Labor-management ties that helped explain automaker's success are now seen as a liability.
By Stephen Power and Matthew Karnitschnig / Wall Street Journal
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Comment on this storyBERLIN -- Last July, a few weeks after he was fired by Volkswagen AG for alleged embezzlement, Klaus-Joachim Gebauer, a former midlevel manager in the company's personnel department, began telling stories about the auto giant that many Germans found hard to believe. Now, as the company and German prosecutors buttress key elements of his account, Gebauer's tale is rocking the world's third-largest economy.
In January 1996, Gebauer says, VW sent a dozen of its top German labor leaders to Brazil for a tour of the company's Sao Paulo facilities and meetings with local Brazilian union officials.
After finishing the official portion of the trip, Gebauer says he and the other men took a bus to Rio de Janeiro and checked into the Othon Palace, a high-rise hotel on the city's famous Copacabana beach. They explored the shops, the nightlife and, Gebauer says, picked up prostitutes for trysts on the beach and back in their hotel rooms. In the morning, he says in an interview, Gebauer paid the women -- and, using some phony receipts and some real ones, got his employer to reimburse him for the group's expenses for the entire trip.
The Rio excursion was the first of what Gebauer says were dozens of "Lustreisen," or pleasure trips, to exotic locations undertaken by VW worker representatives and paid for by the automaker over the following nine years.
The trips are at the center of a widening criminal investigation by German state prosecutors into whether officials at Volkswagen -- Europe's biggest automaker and one of Germany's corporate icons -- illegally used company funds to pay for top labor leaders to go on junkets involving posh hotels, call girls and the use of a company plane.
Gebauer says he was given blanket instructions by his boss to use the trips to curry worker representatives' support for Volkswagen management.
At a time when Germany is suffering through slow growth and high unemployment, his charges of corruption have resonated widely, highlighting the snug relations between management and labor that have been a hallmark of Germany's economic model.
For much of the postwar period, this close relationship helped explain Germany's success, allowing the nation to avoid the labor strife that has hurt other economies. Now, it is seen by some as part of the problem, encouraging backroom deals and forcing management and labor to take half-measures that fail to solve underlying problems, rather than bold but painful steps, such as cutting jobs.
That tension also has divided VW's supervisory board, prompting one of its members -- Gerhard Cromme, a prominent German executive and corporate governance champion -- to signal in recent days his intention to step down when his term expires next year, according to people familiar with the matter.
Trips continue in downturn
The lavish union-leader trips began as VW was enjoying a boom in the 1990s, but they continued as the company's fortunes started to fade in 2001 amid high labor costs in Germany and a troubled push into luxury vehicles.
Volkswagen initially responded to the charges by assailing Gebauer's credibility. In June, weeks before Gebauer went public with his allegations, Volkswagen fired him for allegedly trying to embezzle company funds and seeking kickbacks from potential VW business partners, a charge for which he himself is under investigation by prosecutors.
Gebauer denies the charges.
"We treat with caution any statements concerning these incidents solely made by a former employee who was dismissed without notice on the grounds of personal enrichment," the company said in a written statement on Oct. 24 in answer to questions from the Wall Street Journal about the charges.
But Gebauer's allegations have been gaining credibility both inside and outside the company.
Over the summer, state prosecutors, initially looking into the allegations against Gebauer, expanded their probe into his claims that the company had been funding improper inducements of its labor representatives. Prosecutors say they now have nine suspects, including several current and former labor representatives, as a result of his testimony.
"We've looked into some of what he has alleged and have uncovered evidence of criminal wrongdoing as a result," said Klaus Ziehe, a spokesman for the prosecutor's office in Lower Saxony, the carmaker's home state.
"There is no reason to dismiss everything he's saying as a defensive maneuver."
Boss resigns over scandal
Following the allegations, Gebauer's prominent boss, Peter Hartz, resigned. Hartz was VW's personnel director and also a close adviser to departing Chancellor Gerhard Schroeder. Hartz's name is associated with many of Schroeder's efforts at introducing market forces into the German economy. After initially characterizing Gebauer's charges as "absurd," Hartz resigned from VW in July, saying he was doing so to accept "overall responsibility for what is done in my area" of the company.
Last month, investigators from the Lower Saxony prosecutor's office searched Hartz's former VW office, saying that Hartz, "contrary to his statements, may have had knowledge of the nature ... of the actions of (Mr. Gebauer) in connection with expenses and privileges, and may have condoned or supported them."
Hartz, whom prosecutors are investigating on suspicion of improper use of company funds for the junkets, didn't respond to messages seeking comment on the accusations. His attorney declined to respond to a written list of questions.
Volkswagen also has begun to indicate that something went wrong. After firing Gebauer and another manager for allegedly seeking kickbacks, Volkswagen asked accounting firm KPMG LLP to investigate the "abuse of traveling expenses and other expenses" at the company, CEO Bernd Pischetsrieder said in a July 29 conference call with analysts.
Last week, Volkswagen disclosed the auditors' findings, acknowledging it paid about $740,000 to an "acquaintance" of Volkswagen's former top labor leader, Klaus Volkert, for services that were not "appropriate," and that Hartz approved some of the payments.
Volkert, through his attorney, Rainer Hamm, declined to comment.
"We support the investigation by the prosecutor and Volkswagen's internal investigation," Hamm said.
Prosecutors say they are investigating Volkert as a possible accessory in the matter.
Volkswagen says its internal probe has been hampered because it doesn't have access to Gebauer's private banking records.
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