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 Georgia headquarters: 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: Gerard Boissier 2 Place du Port Geneva, Switzerland 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 25, 1969: 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 fees. 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 Selling Price New Model C-130 Military Airplanes 2% New Commercial Hercules and Military C-130 Spare Parts and Ground Support Equipment 2% 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 Arabia.) 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 freeze.... 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 receipts. Viz.: 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 continues: 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.