Car Crash: Bribery and a sex scandal devastate Volkswagen

The Volkswagen head of personnel has become a hate figure in Germany for hundreds of thousands of unemployed who claim he is responsible for slashing their welfare benefits. But the Brazilian Joselia R, as the tabloids call her to protect her identity, is rather fond of Mr Hartz, 63. The escort is at the heart of one of Germany's most extraordinary sleaze scandals: a tale of posh cars and hotels, corruption, bribery and more lap dancers than can fit into a VW Beetle. It is also a scandal that may rob the beleaguered Mr Schröder of his last chance to stage a political comeback before September's general election.

It was in autumn 2003 when Joselia R, who was working in Lisbon's Elefante Branco nightclub, was approached by a man calling himself Klaus. "He took me to the Lapa Palace Hotel," she told Germany's mass tabloid circulation Bild, "and introduced me to a guy who would only call himself 'Peter'." It was the first of four cosy trysts the VW executive is alleged to have enjoyed with Joselia. Later he would fly her to the five star Georges V hotel in Paris; on another occasion she accompanied him for a luxury trip to Sao Paulo.

None of this came cheap, of course: as well as flights, hotels and luxury lunches, Joselia, 35, says she was paid €1,000 (£700) for her trouble in Paris and received $600 (£350) in Sao Paulo. But the best bit was it didn't cost her Peter a penny. The fees for the affair came out of a €700,000 slush fund provided by VW and managed by "Klaus," in reality Klaus-Joachim Gebauer, a well-paid VW fixer with a company credit card. When the "Hartz affair" broke earlier this month the scandal broke the back of Europe's largest carmaker.

The company, based in Wolfsburg, central Germany, also owns Audi, Skoda, Bentley, Bugatti, and Lamborghini and has a majority share in Seat. It employs 320,000 workers in 20 countries. Yet its origins date back to Nazi populism.

In 1933 that Adolf Hitler met with Ferdinand Porsche to design the " People's Car". It was the Führer's pet project: a cheap and efficient mode of transport, a luxury that could transport two adults and three children at a speed of 60mph and should be available to every German.

Yet the main beneficiaries of Mr Gebauer's ample entertaining budget were not the average German, but a handful of lucky VW workers' council directors. Every major German company is required by law to make space for these men and women voted in from the shop floor who take part in major investment decisions. It is a key part of Germany's consensus model and helps to keep strikes at a minimum in a country where trade unions still wield serious power. VW recently transferred production of Skoda to the Czech Republic, a move which saved money, but at the cost of many German jobs. Curiously, the unions have barely let out a murmur of discontent.

"Can Germany's worker directors be bought off?" asked the country's premier business magazine, Wirstschafts Woche, this week. " Absolutely not," countered VW chief, Bernd Pischetsrieder. "That's an absurd claim."

Even so, the workers' council directors from Wolfsburg seem to be having one hell of a time. Luxury mini-breaks appear to have been the norm for the middle-aged managers, who were regularly slipped VW-sponsored Viagra as an added perk. Samba dancing lessons and prostitutes were charged to the company credit card for a VW workers director trip to the Rio carnival.

And so far as long-term mistresses went, Peter Hartz was, by far, not the only VW executive to maintain a lover at company expense.

Adriana B has been named as the Brazilian lover of Klaus Volkert, a former head of the VW workers' council. Volkert, 62, is reported to have taken her to a five-star hotel in Portugal; provided her with a car and apartment in Germany and subsidised a €60,000 house in Brazil. All this was at VW's expense. She is also said to have been paid €23,000 per quarter, but denies that they had an affair. She told the tabloids she was employed to produce corporate videos. Mr Volkert, however, seems to have a far guiltier conscience. Since the allegations broke last month, he has resigned, nine months earlier than expected, turned off his mobile phone and gone into hiding.

