Friedrich Hennemann was detained after a series of spectacular raids on Bremer offices and the homes of company managers scattered in 29 locations in northern Germany. Police are reported to have discovered a "six- figure cash sum" and "incriminating material" in Mr Hennemann's second home, which he had kept secret from the authorities until now.
Mr Hennemann, 60, had left Germany's largest shipbuilder at the end of last year as the first reports began to surface about a large hole in Bremer's accounts. After it posted an operating loss of DM1bn for 1995, the European Commission demanded the return of DM600m worth of regional funds, forcing the company to seek protection from creditors in February. It went into receivership at the end of April, threatening 23,000 jobs.
In the past months investigators have revealed a series of irregularities at the company's Bremen headquarters, ranging from false dividend forecasts to misleading statements to creditors, but these appear to have been dwarfed by the alleged pilfering of public funds which took place over a five- year period.
In the early 1990s, Bremer Vulkan purchased a string of derelict shipyards in the former East Germany, and proceeded to harvest subsidies earmarked for the redevelopment of eastern industry. Of the DM854m dished out by the EU and German taxpayers, only DM138m is estimated to have reached the shipyards in the east.
Attempts to diversify into other activities proved wholly unprofitable, but losses were concealed by transferring money destined for the east into accounts in Bremen. In effect, the EU and government funds were used to cross-subsidise the company's core groups.
Bremer's demise in a blaze of scandal threatens to turn the once prosperous Hanseatic port of Bremen into an economic disaster zone. Though the company is being kept afloat in order to regain some investment sunk into half- finished projects, the city's unemployment rate will hit a west German record of 20 per cent when the shipyards are inevitably closed.
The Bonn government has refused to bail out the company, and has denied any responsibility for Bremer's corrupt practices. But the National Court of Audits is expected to issue a highly critical report next week, accusing the Bonn authorities, the east German privatisation agency, Treuhand, and its successor, BvS, of negligence.
Germany's leading banks, most of which seemed happy to pour good money after bad, are also unlikely to escape blame. A line of credit was arranged by leading institutions last September, at a time when rumours about Bremer's state of health were already in circulation. It is not expected that the loans will ever be repaid.
Since April, Bremer Vulkan has been broken up into its constituent groups. Ironically, the units that have proved most successful after the meltdown are the same east German shipyards that were deprived of investment by the parent company for so long.