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Glock's Secret Path to Profits


It's the largest supplier of handguns to law enforcement in the U.S. But behind its success lies a troubling tale of business intrigue

Gaston Glock, an Austrian manufacturer of shovels and knives, had an improbable dream: He would make a fortune selling handguns in America. In the early 1980s, Glock, a self-taught firearm designer, produced an innovative pistol for the Austrian military. He then devised a plan for promoting his invention in the U.S., the world's richest gun market. First, he'd persuade American police they needed a lightweight weapon with more ammunition than traditional revolvers. Then he'd use his law enforcement bona fides to win over private gun buyers.

The strategy succeeded spectacularly. By the late 1980s, major police departments across the U.S. wanted more firepower to combat crack-cocaine violence. Glock had the answer. No less impressed, street gangsters adopted the squared-off Austrian handgun as an emblem of thuggish prestige. Hip-hoppers rapped about Glocks; Hollywood put the pistol in the hands of action heroes.

Gaston Glock shouldered past the storied American brand Smith & Wesson (SWHC) to make his creation the best-known police handgun in the U.S., and probably the world. When American soldiers hauled Saddam Hussein from his underground hideout in 2003, the deposed Iraqi ruler surfaced with a Glock.

Today the company claims 65% of the American law-enforcement market, an amazing accomplishment for a privately held manufacturer based in tiny Ferlach in southern Austria. U.S. fans celebrate "Glockmas," the 80-year-old founder's July 19 birthday. U.S. sales soared 71% in the first quarter of its 2010 fiscal year, largely due to what gun executives call the "Obama stimulus": fear among gun owners that the liberal President plans to curb the marketing of handguns. Gaston Glock played on that anxiety in an open letter to customers in January. "As shooters and gun owners, we must band together with even greater zeal than in the past," he wrote. "We are not going to roll over and have our guns taken away because of some of our misguided neighbors, no matter who they are."

Behind the Glock phenomenon, however, is another story, one rife with intrigue and allegations of wrongdoing. The company's hidden history raises questions about its taxpayer-financed law-and-order franchise. Is this a company that deserves the patronage of America's police? Does Glock merit the lucrative loyalty of private American gun buyers? The Glock tale also underscores the difficulty U.S. regulators have overseeing complex international businesses.

CLAIMS OF SKIMMING

Allegations of corruption permeate Gaston Glock's empire. His former business associate, Charles Marie Joseph Ewert, now resides in a prison in Luxembourg, having been convicted in 2003 of contracting to have Glock killed. The murder plot—thwarted when the victim, then 70, fought off a hammer-wielding hit man—led to a trial that revealed a network of shell companies linked to Gaston Glock. That corporate web is now under scrutiny by the U.S. Internal Revenue Service, according to lawyers familiar with the probe. Attorneys for Glock have acknowledged the misuse of company funds. But they blame most of the wrongdoing on Ewert, a money man known in the European press as "Panama Charly."

Among the Glock-related material the IRS allegedly is examining: boxes of invoices and memos provided by the company's former senior executive in the U.S., Paul F. Jannuzzo. Once one of the most prominent gun industry executives in America, Jannuzzo said in a federal complaint he filed last year that Gaston Glock used his companies' complicated structure to conceal profits from American tax authorities. "[Glock] has organized an elaborate scheme to both skim money from gross sales and to launder those funds through various foreign entities," Jannuzzo alleged in the sealed May 12, 2008, IRS filing, which BusinessWeek has reviewed. "The skim is approximately $20.00 per firearm sold," according to the complaint. Glock's U.S. unit, which generates the bulk of the company's sales, has sold about 5 million pistols since the late 1980s, Jannuzzo estimates in an interview.