In Prague, things at VW were much the same. Skoda's human resources manager, Helmut Schuster, a former workers' director at VW who was installed at the VW subsidiary company in 2001, was developing a taste for fast women and faster cars. Mr Schuster, 51, a father of five, is reported to have taken a lover in the form of a Czech actress, Katerina Brozova. The 37-year-old, who posed naked for Playboy, denies things ever went that far, but has been happy to reveal how much "Lambo Schuster" loves his shiny silver Lamborghini. When the scandal broke in mid-June and Mr Schuster was fired,he holed up in his luxury VW villa in Prague. He is already planning his next career move, offering his version of the VW inside story to any publisher who will pay a six-figure sum.

Mr Schuster is also at the heart of far more serious allegations that dummy companies were set up to supply Volkswagen and rake in profits for a handful of corrupt VW executives. In one case, Mr Schuster is reported to have demanded the government in the southern Indian state of Andhra Pradesh transfer €2m to a company in the name of "Vashishta Wahan" in order to secure Volkswagen investment. The money was paid but " Vashishta Wahan", it transpired, was nothing to do with VW. Allegedly it was a company set up by Mr Schuster and the money has reportedly since disappeared. VW denies all wrongdoing and has hired the auditors KPMG to go through the books.

As more VW heads rolled,observers said, with an 18 per cent share in VW owned by the state of Lower Saxony, it would only be a matter of time before the scandal spread to politics.

Sure enough, this week, the influential weekly news magazine Focus claimed VW paid for sex parties to buy influence with Schröder's ruling Social Democratic Party. An entire floor of the Sex World brothel in Hanover was hired in spring 2001 for an all-night champagne and prostitute-filled romp for Audi workers' council directors. One, as yet unnamed, Social Democrat MP was also invited. The sex party at a cost of €15,000 was covered entirely by the VW entertainment fund.

The VW scandal is a wounding blow to the Chancellor. Mr Hartz, famous for his innovative labour practices such as the four-day working week, sat down with the German leader and worked out some of the most radical job creation reforms ever seen in Germany. With almost five million unemployed Mr Hartz seemed, at first, like a saviour. But unemployment in Europe's largest economy has stayed stubbornly high. Left-wingers complained that his reforms were impoverishing German workers and throwing older employees on the scrapheap. With the aid of Mr Hartz, the left wing said, the rich were getting richer and the poor were getting poorer. That made Mr Hartz a very vulnerable target: hit the VW director and you hit Gerhard Schröder.

That goes some way to explaining the epidemic of leaks about VW that has erupted in the German press this summer. One theory is that sympathisers with Oskar Lafontaine, leader of the newly christened left-wing "Links Partei" in the VW workforce or in the union movement have been feeding the newspapers with titbits about murky life inside the firm. Another possible channel of gossip has been the Christian Democrats who now rule Lower Saxony. "It's payback time," says one political insider. "VW helped drive Schröder to power and now it's all moving into reverse gear."

VW employs hundreds of thousands of workers all over the world; if it ails, then so does the entire German economy. Its profits are flagging. The mood in Wolfsburg is surly. Not many of the locals, one suspects, will be voting for Gerhard Schröder this September.

VW is a leaky ship. Top management must have had some clue to the slush-fund antics. Mr Gebauer was spotted in the bar of the Schlosshotel in Berlin's exclusive Grunewald district, noisily entertaining his Russian lover. When the manager complained, the angry VW executive threatened to withdraw the custom of clients from the carmaker, worth, he said, some €50,000 a year. The hotel manager called Mr Gebauer's superiors, but no action was taken. Mr Gebauer has always claimed his fixing activities were ordered from above and Mr Hartz often countersigned expenses. For 18 months after the Grunewald incident though, VW were aware such things were afoot, yet did nothing. That may be reason enough for a high-level purge. Certainly, investors are speculating that the scandal will lead to a much-needed shake-up in Wolfsburg.

German car companies, from DaimlerChrysler to BMW, are staid places, where everyone above the shop floor wears a tie and swearing is discouraged. They are not the natural stage for trouser-dropping farce. But change is afoot and sometimes a bit of scandal helps to speed things along. Reformers in VW were privately describing the sex and sleaze as a "great chance". Not for Peter Hartz: the icon of Schröder's reforms whose offer of resignation was accepted last week. Somehow, one doubts that Joselia will be seeing much of her Peter for a while.