Volkswagen Is Back In The Suppe

A new scandal suggests German carmakers are still too lax

The whistle-blower this time was ABB Asea Brown Boveri Ltd., the Swiss-Swedish conglomerate. Last year ABB auditors uncovered accounting irregularities in a project to build a paint shop for Volkswagen's Skoda unit in the Czech Republic. ABB had apparently paid millions of dollars in kickbacks to land the contract. After an investigation, ABB in December laid out the findings to VW and filed blackmail charges with the district attorney's office in Zurich. On February 17, ABB filed similar charges in the German city of Braunschweig.

The bribery scandal boiling over at Volkswagen is the latest example of corruption in German business circles. Two years ago, General Motors Corp.'s German division, Adam Opel, was shaken by revelations that purchasing executives had received kickbacks from suppliers. That scandal led to the suspension of one executive and two supervisory board members as well as the prosecution of several midlevel officials. But that doesn't seem to have persuaded the industry to clean up its act.

The VW incident suggests that some German auto companies are lax about enforcing ethical behavior. "I never met purchasing people in the auto industry who did not have `secondary benefits' from their suppliers," says a former VW executive. Adds a top official at another European carmaker: "It is an industrywide problem to an alarming extent."

PRESSURE ON PIECH. The scandal also puts renewed pressure on VW Chief Executive Ferdinand Piech. He recently agreed to pay GM $100 million to settle a civil case over charges that former purchasing chief Jose Ignacio Lopez de Arriortua stole company secrets when he left GM to join VW in 1993. Lopez has been indicted by German prosecutors.

Meanwhile, the German magazine Der Spiegel also alleges that close associates of Lopez are involved in the latest scandal. Officials at ABB and at the Braunschweig prosecutor's office won't confirm or deny that allegation. Germany's federal criminal investigors have been called in to assist with the inquiry.

The current scandal bolsters the impression that VW's top brass winks at unethical behavior. VW issued a statement saying that it is investigating. Ironically, the company has rules designed to avoid such shenanigans, says a former purchasing executive there. Purchasing employees, for instance, are required to sign ethics statements annually, he says. And even such perks as lunch on suppliers' tab are closely controlled.

But even stricter standards may be necessary. What's lacking, say some industry insiders, is swift, decisive action against those who break the rules. Suspected wrongdoers need to be suspended pending a full investigation, they argue, and proven rule-breakers should be sacked. German companies can no longer afford to sweep corrupt behavior under the rug.

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