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This is all they needed

Posted by Richard Thursday, July 07, 2005

With its economy already in deep mire, the last thing the Germany needs is a major corruption scandal involving Volkswagen, one of its largest and most prestigious carmakers. Yet, that is precisely what is happening. And, with Schröder already weak in the polls, a financial scandal that taints him is also exceedingly unwelcome.

After numerous rumours that something was amiss, the story itself broke late last month, which had Deutsche Welle on 1 July headlining: "VW Faces Bribery Scandal". Then, it was reported that the head of the general works council at Volkswagen had stepped down in the midst of an alleged bribery scandal.

This was a figure largely unknown in Britain, Klaus Volkert, who had been head of VW's general works council – one of the most powerful councils in Germany - since 1990. He also sat on the company's supervisory board and, in the 1990s, he was involved in the introduction of the four-day week in VW.

Yet, at the age of 62, he announced told workers he was resigning "due to reasons of age", which did nothing to dispel rumours that he was leaving his post in connection with a bribery scandal at VW's Skoda unit involving Skoda's former head of personnel, Helmut Schuster.

Suspicions were reinforced when Der Spiegel reported that internal auditors at VW were looking into allegations that Volkert and Schuster had been involved in a company that had been bidding to win a contract from Skoda. Schuster, who had already resigned in May, was being investigated by prosecutors on allegations he had received bribes from potential suppliers.

CEO Bernd Pischetsrieder immediately promised a full investigation of the allegations against other VW employees and complete cooperation with the judiciary. However, then the German economic magazine, Wirtschaftwoche, pitched in. It claimed that the Skoda bribery scandal had much wider implications and that Volkert's resignation was by no means the end of the affair. The magazine also claimed that certain politicians, including the former president of Lower Saxony, Sigmar Gabriel, and Schröder, were aware of the wrongdoings in the Skoda unit.

By 5 June, Deutsche Welle was reporting that the scandal was deepening, as accusations kept piling up. The company was also reportedly putting certain expansion plans on ice while rumours of further resignations abounded.

Amongst the new accusations was the claim that VW staff had set up a global network of six front companies to get supply contracts, and that former staff had sought "kickbacks" for work in India and Angola. German newspapers had been reporting that the scandal had caused VW chairman Bernd Pischetsrieder to postpone making a decision on the planned construction of a new factory in India, as well as an assembly plant in Angola.

Then, the German state of Lower Saxony called for investigators to get to the bottom of the allegations and VW called in auditors KPMG to review the matter. "There apparently was criminal energy at work and that's why it is very important that the audit runs parallel to the investigations of the Brunswick state prosecutor's office," said Lower Saxony economics minister, Walter Hirche, also a member of VW's supervisory board.

For Lower Saxony, the issue was doubly embarrassing as the länd owns around 18 percent of Volkswagen and now the magazine Wirtschaftswoche was claiming that the works council chief, Klaus Volkert was simply the "tip of the iceberg". More resignations - including that of VW's head of personnel and overseer of the German government's economic reforms, Peter Hartz - would follow.

Joining in the fray came Reuters, citing VW as declining to discuss a report by Germany's Sueddeutsche Zeitung that the company for years had offered improper inducements to senior labour representatives in return for their support on key issues.

Then The Financial Times Deutschland came into play, citing a "press source" claiming that Peter Hartz had ordered a budget to be allocated to the works council, partly for business travel, but that use of the budget had not been controlled. The newspaper Sueddeutsche Zeitung was more graphic, accusing Volkswagen's management board of paying for "pleasure trips" to Brazil and other countries, which included visits to prostitutes, for the leaders of the works council.

Hartz was reported to have clearly instructed the human resources department to support works council head Klaus Volkert in the organisation of foreign travel, and not to examine whether the journeys were necessary for the functions of the works council. A management source has said that, furthermore, this budget "was not controlled subsequently in the course of the provision of accounts."

Coming right up to date, Die Welt is reporting that German prosecutors are focusing their attention on a VW plant project in India, suggesting that an unnamed VW employee received about €3 million from the Indian city of Visakhapatnam in the province of Andra Pradesh, where VW had planned to set up a factory for trucks and buses. At that time, the province was one of several competing as a site for the VW project, the newspaper said.

This had the New York Times (from this site), reminding us that Schröder had once sat on Volkswagen's supervisory board and, with the company "up to its axles in a bribery and corruption scandal", this could harm the chancellor's election plans.

Not least, the "VW affair" has become fodder in Germany's heated political debate with the Christian Democrats seizing on the issue as typifying Germany's dangerously outdated industrial policies. Whether true or not, the scandal is set to dominate the headlines in Germany for months to come, right into the autumn when the German general election is expected to be held.