Something's Rotten In...Germany?

It can't happen here. That was the reaction in Germany to the scandals that have spread through Italy and France. Sure, Germany has its share of outlaws, such as Jurgen Schneider, the maverick real estate developer who bilked his creditors out of millions. But Germans comforted themselves that no widespread corruption tainted their business establishment.

Until now. This summer, Germans learned that prosecutors suspected dozens of employees at auto maker Adam Opel of extracting kickbacks from suppliers eager for building contracts. The probe has so far implicated 244 people at 40 companies and triggered the sudden resignations of three top Opel executives. No one has been charged, and the executives protest their innocence. Unlike Italy, no top politicians are involved. But the news has forced Germans to admit publicly that corruption is no stranger to their country.

The Opel scandal is hitting just when the whole system is under strain. Ordinary Germans, fed up with higher taxes, are angered by evidence that the corporate elite is lining its own pockets. Germany Inc. is under pressure to open itself up to closer scrutiny, police insider trading more rigorously, and treat minority shareholders better. And prosecutors are ready to pounce on any signs of wrongdoing. "This is a turning point for Germany," says Peter Eigen, head of Transparency International, a Berlin-based nonprofit group devoted to fighting corruption worldwide.

The German press is sniffing around for Opel-type shenanigans at Ford, Volkswagen, and Hoechst, which the companies have denied. Yet many executives wonder what prosecutors will turn up next. They think that Opel, a division of General Motors Corp. headquartered in Russelsheim, may be forcing more stringent U.S. standards of accountability onto German companies, which could result in further revelations of corporate wrongdoing.

After a supplier complained of being squeezed for bribes last year, Opel immediately notified prosecutors and launched its own investigation. When the story leaked, the company quickly gave interviews. Opel also vows to cut off business with any supplier that does not take steps to deal with the problem. "The American style is more puritanical," says management consultant Gertrud Huhler.

Now many Germans are admitting that they have liked their business relationships cozy. If a supplier wanted to remodel a customer's house for a low price or shower a key contact with gifts, no one would make a fuss about it. "There is an inbred nature to the German economy," says David Herman, the American chief of Opel. These practices seem especially widespread in the construction industry, where bidding is keen for building contracts from both the public and private sector. In the state of Hesse, an anticorruption squad has uncovered 1,500 cases of public officials on the take between 1987 and 1995 in Frankfurt alone.

SHORTCUTS. Prosecutor Gunter Wittig of Hesse's anticorruption squad estimates cash bribes doled out to clinch a deal add 3% to 5% to the cost of every building contract. Altogether, kickbacks and other schemes add 20% to 30% to projects, costing taxpayers billions of dollars a year. "Corruption is nothing new," Wittig says. "There are more cases because we're looking for them."

Yet many experts also fear that the number is on the rise. As they encounter innumerable shady practices in the new markets of Asia and Eastern Europe, German companies may be more inclined to try something corrupt at home. And sharper competition due to economic sluggishness in Germany makes illicit shortcuts all the more tempting.

Calls for reform are on the rise. Auditors are complaining they have no mandate to look for improper expenditures. States are beginning to blacklist companies accused of bribing public officials. Germans suddenly are embarrassed that their tax code actually allows deductions for bribes.

German corruption still could take years to root out. Yet, says consultant Huhler, "we're no longer so naive." That's the first step toward change.

How to Stop German Graft

MODIFY THE TAX LAW It now allows a deduction for some bribes

GIVE AUDITORS MORE POWER At present they cannot probe for improper spending

MOVE PEOPLE AROUND Companies should regularly rotate executives out of jobs dealing with outside contractors


Before it's here, it's on the Bloomberg Terminal.