 million, P.K. would easily realize
his goal of at least $175,000-but the real dough, so far as he
was mistakenly concerned, rested with the $150,000 per plane
"bonus." This money, if not "negotiated away" would provide him
with an additional $60,000 for each plane sold, or an
"extra" $600,000 on the deal. The commission itself, incorrectly
thought to equal no more than a small percentage of a single
plane's cost, was potentially less than one-third of the
money P.K. might reap through the bonus. By "negotiating away"
$100,000 of the supposed $150,000 bonus, Temp seemed to have
reduced P.K.'s bonus share from $600,000 to a mere $200,000.
Predictably, the prince was furious. And Temp, of course, was
confused, incorrectly assuming that P.K. had a commitment to of
$125,000 per plane, whereas, in fact, it appears to have been a
simple, one-time debt. Had Temp understood that, he would have
told P.K. that his 40 percent of 8 percent, plus remaining bonus,
would amount to more than $2.25 million on the deal- about three
times the amount envisioned in his wildest dreams.) Following
this confusing session in the prince's villa, the memorandum
Temp Walker, D. 0. Wood, Ned Ridings and Lew Lauler [Lauler
was Khashoggi's "man in Beirut" at the Triad offices] met with
A.K. in Beirut to resolve the flap caused by P.K. phoning Lew
Lauler and asking for an accounting. A.K. did not seem
particularly disturbed for he apparently guessed that P.K. was
talking about a total payment to P.K. of about $275,000 and that
P.K. would be overjoyed when he actually got more. A story was
developed to present to P.K. which would support the actual split
A.K. intended to make with P.K.
Under the SAVERIA company, A.K. has told P.K. that the total
com- mission paid by Lockheed is 3% of the sales price plus 50%
of any negotiating monies remaining. A.K. and
P.K. split this 60%-40%.
On December 10 in Riyadh [those who'd met earlier in Beirut)
met with P.K. to settle matters. It soon became evident that P.K.
was not upset over the percentage commission, 3% of the total
contract being much more than P.K. had expected, but was very
upset over Temp giving up "his" negotiating money
unnecessarily.... To further complicate matters, A.K. had
told P.K. there was $150,000 negotiating money rather than the
actual $200,000. It was finally agreed by D. 0. Wood that P.K.
would receive his commission (through SAVERIA Co.) as
though Temp had not negotiated away $100,000. [Memorandum dated
January 22, 1974.]
Poor Temp. How could he have explained to P.K. that the
"negotiating money" was mere peanuts, placed in the contract as a
sop to Arab haggling, and meant to be bargained away? As for
Khashoggi, he must have seemed both a genius and a benefactor to
P.K., having negotiated a deal with Lockheed that provided
Saveria Establishment with 3 percent of $62 million rather than 8
percent of a mere $6.2 million. And, as for P.K., he undoubtedly
regarded himself as quite the wily Arab, forcing the decadent
Americans to cave in to demands for the replacement of "his
share" of the $100,000 in mad money.