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Europe's New Morality (Int'l Edition)


International -- Cover Story

EUROPE'S NEW MORALITY (int'l edition)

When French magistrate Thierry Jean-Pierre was assigned to investigate illegal political party financing in 1990, he did something few of his colleagues dared: He refused to bury the case. Twice, officials from special police forces came to his office and advised him to quietly drop his inquiry into Socialist Party financing. Later, he received an anonymous threat: A doctored photo of him in a morally compromising position might appear in newspapers.

Jean-Pierre, then 35, ignored the intimidation tactics and soldiered on. When the Socialist Justice Minister removed the case's files from Jean-Pierre's office--alleging he overstepped legal boundaries in the hunt for evidence--he and fellow prosecutors went to the press. Jean-Pierre won the case back and eventually brought to light some $25 million in illicit political funding used in the presidential campaigns of Francois Mitterrand. "The judges aren't afraid anymore," says Jean-Pierre, now a member of the European Parliament.

All over Europe, the high and mighty are encountering a backlash against corrupt practices that were once tolerated as a birthright of the elite. In 1995, an unprecedented number of dirty-money charges stung and toppled senior politicians, public administrators, and top executives. Among the victims: NATO General Secretary Willy Claes, Norwegian Central Bank Governor Torstein Moland, and Alcatel Alsthom Chief Executive Pierre Suard. The alleged offenses range from tapping public or corporate funds for self-enrichment to extorting kickbacks, dodging taxes, and setting up illegal political slush funds.

The investigations into this chicanery will continue for years and will have an indelible impact on Europe. From Oslo to Geneva and Lisbon to Vienna, prosecutors and journalists are no longer willing to close their eyes to shady dealings and graft in government and industry that persisted for half a century but mushroomed to incredible proportions during the 1980s.

"LIFTING OF A TABOO." Such practices were tolerated as long as Europe prospered and a cold-war imperative for political stability prevented any serious challenge to institutional power. But now ordinary citizens, hit hard by Europe's economic malaise, don't see why the ruling classes should be above the law. With communism in retreat, prosecutors aren't worried about destabilizing governments with too-tough investigations. Investors, inspired by the shareholder activism of the U.S., are clamoring for stronger corporate governance to rein in corrupt business practices. And thanks to new sources of information, particularly the proliferation of independent television stations, news about shady dealings reaches the public faster than ever.

That means it's open season on the dirty-money ways of the Establishment. "What's happening now is the lifting of a taboo," says Marc Pieth, chairman of the Organization for Economic Cooperation & Development's working groups on bribery and money laundering. "Places that thought they were clean are finding themselves in the middle of a swamp." Although it won't completely eradicate corruption, the ongoing shakeup should result in a more open, arm's-length relationship between European politics and business. Says Frank Vogl, vice-president of Berlin-based Transparency International, an advocacy group devoted to cleaning up business and government: "Europe may have to go down an extremely messy path, but it has to achieve a society where transparency is the rule, not the exception."

In this new era, few countries will be spared the painful discoveries that France and Italy have already endured. In Switzerland during one week in November, the country was rocked by several high-profile cases of alleged money laundering. Swiss banks received demands from foreign authorities investigating the finances of Korean President Roh Tae Woo and the family of former Mexican President Carlos Salinas de Gortari.

Germany, which has long prided itself on its honest public servants and business executives, is also discovering how universal the culture of corruption is. In July, Germans were shocked by revelations that as many as 65 current and former employees at auto maker Opel were under investigation for taking bribes from suppliers--and 244 people at 40 suppliers are being investigated for involvement in a suspected kickback scheme. "Germany is a lot worse than it appears," confides one chief executive from Scandinavia. The Opel affair is prompting legislators to draft a bill outlawing such practices.

Most of Germany's corruption investigations are concentrated in the public-works sector. Working steadily since 1987, prosecutor Wolfgang Schaupensteiner has churned up 1,560 cases of corruption of public officials in the Frankfurt area alone. Schaupensteiner estimates that corruption involving public-works contracts costs the government $7 billion a year in inflated costs. "It's like a cancer," says Schaupensteiner. "It was unimaginable that a public official could be corrupt, so there were no controls" for monitoring public contracts, he says.

