Sarkozy's best man investigated for kickbacks from arms deals

Spreading financial scandal threatens to engulf President and his closest friends

An explosive financial scandal threatened President Nicolas Sarkozy yesterday after two of his associates were formally accused of handling illegal kickbacks on arms contracts.

One of the President's closest friends, Nicolas Bazire – who was best man at Mr Sarkozy's wedding to Carla Bruni in February 2008 – was placed under formal investigation yesterday for "receiving embezzled funds".

Mr Bazire, 54, now a luxury goods executive, is suspected of illegally handling cash kickbacks from arms sales to Pakistan and Saudi Arabia in 1994 and 1995 to fund the failed presidential campaign of the former Prime Minister, Édouard Balladur.

Another long-time associate of Mr Sarkozy, Thierry Gaubert, 60, was placed under formal investigation on the same possible charges on Wednesday. At the time of the alleged offences, he was the deputy head of Mr Sarkozy's private office at the French budget ministry.

According to judicial sources in Paris, the next person to be placed under formal investigation – one step short of a charge – may be Mr Balladur himself. The former Prime Minister, 78, was one of Mr Sarkozy's political mentors but is now largely retired from frontline politics.

With less than seven months until the presidential elections, the affair is potentially explosive for Mr Sarkozy, politically if not legally. Until recently, he has successfully distanced himself from the web of financial and political chicanery long alleged against his presidential predecessor Jacques Chirac and other figures on the centre-right.

Over the past year, and especially in recent weeks, new allegations have surfaced – without concrete evidence – that Mr Sarkozy has taken illegal campaign donations in the past, both at home and abroad. Another judge said earlier this month that she had received evidence that Mr Sarkozy took illegal contributions from France's richest woman, Liliane Bettencourt.

A book published last week, La République des Mallettes (The Briefcase Republic) by the investigator Pierre Péan alleges that politicians on both right and left, including Mr Sarkozy, have been involved for years in illegal cash campaign payments from African leaders and Middle Eastern arms contracts. Both sets of claims have been dismissed by the Élysée Palace as baseless.

Although there is no evidence that Mr Sarkozy knew of the alleged kick-backs, he was Mr Balladur's campaign spokesman and right-hand man. Mr Gaubert was a close associate of Mr Sarkozy for many years, starting in the 1980s when he was elected mayor of Neuilly, a wealthy suburb just west of Paris. Mr Bazire, who now runs a holding company that controls the luxury goods giant LVMH Moët Hennessy, remains one of the President's closest friends and an unofficial political adviser.

The accusations surrounding the Balladur campaign are politically explosive for another reason. The alleged kickbacks are said to have been taken from multimillion-dollar "fees" paid to shadowy intermediaries in the Pakistani and Saudi arms deals: in other words, it is alleged, they were "commissions on commissions", illegally passed to Mr Balladur's campaign in the form of briefcases full of cash.

After Mr Chirac won the 1995 presidential election, he froze the Pakistani and Saudi commissions. He suspected that kickbacks had been paid and allegedly wanted to punish his old friend Mr Balladur for running against him. It is alleged by two other investigating magistrates that the non-payment of the Pakistani commissions led indirectly to a "terrorist" attack on a bus in Karachi in 2002 in which 11 French submarine engineers died. Other investigators are said to believe that the "Karachi bomb" connection is, at best, tenuous.

A spin-off inquiry has led to alleged new evidence of corruption in the Balladur campaign. Some of this evidence has been offered to investigators by the wives of two of the suspects, both of whom are involved in ill-tempered divorce cases.

Yesterday, the Élysée Palace took the unusual step of issuing a formal denial that Mr Sarkozy had any role in financing the Balladur campaign. To suggest he had any link to illegal payments was "nothing but calumny and political manipulation", it said.