The Multinational Monitor

DECEMBER 1984 / JANUARY 1985 - VOLUME 5. NO 12 / VOLUME 6, NO. 1

W A R   G A M E S

Democracy On the Take

Flick Scandal Shakes West German Politics

by Julie Strawn and Charles G. Hogan

When West German federal investigators raided the files of Flick Industrial Holdings Company in November, 1981, they suspected they would find proof of illegal political contributions by the nation's largest family-owned corporation. But the documents seized that night revealed much more - a pattern of corporate bribery and official influence peddling woven deep into the fabric of West German democracy.

Flick's meticulous records, and subsequent testimony by politicians and businessmen, have exposed for the first time the scope of corporate influence in postwar West German politics. Mounting evidence indicates that German corporations have secretly bankrolled every major political party and in turn received tax breaks, government favors, and behind--the--scenes sway over appointments and policy. The scandal has reached all the way to Chancellor Helmut Kohl, with allegations that Flick was instrumental in his rise to power as chairman of the Christian Democratic Union (CDU).

The Flick affair now threatens to topple Kohl and dims his coalition's prospects for the 1987 election. The revelations have undermined public trust in the West German government and may increase the popularity of the Greens, the only party left untainted by the controversy.

At first, the Flick case seemed an isolated incident of tax evasion and bribery, confined to one company and a handful of government officials. The initial investigation involved the legality of tax waivers given to Flick in mid-70. In 1975, the company had made a profit of DM 1.9 billion (then worth $833 million) by selling off its 29% share of Daimler--Benz AG, maker of Mercedes automobiles. Under West German law, Flick would have been exempt from capital gains tax on those profits if it had reinvested them by the end of 1978 in ways certified by the government as beneficial to the national economy.

Flick actually invested more than half the money in American companies, becoming the largest shareholder of W.R. Grace and Co and purchasing 34.5% of the United States Filter Company. But two economic ministers, Christian Democrat Hans Friderichs and his successor Otto Count Lambsdorff of the Free Democratic Party, ruled that Flick was nonetheless entitled to a tax waiver worth $175 million. Flick claimed the tax break was justified on the grounds that its $400 million of W.R. Grace stock would enable it to steer Grace into joint ventures profiting the Federal Republic. In fact, however, as federal investigators would later conclude, Flick had merely bought an "ordinary and lucrative" share in Grace.

Meanwhile, a separate federal probe into illegal political contributions found that both Lambsdorff and Frederich were listed in Flick's confiscated financial records as recipients of large secret donations. Prosecutors then launched an investigation into the circumstances surrounding the granting of the exemptions.

In November 1983, after a 21-month investigation, Lambsdorff was formally charged with accepting a bribe of DM 135,000 (about $50,000) in exchange for authorizing the Flick tax break. It marked the first time in the Federal Republic's history that a federal minister had been indicted for corruption while still in office. Also charged were Hans Friderichs and Horst Ludwig Riemer, the former economics minister of North RhineWestphalia. Two former Flick executives, Eberhard von Brauchitsch and Manfred Nemitz, were indicted for giving the bribes.

The following month the Economics Ministry rescinded the exemptions and ordered Flick to pay $175 million in back taxes.

Flick appealed that decision, raising a revealing argument. Under German law, once government officials come to suspect a tax exemption is invalid, they have only one year to revoke it. After that the exemption becomes untouchable. Flick produced documents indicating that Lambsdorff must have known their exemption was invalid more than a year before the December, 1983 revocation. In two blunt memos - available to Lambsdorff in November, 1982 - Flick executives Eberhard von Brauchitsch and Friederich Flick openly discussed the likelihood of a federal investigation and acknowledged that they had not guided Grace into the joint ventures that would have been necessary to justify their receiving the tax break.

The appeal has yet to come to trial.

Despite the charges against him, Lambsdorff remained at his post for another six months, until June 1984, when the state court confirmed his earlier indictment. In the meantime, the German parliament had launched its own investigation, led by Dieter Spoeri, a Social Democrat (SPD) and longtime critic of corporate tax favoritism. When the Spoeri committee asked the Kohl government to turn over its files on the exemption case, Finance Minister Gerhard Stoltenberg refused, saying that they contained confidential tax information. Parliament took the matter to court and prevailed. In July, 1984, finding that the public's right to know outweighed the corporation's right to tax privacy, German federal court ordered the government to surrender its files.

It was after these documents were in the hands of a parliamentary investigating committee that the larger picture of corruption was revealed to the public. According to the German weekly Der Spiegel, which broke the story and published many of the documents from the case, approximately 100 loose-leaf binders and 150 account books - many containing detailed descriptions of Flick's covert political contributions - were confiscated from Flick headquarters.

The documents revealed that Flick gave between $376,000 and $1.35 million annually to all of the country's political parties except the Greens. Fifteen million marks were given to the Christian Democrats (CDU) and their right-wing partners the Christian Social Union (CSU),six million to the Free Democrats (FDP), and four million to the Social Democrats (SPD).