For decades, the steady rise of government spending in Germany and elsewhere in Europe fueled illicit activity, which ordinary citizens shrugged off in more affluent times. "Increases in public spending were oiling everything," says Stefano Micossi, director general of industry at the European Union. As long as the public enjoyed secure employment, high wages, and generous health and welfare benefits, it turned a blind eye to corruption.

But since 1990, average income-tax rates across Europe have been biting at 50% or more, far higher than the 43.7% average in 1978. And taxpayers are balking. "The state [is running] out of money to pay for lavish public spending" and the "wasteful corruption" that goes with it, says Giorgio Sdogati, professor of international law at Milan's Universita Commerciale Luigi Bocconi and a member of the OECD's committee on international corruption.

The scandals have thrown into sharp relief a widening gap between public officials who enrich themselves and hard-pressed citizens. "Criticism against the elite is becoming more and more violent," says Claude Angeli, editor-in-chief of Le Canard Enchaine, the Paris-based newspaper that specializes in exposing French wrongdoers. An irate middle class is angrily withdrawing the de facto immunity that once protected the political and industrial elite. "People, who are the shareholders of government, are beginning to exert their control. They are asked to make sacrifices due to the high public debt, and they want their money's worth," says Peter Praet, chief economist at Belgium's Generale de Banque.

The rash of current cases and charges depicts a class of officials across Europe that feeds liberally at the public trough. Luis Roldan, former head of the Spanish paramilitary force, the Civil Guard, is being tried for enriching himself with government funds and demanding illegal payments from suppliers bidding on public construction contracts. In Italy, hundreds of Army officers were recently accused of accepting kickbacks on food and clothing contracts.

CUTTING COSTS. In France, the spectacle of 100 Parliament members and public officials placed under investigation has been particularly shocking. Former Socialist Party boss Henri Emmanuelli was found guilty of using a front corporation to funnel kickbacks on government contracts into party coffers. Alain Carignon, a prominent Gaullist and former mayor of Grenoble, just got three years in prison for accepting gifts worth more than $4 million in exchange for granting the city's water-supply concession to a private company. Bernard Tapie, a former minister and once prominent French businessman, has just been sentenced for fixing a soccer match involving his team. He is appealing, but he also must fight separate charges of tax evasion and fraud. "Corruption is at the base of the French political system," complains Philippe Bilhaut, 42, a small-business owner in Paris.

Business is also getting fed up with the endless demand for "contributions" and other kickbacks to politicians and well-connected individuals. This frustration is leading managers around Europe to call in the prosecutors. It was a small businessman in Italy, Luca Magni, who spurred the corruption scandals there by complaining to Milan prosecutors of kickbacks he had to pay to get a cleaning contract at a nursing home. The subsequent investigations snaked back to the whole political and business Establishment as one deal after another came to light. Careers have been ruined, but Italy is starting to see some benefits from the cleanup. Since the Clean Hands affair began in 1991, the once-bloated cost of construction works in Italy has plunged by 40% to 50%.

Other forces for change are bearing down. As Europe has opened its borders over the past few years, companies have confronted mounting global competition and new standards of openness and accountability. Some businesses simply can't afford to pay bribes anymore--and are ratting on rivals that do. Opel supplier Lagrange, for example, exposed the alleged kickbacks from a whole network of suppliers. The realization that corruption is bad for business is growing. "You just can't be competitive in the long run if you're involved in that sort of activity," says Ignacio Hernando de Larramendi, founder of Spain's biggest insurance company, Mapfre.

BOLD INVESTIGATORS. Meanwhile, a budding group of shareholder activists in Europe is giving powerful assistance to justice officials and the media. Because international investors demand a standard level of accountability in operations, European CEOs are being forced to junk murky accounting practices that once covered a myriad of sins.

