Just after lunch on Aug. 26, 1991, in the Swiss border town of St. Margrethen, three Germans converged in a shopping center parking lot. One of the men handed over an envelope containing $500,000 in cash. After a brief discussion, they went their separate ways.
Eight years later, the consequences of that meeting are rocking Germany's political Establishment to its core. The three who came together that day were Karlheinz Schreiber, a German-Canadian arms dealer; Walther Leisler Kiep, the longtime treasurer of Helmut Kohl's Christian Democratic Union; and Horst Weyrauch, Kohl's trusted party accountant. The $500,000 passed from Schreiber to Weyrauch--payment, investigators suspect, for the CDU's support of a sale of 36 tanks by industrial giant Thyssen to Saudi Arabia. But this is not an isolated case of bribery. Prosecutors have established that the money landed back in CDU accounts. And that has led them to investigate a much broader web of corruption involving CDU finances and secret bank accounts run by former Chancellor Kohl.
The scandal surrounding what Germans are calling Das System Kohl has captured headlines for weeks. It could take months--or longer--for prosecutors to track down the origins and donors of at least $16 million in CDU funds, and to figure whether that money was illegally obtained, either as payoffs for services rendered or as illegal campaign contributions. More will emerge, no doubt, when parliamentary hearings on the CDU mess begin in mid-March. But even now, prosecutors, legal experts, businesspeople, and the newly assertive German media are piecing together the tale--and analyzing its potentially profound impact on Germany.
Many see the Kohl scandal as part of a broader transformation in German society. Germans have made it clear that they no longer believe in the paternalistic political machines that made the country an island of stability during the cold war. The era of consensual politics, where the border between government and business was often blurred, is over. Says a top German fund manager: "The country really needed shaking up, and this could be the catalyst."
ON THE HOOK. The disclosures certainly are shaking up the CDU, headed for 16 years by the "eternal chancellor" Kohl. The 69-year-old architect of German unification has seen his legacy stained by revelations that he ran a secret slush fund, and he has already resigned as honorary party chairman. Wolfgang Schauble, Kohl's successor as CDU boss, has also admitted that he accepted an illicit cash "donation" from Schreiber in 1994 that has since disappeared. A host of other CDU politicians, past and present, have also been implicated.
While Kohl admits to violating Germany's party-financing law by not declaring donations of more than $10,000, only his party can be penalized for the infraction. The CDU faces fines of up to $18 million. Still, Kohl is not off the hook. Prosecutors are considering charging him with breach of trust for allegedly mismanaging his party's funds, a crime that carries a maximum sentence of 10 years in prison. Other crimes under investigation include money laundering, embezzlement, bribery, fraud, and tax evasion. The CDU is even in danger of splitting up or disintegrating as one party elder after another comes under suspicion. "The fact that members of the federal government violated laws in a systematic manner over a period of years has seriously damaged the CDU's credibility. Neither the CDU nor the party system will be the same," says Jurgen Ruttgers, CDU chief in the state of North Rhine Westphalia.
How did it come to this? The CDU's troubles started in 1995, when prosecutors in Augsburg began investigating the dealings of arms dealer Schreiber. Investigators stumbled onto the $500,000 payment as part of a probe into commissions Schreiber received for lobbying work he did for Airbus Industrie and Thyssen in the late 1980s and early 1990s. It took them four years to amass evidence, but finally they issued a warrant for Schreiber's arrest on tax-evasion charges. Canadian police arrested the 65-year-old Schreiber in a Toronto restaurant last September. He is now fighting the prosecutors' efforts to extradite him to Germany. In press interviews, Schreiber has said the payment was meant as a contribution to the CDU. BUSINESS WEEK could not reach him in Toronto for comment.
A note in Schreiber's calendar led prosecutors to look into his dealings with CDU treasurer Kiep. A dapper man, now 73, Kiep solicited donations and held the purse strings for his party from 1971 to 1992. He was well-connected with the leading lights of Germany Inc., and his foreign contacts were also prized. They were so valuable, in fact, that Socialist Chancellor Gerhard Schroder, who knew Kiep from their time on Volkswagen's supervisory board together, has continued to use him as an envoy to drum up investment for Germany.
Indeed, Kiep was just about to leave on such a mission to the U.S. in early November when prosecutors issued a warrant for his arrest on tax evasion charges. Kiep turned himself in, was released on $250,000 bail, and even took his trip. Before he left, he denied in court that he had pocketed the $500,000 from Schreiber. Instead, he said, Kohl accountant Weyrauch had deposited it into a CDU account. Up until then, prosecutors hadn't known about the involvement of Weyrauch, who runs a small accountancy in Frankfurt and had been engaged by Kiep in 1971 to work for the CDU. Kiep declined to comment.
