Scandal at Volkswagen With Prostitutes and Shady Executives, There's No Love Left in this Bug

The sex, bribes and corruption scandal at Volkswagen is shaking the company to its core. But in a company whose largest shareholder is the German state of Lower Saxony, a number of politicians also have their fingers in this mess. Now, the affair is casting a shadow over federal elections.

Last Wednesday was Volkswagen day. By 8 a.m., the company's supervisory board was already meeting at company headquarters in Wolfsburg. For Peter Hartz, Germany's best-known and most controversial personnel director, it was his last -- and at times most embarrassing -- appearance at the Wolfsburg-based corporation.

In response to a joint request by VW's auditors, together with Supervisory Board Chairman Ferdinand Piëch, Jürgen Peters, the president of Germany's IG Metall trade union, top labor representative Bernd Osterloh and Christian Wulff, governor of the state of Lower Saxony, Hartz presented his life story, which has essentially consisted of three things: work, work, and more work.

On August 1 of this year it will be exactly 50 years ago to the day that he began his apprenticeship in a machine plant. The group quickly agreed that August 1 would also be the appropriate date for Hartz to leave the company. With his departure, he is also assuming responsibility for company scandals that had Volkswagen paying for lush pleasure trips and procuring prostitutes for its directors and executives.

At 2:00 p.m., Chief Financial Officer Hans Dieter Pötsch and Volkswagen brand group chairman Wolfgang Bernhard, speaking to analysts, summed up the group's current situation with one word: "bad." Volkswagen's plunge into the red is "dramatic," said Pötsch, and rapid improvement is unlikely to happen anytime soon. Worse yet, any spur in sales set off by the launch of its new Golf and Passat models has more or less fizzled.

Bernhard said VW has no plans to close any factories at this point, but added: "We are considering all options." And then the affair involving prostitutes and visits to brothels was taken to the next level of scandal when entertainment magazine Bunte published allegations by the wife of Helmuth Schuster, the former director of Volkswagen's Czech subsidiary, Skoda, who the company showed the door without any notice. His wife, "Ilona R.," alleges that Viagra and other aphrodisiacs were handed out to supervisory board members during their pleasure trips -- and VW was footing the tab for it.

For VW, it was a day of back-and-forth between major problems and minor frivolities, between the tabloids and madness, red lights of the bordello milieu and the blue lights of cop cars; corruption in the business world and storms on the political horizon that have already engulfed the governor's office in Lower Saxony and veteran members of the Social Democratic Party.

Hardly a stone has been left unturned, everything seems to have been turned upside-down, and in the ensuing giant cloud of dust, it's almost impossible to recognize how the various parts were ever connected in the first place.

An army of officials -- auditors, district attorneys, the state office of criminal investigation -- has now been charged with the monumental task of investigating VW's problems. Even Indian federal police officials are involved -- they're investigating Indian politicians charged with corruption.

And if that weren't enough, prostitutes, detectives and brothel owners are now offering their stories to the tabloids, usually for money. Of course, this doesn't exactly make it any easier to understand the three main stories in the VW saga.

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First there's the criminal case. Schuster, the former Skoda director and colleague of Hartz, allegedly used a network of international front companies in an attempt to land private deals with VW. Klaus Volkert, once Germany's most powerful labor representative, was forced to resign when it emerged that he was involved in at least one of Schuster's front companies.

And then there's the workers' council scandal. On a number of business trips, former personnel manager Klaus-Joachim Gebauer procured prostitutes for labor representatives, billing the charges to VW. As a result, members of the company's works council are now open to charges that they were bribable.

Finally, VW's problems have turned into political issues leading up to Germany's expected parliamentary elections in September. As auditors and executives clean house at VW, it's becoming apparent that for decades influential SPD and IG Metall union officials abused their powers to use the company essentially as a self-service shop. The latest allegations centering on Sigmar Gabriel, a former governor of Lower Saxony and VW supervisory board member. Gabriel is under scrutiny because, after he left office as governor, a company he started secured a lucrative consulting contract with Volkswagen. Problem is, Gabriel was still actively involved in politics.