In many cases the donations were not only undeclared and therefore illegal, but the payments were actually claimed as tax--exempt contributions to charitable organizations - front groups which in fact recycled the money back to Flick. One "charity" in particular, according to Der Spiegel, received $3.76 million for which it gave Flick tax deductible receipts. The organization then kept $750,000 for itself and returned the rest of the money to Flick. Flick, in turn, gave much of that money in cash to government officials and party organizations.

Throughout the fall of 1984, a long procession of witnesses came before the parliamentary committee in national televised sessions reminiscent of the Watergate hearings. Detailed account books kept by former Flick treasurer Rudolf Diehl implicated an ever widening circle of top Bonn officials. So far, more than 1,700 politicians and businessmen have been investigated in connection with the scandal.

Leading politicians from virtually every party came before the committee described Flick's pervasive influence in German politics. Foreign Minister Hans Dietrich Genscher, who, until recently, was also head of the Free Democratic Party, testified that after the 1980 elections he conferred with Flick executive von Brauchitsch about formation of the Federal Cabinet. Genscher denied that the Flick executive - a personal friend - had tried to influence political appointments.

Documents leaked by members of the committee to Der Spiegel showed that Bundestag President Rainier Barzel had been given DM 1.7 million by Flick in the mid-70s, allegedly to persuade him to step aside as chairman of the Christian Democrats in favor of Helmut Kohl. A 1973 memo from Kurt Beidenkopf, then general secretary of the Christian Democrats, to the managing director of Flick, von Brauchitsch, asked that Barzel not be allowed to become a "welfare case." Notes jotted down in the records by Brauchitsch himself included entries such as "Decided for Kohl action." On October 25, 1984, Barzel resigned the Bundestag Presidency, still maintaining his innocence. Although Barzel admitted to meeting regularly with Friedrich Carl Flick and his managers, he denied any connection with his relinquishing the CDU chairmanship or to any tax breaks given Flick.

Christian Social Union (CSU) chairman and Bavarian Prime Minister Franz Joseph Strauss testified that CSU had received contributions from Flick as far back as 1949, some of them made directly to him. Strauss said that Flick's long--standing support had helped the CSU in "mastering the difficult tasks facing the party." Strauss, like other political leaders, has denied that the funding given his party had any conditions attached to it.

The CSU is the Bavarian ultraconservative "sister party" of the national Christian Democrats. As Minister of Defense in the early 1960s, Strauss tried unsuccessfully to silence Der Spiegel's criticism of the government. Popular indignation at his methods - breaking into the offices of the magazine and rifling the files, for example - led to the fall of the Adenauer government. Strauss has symbolized reactionary conservatism to West German liberals ever since. Der Spiegel's exposure of the Flick scandal is but the latest manifestation of this adversary relationship between that publication and the Strauss conservatives.

Though Flick was naturally at the center of the controversy, examples of other corporate abuses came to light during the investigation. Genscher was asked by the committee why the Free Democratic Party was unable to identify the source of an anonymous contribution of DM 6 million made in December, 1983. After several days the FDP finally produced the name of a German millionaire, residing in Switzerland, who owns a chain of department stores. The West German financial giant Deutsche Bank AG was forced to pay back tax deductions it took for party contributions amounting to 29 million marks over the last quarter century. One taxexempt group, which, according to the Wall Street Journal consisted of "a small office and a parking space," took in approximately 227 million marks from 1969 to 1980, money it then passed on to political parties or back to corporations.

The revelations reached a peak when Chancellor Kohl was called before the committee on November 7, 1984 to explain why his name was listed in Flick records next to entries totalling DM 565,000 ($194,000) between 1974 and 1980. Kohl admitted taking envelopes stuffed with cash from von Brauchitsch on several occasions, but said that he turned the money over to the Christian Democratic Party, and denied that there were any "strings attached." Kohl acknowledged accepting $53,000 from von Brauchitsch in this manner between 1977 and 1979 alone, telling reporters, "I must admit that, as regards our duty to report contributions we did not do justice to the rules."

In anticipation of the coming investigations and prosecutions, the Kohl government had clumsily attempted to extricate itself by proposing in May of 1984 an amnesty bill for political tax evaders. The bill offered a general amnesty to all persons who took illegal tax deductions for donations to political parties. The proposal was first introduced in the Bundestag as a rider to another bill, a tactic which prompted criticism from the Social Democrats and the Greens, who called it a "red carpet for professional tax evaders." Opposition even came from within the ruling coalition - the Free Democratic Party and the youth organization of the CDU. Had the bill passed, it would have affected 1,805 cases then being litigated by the Federal Prosecutor's Office, nine prior convictions, and an additional 1,050 cases still at the regional court level.

The sheer number of cases being prosecuted indicates the dimensions to which the scandal has grown. The initial cause of the affair, the $175 million in tax waivers given Flick, has been dwarfed by the larger issue of the relationship between business and politics in West Germany. Although German law states that any political contribution over the equivalent of $6,800 must be declared and the identity of the donor revealed, evidence uncovered during the Flick affair has made it clear that illegal corporate contributions to political parties are widespread and have been since World War II.