A burly man with a staccato delivery, Jannuzzo has several potential motives for airing these allegations. As a whistleblower, he is seeking a percentage of any federal tax recovery. He is also fighting embezzlement charges by his former employer. Since 2007, the company has been providing information about Jannuzzo to authorities in Cobb County, Ga., where Glock's American subsidiary is based. The Cobb County District Attorney's Office is prosecuting Jannuzzo—who once represented the company at a White House Rose Garden ceremony and on CBS' (CBS) 60 Minutes—for siphoning corporate money into a Cayman Islands account. Jannuzzo, who left the company in 2003, claims he's the victim of a vendetta.

Speaking on behalf of the company and Gaston Glock, Carlos Guevara, the general counsel of Glock Inc. in the U.S., said in a written statement: "Glock has acted lawfully and properly throughout its history. Unfortunately, Glock was victimized by several former employees and fiduciaries," including Ewert and Jannuzzo. "The Glock companies are exceptionally well-run and managed. Glock's tax filings and reporting are accurate."

Still, eyebrow-raising goings-on appear to have been standard at Glock. After the attempt on Gaston Glock's life, an internal investigation conducted at his instruction turned up documents apparently showing that a Glock affiliate in Panama helped in 1995 to start a bank called Unibank Offshore in the Turkish Republic of Northern Cyprus. Unibank's co-founder was an alleged money launderer named Hakki Yaman Namli.

In the U.S., Jannuzzo and another former Glock executive, Peter S. Manown, have claimed that for years they distributed company funds to their wives and Glock employees with the understanding that the money would be donated to congressional candidates—an apparent violation of U.S. election law. The ex-executives, who say they acted with Gaston Glock's approval, have estimated the total amount in the hundreds of thousands of dollars. Buttressing this allegation are ledger entries and cancelled checks. Guevara, the company lawyer, said: "Glock has never authorized, and would never authorize, any act that would violate U.S. campaign finance laws."

Glock's political and public relations activities in the U.S. sometimes have tended toward strangeness. Internal records show payments of thousands of dollars a month over several years to a gun industry lobbyist named Richard Feldman. In interviews, Feldman says that at Gaston Glock's request he spent some of the money in 1999 and 2000 to arrange U.S. appearances by Jörg Haider, then the leader of Austria's anti-immigrant, far-right Freedom Party. Glock has been described in Austria as a political supporter of Haider, although the arms maker has sued both an Austrian newspaper and a politician there for making that claim. The arrangements Feldman says he worked on included Haider's attendance at a January 2000 banquet in New York honoring the birthday of slain civil rights leader Martin Luther King Jr. The King dinner, sponsored by the Congress of Racial Equality, received media coverage because Hillary Clinton criticized her then-rival for a New York Senate seat, Rudolph Giuliani, for attending the celebration Haider present.

Before he died in a car accident last year, Haider stirred controversy, according to media reports, for praising the "character" of elite Nazi SS troops and the "employment policy" of Adolph Hitler. "Glock urged me to help Haider overcome some of the [image] problems," says Feldman. The lobbyist says he thoroughly researched the situation to satisfy himself that neither Glock nor Haider ever supported the Nazi cause. "There were loose statements [by Haider] that were blown out of proportion," he says.

Glock's Guevara did not respond to questions about the company's or Gaston Glock's relationship with Haider.

GERMAN ARMY CAMPS

Gaston Glock has recounted that he first learned about firearms during a short stint as a teenager in a German military training camp near the end of World War II. "I saw rifle, pistol, hand grenade," he recalled in a deposition taken during a product-liability lawsuit in Knoxville, Tenn., in November 1993. "I was getting acquainted when you pull a trigger, that it makes boom." He said he spent "just a few days in camps of the German Army" in 1944 or 1945, when he was 15 or 16 years old. Asked about his wartime experience in subsequent U.S. court proceedings, he has characterized his contact with the German military as extremely limited.

After the war, Glock, a civilian engineer, held a series of manufacturing jobs and eventually came to run his own company. He learned in 1980 that the Austrian army was in the market for a new sidearm. Despite a lack of experience designing guns, he sought the pistol contract. Intense research and consultation with weapon experts prepared him to make a breakthrough. The Austrian Defense Ministry awarded him the contract in 1982, bypassing five other manufacturers.

