The CDU Party Funding Scandal


The Christian Democratic Union (CDU) party funding scandal, which erupted in 1999, tarnished the reputation of legendary Chancellor Helmut Kohl—the architect of reunification—and derailed the career of his likely successor, Wolfgang Schäuble. German investigators caught CDU officials taking payments from an agent acting for Thyssen-Henschel, the armored vehicles manufacturer, to promote sales to Saudi Arabia and Canada. These practices were part of a broader pattern of secret political finance arrangements that had supported Kohl’s 16 years in office. It was an unsurprising scandal, however, in at least two respects. First, the German center-right had already been struck by two corruption scandals tied to party finance in the prior decades, the Flick and Amigo affairs. Second, Western Europe was in the throes of a wave of similar revelations that had begun in the early 1990s, including the Tangentopoli investigations in Italy, the “retro-commissions” scandals in France, and an arms procurement and bribery scandal in Belgium that forced the resignation of NATO Secretary-General Willy Claes. The CDU party funding scandal was therefore symptomatic of both the prevalence of bribery in arms sales and the deep rot of political corruption in democratic Europe.

Key Facts

Buyers: Saudi Arabia, Canada

Sellers: Germany (Thyssen-Henschel, now part of Rheinmetall)

Year of Procurement Decisions: 1992 (Saudi Arabia); Canadian deal never completed.

Equipment Sold:

36 Armored Vehicles, including 10 Thyssen-Henschel “Fuchs” CBRN Detection Vehicles (Saudi Arabia)

Licensed production of Thyssen Armored Vehicles at a proposed facility in Nova Scotia (Canada) – not carried out.

Value of Deal:

DM 446 million (approximately USD 300 million at Jan. 1991 rates) (Saudi Arabia)

Proposal for CAD 58 million (approximately USD 47 million at Sep. 1988 rates) investment by Thyssen; no actual procurement orders committed (Canada).

Sum Involved in Corruption Allegations:

DM 220 million included in the structure of the Saudi deal; additional DM 3.8 million separately.

DM 10 million (Canada)

DM 1.1 million total handed to the CDU. Does not include bribes to individual CDU/CSU officials.

Dramatis Personae

Ludwig Holger Pfahls on trial in Augsburg, Germany, on Oct. 5, 2011. Getty/AFP, Christof Stache.

Ludwig Holger Pfahls – deputy minister of defense of Germany and former Christian Social Union (regional electoral ally of the CDU) aide; accused of accepting DM 3.8 million in commissions. Convicted of tax evasion and received a sentence of two years and three months in jail. Was later convicted again for fraudulently declaring bankruptcy and sentenced again to four and a half years in jail.

Karlheinz Schreiber – arms and aerospace broker, working for MBB, Airbus, and Thyssen-Henschel. Found guilty of tax evasion charges and sentenced to six and half years imprisonment.

Walter Leisler Kiep – CDU treasurer; suspected of either handling bribes from Schreiber to the CDU or pocketing them himself. Fined DM 45,000 for tax evasion.

Wolfgang Schäuble – leader of the CDU parliamentary faction, later chairman of the Christian Democratic Union; handled an off-the-books DM 100,000 cash donation from Schreiber. Resigned from chairmanship of the CDU.

Helmut Kohl – chancellor of Germany, later the honorary chairman of the Christian Democratic Union; admitted to being aware of the system of CDU secret donations. Stepped down from his honorary position.

Jürgen Massmann – Thyssen-Henschel employee; received kick-backs from Schreiber. Convicted of tax evasion and working against the interests of his employer. Sentenced to two and a half years in prison; later reduced and suspended.

Winfried Haastert – Thyssen-Henschel CEO; received kick-backs from Schreiber. Convicted of tax evasion and working against the interests of his employer. Sentenced to one year and ten months in prison; later reduced and suspended.

Brian Mulroney – prime minister of Canada; admitted to receiving CAD 225,000 to lobby UN Security Council members on behalf of Schreiber.

Former German Chancellor Helmut Kohl speaking on May 5, 2010, at Ludwigshafen, Germany. Getty, Andreas Rentz.


The Arms Deals

The CDU party funding scandal was a far-ranging affair involving many cases of government corruption. While the arms-related deals were relatively insignificant in monetary value—paling in comparison, for example, with the corruption tied to the sale of the Leuna oil refineries in East Germany to Elf—they produced allegations leading directly to the downfall of Kohl and his successor, Wolfgang Schäuble.

In around 1985, the German firm Thyssen-Henschel (then a subsidiary of the Thyssen Industrie conglomerate and now part of Rheinmetall) began lobbying the Canadian government for support to build an armored vehicles production plant in the province of Nova Scotia. Thyssen-Henschel was interested both in selling vehicles to the Canadian armed forces and circumventing Germany’s strict export regulations; the company sought from the Canadian government a five-year export license for sales to Algeria, Bahrain, Kuwait, Pakistan, Saudi Arabia, and the United Arab Emirates. The firm’s pitch to the government of Prime Minister Brian Mulroney, who represented a constituency neighboring the proposed project, emphasized the potential to revitalize the provincial economy. The project was never approved despite support from Mulroney and local politicians due to opposition from the defense and external affairs ministers, as well as their senior staff. The opponents noted that Canada already produced armored vehicles, was not planning to purchase more in the short term, and the export licenses sought by Thyssen-Henschel challenged the Department of External Affairs’ traditional reluctance to approve controversial arms sales. Nonetheless, over the course of a decade of unsuccessful advocacy for the deal, Thyssen-Henschel paid DM 4 million to a middleman, the German-Canadian Karlheinz Schreiber, who hired Canadian lobbyists and sought diplomatic support from the German government.