But the scandals really began with Gebauer and Schuster, both former colleagues of Hartz. According to prosecutors, Gebauer -- the man accused of procuring prostitutes for labor representatives -- managed to spend €780,000 within two years without ever having turned in any receipts. To be reimbursed for these dubious expenses, Gebauer merely had to submit a piece of paper on which he would write something to the effect of: "€6,880 spent, in the interest of the company, for the Group Works Council."

One of these expenditures "in the interest of the company" was for a trip to India, which included both labor representatives and Schuster, then a director of Skoda and in charge of the company's operations in India. One participant in this expedition recalls the intensity with which Gebauer and Schuster encouraged employees to involve themselves with prostitutes. The trip was allegedly charged to the VW Group through Gebauer's now notorious homemade receipts.

The participants often referred to the India trip as their "1001 Nights." But these days, the fairy tale is over.

In retrospect, some now speculate that VW's high-flying executives didn't put the labor representatives in embarrassing situations to compromise their independence as some suspect. Indeed, doing so would weaken the position of the workers' council, which is responsible for employer-employee relations, against Volkswagen's executive board. Instead, many now believe their purpose may have been entirely different: to cover their own tracks.

At the time, Schuster, with the support of aides, had allegedly already developed his own network of front companies. Both Gebauer and Volkert later became involved in the fronts.

An Indian company, Vahishta Wahan, played a role in Schuster's planned business in the country. While involved in negotiations for the construction of a VW plant in India, Schuster allegedly used VW letterhead to submit a request to Botcha Satyanarayana Rao, the minister of industry of the Indian province of Andhra Pradesh, for €5 million in start-up money. The minister responded to Schuster's request by transferring €2 million to an account held by Vahishta Wahan. Although the company has the same initials as VW, it is not part of the VW Group. Once the money was received in Vahishta Wahan's account, it was promptly transferred to another account -- and has since disappeared.

Through his attorney, Ferdinand Gillmeister, Schuster has declared that the VW Group was fully informed about the Indians' €2 million contribution. VW, says Gillmeister, had insisted that the Indian partners pay the start-up costs for the investment. Because the money from Vahishta Wahan was supposedly intended to cover "initial planning and development costs," Gillmeister claims, it did not constitute a loss for VW. However, the company has since put on ice any decision on whether to move forward with the India factory.

Under-handed deals

Back at VW headquarters in Wolfsburg, executives had long before been warned of Schuster's plans to go into business with shady partners. In 2003, VW learned that Johann Johannsen, a man with whom Schuster planned to do business exporting products to Angola, was a serial swindler. But Schuster nevertheless managed to dispel VW's concerns about his business partner.

VW's auditors are also investigating claims that Schuster transacted other deals, heretofore unknown to VW, with the companies he presumably owned. According to these claims, Schuster could never have supported his opulent lifestyle in Prague, where his Lamborghini garnered him the nickname "Lambo Schuster," with his salary as a board member.

The auditors are looking into whether a commission may have been paid to one of Schuster's companies for the hiring of about 4,000 Polish temporary laborers at Skoda. Schuster's attorney, Gillmeister, explains that the public prosecutor's office has so far failed to provide him with any evidence of criminal activity on the part of his client.

Similar scandals surrounding allegations of embezzlement by high-ranking executives exist in other companies that are not influenced by politicians -- at DaimlerChrysler, for example, as well as at Infineon, a technology company where the offices and homes of several executives were searched last Friday.

But the VW scandal takes on an additional dimension because the government of Lower Saxony holds an 18 percent interest in the company and retains voting rights that give it decisive power in decision-making. The fact that state legislators and federal parliamentarians from the state hold positions on VW's supervisory means that politics and electioneering are playing an increasingly important role in the complicated case.

