This Slush Fund Scandal May Swamp Alcatel's Skipper

Embattled Alcatel Alsthom Chief Executive Pierre Suard vowed last month to remain at the helm of the French telecommunications giant for another five years. But on Feb. 7, the going got tougher for Suard. While he was in Vietnam rustling up new business, French newspapers reported fresh evidence allegedly implicating an Alcatel subsidiary in the illegal funding of French political parties.

Specifically, a Luxembourg magistrate uncovered documents that track the movement of Alcatel funds in 1991 to a Luxembourg bank account already tied to covert funding of France's conservative Republican Party. The alleged misuse of funds has already brought down Gerard Longuet, the party's president, who quit as Industry Minister last year.

While magistrates have filed no charges related to the findings, it's one more blow to the $27 billion Alcatel, which has been the subject of other investigations. The most damaging is an official inquiry into the alleged overbilling of France Telecom, Alcatel's largest customer, which is said to total $127 million over three years.

The combination of controversy and Alcatel's sharp decline in profits last year "is explosive for Suard," says one senior French executive. Increasingly, corporate insiders see Alcatel as a test case and wonder if Suard will become the first French chief executive to be brought down by the recent investigations. That would be a watershed event in the development of corporate accountability in France.

In response to the latest news, Alcatel denies any wrongdoing by the company or Suard. It says the alleged payments to the Republican Party were actually "payments purely of a commercial nature" to support export activities. "It's possible payments were channeled by agents...for different purposes [that were] completely unknown to us," says Franois de Laage de Meux, president of Alcatel. "We pay agents for obtaining contracts through normal channels. We [do it] the way they tell us." De Laage de Meux declined to confirm whether individuals named in the investigation were agents of Alcatel.

To be sure, allegations of illegal corporate funding of political parties are nothing new in France. And from a prosecutor's point of view it will be extremely difficult to prove that Alcatel's top brass ordered payments into a slush fund. But no company likes judicial probes. "This case will do more harm from a public-image point of view than from criminal charges," says Jeannot Nies, the Luxembourg magistrate pursuing the investigation with French magistrates.

"SYMBOL." Some believe that the wave of corruption cases is giving painful birth to a new era of political and corporate accountability in France. In December, 1994, all corporate contributions to parties were banned outright. Where once authorities winked at illegal political-party financing and private corruption by the political and business elite, now heads may roll. "In the past, some politicians and executives had the feeling they were above the law," says Pascal Aubert, assistant managing editor at the daily La Tribune.

Financial crime wasn't even a major topic at judicial schools until the late 1980s. But when Prime Minister Edouard Balladur entered office in 1993, he promised government would no longer interfere with the judicial process. Magistrates have taken that as a green light to pursue cases aggressively.

The investigations are putting more heat on France's tradition of tight links between industry and government. Such policies were already cracking due to global competition, privatization, and the increasing pressure for shareholder accountability. "The old industrial policy in France is finished, dead," says Elie Cohen, a professor of economics at the respected Institute of Political Studies in Paris and head of the National Center for Scientific Research in Paris. "The crisis of Alcatel is a good symbol of the end of an era in industrial politics."

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