Simpler than most pistols, the Glock costs relatively little to make. In a 1994 patent lawsuit in the U.S., Glock estimated its profit margin per pistol at 68%. The guns typically sell for $450 to $600 in U.S. retail gun stores. The Glock's polymer frame is formed from a mold, not from the more conventional tooled steel. The Glock ammunition magazine, which snaps into the handle, can hold as many as 19 rounds. Revolvers typically hold only six bullets, which are fired from a revolving cylinder.

When early Glock models began surfacing in the U.S. in the 1980s, they caused a sensation, recalls Massad Ayoob, a personal defense instructor who runs the Lethal Force Institute in Concord, N.H., and has done promotional writing about Glock. "They looked like something out of Star Trek," he says.

DELIGHTING LAW ENFORCEMENT

To sell his gun to U.S. police departments, Glock employed a combination of German-speaking executives and retired American cops. Many police chiefs were receptive to the pitch that they should trade in six-shot revolvers for more potent Glocks. "The bad guys were starting to carry high-capacity weapons, unlike what they had carried in the past," recalls Sheriff John H. Rutherford of Jacksonville, Fla. As a lieutenant, he led a study in 1987 that resulted in the department buying Glocks. The 1,700-member force still uses the brand.

"It was a conscious decision to go after the law enforcement market first," Gaston Glock told Advertising Age in June 1995, when the trade magazine honored him as one of its "Marketing 100" stars. "We assumed that, by pursuing the law enforcement market, we would then receive the benefit of 'after sales' in the commercial market." Police departments from New York to Miami to St. Paul, Minn., signed on. The strategy closely resembles that of firearm pioneer Samuel Colt, who popularized his six-shooter in the mid-19th century by seeking endorsements from soldiers and lawmen.

Syndicated columnist Jack Anderson raised the Glock profile when he wrote in January 1986 that Libya, a notorious terrorist threat, was trying to acquire Austrian-made "plastic" guns that could evade metal detectors. Glock pistols are actually made mostly of metal and are easily identified by alert airport screeners. The company denied it was marketing to Libya. Rather than tarnish the gunmaker, the Anderson column helped spread the idea that serious bad guys preferred Glocks, says Robert Ricker, a longtime lobbyist for the firearm industry. "It was an incredible lucky break," Ricker adds. "It raised public awareness, got people interested in it." Sales grew rapidly.

At nearly every turn, Gaston Glock and his executives displayed impressive marketing and legal savvy. When arch-rival Smith & Wesson in 1994 came out with a Glock-like pistol called the Sigma, Jannuzzo led a successful patent-infringement lawsuit. S&W agreed to pay an undisclosed settlement and modify its gun. An S&W spokesman declined to comment on the confidential resolution, other than to say the company had neither admitted nor denied wrongdoing. Glock now offers about 40 models in various calibers. "They're simple, they work, and you don't have to mess with them," says Herman Gunter III, an investment adviser in Live Oak, Fla. He owns two Glocks for personal defense and target shooting.

The company has boosted its profits with innovative pricing strategies. It has offered discounts to police on new pistols if cities turn over used service weapons and guns confiscated from criminals. Glock has arranged to have the second-hand firearms sold on the used-gun market, where former police weapons command a premium.

With Jannuzzo as its U.S. front man, Glock deftly ducked repeated legal assaults on the gun industry. Jannuzzo, a former state prosecutor in New Jersey who joined the company in 1991, displayed a knack for talking compromise while rarely giving much ground. In one notable episode in 2000, he made encouraging noises about a master settlement with the Clinton Administration and more than 20 cities that would have shielded gunmakers from future liability in exchange for restrictions on gun marketing. But at the last minute, Jannuzzo pulled back from the deal, leaving rival Smith & Wesson as the only industry signatory. A boycott led by the National Rifle Assn. temporarily crippled S&W, while Glock and other manufacturers enjoyed a sales surge. The settlement later collapsed, and the issue faded when Congress passed a statute in 2005 to protect gunmakers in court.