While the Bear Head project never got off the ground, Thyssen-Henschel made good use of its relationship with Schreiber to secure a deal to sell similar armored vehicles to Saudi Arabia during the Persian Gulf War. Jürgen Massmann, an executive at Thyssen-Henschel, had already established by the summer of 1990 that the Saudis were interested in the Fuchs armored vehicle, a variant of which can operate under chemical, biological, radiological, or nuclear (CBRN) conditions. Massmann brought Schreiber into the deal to lobby the deputy minister of defense in charge of arms exports, Ludwig Holger Pfahls. Pfahl’s support was deemed necessary to help overcome the arms embargo that Germany had traditionally maintained on the Middle East. Another middleman, Mansour Ojjeh, arranged for bribes to Saudi parties. In September 1990, Pfahls, Saudi representatives, and Thyssen-Henschel executives agreed to a DM 446 million deal, with DM 220 million earmarked for consulting fees, for 36 armored vehicles (including 10 CBRN-capable vehicles) to be taken out of Germany army formations and transferred immediately to Saudi Arabia. Thyssen-Henschel would then manufacture replacements over time. Despite encountering initial pushback from the German ministry of defense, which opposed selling the military’s own vehicles, and from other ministers interested in preserving the embargo, Pfahls and Schreiber were able to win cabinet support for the deal in February 1991.

N.B.: the timeline of the deal and the investigation draws from, in addition to the linked articles, Stevie Cameron and Harvey Cashore, The Last Amigo: Karlheinz Schreiber and the Anatomy of a Scandal (Toronto: Macfarlane Walter & Ross, 2001).

The Investigations and Outcomes

Schreiber’s previous business dealings, as a middleman for both Airbus and its German-shareholder Messerschmitt-Bölkow-Blohm (MBB), had long been the subject of rumor and controversy in Canada. However, it was a German investigation into Schreiber’s taxes that brought the CDU’s role into the public eye. Before Germany implemented the OECD’s Bribery Convention in February 1999, foreign bribery was not criminalized and could be treated as a tax-deductible business expense. However, tax investigators could still demand that a business prove that it was expensing actual bribes (euphemistically booked as “useful expenses”), and not fraudulently abusing the expense category to lower reported profits. Because Schreiber’s bank accounts were based in Switzerland and Lichtenstein, investigators at the tax office in Augsburg had difficulty certifying his accounts, and in December 1992 they demanded that he hand over his list of bribe recipients, eventually igniting a legal battle in Swiss courts. In 1994, a separate investigation into the family finances of the recently deceased Franz Josef Strauss, the long-time leader of the Christian Social Union of Bavaria, prompted separate media investigations into Strauss’ business ties. Because Max Strauss, the son of Franz Josef, was an associate of Schreiber, the German media began looking into the latter’s accounts as well. In August 1994, Schreiber’s estranged lawyer had shared his files with Der Spiegel, and a year later German prosecutors found a copy of the Saudi commissions arrangement in the keeping of a ThyssenHenschel executive, Winfried Haastert.

By 1996, prosecutors had also caught wind of a specific payment that implicated CDU leaders. In August 1991, Schreiber met Walther Leisler Kiep, the CDU’s treasurer, and Horst Weyrauch, a party tax advisor, at a town along the Swiss border and handed over DM 1 million in cash. The sum was cashed into an account in Frankfurt and later dispensed to Kiep, Weyrauch, and Uwe Lüthje, a long-time party finance official. Nonetheless, Schreiber insisted that the sums were a donation to the CDU. Kiep had played a role in the Saudi deal; in early February 1991, Schreiber had met with him to push for the export approval, which was forthcoming at the end of that month.

In 1999, a Swiss appeals court granted German investigators access to Schreiber’s bank accounts, allowing them to confirm their suspicions about his network of payees. These were wide-ranging, including both Massmann and Haastert at ThyssenHenschel and lobbyists in Canada, but also Pfahls and other government figures. Massmann and Haastert were indicted in April, and shortly thereafter Pfahls fled the country, becoming a fugitive. German authorities arrested Kiep in November, and issued a warrant for Schreiber. In December, the Bundestag created an investigatory commission after Helmut Kohl admitted to having received off-the-books donations for years.

Former German Chancellor Helmut Kohl testifies regarding the donations scandal on June 29, 2000, in Berlin. Getty/Photothek, Thomas Imo.