Members of the Social Democratic Party, which holds power nationally, are accusing the state's conservative governor, Christian Wulff, of using VW as a public stage to discredit Hartz, who is also an advisor to Social Democratic German Chancellor Gerhard Schröder, and, perhaps later, other Social Democrats in the run-up to federal elections. But Wulff is hardly reproachable in this respect, since the Social Democrats got themselves so deeply entangled in Volkswagen that their presence could hardly have benefited the car-maker.

For years, Ingolf Viereck and Hans-Hermann Wendhausen, prominent Social Democrats sitting in the Lower Saxony state legislature, pocketed salaries from both the government and Volkswagen. The practice was anything but unusual at Volkswagen, where members of the state and federal parliaments regularly appeared on the payroll. But when news of it leaked out, Viereck and Wendhausen promptly terminated their VW contracts and stopped receiving VW salaries.

Last Wednesday however, the news emerged that both politicians are again moonlighting at VW, and they're on two payrolls -- Wolfsburg's and the government's.

The Old Boy's Club

The old boys network is alive and well at Volkswagen. VW CEO Bernd Pischetsrieder and Hartz, still a member of the supervisory board, were allegedly unaware that the two politicians had again been added to VW's payroll. From a purely legal standpoint, Viereck and Wendhausen are not permitted to return to VW until their parliamentary terms expire. An employee in the personnel department at VW has admitted that he arranged the contracts with the two politicians -- but at the suggestion of the recently resigned head of VW's general works council, Volkert.

It will be up to Pischetsrieder to clean up the mess at VW if he hopes to avoid coming under pressure himself. His predecessor, Piëch, is already rapidly coming under fire. But in public, Piëch hardly even gives the impression these days that he is still the chairman of VW's supervisory board.

And when the media turn on their cameras and microphones, Wulff appears to be the man in charge. The Christian Democrat sets the tone. He recently suggested that Hartz would not leave the company unscathed. And later, he recommended that the company immediately accept Hartz's resignation offer.

Wulff and supervisory board chairman Piëch are bound together by what one board member calls a "non-relationship" -- hardly the ideal basis for the board to conduct professional crisis management. Nevertheless, though dramatic clashes between senior executives are potentially damaging to the company because of the negative publicity they generate, they also present an opportunity. The beleaguered company can only succeed in turning itself around economically by severing old ties that seem to give a greater priority to personal relationships than economic considerations.

With the hopes that house-cleaning at the top could give a boost to Volkswagen's necessary restructuring, it comes as little surprise that the company's stock has been rising steadily since the first details of the scandal emerged.

For Bernhard, the company's brand group chairman whose job it is to turn the goliath around, the mass exodus of top brass could be a boon.

At a recent management meeting, he announced his plans for revamping VW's marketing approach. For many years, executives tried to position the Volkswagen brand against Mercedes-Benz. But now Toyota is the company's new target, because the Japanese have managed to produce better-quality vehicles at a lower cost.

Bernhard is especially troubled by quality problems, because they drive up warranty costs and further damage the company's image. After analyzing VW's production plants, Bernhard realized that the company's quality strategy was completely incorrect. In these plants, quality is mainly assessed at the end of the assembly line -- after engineers have already corrected any problems in vehicles, often at considerable cost. The high costs of fixing these problems were not taken into account, a practice Bernhard says is "completely unacceptable."

But Bernhard's biggest challenge will be to reduce the company's excess capacity. VW's plant in Brussels is barely surviving. Production of the Golf models built there could easily be transferred to Wolfsburg, thereby utilizing the company's main plant more effectively. Audi currently plans on resuming full production of its A3 model in Ingolstadt and discontinuing partial assembly in Brussels. If these plans materialize, the Brussels plant will quickly become redundant.

Then, of course, there's Volkswagen's problem in the United States. Sales of the Volkswagen brand have been declining in the US for years, and on Wednesday evening, Bernhard was preparing a trip there to assess progress in the company's restructuring of its business in North America.

CEO Pischetsrieder is most likely envious of his colleague -- after all, the headaches in America don't fill the pages of the tabloids like the sex and bribery scandals in Wolfsburg.

Translated from the German by Christopher Sultan

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