Photo Gallery: A Brewing Scandal at EADS

Foto: Sean Gallup/ Getty Images

Corruption Scandal Investigation into Dubious EADS Austria Deal Intensifies

A scandal over dubious transfers of millions of euros is creating turbulence for European defense giant EADS. If suspicions by investigators that the company committed corruption in a deal to sell Eurofighters to Austria are proven, it could mean the end of the sale -- and billions in losses.

Three features at his home in the posh Hamburg neighborhood of Rothenbaum confirm that businessman Frank Walter P. doesn't like to receive spontaneous visitors. First, there's the security camera that hangs at the entrance to his apartment building. Second, there's the fish-eye lens at the door to the building. Third, there's the doormat upstairs in front of his apartment with the inscription "My home is my castle."

And this brings us to a fourth one: his daughter, who announces over the intercom that her father is not available. For how long? the visitors ask. "For the next few weeks," she answers.

Normally that would be enough to keep unwanted visitors at bay. But the visitors who rang the doorbell last Thursday were rather insistent -- and they had brought along a door-opener that's even effective on castle gates: a search warrant.

Frank Walter P., 50, a banker by trade, with addresses in Hamburg, Schleswig-Holstein, Munich and the Austrian state of Tyrol -- and with at least as many companies as residences -- is under investigation on suspicions of distributing money in an alleged multimillion euro corruption scandal.

The scandal has already been shaking Austria for a number of years, right up to the top political echelons. Now, the affair is spreading to Germany. At the center of attention is the European Aeronautics Defense and Space Company's (EADS) German headquarters in Ottobrunn, near Munich.

During the sale of Eurofighter Typhoon jets to Austria, an estimated €113.5 million ($144 million) is believed to have been transferred from EADS to the accounts of dubious companies. One of these accounts reportedly belongs to Frank Walter P.'s Comco International Business Development, located in the tax haven of the Isle of Man.

Were Bribes Paid?

These funds were purportedly intended to kick-start investments in Austria that EADS had agreed to as part of the Eurofighter deal. But public prosecutors in Vienna and Munich suspect that the millions of euros may have been used to bribe Austrian decision-makers -- or as kick-back payments to greedy EADS managers -- or perhaps to establish slush funds within the consortium.

Last Tuesday, 54 officials representing the public prosecutor's office and Munich tax fraud investigators, searched apartments and offices at three different EADS locations in Germany. The alleged offenses listed on the search warrants were as follows: "Collective bribery in coincidence with aggravated breach of trust."

This means that German politics has also been engulfed by the affair. Indeed, EADS is no ordinary company -- and it remains a top priority matter in Berlin. The Chancellery and the Economics Ministry are closely following the events in Munich and Vienna. After all, this concerns a company that has been provided with billions in taxpayers' money since the turn of the millennium. EADS, whose subsidiary Airbus provides over 10,000 well-paid jobs in Hamburg alone, serves as a showcase for German and European high-tech superiority.

A juicy corruption scandal at EADS is the last thing that the government in Berlin could use right now. German Chancellor Angela Merkel's administration has only just recently taken a public beating because Berlin is primarily to blame for the failure  of the planned merger of EADS and British defense company BAE Systems. At the same time, the German government intends to use Germany's state-owned development bank (KfW) to purchase enough shares to acquire a 15 percent stake in EADS and enhance its power and influence in the multinational corporation. Negative headlines could spell the end of this politically controversial plan.

The scandal is also jeopardizing the most expensive military investment project in postwar German history. The German military, the Bundeswehr, has already been given the go-ahead to purchase 140 Eurofighter jets for €15 billion. The price of these aircraft is bound to increase if one of the current purchasing countries backs out of the deal.

That is precisely what could now happen. If the suspicions of corruption are confirmed, the Austrians' purchasing contract for 18 Eurofighters at a total price of nearly €2 billion could be terminated -- at least according to Appendix A-8 of the classified agreement. For the Germans, this would be a disaster, not least because it would jeopardize hundreds of well-paid jobs at the EADS defense division in Bavaria.

But it's not all bad news for the government in Berlin. Investigators list over half a dozen former and current executives as suspects, including two former department heads. This would nudge the affair dangerously close to Tom Enders. The current EADS CEO was the head of the Defense and Security Systems division at the time of the deal, making him the direct superior of the department heads who are under investigation.

Anything that damages Enders would be welcomed by some members of the government in Berlin. The powerful company boss's gruff manner has made him plenty of enemies in the capital -- starting with the chancellor and her aviation coordinator, Peter Hintze. If Enders were toppled, it wouldn't exactly be a crushing blow for Berlin.

