A congressional committee is investigating whether Northrop improperly bought influence in South Korea in an attempt to sell its F-20 jet fighter.
At issue is whether the Los Angeles-based aerospace firm violated the Foreign Corrupt Practices Act by entering two agreements with Korean firms--one a project to ostensibly build a hotel in South Korea and the other an arrangement to hire certain individuals to help market Northrop's F-20.
In the first deal, Northrop paid $6.25 million four years ago to Asia Culture Travel Development Co., an organization set up by the late C. K. Park, a Korean with high-level connections in that country's government. The Korean firm was a joint venture partner with Northrop to build a hotel in Seoul. Northrop contends that it was a victim of fraud in the deal; the hotel was never built.
In the second deal, Northrop set up a sales representation agreement with the Dong Yang Express Group in January, 1984, for its assistance in marketing the F-20, according to documents obtained by The Times.
Northrop ended the sales representation agreement in June, 1986, when it paid $1.5 million to Dong Yang, according to the termination agreement. Investigators say they are looking into why Northrop would have paid $1.5 million to terminate an agreement that did not result in any sales of F-20s. A Northrop spokesman said he was not familiar with the agreement.
The F-20 was a major project at Northrop. The firm invested $1.2 billion in company funds into the fighter, which was intended for sale to foreign nations. But in 1986, after intense efforts to market the plane abroad and a last-ditch campaign to get U.S. government support, Northrop ended the project without having sold a single aircraft.
In addition to the congressional investigation, which is being pressed by a panel of the House Energy and Commerce Committee, the government of South Korea is conducting a high-level investigation of influence peddling by Northrop, according to a source familiar with that probe.
The $6.25 million that was paid to the Asia Culture Travel Development Co. was deposited in a Hong Kong branch of the Korea Exchange Bank, according to documents obtained by The Times stemming from the South Korean government probe.
The funds were earmarked for construction of a hotel in South Korea as part of an "offset agreement," an arrangement in which a country buys weapons from a defense contractor that consents to buy something in exchange. But congressional investigators say they are looking into whether it was a legitimate offset.
The key questions being asked in the congressional and Korean investigations are why Northrop sent the hotel payments to Hong Kong, why Northrop agreed to a joint venture that gave the firm so little control over its own money, and why the money was paid so far in advance for a hotel that apparently had not yet been approved by the government.
"We want to know where the offset liability came from," a congressional investigator said. The House Energy and Commerce's subcommittee on oversight and investigation, chaired by Rep. John Dingell (D-Mich.), is conducting the probe.
A Northrop spokesman, who asked not to be identified, said the firm was a "victim of a fraud" and has filed a lawsuit in South Korea to recover the $6.25 million.
"We filed for arbitration in May of 1987 and filed a lawsuit in December of 1987," he added. "We said (in the lawsuit) that we had entered a partnership with them in 1984 as part of an offset program. It was an extension of the F-5 program that would have led to the F-20 program. It was an overall offset program.
"After some years of trying to get the hotel built and being told of countless delays, we filed for arbitration," he said. The spokesman said he was aware that the congressional investigators had asked some questions, but was not aware of the specific purpose of the investigation.
An investigator on the House panel said: "Northrop has got itself in a position where they can't tell you anything about what happened to their money."
The sales representation agreement with Dong Yang appears to be separate from the hotel deal. But knowledgeable sources say that at least some of the $6.25 million in hotel payments may have ended up in the hands of Korean and American individuals close to the sales representation agreement.
Under that agreement, Northrop was to pay Dong Yang 2% of the value of contracts that Northrop obtained through the efforts of the representatives. The payments to Dong Yang were not to exceed $55 million, according to the representation agreement, a copy of which was obtained by The Times.
The representation agreement was signed by Joseph T. Gallagher, vice president and general manager of the firm's aircraft division, which was developing the F-20 jet fighter for export to foreign nations. The termination of the agreement was signed by William G. McGagh, who was then Northrop senior vice president of finance and earlier this year relinquished that post. At Northrop's annual meeting Wednesday, Chief Executive Thomas V. Jones declined to comment on McGagh's status.
The sales representation agreements declared that Dong Yang's responsibilities were, in part, to "obtain market intelligence" and "conduct research into Northrop's competitors' sales activities in the territory."
Annual meeting, Page 11