OCTOBER 1996 · VOLUME 17 · NUMBER 10

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C O R R U P T I N G    D E M O C R A C Y

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BUENOS AIRES, ARGENTINA -- In a so-called "corruption index" compiled earlier this year by the Berlin-based nonprofit group Transparency International, half a dozen Latin American nations -- Bolivia, Mexico, Ecuador, Brazil, Colombia and Venezuela -- rank worse than Argentina when it comes to corrupt police, private executives and politicians.

But that is little consolation for International Business Machines Corp., whose Argentine subsidiary is embroiled in one of the most embarrassing scandals involving a U.S. company to hit Latin America in years.

IBM -- ironically listed as among Transparency International's biggest corporate benefactors -- is being accused of bribery in connection with a $249 million contract to modernize and install computers at all 525 branches of state-owned Banco de la Nación, Argentina's largest commercial bank.

On April 30, following six months of investigations, a Buenos Aires judge indicted 30 former officials of IBM Argentina S.A., Banco de la Nación and associates of President Carlos Menem on charges of defrauding the Argentine government. Separately, the U.S. attorney for the Southern District of New York and the Securities and Exchange Commission are investigating whether IBM violated the Foreign Corrupt Practices Act, which prohibits U.S. companies from paying bribes abroad.

The charges stem from a routine audit by the Argentine tax agency DGI, which uncovered a $37 million payment by IBM to two local software companies, CCR and Consad, neither of which had reported those revenues. Argentine authorities say the money was used as a bribe to secure the huge contract.

Soon after the revelation, IBM -- which denies any wrongdoing -- dismissed its top three officials in Argentina, including its president and the vice-president of operations. The heads of others involved in the scandal, including Aldo Dadone, president of Banco Nación, and Juan Carlos Cattaneo, a senior aide to Menem cabinet member Alberto Kohan, also rolled.

"We're not commenting because the issue is in litigation," says IBM spokesperson Fred McNeese, adding that "IBM continues to do business in Argentina."

The company also continues to face tough questioning. In June, Argentine prosecutors launched an investigation into a $513 million contract that DGI had awarded IBM for the upgrading of the tax agency's computer system. This followed accusations by then-Argentine Economy Minister Domingo Cavallo that the opposition Radical Civic Union (UCR) and IBM were involved in unsavory business arrangements during the 1980s.

UCR Senator Leopoldo Moreau, for his part, accused James Cheek, the U.S. ambassador to Argentina, of hiding information on the IBM case in order to protect U.S. interests. He said the United States "claims it is struggling against corruption, but when the time comes to implement this struggle, it fails to come through."

Until recently, the whole IBM affair had produced no more than legal wrangling and political mudslinging. In August, however, the scandal turned violent when an Argentine journalist who had criticized the U.S. multinational was beaten by three knife-wielding men in the streets of Buenos Aires. The reporter, Santiago Pinetta, was later found with the letters "IBM" carved into his chest. In early 1994, Pinetta had published a book, La Nación Robada (The Stolen Nation), in which he accused IBM of paying kickbacks to secure its controversial contract.

While no officials have openly accused Big Blue of involvement in the attack, IBM -- concerned about its 1,100 Argentine employees and the loss of one of its most lucrative computer contracts in the region -- is keeping a very low profile. So are its allies in the local business community.

Felix E. Zumelzu, executive director of the American Chamber of Commerce in Buenos Aires -- which counts IBM among its 420 members -- absolutely refused to discuss the issue when asked whether the worsening scandal has had any impact on local attitudes towards U.S. firms operating in Argentina.

"That's in the hands of the courts and the justice system, and we won't comment on it," he said adamantly. "It's my privilege not to comment."

Despite its efforts to maintain a low profile, IBM Argentina has filed suit against Banco de la Nación, seeking payment of $86 million for work performed, plus costs incurred and other unspecified damages stemming from the bank's "wrongful" revocation of the contract.

"IBM has worked hard to complete this project and to meet the bank's changing requirements," says Wilmer Guecaimburu, president and general manager of IBM Argentina, in a prepared statement. "We would have much preferred to reach an amicable agreement with the bank in which we would meet its information technology needs. The decision by the bank's board of directors to revoke this contract unfortunately leaves us with no alternative but to go to court to protect our legal rights."

Says McNeese: "We attempted to work out various issues with the bank. Regrettably, we had to file suit against them. They did not provide the necessary support we needed to get the job done."

Banco Nación has responded to the IBM suit with its own countersuit.

