IMPROPER PRACTICES, COMMODITY IMPORT WEDNESDAY, JANUARY 31, 1968 U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. The subcommittee met at 11:10 a.m., in room S126, Capitol Building, pursuant to Senate Resolution 53, agreed to February 17, 1967, as amended (S. Res. 150), Senator Abraham Ribicoff (acting chairman) presiding. Members of the subcommittee present: Senator Abraham Ribicoff, Democrat, Connecticut; Senator Karl E. Mundt, Republican, South Dakota; Senator Carl T. Curtis, Republican, Nebraska. Also present: Donald F. O'Donnell, chief counsel; LaVern J. Duffy, assistant counsel; Philip W. Morgan, chief counsel to the minority; John J. Walsh, investigator; Ruth Y. Watt, chief clerk. Senator RIBICOFF. The Senate Permanent Subcommittee on Investigations of the Committee on Government Operations will come to order. (Members of the subcommittee present at time of convening: Senators Ribicoff and Mundt.) Senator RIBICOFF. First I would like to submit a letter from the chairman, Senator John L. McClellan, authorizing me to conduct these hearings as acting chairman. (The letter follows:) U.S. SENATE, COMMITTEE ON GOVERNMENT OPERATIONS, Hon. ABRAHAM RIBICOFF, Washington, D.C. DEAR SENATOR RIBICOFF: On July 24, 1967, I appointed you as Acting Chairman of the Senate Permanent Subcommittee on Investigations to conduct hearings in open session in connection with Improper Practices, Commodity Import Program. Please be advised that your appointment as Acting Chairman is a continuing one in order to permit you to conduct additional hearings on this subject matter. Sincerely yours, JOHN L. MCCLELLAN, Chairman. Senator RIBICOFF. The Senate Permanent Subcommittee on Investgations today resumes its hearings, which began in August 1967, relating to certain aspects of Agency for International Development activities in Vietnam, particularly the procurement of pharmaceuticals under the commodity import program. 78-726 0-68—pt. 2- -19 503 In early 1967, the subcommittee's staff developed information involving improper activities in the shipment of chemicals, pharmaceuticals and steel bridges to Vietnam under the commodity import program financed by AID. I was requested by Senator John L. McClellan, chairman of the subcommittee, to preside over the hearings which were conducted in August of 1967. Evidence was presented before the subcommittee on August 2, 1967, by officials of AID, which charged wrongdoing on the part of Clement Gubbay, a resident of Milan, Italy, and certain of his associates, including Ernest Lowens of New York City. Mr. Lowens is an officer in three New York companies influenced or controlled by Mr. Gubbay. During the questioning of Ernest Lowens before the subcommittee, Peter Campbell Brown, the attorney for Mr. Lowens who also represents Mr. Gubbay, requested that Mr. Gubbay be afforded an opportunity to be present and to respond under oath to the charges made against him. The subcommittee acceded to Mr. Brown's request and postponed further questioning of Mr. Lowens until Mr. Gubbay could arrange to appear and testify before the subcommittee. I advised Mr. Brown that when Mr. Gubbay appeared in Washington, the subcommittee would hear his testimony. Mr. Brown told the subcommittee at that time, August 2, 1967, that he would communicate with his client, Clement Gubbay, and arrange for his appearance before the subcommittee "as quickly as possible." As of January 19, 1968, the subcommittee had not received any communication from either Mr. Brown or Mr. Gubbay concerning Mr. Gubbay's appearance as a witness. The subcommittee notified Mr. Brown by letter on January 19 that these hearings, long postponed, would be resumed at an early date. We again gave Mr. Gubbay the opportunity to appear and testify. Since the August hearings, investigators from both the subcommittee staff and AID have uncovered new evidence relating to the activities of both Mr. Lowens and Mr. Gubbay. This new evidence will be presented here this morning. Our first witness will be Daniel Cohen of the office of the comptroller of the Agency for International Development. First, I would like to submit, if there is no objection, a letter from Mr. Donald F. O'Donnell, chief counsel, notifying Mr. Peter Campbell Brown of these hearings, and requesting the appearance of Mr. Clement Gubbay, and the reply of January 29, from Mr. Peter Campbell Brown indicating that Mr. Gubbay is unable to appear. They will be printed in the record, without objection, at this point. (The letters follow :) Mr. PETER CAMPBELL BROWN, JANUARY 19, 1968. DEAR MR. BROWN: During August of 1967, the Senate Permanent Subcommittee on Investigations held public hearings into alleged improper activities related to the shipment of pharmaceuticals to Vietnam, financed by the Agency for International Development under the Commodity Import Program. On August 2, 1967, testimony was