Those who hesitate may find themselves hounded for missing information. Didier Pineau-Valenciennes, chairman of French electric equipment maker Schneider, spent 12 days in a Brussels jail last year while prosecutors questioned him on charges of fraud and embezzlement brought by minority shareholders of the company's Belgian financial units, Cofimines and Cofibel. Although he denies it, they hold Pineau-Valenciennes responsible for alleged financial maneuvers that lowered the value of Cofimines by $20 million just before Schneider launched a takeover bid. The investigation is continuing.

A new generation of international business managers, many of whom earned their MBAs abroad or worked for big multinationals, are also quietly reforming the old cozy-but-inefficient ways of doing business in Europe. Serge Tchuruk, a French chief executive who spent 16 years at Mobil Oil Corp. and recently replaced Suard at Alcatel, immediately brought a new clarity to Alcatel's financial accounts. He also initiated a more candid relationship with the press and assured the public that Alcatel, which should post losses of $5 billion this year, would adopt a more vigorous style of corporate governance.

While more taxpayers and executives want change, no progress would be possible without a new corps of aggressive prosecutors and journalists. Traditionally timid, the judicial system and media have been galvanized by events of the past few years. In 1990, then-President Mitterrand touched off a controversy in France when he issued a general amnesty for anyone involved in illegal political party financing. Enraged prosecutors staged a standoff with police for two days at the Justice Ministry in Paris. "It was absolutely scandalous," recalls Jean-Pierre. Prosecutors have since been much more assertive, going after suspected corruption on both the left and the right.

Now, the French magistrates are leaking to an eager press any move by government officials to block their investigations. On Oct. 18, Angeli's Le Canard Enchaine published the letter of three French prosecutors to the Swiss Justice Ministry, complaining that French Justice Minister Jacques Toubon was obstructing their attempts to pursue cross-border investigations. "The judges are trying to restore the concept of public morality, which has disappeared entirely from political debate," explains Angeli. A spokesman for Toubon says the minister was trying to enforce the normal procedures for cooperating with foreign prosecutors.

SUARD'S SHOCK. This year, prosecutor Jean-Marie d'Huy successfully tested the system by hauling in Alcatel's Suard for questioning. In May, Suard resigned, toppled by continuing investigations into personal fraud, abuse of corporate funds, and the alleged overbilling of Alcatel's largest customer, France Telecom, by more than $100 million. Suard has yet to be formally charged, but his fall from power sent a shock through stately boardrooms and government ministries. "The politicians' contempt of the justice system has turned to fear" of prosecution, says Antoine Gaudino, a private investigator specializing in financial fraud.

Scandals on such a colossal scale have emboldened the press. Competition between Germany's traditional muckraking journal Der Spiegel and newcomer Focus are now creating a lively market for investigative reporting. In Spain, upstart newspaper El Mundo has been busily investigating political party financing and government funding of antiterrorist death squads. The paper's exposes helped push through a new criminal code that defines crimes such as money laundering and use of public property for private benefit.

As the old elite gets caught in one scandal after another, new leaders are rising to take advantage of the public's disenchantment. In Italy, Antonio Di Pietro, the magistrate who led the attack on the Establishment, is considering a run for political office. Some of the new faces are on the fringes of the political spectrum. In Austria, for example, far-right politician Jorg Haider is gaining popularity by going after cronyism in the country's mainstream political parties (page 21).

With political winds shifting, many believe that Europe is at a crossroads. "The question is, can our democracies handle [corruption]?" says the EU's Micossi. Certainly, reforms will be easier to pass in Northern Europe, where ethical standards for public officials are stricter. Swedish Deputy Prime Minister Mona Sahlin, for example, was forced to resign last month for using a government credit card to make small personal purchases, including diapers.

Progress is likely in Germany, where political parties are already financed by public funds, based on recent election results. Change is needed in the procedures for handing out public-works contracts. In Germany, however, once reforms grind through the machinery of government, they tend to work. After embarrassing revelations about insider trading during the early 1990s, for example, Germany outlawed the practice and started nailing violators. The most recent conviction: Heinz Schwake, a 62-year-old Frankfurt broker who was fined $100,000 on Dec. 1 for misusing privileged information.