The Makings of a Hollywood Thriller

The Austrian affair already has the makings of a Hollywood thriller. One of Europe's flagship companies is now being mentioned in the same breath with arms dealers, an Italian investment swindler with mafia connections and finally a man who ranked among the most flambouyant politicians on the continent: Jörg Haider, the former leader of the right-wing populist Austrian Freedom Party (FPÖ).

This is in fact only one of the many lines of inquiry being pursued by investigators tracking down the enormous sums of money that were apparently siphoned from EADS accounts and channeled into a secret network of shell corporations. If the current suspicions are confirmed, it would be a spectacular criminal conspiracy.

Haider and fellow party member Karl-Heinz Grasser had long opposed the Eurofighter purchase. Grasser, who served as the Austrian finance minister from 2000 to 2007, became a prominent member of the Viennese jet set after he married Fiona Swarovski, heir to the Swarovski crystal manufacturing empire. FPÖ leader Haider even advertised his opposition to the deal in a nationwide billboard campaign.

But then they both suddenly threw their weight behind the deal. This soon gave rise to speculation that right-wing populist Haider's expensive election campaigns could have been bankrolled by German sources. Peter Pilz, a member of the Green Party in Austria's lower house of parliament, the National Council, played a key role in ensuring that an investigative committee reviewed the allegations.

Nevertheless, the committee failed to find the decisive documents necessary to prove a connection between the secret network and EADS. In 2007, the group discontinued its investigation.

Last week's breakthroughs have rekindled the hopes of Pilz and his colleagues. It's very possible that the affair can now still be cleared up. At his office near Vienna's prestigious Burgtheater, Pilz has an aquarium with piranhas -- and a steel cabinet where he keeps his files.

"EADS had a streak of very bad luck here," says the member of parliament. It was pure coincidence that the affair flared up again. In the spring of last year, Italian police arrested fraudulent broker Gianfranco Lande, who scammed investors in a Ponzi scheme. A large proportion of the money allegedly came from the 'Ndrangheta, the Calabrian mafia. Lande apparently feared for his life. "He categorically refused to spill the beans on the mafia," says Pilz.

But the arrested man realized that he had to give the public prosecutor something, so he told investigators that he had created a complex web of companies for a large corporation in Germany, with London-based Vector Aerospace LLP at its center. "Vector Aerospace is a company that was founded in 2005 with the collaboration of the defense division of EADS Deutschland," as it stands in the interview protocol of the Italian public prosecutor from April 6, 2011.

Lande also named individuals at EADS, including the names of two arms dealers, Walter S. and Alfred P. from Vienna, who served as liaisons for Vector Aerospace, as the arrested investment broker claimed.

At first, the Italian public prosecutor didn't know what to do with this information, and it nearly ended up gathering dust in a filing cabinet in Rome. But Pilz found out about it by coincidence, and put the public prosecutor in Rome in contact with his counterpart at the district court in Vienna, Michael Radasztics.

'Reason to Suspect' Bribes

Radasztics began to investigate the allegations. This spring, he made a number of requests for legal assistance, including letters to his colleagues in Munich and Hamburg. A report by the Austrian investigators states that "there is reason to suspect that EADS Deutschland used a network of diverse offshore companies in an attempt to pay bribes to companies or officials."

The Viennese public prosecutor's office was able to present German investigators with an entire web of companies that revolved around the now defunct Vector Aerospace. The names of the companies sound as random as they probably are in reality: Incuco Capital Markets, Greenwell & Co Ltd, Crossco Aerospace. Some of them belong to Frank Walter P., the man whose house in Hamburg was searched last week.

But all of the companies have one thing in common: They have no staff, only post boxes. According to its annual report, Vector Aerospace allegedly made countertrade agreements with Austrian companies within the framework of the Eurofighter deal. These quid pro quo deals were supposedly covered by the contract between the Austrian Defense Ministry and the defense company, in which EADS promised to order goods from Austrian companies for twice the purchase price of the fighter jets, corresponding to a total of some €4 billion.

A Disaster for EADS

The government in Vienna, however, has no record of such barter deals. "How are shell corporations supposed to be able to initiate countertrade agreements?" ask the incredulous investigators. They think the companies were actually designed to cover up the flow of money.

So who benefited from the money? Investigators say they have two probable explanations. They contend that one possibility is that these were kick-back payments that allowed money from the big Eurofighter sale to flow back into the pockets of EADS executives. In addition to money laundering, Viennese public prosecutors mentioned possible charges such as breach of trust, bribery and the formation of a criminal organization within EADS.