Even as the Glock company faced courtroom challenges in the U.S., a more personal and dangerous conflict was playing out for Gaston Glock in Europe. Beginning in 1987, the Austrian industrialist had employed Charles Ewert as his financial architect. "I was not a salesman. I am a technician...so I had to find a partner that helps me to sell the pistol," Glock explained in a U.S. court deposition in September 1995.

Ewert, a mustachioed Luxembourg resident now in his late 50s, wasn't exactly a salesman either. Nicknamed "the Duke" by Glock employees because of his imperious manner, he was a purveyor of shell companies: paper corporations that can be used to shield income from taxation—sometimes legitimately and sometimes in questionable ways. Ewert designed a network of shells to lessen the gun empire's exposure to product liability and potential taxation, according to documents filed with the Luxembourg court. These firms absorbed millions of dollars, the records show.

VIOLENT ATTACK

Over time, Ewert transferred ownership of some of the Glock-affiliated shells to himself, according to Luxembourg court judgments. Suspicious of Ewert, Gaston Glock sought an explanation in July 1999. On the afternoon of a meeting scheduled at Ewert's office near the tony Rue Royale in central Luxembourg, Glock was attacked in an underground garage. The hit man, a former professional wrestler and French Legionnaire named Jacques Pecheur, bashed the businessman on the head with a rubber mallet, a technique apparently aimed at making it look like the victim had fallen down and fatally injured himself. Glock, physically fit from daily swimming—often in the frigid lake abutting his home near Klagenfurt, Austria—fought back. When police arrived, they found Glock bleeding from gashes to his skull. Pecheur, 67, was unconscious.

Luxembourg investigators found Ewert's business card in Pecheur's car and determined that the two had met at a gun range in Paris in 1998. Both were convicted of participating in a conspiracy to kill Glock. Pecheur received a sentence of 17 years, Ewert 20.

Ewert denies any involvement in the attack, which he blames on unnamed Glock associates who he alleges wanted to gain control of the manufacturer. "They needed me out of the way so they could grab everything," he says in an interview at a maximum-security prison in rural Luxembourg. His lawyers are appealing his conviction to the European Court of Human Rights in Strasbourg, France, arguing that police improperly seized records from Ewert's office that were protected by attorney-client privilege. Pecheur was released early from prison in 2007 for good behavior, his attorney, Fränk Rollinger, says. Pecheur couldn't be located for comment.

Although Gaston Glock saw his antagonists punished and regained control of his corporate holdings, the investigation of the attempted killing and related financial fraud opened a window on the gun company's finances. Most striking are their sheer complexity. With Ewert's help, Gaston Glock purchased a Panamanian shell company called Reofin International in 1987. Reofin then bought Unipatent Holding, a Luxembourg shell. Unipatent received a 50% stake in Glock's unit in the U.S., where the company generated the vast majority of its revenue. "The purpose of this holding company [Unipatent] was to appear externally as a partner of Glock and hold approximately 50% of the shares of its subsidiaries," according to an Apr. 3, 2000, document entitled "Establishment of the Glock Group," which Gaston Glock's attorneys filed with the Luxembourg court.

Three other shell companies in Ireland, Liberia, and Curaçao were created to issue bills for various "services" to Glock headquarters in Austria and operating units in Latin America and Hong Kong. But these service firms "had no economic substance and were motivated by tax reasons," according to a confidential 92-page analysis of the Glock companies in 2002 by auditing firm PricewaterhouseCoopers. PwC had been retained by the provisional administrator of Unipatent appointed by the Luxembourg court. The PwC auditors found that the service companies' role appeared to be the shielding of profits from potential taxation in Austria, Latin America, and Hong Kong.

The Latin American and Hong Kong units, in turn, appeared to be used to extract profits from the U.S. subsidiary, PwC alleged—an assertion reiterated by the 2008 IRS complaint filed by Jannuzzo. American tax liability allegedly was artificially lowered by having pistols manufactured in Austria sold first to the Latin A


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