received from one of your clients, Ernest Lowens of New York City, who was charged by AID officials with wrongdoing concerning pharmaceuticals shipped to Vietnam under AID financing. Another of your clients, Clement Gubbay of Milan, Italy, was similarly charged. While Mr. Lowens was testifying before the Subcommittee, you requested that Clement Gubbay be afforded an opportunity to be present to answer the charges made against him by AID officials. Senator Ribicoff, Acting Chairman of the Subcommittee acceded to your request, postponing further testimony from Mr. Lowens until you could communicate with your client, Mr. Gubbay, and arrange “within a reasonable time" his appearance in Washington. You stated at that time that you would communicate with Mr. Gubbay and make the proper arrangements "as quickly as possible." As of this date, we still have not received any communication from you or Mr. Gubbay concerning Mr. Gubbay's appearance before the Subcommittee. It is imperative that these hearings, long postponed, be resumed at an early date so that a final report can be prepared and presented to the United States Senate. The resumption of public hearings on Vietnam will be held in the immediate future. We would appreciate it if you would advise this office by letter within ten days of the date of this letter whether or not your client, Clement Gubbay, will be present in Washington to testify and make available for review by the Subcommittee staff his personal financial records, including, but not limited to, all bank accounts, cancelled checks, deposit slips, check stubs, and savings accounts for the period January 1, 1963, to present. Your cooperation in this matter will be appreciated. Sincerely yours, Mr. DONALD F. O'DONNELL, DONALD F. O'DONNELL, Chief Counsel. BROWN, CARLINO & EMMANUEL, New York, N.Y., January 29, 1968. Chief Counsel, Committee on Government Operations, DEAR MR. O'DONNELL: Reference is made to your letter of Friday, January 19, 1968, which reached me here on Monday, January 22, 1968. You inquired as to whether or not Mr. Clement Gubbay could arrange to appear before the Committee in Washington within a reasonable time. I am advised that Mr. Gubbay is unable to so appear. Yours sincerely, PETER CAMPBELL BROWN. Senator RIBICOFF. Will the witnesses please stand, Mr. Cohen and Mr. Leslie Grant? Do you solemnly swear that the evidence you give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. COHEN. I do. Mr. GRANT. I do. TESTIMONY OF DANIEL COHEN AND LESLIE A. GRANT Senator RIBICOFF. Mr. Daniel Cohen, you may proceed. Do you have a prepared statement? Mr. COHEN. Yes, sir. Senator RIBICOFF. You may proceed. Mr. COHEN. Mr. Chairman, when I testified before this subcommittee on August 2, 1967, I reported that AID had found a number of apparent irregularities in connection with AID-financed procurement of foreign pharmaceutical speciality products supplied by firms controlled by Clement Gubbay, of Milan, Italy, and managed in this country chiefly by Mr. Ernest Lowens, of New York. I revealed that in 1961, restrictions were imposed on the source of procurement for commodities to be financed by AID. Prior to 1961, there had been no restrictions on source of procurement under the foreign assistance program except to exclude commodities of Communist-bloc origin. However, in order to protect the balance-of-payments position of the United States, a policy of "limited worldwide" procurement was initiated, which precluded the 19 industrially developed countries of the world as sources of supply. Letters of commitment to participating banks bore instructions to the effect that payment under applicable letters of credit was to be conditional on the certification by the supplier that the commodities in the AID-financed transaction were from the source/origin designated as eligible under the procurement authorization. A brief review of the chart incorporated in my former testimony would be helpful to refresh the subcommittee's recollection of the structuring of the Gubbay complex. Senator RIBICOFF. That chart is already in the record. Mr. COHEN. Yes. You will recall that Mr. Gubbay represented a number of French and Italian pharmaceutical manufacturers through his proprietary company, International Pharmaceutical Organization, that is referred to as IPO, headquartered in Milan. In addition, he serves as a delegate for two Milan-based drug firms, Archifar International and Ormonoterapia Richter. Senator RIBICOFF. What is a delegate in Italy comparable to in America? Mr. COHEN. It is comparable to a director in an American firm. He directs the activities of a promotional firm in Vietnam, Vietnam Pharmaceutical Promotion Office (VPPO), in which he owns a 2212-percent interest. Through this international network, Mr. Gubbay was able to exploit a lucrative dollar-backed market in Vietnam. Faced with the loss of this