Source: US Global Legal Monitor
The following is a guest post by Steven Hughston Vasil, a 2020 summer intern working remotely with the Digital Resources Division of the Law Library of Congress. He is a current graduate student pursuing a Master of Library and Information Science degree at the University of Maryland, College Park.
On December 19, 1977, President Jimmy Carter signed the Foreign Corrupt Practices Act (FCPA) into law. One of the events that led to this law being passed by Congress in 1977 was what has been referred to as “Banana-gate.” The FCPA’s appeal (pun intended) was to prohibit the bribing of foreign government officials and to mandate better accounting practices from publicly traded companies to promote transparency for both stockholders and government regulators. This post describes the events surrounding “Banana-gate” and how it came to influence the FCPA.
The Banana-gate scandal began in New York when the United Brands president, Eli Black, used his attaché case to create a hole in his office window and jumped to his death. The Securities and Exchange Commission (SEC) investigated his suicide and uncovered a plan to bribe the president of Honduras to lower Honduras’ export tax on bananas. Because bananas are a $25 billion industry in today’s market, many Latin American governments wanted to receive revenue in the form of export taxes. This meant taxing bananas as they were shipped abroad. Honduras wanted to tax bananas 50 cents per 40-pound box, which would have cost United Brands $7.5 million in 1974, or approximately $40 million today.
On February 4, 1975, The New York Times reported Black had been under great strain because of business pressures, which led to his suicide. The company’s Central American banana plantations had been damaged by Hurricane Fifi, in addition to the burden of export taxes imposed by Central American countries. On April 10, 1975 The New York Times published a story with the headline, “S.E.C. Suit Links a Honduras Bribe to United Brands, which described how the company paid a $1.25 million bribe to Honduran government officials with the goal of not being taxed on their bananas grown in Honduras. The story also determined an additional $750,000 in bribes had been paid to unnamed European officials since 1970. The agency had been informed of the bribe by United Brand’s law firm Covington & Burlington. United Brands wanted to keep the matter confidential when it disclosed the matter to the SEC, but the SEC’s lawsuit dashed any hope of keeping the matter secret.
According to the SEC’s 1975 Annual Report, SEC filed a lawsuit on April 9, 1975, against United Brands, alleging that the company had failed “to disclose substantial payments to officials of foreign governments in order to secure favorable treatment in connection with its operations in those countries (page 36).” The SEC did not name the Honduran president in their lawsuit, but news reports at the time reported that the bribe was paid directly to President Arellano.
Later reports from The New York Times in May of 1975, which quoted the official statement of a Honduran government spokesman, reported Black played an active role in taking care of the “banana problem” with an attempted bribe to President Arellano. The spokesman stated the Honduran President had refused the offer. In spite of the spokesman’s denial, these reports demonstrated how corporate leadership knew these schemes were taking place even if they were not direct participants.
While the SEC and United Brands grappled with the alleged bribery in federal court, a series of hearings in both the House of Representatives and the Senate were held to hear testimony regarding the spate of bribery scandals. Representative Robert Nix, chairman of the Committee on International Relations, noted that United Brands had admitted to making payments of $1.25 million to the Honduran Chief of State, Oswaldo Lopez Arellano, who was ousted in April  as a result. (Activities of American Multinational Corporations Abroad, Statement of Rep. Nix, at page 2.)
The SEC, in the 1975 annual report, stated that the basis for its suit against United Brands was that it failed “to disclose substantial payments to officials of foreign governments in order to secure favorable treatment in connection with its business operations in those countries.” (Page 36.) The SEC sued United Brands because the company did not publicly disclose that it was engaging in this behavior to its investors. That is, this lawsuit was launched not because the company was barred by law from engaging in this form of bribery at the time, but because the payments were not disclosed to United Brands’ investors or to federal regulators.
An express prohibition against bribery became law when President Carter signed the FCPA into law in 1977. President Carter announced during the signing that bribery was “ethically repugnant and competitively unnecessary” and these practices could “undermine the integrity and stability of governments and harm our relationships with other countries.” The FCPA criminalized the act of businesses bribing government officials to receive favorable treatment in those local jurisdictions as well as the falsification of accounting documents to hide the payments.