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The War On Sleaze Heats Up (Int'l Edition)

International -- European Business: SCANDALS


More white-collar criminals end up in jail as probers get tough on practices that once were overlooked

As Spain's most prominent financier in the 1980s, Mario Conde once entertained royalty aboard his yacht, hobnobbed with top U.S. investment bankers, and set up his own business school in Madrid. Once, he even organized a seminar on business ethics at the Vatican. But on Mar. 21, a Spanish court found the former chairman of the Banesto banking group guilty of fraud for siphoning off $4 million from Banesto into his own company. He was sentenced to six years in prison and fined $70,000. That may be just the start. Conde faces a second trial for fraud and misappropriation of $85 million in Banesto funds--and this time prosecutors want to jail him for 44 years.

Europe's chief executives and politicians once considered skimming corporate and public funds a perk that went with the job. No more. Eighteen months ago, a wave of high-level corruption investigations rocked Europe's boardrooms and government offices. Following the example of Italy's "clean hands" effort to root out corruption, a new generation of determined magistrates from Oslo to Madrid has begun exposing seamy traditions among Europe's corporate and political elite. The first big wave of Continental cases is now moving toward denouement (table). And Italy's initiative has already brought results. On Apr. 9, a Turin court found Fiat Chairman Cesare Romiti guilty of fraud, sentenced him to 18 months in prison, and ordered him to step down from his post at the carmaker. Romiti is the highest-level executive to be investigated in Italy's "clean hands" sweep.

True, the judicial pace in some countries is glacial, and sentences seem light compared with punishments meted out in the U.S. for similar offenses. Yet for the first time, a number of once-untouchable executives and politicians face jail sentences. "We have two former [French] ministers in jail. That would have been unthinkable five years ago," says former French magistrate Thierry Jean-Pierre, now a member of the European Parliament.

The antisleaze campaign has gained momentum in part because of a revolution in corporate governance. As more European managers seek capital in international markets, they no longer dare risk the blot of financial scandal. "Companies are much more careful about obeying the law and not stepping out of line," says an Italian CEO. The financial transparency that global investors demand doesn't leave much opportunity for cooking the books. "If they want us to be investors, they'll have to play by our rules," says Alastair Ross Goobey, chief executive of investment company Hermes, which manages $49 billion for Britain's postal and telecoms pension plans.

So U.S. funds are drawing up codes of conduct for European companies seeking investments. The California Public Employees' Retirement System, the largest public pension fund in the U.S., on Mar. 27 presented new corporate governance principles for French and British companies in which it invests. In France, the fund is recommending broader disclosure of executive pay, an end to cross-shareholding, a one-share, one-vote capital structure, and the regular election of directors.

BILKED. France Telecom, which is preening for a May public offering, has taken heed. Two years ago, investigations revealed that the French telephone operator had been bilked by its main equipment supplier, Alcatel Alsthom, for more than $138.6 million in overbillings. The matter was settled out of court, but the scandal threw accounting procedures at the monopoly operator into question, because it didn't know what was going on. At a press conference on Mar. 19, France Telecom took pains to explain its cleaned-up balance sheet, including write-downs for overvalued real estate assets and a one-time pension fund payment to the state that forced its 1996 profit down 77%.

Some companies are even turning whistle-blower. In January, Swiss-Swedish engineering group ABB Asea Brown Boveri Ltd. turned over evidence to Volkswagen and a Zurich prosecutor that VW purchasing managers demanded $12.5 million in bribes from ABB in exchange for a $250 million contract for a paint factory at VW's Skoda unit in the Czech Republic. VW dismissed one of its own purchasing managers after an internal probe and in February asked German prosecutors to look into the charges. But investigators are now exploring allegations that the Skoda incident was just one in an extensive, longstanding system of kickbacks among several leading car companies and their suppliers, including General Motors Corp. and its Opel subsidiary in Germany.

Cleaning up systemic corporate and political corruption will take time. Investigators say existing cases are only the tip of the iceberg. In addition, the wrongdoers are fighting back. A French court in January cut from five years to three the amount of time magistrates have to file charges for misuse of corporate funds, under pressure from business leaders. In essence, the ruling grants immunity to anyone who can hide a misdeed for three years. It also decriminalized corporate bribe-paying in cases where a company benefits from paying the bribe. France's magistrates rallied to challenge the ruling, which now will be reviewed by the country's supreme court later this year. "There was a howl of judicial protest," says Jean-Pierre. "I am fairly sure the ruling won't survive."

But the biggest face-off between the magistrates bent on change and the white-collar elite they are chasing is yet to come. On Oct. 1, seven European magistrates publicly accused government officials of blocking their efforts to track illegal financial transactions across borders, hindering the pursuit of crime rings and big-time money-launderers. In what was dubbed "the Geneva appeal," they demanded that European Union magistrates be allowed to collaborate in crossborder investigations without meddling from politicians and justice officials. European Parliament members who support the magistrates say a new law on collaboration could be drafted within two years.

ECHOES. Judges, prosecutors, and magistrates throughout Europe have echoed the Geneva appeal in their own countries. In December, a 200-member organization called Equality Before the Law sent 577 French Parliament members a text denouncing the justice system's emphasis on small-time criminals and its velvet hands when it comes to the country's business and political elite.

It will take years before a new business and political ethic takes firm root on the Continent. But the brave band of magistrates that is challenging a system hostile to change already has come a long way.By Gail Edmondson in Paris, with Julia Flynn in London, Karen Lowry Miller in Frankfurt, and Andy Robinson in SpainReturn to top

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