market by AID's source/origin restrictions, Mr. Gubbay established two corporations in New York City for the purpose of providing apparent eligible sources for these European speciality products. These corporations, Associated ChemoPharm Industries, Inc., and Archifar Pharmaceuticals, Inc., became the conduits through which these commodities would continue to reach the Vietnam market under AID financing. Through his connections with Ormonoterapia Richter, Mr. Gubbay was able to arrange for the managerial assistance of Mr. Ernest Lowens, vice president of the Richter export subsidiary in the United States, Gedeon Richter Pharmaceutical Products, Inc. Mr. Lowens, an American citizen, undertook the administrative management of these two operations and held the office of treasurer in each corporation. Associated Chemo-Pharm and Archifar shared office space with Gedeon Richter at 20 Exchange Place in New York's financial district. As I previously testified, our postaudit procedures raised certain suspicions of source/origin violations. A visit to their joint offices confirmed that neither company was a manufacturer despite their representations to this effect made on supplier's certificates. It was learned that they operated on the basis of a subcontracting arrangement with an independent laboratory whose principal manufacturing facility was located in the foreign trade zone on Staten Island, New York. Further pursuit of this question led me to participate in a joint investigation with our Management Inspection Staff-the predecessor of AID's Inspections and Investigation Staff-into the foreign trade zone operation. We found this operation to be essentially a repackaging and relabeling activity. Ampoules and tablets, manufactured in France and/or Italy, were brought into the foreign trade zone in bulk and repackaged for export to Vietnam. The obvious purpose of this arrangement was the circumvention of AID's previously cited source/ origin regulations. Our investigation brought about an admission by Mr. Gubbay that he had "done wrong" by falsely certifying that the products were of U.S. origin. He sought to justify this deception on the grounds that the pressure of delivery schedules for orders on hand did not permit him time to establish legitimate production facilities in the United States. These admissions were contained in two letters written to me by Mr. Gubbay which were introduced into the record at the time of my initial appearance before this subcommittee. Senator RIBICOFF. Those prior certificates were placed in the record? Mr. COHEN. Yes, sir. Mr. O'DONNELL. Those were printed in the record and not introduced as exhibits, those letters. Mr. COHEN. Yes. The Agency for International Development took the following action with respect to the disclosures of this investigation. It advised the Vietnamese authorities of these source/origin violations, and referred the evidence against Associated Chemo-Pharm and Archifar to the Department of Justice for prosecutive consideration. The Government of Vietnam acted immediately to suspend these firms from participating in their commercial import program. Frustrated by the Vietnamese action, Mr. Gubbay arranged with Mr. Lowens to utilize Gedeon Richter of New York as the supplier of the French and Italian specialty products which would thereafter "originate" from Brazil, Chile, Portugal, and/or Greece. This was accomplished in part by the use of manufacturing facilities of subsidiaries of certain of the French and Italian firms and by special contract arrangements with independent manufacturers located in the designated countries. In each of these countries, it was necessary to import a relatively high percentage of the ingredients and accessory materials from ineligible source countries. However, since the cost of foreign components is measured against the selling price of the finished product in determining the eligibility for AID financing, Mr. Gubbay achieved ostensible compliance with our source/origin requirements by inflating the selling price. This was possible because of the proprietary nature of the products involved. There were no comparable products being shipped by other firms; and the Gubbay-controlled firms were not supplying any market other than Vietnam. Under these circumstances, Mr. Gubbay was able to manipulate the prices and charge whatever the traffic would bear. Senator RIBICOFF. Were all the Gubbay enterprises set up for the Vietnam market? Mr. COHEN. Yes, they were set up for the Vietnam market. Senator RIBICOFF. And they did no business with any other nation? Mr. COHEN. Well, the firm in which he was a director in Milan, Italy, or rather the two firms in which he was a director, did supply the Italian market. The French firms whose formulas IPÓ controlled supplied the French market. But these were not export operations. They were local operations. |