Kiep's November disclosure sent a chill through the CDU ranks. Ironically, it came just a few days before Kohl would share a podium with former U.S. President George Bush and former Soviet leader Mikhail Gorbachev to celebrate the 10th anniversary of the fall of the Berlin Wall and the reunification of Germany--the Chancellor's greatest achievement.
NO TRACKS. On Nov. 9, Kohl denied knowledge of the Schreiber donation. But the story wouldn't go away. Former associates began whispering to the German press about secret accounts Kohl ran when he was Chancellor--apparently so he could spend party money without leaving tracks. Then came the bombshell: On Nov. 30, Kohl acknowledged that he indeed operated secret party accounts while he was Chancellor, thus breaking federal party financing laws.
The pressure for more information kept building. In a television interview on Dec. 16, Kohl admitted to accepting up to $1 million in secret donations between 1993 and 1998. He said he used the money to finance East German CDU branches. But the former Chancellor refused to reveal where he got the money. "These were German citizens who have no business connections to government, but wanted to help me. I don't intend to reveal their names because I gave my word not to," Kohl said in the interview. Since then, an independent audit of the CDU books by Ernst & Young has revealed that CDU accounts hold $6 million in undeclared donations--far more than Kohl admitted.
Many Germans think Kohl is lying about the secret donors. Some Germans believe Kohl and the CDU banked big donations from German companies. Others, including German television station ARD, have ventured that Kohl's old friend and fellow statesman, Francois Mitterand, gave money to him when he faced an uphill battle for reelection in 1994. According to this theory, Mitterand may have used state-owned Elf-Aquitaine, which purchased East German oil refinery Leuna in 1992, as a conduit for a $15 million donation. In France, the oil giant has already acknowledged acts of fraud and embezzlement totaling more than $200 million under its former chairman, Loik Le Floch-Prigent, a Mitterand associate, from 1989 to 1993. But Kohl calls suggestions that a Socialist leader like Mitterand financed a CDU victory "absurd."
Still, the revelations keep coming and they're bringing down prominent CDU politicians. CDU parliamentary accountant Wolfgang Hullen committed suicide in January, leaving behind a note admitting that he had embezzled party funds. Top officials in the state of Hesse, home of the German banking capital, Frankfurt, have also been implicated. Manfred Kanther, for example, honed his reputation on his law-and-order policies as Germany's Interior Minister from 1993 to 1998. He was leader of the CDU in the state of Hesse from 1991 to 1998.
But on Jan. 14, Kanther admitted in a news conference that under his leadership, the Hesse CDU had transferred about $4 million to accounts in Switzerland. Several days later, his successor as CDU chief revealed that as much as $10 million had been transferred to Switzerland in the early 1980s, just before Germany implemented new party financing regulations. On Jan. 17, Kanther resigned his parliamentary seat. He is under criminal investigation for suspicion of breach of trust. Kanther could not be reached.
Investigators are just as puzzled over the origins of the Hesse funds as they are about Kohl's secret accounts. While it's not illegal for a German party to have foreign accounts, it is illegal not to include the assets in annual accounting reports. Prosecutors are hoping that Kohl accountant Weyrauch, 67, will unravel the mystery. Weyrauch, who is under investigation on suspicion of fraud and breach of trust, was the only person with access to all of the books: He not only set up Kohl's secret accounts but also managed both the official and secret accounts of the national and Hesse CDU. Investigators suspect that some of Kohl's secret cash may have come from Hesse. But on Jan. 30 Weyrauch released a statement saying "at no time did money flow from the state Hesse branch of the CDU to the national party." He has handed over control of the secret accounts.
Underscoring Weyrauch's importance to the CDU scandal, the parliament is planning to call him as the first of 26 witnesses before its special committee. Weyrauch describes himself as a "cog in a wheel" who only acted on orders. Weyrauch did not return phone calls from BUSINESS WEEK. But he recently warned a CDU official in a phone conversation that his revelations will "rock the republic."
The CDU scandal could well lead to the prosecution of several leading German political figures before the dust settles. But truth be told, the Old Germany represented by Kohl was already disappearing. Instead of stability, Germans are now more interested in transparency and accountability. If Germans weren't ready to sacrifice Kohl and move on, the arrest of a little-known arms dealer in Toronto would not have caused Das System Kohl to fold like a house of cards.