IBM is hardly the first U.S. company to get embroiled in an Argentine business scandal. In 1990, according to Latin Trade magazine, Swift-Armour -- a subsidiary of Campbell Soup Co. -- denounced Menem's then-brother-in-law for demanding a bribe to clear the company's Argentine investment plans. In addition, the 1991 sale of state-owned Aerolineas Argentinas to Spain's Iberia was clouded with corruption. On its acquisition sheet, reported the magazine, Iberia reported $80 million in expenses under "costs associated with the sale" -- an amount that allegedly covered bribes paid by the Spaniards to corrupt Argentine government officials.

Yet the IBM case is clearly more serious, not only because of the attack against journalist Pinetta but because of the potential violations of the U.S. Foreign Corrupt Practices Act.

The scandal is also particularly worrisome for U.S. business interests, highlighting the unique hazards they face in operating throughout Latin America.

Bribery remains almost a necessary cost of doing business in many Latin American countries. That sorry state of affairs certainly persists in Argentina, despite a 1994 declaration by Carlos Ruckhauf, Argentina's interior minister at the time, that "this government has completely overcome" the problem of corruption.

Multinationals based outside of the United States do not face the same home-country restrictions on bribery as their U.S. competitors, however, giving them a competitive advantage in many Latin American nations.

IBM, it appears, may have allowed its competitive impulse to override its obligation to abide by the law.

Raytheon Survives Scandal in Brazil

Just as IBM sinks deeper and deeper into scandal over its questionable business practices in Argentina, another U.S. multinational -- Raytheon -- is quietly proceeding with its own controversial project in neighboring Brazil, after over-coming similar allegations of bribery and corporate misconduct. In May, the Brazilian Senate authorized financing for a $1 billion contract with Raytheon Co. of Lexington, Massachusetts, a leading engineering and defense conglomerate. That gave Raytheon the legislative green light to implement its Amazon Vigilance System (known by the Portuguese acronym SIVAM), a radar surveillance system designed to protect Brazil's Amazon resources from illegal mining, logging and drug smuggling, and to give Brazil control over its own airspace. "SIVAM will provide a wide range of benefits for the people of Brazil and help Brazil ensure the sustainable development of the Amazon region," says Raytheon Vice President James W. Carter. "SIVAM's network of ground-based and airborne radars, environmental monitors, optical, infrared and satellite-based sensors and weather radars and stations will be the core of the most modern environmental surveillance system in the world." Others are less enthusiastic. Senator Gilberto Miranda, chief of the Senate Commission on Economic Affairs, calls SIVAM obsolete and expensive compared to other systems in the United States, Russia and Ukraine, and says it will not provide total coverage of the Amazon region. Miranda's outspoken opposition to SIVAM was the seed of the scandal in which Raytheon recently found itself embroiled. The scandal developed after police released wiretapped phone conversations in which Julio Cesar Gomes dos Santos, an adviser to Brazilian President Fernando Henrique Cardoso, allegedly suggested that José Alfonso Assumpâo -- a businessperson who represents Raytheon -- bribe Miranda to get him to stop holding up the project by delaying authorization for its financing. Raytheon denies a bribe was ever offered, saying that "at no point in the transcripts does Gomes dos Santos recommend or suggest that Assumpâo pay a bribe to Senator Miranda." In a statement issued shortly after the allegations surfaced, the company insisted that it "has not, and never will, condone the payment of bribes or gratuities to government officials, and [that] no such payments have been made by Raytheon in connection with the SIVAM program." Even so, the allegations of influence-peddling forced the resignation of three top Brazilian officials, including Aeronautics Minister Mauro Gandra. Raytheon won the SIVAM contract, it says, "by providing the best technology, the lowest price and the best financing." The $12 billion conglomerate defeated three other contenders including Unisys, France's Thomson and the German-Italian consortium DASA/Alenia. Raytheon spokesman Barry French says that the company will finalize all its agreements with subcontractors -- including Infranav, Embraer and IBM do Brasil -- within two to three months and begin the civil works part of the project, preparing physical sites for the installation of equipment. French says that SIVAM became controversial "because it was a highly competitive program and because a huge amount of money was at stake. That often generates all kinds of completely unsubstantiated allegations, which is extremely unfortunate." "Our program was reviewed and investigated by a number of bodies in Brazil, including the Chamber of Deputies, the Senate and the Federal Audit Commission," he adds. "All of them said there is no reason why the program should not go forward, and gave it a clean bill of health. We in the program itself have been scrutinized over and over, and there's been absolutely no evidence that anybody at Raytheon did anything wrong." -- L.L.