Switzerland, too, has come a long way in fighting dirty money, including changes in banking regulations to allow cross-border investigations. This year, the Swiss Parliament has drafted a new law to combat money laundering, with a vote likely in January. Swiss Federal Prosecutor Carla del Ponte is working together with Milan magistrates to control money laundering by the Italian and Russian mafias.

MAJOR OVERHAUL. Belgium outlawed corporate contributions to political parties in 1989, and politicians of every stripe have called for additional reforms. The Flemish Socialists have proposed further capping individual donations to $800,000 and lifting parliamentary immunity for any member accused of corruption. One radical element of the proposal suggests freezing the assets of any Parliament member under investigation whose lifestyle does not correspond with declared income and revenue. "There's a new generation of politicians between 30 and 40 years old who want change. It's part of an international phenomenon," says Vincent Henderick, a political correspondent at the Belgian daily La Libre Belgique.

Real structural change will be much more difficult to achieve in France, Spain, Portugal, and Italy, where traditional links between political parties and industry created vast pools of dirty money. The practice is so pervasive that the whole relationship between government, business, and public administration must be reformed.

Italy must overhaul the state bureaucracy. France needs to outlaw the practice of politicians holding two offices at the same time, eliminate top appointments in industry as a payoff for political patronage, and develop a greater public awareness of what comprises a conflict of interest. "In most of Southern Europe, corruption has not faded," says Yves Meny, a professor at the European University Institute in Florence and author of two books on corruption. Many government leaders in France, Italy, and Spain are loath to disentangle the very structures that secure their privileges.

Just as Europeans are beginning to wake up to fraud, corruption is becoming more sophisticated. Tracking illicit funds is becoming increasingly difficult in the global economy, where computer transfers of money happen at lightning speed. "The international banking system provides the oxygen for world corruption through money-laundering," says Karl Ziegler, a former banker, now co-director of Transparency International's British operations.

Yet the awareness of corruption and its baleful effect on democracy can be turned to good use. As revelations mount, it's clearer than ever that Europe cannot afford the old ways of dirty money. What's needed now is enough zeal from politicians, policymakers, and voters to stamp out as much corruption as possible. The health of Europe's democracies depends on these much-needed reforms.

Under Attack in Europe

FRANCE

BERNARD TAPIE: Former Socialist Minister sentenced for fixing a soccer match involving a team he owned. Plans to appeal.

GERARD LONGUET: Resigned as Industry Minister in October, 1994, following charges of setting up a slush fund for his party. Investigation under way.

PIERRE SUARD: Alcatel's chairman resigned in May under pressure after allegations of fraud. Probe continues.

SPAIN

FELIPE GONZALEZ: The Prime Minister is under attack

LUIS ROLDAN: Former Civil Guard chief is in prison awaiting trial on embezzlement and bribery charges

ITALY

SILVIO BERLUSCONI: Media magnate and former Prime Minister due to stand trial in 1996 on charges of bribing tax officials.

BETTINO CRAXI: Now in exile in Tunisia, the former Socialist Prime Minister faces arrest warrants on charges of corruption.

GERMANY

OPEL: Prosecutors are investigating 65 current and former employees alleged to have received illicit payments and favors from suppliers.

VOLKSWAGEN: In August, prosecutors launched a probe into possible payments made to the Spanish Socialist Party by Volkswagen subsidiary SEAT.

MANNESMANN: Former Chief Executive Werner Dieter resigned from supervisory board in February under allegations he awarded favorable contracts to a company he partly owned. Case under investigation.

BELGIUM

WILLY CLAES: Secretary general of NATO resigned in October following charges that he funneled bribes from an Italian defense contractor to the Belgian Socialist Party in 1988. Investigation is under way.By Gail Edmondson in Paris, with Silvia Sansoni in Rome, Karen Lowry Miller in Frankfurt, Linda Bernier in Brussels, and bureau reports


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