Another possibility is that these were payoffs to politicians in Austria who had a say at the time in approving the multibillion euro deal. One lead currently being pursued took investigators to a businessman in Linz, and from there to a foundation that financed a large infrastructure project in the Austrian state of Carinthia. The initiator of this technology park was none other than then-Governor Haider, who boasted about this achievement during his election campaign. Millions of euros flowed into this construction project.

Eurofighter Contract Could Be Cancelled

Pilz suspects that "additional secret networks aside from Vector Aerospace" exist. Working together with a lawyer, he is researching additional financial transactions. Cases filled with large amounts of cash were allegedly carried between London and Vienna. Pilz also suspects that the FPÖ, which has consistently denied that it took any bribe money, may not be the only party that benefited financially from the deal.

The revelations that have already come to light are a disaster for EADS. Indeed, in the secret purchasing agreement for the Austrian Eurofighters, the consortium pledges to pay no "incentives as stipulated under Article 304 of the Criminal Code" to officials in charge of awarding the contract.

In plain language, this means that the contract could be terminated if bribes have been paid -- even if the money was transferred via "third parties," in other words, via a network such as the one allegedly surrounding Vector Aerospace.

Pilz believes that the sale agreement may already be a thing of the past by next year. By then, he says the investigations will have been completed. If the suspicions are confirmed, the government has no choice, he argues. "They will have to terminate the contract," says Pilz. And should they fail to do so, he intends to file a lawsuit. If the contract were terminated, the consortium would have to pay out billions of euros -- and the damage to the company's image would be so devastating that it would be difficult to find a new customer.

At Eurofighter headquarters near Munich, officials are still hoping they can convince Switzerland to buy their fighter jets, even if the Defense Ministry in Bern is currently in favor of purchasing a Swedish aircraft. But a decision has not yet been made.

Swiss investigative authorities are also active in the Austrian case because some of the shell corporations were located in Switzerland. The government will have a hard time justifying such a major purchase from a consortium that is being investigated by Swiss authorities. It's a similar situation in India, where the investigations by Viennese authorities are jeopardizing a €20 billion deal.

'The Highest International Standards'

Last Thursday, EADS CEO Enders reacted to the investigative searches by writing a letter to his managers. He said the company wanted to make deals, "but not at any price" because "breaking laws is not an option."

Enders went on to say that over the past few years the consortium has bolstered its compliance department, which is tasked with ensuring that all company-related business transactions remain above board. He said that he would guarantee that this department works "according to the highest international standards."

That sounded good, but in reality it wasn't until very late in the game -- in 2008 -- that the company began to establish such a department. As recent as 2010, an EADS controller, who had reported concrete indications of bribery payments at a subsidiary in Saudi Arabia, complained that he had been completely ignored by the head of the compliance department at the company's Parisian headquarters.

Nobody took him seriously, the man complained in an e-mail. In another, he wrote: "These people at the top are very good at distancing themselves from information."

EADS has declined to comment on either the Saudi case or the current investigation in Austria. It thus remains open whether the company has already launched an internal investigation into the Eurofighter affair. Initial reports that something had gone wrong in Austria surfaced six years ago, but even insiders are unaware of any in-house inquiry.

Comparisons to Siemens Corruption Scandal

Officials in Berlin are already comparing the Austrian affair with the Siemens corruption scandal. At the time, supervisory board chairman Heinrich von Pierer resigned -- although it was never proved that he was directly involved in any illicit payments.

Enders hasn't been linked with the affair, either, but the scandal has edged dangerously close to the EADS CEO. Some of the managers allegedly involved in the scandal are among the young, ambitious team who emerged from the Daimler consortium and EADS' predecessor DaimlerChrysler Aerospace (DASA) and made their way to the executive floors. They all knew each other. And something else poses a risk for Enders, who has a reputation for integrity: the enormous sum of €113.5 million. Such amounts are not usually approved for payment unless they are previously signed off by the board of directors.

Based on the secured documents, the Munich public prosecutor's office is now trying to ascertain who knew about the secret realm surrounding Vector Aerospace. It has purposely maintained a large circle of suspects; otherwise it says that some of the charges may fall under the statute of limitations in late December. Enders is not under investigation.

The CEO has never suffered from a lack of self-confidence. Last week, Enders -- a former paratrooper who is a major in the reserves -- appeared in Berlin as if nothing had happened. He told a group of aviation industrialists that if the government didn't agree with his views, they would just have to look for someone else.


Translated from the German by Paul Cohen

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