The Sarkozy Affair

On a chilly evening in March 2007, about 40 people gathered at the Crowne Plaza Hotel near the Geneva International Airport. The crowd consisted mostly of French expatriates working in Switzerland's private-banking industry, and they came armed with their checkbooks: Eric Woerth, treasurer of France's center-right UMP party, was holding a fund-raiser for Nicolas Sarkozy's Presidential campaign. Most of the guests made donations of €3,000 to €4,000 apiece, recalls Nicolas de Ziegler, a Geneva-based asset manager who helped organize the evening. "It was completely transparent," he says, "utterly banal." It reflected Sarkozy's promise of "une rupture," a clean break with the history of political slush funds and illicit cash payments that had tainted the campaigns of Presidents from François Mitterrand to Jacques Chirac. Woerth, who had turned UMP's fund-raising into an efficient, professionally managed operation, seemed to personify a hopeful new era.

Three years later, Sarkozy finds himself in the midst of a crisis that endangers his Presidency—and Woerth is in the thick of it. A legal dispute involving Liliane Bettencourt, the billionaire heiress to the L'Oréal cosmetics empire, has metastasized into a political scandal replete with allegations of illicit campaign cash, tax evasion, and clandestine Swiss bank accounts. The French press is feasting on the details, which include secret recordings made by Bettencourt's butler and leaked testimony by her former accountant. Woerth, who became Sarkozy's Budget Minister and is now Labor Minister and point man on pension reform, the most important legislation of the President's five-year term, has been accused by the former accountant of taking covert cash from Bettencourt for Sarkozy's campaign. Woerth and Sarkozy have denied the accusation, and no charges have been filed. The President, though, is scrambling to control the damage, which has helped drive his approval ratings to as low as 26 percent.

Looking drawn and subdued, Sarkozy took a seat on the Elysée Palace terrace on July 12 to answer questions about the scandal in a television interview aired on the state-owned France 2 network. "They've accused me of going to get money from Madame Bettencourt. That's a disgrace," he said. He also reminded viewers that a government inquiry had already cleared Woerth of one potentially serious charge, intervening in Bettencourt's tax affairs while the then-Budget Minister's wife was working as a financial adviser to the Bettencourt family.

Still, Sarkozy asked Woerth to step down as party treasurer and said he would name a commission to study how to avoid potential conflicts of interest. "I promised to create a republic above reproach," he said, "and that is what we are doing."

While it has landed squarely on the doorstep of the president, the trouble began with a relationship between a man and a woman—specifically, according to a criminal complaint filed in 2007, between the 87-year-old Bettencourt and a man 24 years her junior, François-Marie Banier. A celebrity photographer who has taken pictures of Johnny Depp, Karl Lagerfeld, and Queen Elizabeth II, Banier befriended Bettencourt and her late husband, André, after a photo shoot in 1987. He has been charged with "abuse of frailty" in an attempt to extract more than $1 billion in cash and gifts from her, including real estate and paintings by Picasso and Matisse. If convicted, he faces up to three years in prison and €375,000 in fines. Shortly before Banier's trial was scheduled to begin in June, the tabloid magazine Paris Match published photos taken between 1999 and 2006 showing the elegant Madame Bettencourt whispering in Banier's ear at a café in Istanbul, dining with him in Tokyo, and walking arm-in-arm with him on a tropical beach in the Seychelles Islands. Banier's lawyer has said that Banier is innocent. He argues that the heiress's estranged only child, Françoise Bettencourt-Meyers, who filed the charges, was driven to do so by jealousy. "I am perfectly aware of my actions and do not need to be taken care of," Bettencourt said in a statement released on July 14.

Although the case involves the family's private finances, it also raises questions about Liliane Bettencourt's role at L'Oréal, the world's largest cosmetics company, which was founded in 1909 by her father, Eugene Schueller. Bettencourt owns 30.2 percent of the public company and serves on its board; the Swiss food giant Nestlé owns 26.4 percent. Under a complex 2004 agreement, neither side can sell any of its holdings without giving the other the right of first refusal. Bettencourt has promised not to sell her shares during her lifetime, but if Banier is convicted, Bettencourt-Meyers may seek to declare her mother mentally incompetent and take control of her assets. L'Oréal shares have risen 63 percent during the past year, in part because of speculation about a possible takeover by Nestlé. The prospect of a French company with $21.9 billion in sales and 65,000 employees falling into foreign hands made the case politically sensitive even before Sarkozy became enmeshed in it.

Banier's expected summer trial wasdelayed by a startling discovery. In June, Bettencourt's former butler, Pascal Bonnefoy, turned over 21 hours of CDs he had secretly recorded from May 2009 to May 2010 in the sitting room where Bettencourt received visitors to her mansion in the Paris suburb of Neuilly-sur-Seine.

Set against the genteel sound of teaspoons clinking on porcelain, the recordings include discussions about tax evasion, nepotism, and backdoor contacts between Bettencourt's representatives and government officials; both Woerth's and Sarkozy's names come up often.

Woerth's wife, Florence, worked for a Bettencourt-owned company called Clymène—from the ancient Greek word for "famous woman"—that managed the heiress's holdings. In talks captured by Bonnefoy's recorder, Clymène's director, Patrice de Maistre, informs Bettencourt that he hired Florence Woerth at the request of Eric Woerth, whom he describes as "a friend." Portions of the recordings—the authenticity of which have not been disputed—have been leaked to French media outlets.