After the war, the political parties were in desperate need of funding. German business feared the postwar popularity of the the SPD - then a socialist party well to the left of its current position - which, unlike the conservative parties, was not tarnished by association with Nazism. Companies channeled money to the German Right through third parties, phony tax-exempt organizations, or government officials, thereby escaping both unwanted publicity and millions of dollars in taxes. Chancellor Kohl has defended this practice, arguing that "it is no criminal act is a necessity that has been accepted as normal for over 30 years." But others say the close ties between business and government have tarnished both institutions. Walther Leisler Kiep, treasurer of the Christian Democrats, says the end result has been "a substantial loss of integrity of economic and political leadership in this country."

Before the Flick affair, the degree to which this illicit funding had become entrenched in the German political system was largely unknown to the public. Because of the close ties between business and the Third Reich, post-war West German political leaders have been especially careful to present an outward appearance of incorruptibility. This has made the recent revelations all the more shocking.

Given the company's history, Flick's involvement was an especially unsettling reminder. During the early 1930s, Friederich Flick, father of the current company president, joined industrial giants Thyssen and Krupp in financing the Nazi Party. Hitler later rewarded Flick with slave labor from the concentration camps, for which the latter was convicted and briefly imprisoned by Allied courts at Nuremburg. At his trial, Flick defended his policies, saying "I was of the opinion necessarily that political insurance would not do me any harm."

Though the Flick affair became a public sensation in large part because it involved revelations of illegality and clandestine maneuvering, it has also raised deeper structural questions. In most cases, German capital shapes public policy not by passing envelopes stuffed with cash, but by using accepted institutional channels. In the Bundestag and the regulatory and planing agencies, for example, corporate-dominated boards known as "councils of experts" and "peak interest groups" enjoy semi-official status and participate directly in government decisions. Corporate representatives are a permanent fixture, often wielding behind-the-scenes power at the expense of citizen participation and open government. And it is the citizen participation issue, as much as American missles or nuclear energy, that has invigorated the Greens' challenge to West Germany's established political order.

Sixty percent of the West Germans surveyed in a recent poll said their faith in politicians had been "strongly shaken" by the Flick scandal. Eighty-three percent felt that the corruption uncovered so far is just the tip of the iceberg. A majority believed that all parties were equally guilty of taking money. The poll revealed deep cynicism about German politics: 51 percent of those surveyed felt that the Greens were untouched by the affair only because the party hadn't been around long enough to be involved.

Such polls suggest that the political fallout from the scandal may be substantial, especially since there is little chance that it will fade away before the 1987 elections. The trial of three key figures - Lambsdorff, Friderichs, and von Brauchitsch - scheduled for January of this year, was postponed after prosecutors supplemented the von Brauchitsch and Lambsdorff corruption indictments with new charges of tax evasion. Von Brauchitsch is now charged with evading DM 30 million in taxes. Lambsdorff is accused of failing to declare DM 2.5 million in contributions to the FDP. When the trial commences, the Flick affair will again be at the center of public attention.

Meanwhile, there is still a chance that Kohl himself may be indicted. Finance Minister Gerhard Stoltenberg has been mentioned as a possible replacement as leader of the Christian Democrats. But although Stoltenberg is not directly implicated in the Flick scandal, his earlier stonewalling of the parliamentary investigation could reflect poorly on him. He could also have trouble attracting a meaningful proportion of young voters. As Governor of Schleswig-Holstein in the 1970s, Stoltenberg ordered parliamentary suppression of anti-nuclear protesters at Brockdorf, earning widespread popular antipathy.

The Free Democratic Party (FDP), which abandoned its 13-year alliance with the Social Democrats in 1982 to join a coalition with the Christian Democrats and the Christian Social Union (CSU), will be fighting for its life in the next election. Recent opinion polls have shown the Free Democrats below the 5 percent level ' of public support required to be represented in parliament. The Green Party has now replaced the FDP as the third most popular party in Germany.

The Green's growing popularity may benefit the Social Democrats. Polls taken in October by the Allensbach Institute, West Germany's most respected opinion researchers, suggested that had elections been held then, the SPD would have won a clear majority. With the additional Green voters, the two parties could form a coalition government in 1987. However, conservative elements in the SPD may oppose such a partnership, as could more militant members of the Greens. If the Social Democrats and the Greens fail to form a coalition, the result could even be another Christian Democratic government.

In any event, public indignation at the Flick affair is likely to result in demands for regulatory action to reduce corporate influence in national politics. An SPD government would be under pressure to comply with these demands. And the Green Party, whether in coalition or not, can be expected to throw its no longer inconsiderable weight behind reforms designed to wean West German parties from their dependence on covert corporate funding. 

Julie Strawn is an intern at the Carnegie Endowment for International Peace. Charles Hogan is a Washington, D.C. consultant on public and international affairs. Karsten Warnecke assisted with research and translation for this article.

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