The Flames Of Scandal Singe Berlusconi

A young officer, Pietro Di Giovanni, of Italy's paramilitary tax police was handed a bulging white envelope at his desk in Milan in April. It was a small start to what has become Italy's newest--and potentially biggest--scandal. Inside the envelope was almost $2,000 in 100,000-lira bills--part of a $60,000 payoff from a Milan real estate company to escape $4 million in taxes. But Di Giovanni's superiors, who had engineered the bribe, hadn't counted on the young man's honesty. He turned them in.

Di Giovanni's move helped uncover what Italian magistrates say is systematic corruption among Italy's 62,000-strong Guardia di Finanza, the national tax police. The investigation already has snared some 44 tax officers--including one of the top law-enforcement aides to Milan's best-known prosecutor, Antonio Di Pietro. At least three top officers of the police have committed suicide in recent weeks.

The concern is that the new revelations will rock Italy's corporate Establishment just as it is recovering from last year's corruption scandal. Worse, the investigations could seriously weaken the newly formed government of Silvio Berlusconi. So far, more than 103 companies have been implicated, among them Gemina, the huge Milan-based finance group, and the Rinascente department-store chain. Even the local operations of foreign companies are under investigation, including Swiss drug giant Sandoz Ltd., which will not comment, and French cosmetics group L'Oreal, which states that one of its managers recently turned himself in. Gherardo Colombo, one of the key magistrates involved, tells BUSINESS WEEK: "This investigation is going to go as far as it takes us."

It already has hit close to Berlusconi, the media tycoon turned politician who was sworn in as Prime Minister in mid-May. After the confession of top officials of Berlusconi's wholly owned Fininvest media empire, magistrates arrested Berlusconi's 45-year-old younger brother Paolo on July 29, bringing the total number of arrest warrants issued for Fininvest executives to four. As manager of the family's publishing and real estate interests, Paolo is alleged to have given the go-ahead for payments of $206,000 to the tax police in return for lenient inspections. Paolo's lawyer maintains the tax police extorted the money from


NATIONAL SPORT. The investigation is sparking the worst face-off yet between Milan's aggressive magistrates and the new government. When Berlusconi tried to ram through a decree in mid-July to limit preventive detention in corruption cases, critics charged he was cutting the rug out from under magistrates investigating the Prime Minister's industrial holdings. In response, Berlusconi, in a speech to Italy's Parliament on Aug. 2, warned that some judges were "becoming demagogues who mix justice and politics." The Guardia di Finanza investigation, he added, "is spreading fear and panic into entrepreneurs who take risks."

Yet reforming Italian tax collection-- and rooting out corruption among tax inspectors--is one of the most urgent tasks facing Italy. Tax evasion, after all, is virtually a national sport. According to recent government data, 7 out of 10 Italian companies cheat on their tax returns. For a government that must scrape to find every last lira to pay interest on the country's mountain of public debt--now at $1.4 trillion--it's all money sorely missed. The cumulative amount of tax evasion between 1989 and 1993, says Finance Minister Giulio Tremonti, was $322 billion--about $64 billion a year.

GONDOLIERS' BURDEN. Tremonti may be part of the solution. The Milanese tax lawyer, one of the Berlusconi government's few politically independent ministers, has come up with plans for overhauling Italian tax collecting. First, Tremonti plans to quickly dispose of the backlog of 3 million contested tax claims that are swamping the system by allowing payment of a fee to have charges dropped. Not only will the government stand to earn a quick $6 billion from the fees next year but the move could free up authorities to focus on more serious cases of tax evasion.

Tremonti also wants to untangle Italy's complicated tax rules, which, he says, "have, in effect, legalized tax evasion." Until recently, for example, Venice's gondoliers had to complete paperwork for each fare. Tremonti promises by November to unveil reforms to correct all such absurdities. The aim: decentralizing tax collection, vastly simplifying the tax code, and moving from direct to indirect taxation.

A big question is whether Berlusconi's government can muscle tax reform through Italy's fractious Parliament. A positive answer will probably depend on whether the government and Berlusconi himself can withstand the latest investigations on tax evasion and corruption.

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