At the time Florence Woerth was hired by Clymène, her husband was leading a government campaign against tax evasion—a subject of considerable concern to Bettencourt's financial advisers. In recordings made last year, de Maistre explains plans to avoid the crackdown by closing Bettencourt's Swiss bank accounts and moving €65 million to Singapore, where it would be harder for authorities to track. "This has to be cleaned up by Christmas," he told her in a conversation from last November, referring to tax enforcement measures that took effect at the end of 2009. Florence Woerth, who quit her job with Clymène in late June after the scandal broke, has said she was unaware of any attempts to avoid taxes. In a report made public on July 11, France's General Financial Inspection office concluded that Eric Woerth never intervened in tax matters involving Bettencourt while he was Budget Minister.

Bettencourt often sounds confused in the recordings, which include discussions with de Maistre, Banier, and a lawyer, Fabrice Goguel. In a recording made on May 11 of this year, de Maistre tells Bettencourt about his efforts to conceal the ownership of D'Arros Island in the Seychelles, where she was photographed with Banier, from French tax authorities. "Three or four years ago, you put D'Arros into a foundation," he says. "What island?" she asks.

The allegation of tax evasion is one of several threads in the scandal. Claire Thibout, a former Bettencourt family accountant, came forward in June to say that the heiress and her late husband routinely handed envelopes stuffed with cash to French politicians. "These gentlemen often came to get money," she said in a police interrogation report that was leaked to the press. Thibout has alleged that in 2007, de Maistre told her that he was giving €150,000 in cash to Eric Woerth to finance Sarkozy's Presidential campaign—20 times the limit for individual political contributions in France. De Maistre, Woerth, and Sarkozy have all denied that any such payment was made. In his television interview, Sarkozy said he was not close to the Bettencourts and had visited their mansion only two or three times, always as part of a group invited for lunch or dinner. "Can you imagine me coming to dinner, in front of the other guests, and leaving with money?" he said.

Thibout said she spoke out because she felt Bettencourt was being manipulated by her entourage—the same explanation given by the butler, Bonnefoy, who said he feared being fired because he had questioned Banier's relationship with his employer. The prosecutor's office in the suburb of Nanterre, where the Banier case is to be heard, has confirmed it has opened four investigations, one into alleged tax evasion and money laundering, another into alleged illicit campaign contributions, a third into Florence Woerth's work for Clymène, and a fourth into possible invasion of privacy involving Bonnefoy's recordings.

This could hardly come at a worse time for Sarkozy. Voters, frustrated with France's ailing economy and 9.9 percent unemployment rate, have turned on the once-popular president. With his reelection looming in 2012, Sarkozy has proposed what he hopes will be the biggest achievement of his term, an overhaul of the dangerously underfinanced retirement system. He has entrusted passage of the bill to Woerth, now Labor Minister.

Given his party's parliamentary majority, it's likely the legislation will pass. Still, the conversations in the Bettencourt parlor could leave an indelible stain. From the outset, Sarkozy's approach to political finance seemed refreshingly different—and was hugely successful. To prepare for the 2007 elections, Sarkozy and Woerth hired a professional fund-raising staff at the UMP and set up U.S.-style "donor circles." The party raised a record €9.13 million for the elections, while the rival Socialists raised only €750,000. The UMP's 400 to 500 biggest donors, known as the "Premier Circle," are invited to monthly receptions with party leaders at the elegant Hotel Bristol, across from the Elysée Palace. The President attends at least once or twice a year. One Premier Circle member who regularly attends the meetings argues that Sarkozy's decisions can not be bought for €3,000 or evem €7,500, the maximum individual contribution. The donor declined to give his name.

Yet the accountant Thibout's statements—as well as her handwritten ledgers showing regular €50,000 cash withdrawals from the Bettencourts' bank account that she says were used partly to pay politicians—suggest that old habits may not have disappeared completely. Bonnefoy's recordings also include a conversation between Bettencourt and her lawyer Goguel about a private meeting she held with Sarkozy at the Elysée Palace to discuss the Banier case and its impact on L'Oréal. On the tape, Goguel says the meeting was "a very bad thing" because it encouraged the prosecutor to proceed with the trial. Even if the outcome was disappointing to Bettencourt, most ordinary French citizens can't get a private audience with the President. Spokesmen for the Elysée have declined to say whether such a meeting took place. In a July 14 statement, Liliane Bettencourt said: "I hope my daughter will not destabilize this group that my father and I wanted to remain French."

Worries about sale of the L'Oréal stake may be overblown. Bettencourt-Meyers, 57, who is already wealthy and serves along with her husband on L'Oréal's board, has said she is "deeply attached" to the company and has denied wanting to sell the family's holding to Nestlé. And even if she wanted to, Nestlé might not want to buy it. Although flush with $28 billion in cash, the Swiss company is focused on building its nutrition business. L'Oréal's cosmetics, shampoos, and hair colors aren't a natural fit.

For Sarkozy, though, the scandal's political risks are enormous. "There are new revelations every day, a loss of credibility," says Laurent Dubois, a professor at the Institute for Political Studies in Paris. "He doesn't have much maneuvering room." Indeed, a flash poll taken by survey group Ifop after Sarkozy's TV appearance found that 60 percent of viewers found his remarks on the Bettencourt scandal "unconvincing." Sarkozy's biggest challenge in dealing with the scandal may be to confront French voters' deep suspicions about wealth and privilege—"money that corrupts, that buys, that crushes," as Mitterrand once put it. "My God, I'm as suspicious of people who idolize money as of those who detest it," Sarkozy said in his June 12 interview. "Let's stop being so twisted about this subject. If I had been interested in money, I would have had a different career."

With Helene Fouquet

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