A second specific transaction, despite being rather small, had even more substantial consequences. In October 1994, Schreiber passed DM 100,000 to Brigitte Baumeister, Kiep’s successor after 1992, as a donation for the CDU. As late as July 1995, Schreiber was still lobbying Schäuble to support the Bear Head deal, even though his chief ally, Mulroney, was out of office. Baumeister later testified that she handed the sum to Wolfgang Schäuble, at the time the leader of the parliamentary CDU faction, but the sum was never booked into official CDU accounts. At the time, German campaign finance law required that donations worth more than DM 20,000 had to be declared. This transaction was revealed by Schreiber in a January 2000 interview, leading to a series of mutual recriminations by Baumeister and Schäuble which ultimately cost the latter the chairmanship of the CDU. The CDU parliamentary faction’s budget director, Wolfgang Hüllen, committed suicide on January 20.

In Canada, the Royal Canadian Mounted Police (RCMP) was sued by Mulroney for defamation stemming from cooperation with German authorities in their investigation into Schreiber. In January 1996, the suit was settled with the RCMP paying Mulroney’s expenses but not exonerating him. A decade later, as Schreiber was fighting extradition from Canada to Germany, he began airing allegations related to the Bear Head deal against Mulroney again. As a result, in 2007 the government of Prime Minister Stephen Harper decided to open an inquiry into the issue.

Prosecutors had difficulty achieving convictions against all the bribe-recipients in the two arms deals for several reasons. First, Schreiber’s notes and accounts were recorded in a loose code based on recipients’ names (“Jürgland” for Jürgen Massmann, “Winter” for Winfried Haastert), which meant they could not by themselves be used as proof of bribery. Second, the numerous accused could argue that Schreiber had fraudulently created accounts in their name to claim the “useful expenses” tax exemption, and was therefore an unreliable witness against the supposed bribe-takers. As such, not all of the suspected (such as “Master,” supposedly the Strauss family, and “Britan,” allegedly Brian Mulroney) were ultimately convicted of wrongdoing.

Ludwig Holger Pfahls fled in April 1999 from Singapore to Taiwan, then to Hong Kong, disappearing for five years. Prosecutors alleged that Schreiber had assigned him DM 3.8 million in commissions as reward for his advocacy for the Saudi armored vehicles deal. He was arrested in 2004 and sentenced to two years and three months in jail for tax evasion, but was sentenced again in 2006 for fraudulently declaring bankruptcy. This time, he was sentenced to four and a half years in jail. Tax authorities seized EUR 2 million from Pfahls but were ultimately ordered to return half the amount.


Karlheinz Schreiber on trial in Augsburg, Germany, on Feb. 26, 2013. Getty/AFP, Christof Stache.

Karlheinz Schreiber was extradited to Germany in 2009 and sentenced to eight years imprisonment in a May 2010 ruling for tax evasion offences. That ruling was overturned on appeal, but he was again convicted in November 2013 and sentenced to a reduced term of six and a half years in prison.

Walther Leisler Kiep was found guilty of tax evasion in February 2001 and fined DM 45,000. Horst Weyrauch later testified to an inquiry concerning the secret bank accounts in Switzerland of the provincial CDU branch in Hesse. These accounts, created in 1983, contained nearly DM 21 million in secret party funds. Uwe Lüthje passed away in 2003, after accusing Helmut Kohl of being aware of the CDU’s black money system.

Jürgen Massmann was convicted in 2005 of tax evasion and acting against the interests of his employer. The court found that he received DM 2.8 million marks in kick-backs from Schreiber and sentenced him to two and a half years in prison. An earlier court ruling sentencing him to five years in prison for receiving DM 11 million had been struck down on appeal. In November 2005, Massman’s former boss, Winfried Haastert, was convicted of the same offenses and sentenced to one year and ten months of probation. Haastert was accused of failing to pay taxes on DM 1.2 million. Their sentences were later reduced and suspended by the high court in January 2007. Around the same time, Massmann disappeared in Syria to avoid testifying in Max Strauss’ trial.

Max Strauss was convicted in 2004 of avoiding taxes on EUR 2.6 million in commission payments from Airbus and the Thyssen group and sentenced to three years imprisonment. This decision was overturned by an appeals court, however, and he was acquitted at a re-trial in 2007. According to the higher court, the evidentiary base for the charges against Strauss was not strong enough to establish his guilt, as the prosecutors could not demonstrate that Strauss had withdrawn funds from the account created for him by Schreiber.

Wolfgang Schäuble was forced to resign on February 17, 2000, from the leadership of the CDU. Helmut Kohl, after admitting in late 1999 to being aware of the system of secret funds set up by the CDU for electoral purposes, resigned from his position as the party’s honorary chair on January 10, 2000. In April that year, Angela Merkel succeeded Schäuble as party leader.

Brian Mulroney was never tried in court, even though the Canadian public inquiry found that he had acted inappropriately in receiving CAD 225,000 in cash from Schreiber in 1993 to lobby UN Security Council members to buy Thyssen-Henschel products. Schreiber claimed that the total fee was CAD 300,000, and that the arrangement had been made while Mulroney was still in office.

Banner Image Credit

Image Caption: CDU Headquarters in Berlin in March 2006.
Image Source: Flickr/Creative Commons, Penn State University Libraries.


Sources (Click to Expand)

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