How Schreiber's 'grease money' will haunt Canada

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The politicians, military brass and party operatives who once counted themselves as part of Karlheinz Schreiber's inner circle in Canada shouldn't necessarily be relieved to see him confined to a German jail cell.

Just because he's gone from Canada, doesn't mean he's done with his adopted country - thanks to an old German tax law concerning the deductibility of bribes. Most of the charges that the 75-year-old lobbyist faces in Germany relate to tax evasion. German authorities allege that tens of millions of dollars in undeclared income was funnelled into Mr. Schreiber's Swiss bank accounts during his heyday as a middleman, when he travelled the globe brokering lucrative contracts for airplane, helicopter and tank manufacturers.

One of Mr. Schreiber's defence strategies is almost certain to be that all of that money wasn't income, and he may argue that some was earmarked as schmiergelder - literally "grease money" - that was used to influence decision makers.

In 2001, German authorities had to reduce the amount of tax that they alleged Mr. Schreiber had evaded to about $16-million from $52-million because they didn't account for expenses, which included, as Mr. Schreiber's lawyer put it, "useful donations."

Testifying on Mr. Schreiber's behalf in 2002, the lawyer, Jan-Olaf Leisner, explained to Mr. Justice David Watt of the Ontario Superior Court the old German practice of deducting bribes, a law that has since been overturned because of criticism from the Organization for Economic Co-operation and Development.

"It's a kind of corruption, and when a company had to corrupt or bribe people to make a certain deal, it was entitled under German tax law to deduct its payment from revenue," Mr. Leisner told Judge Watt.

Mr. Schreiber received most of his millions in the late 1980s and early 1990s, at least five years before the practice was outlawed in Germany. A good chunk of the money that he never declared to German tax authorities, they allege, was the more than $20-million he was paid by Airbus Industrie, the European airplane manufacturer that enlisted him to land a $1.8-billion contract with then Crown-corporation Air Canada.

Although Mr. Leisner has acknowledged that most of Mr. Schreiber's "donations" went to four Germans, the son of a former Bavarian premier, a former deputy defence minister, and two executives with industrial giant Thyssen, about $1.3-million worth of withdrawals in Canadian currency have never been explained.

To distinguish between income and schmiergelder, the court will likely turn to Mr. Schreiber's voluminous records with the Swiss Bank Corp, or as it's now known, UBS. Contained in those documents is evidence of "extensive cash withdrawals," a forensic auditor told the Oliphant inquiry a few months ago.

"I think what needs to be made clear to the commission is that there are millions of dollars flowing through these bank accounts, of which the ultimate recipient ... is unknown," Steven Whitla, a managing director with Navigant Consulting, testified at the inquiry.

Unlike the adversarial justice system in North America, where a defence lawyer and a state prosecutor debate the evidence before an impartial judge, Germany's justice system is inquisitorial. The system provides judges with tremendous power, and they perform most witness examinations, enter evidence and can also compel an accused to testify.

Even though he will now take a back seat, the German prosecutor heading up the case against Mr. Schreiber seemed delighted at a news conference yesterday. Reinhard Nemetz called the lobbyist's overnight flight back to Germany a "happy end."

Mr. Nemetz described his decade long wait for Mr. Schreiber, who is also wanted on charges of fraud and bribery, as "too long, too long."

The Bavarian deal maker is largely seen as the trigger for one of Germany's largest political scandals, the late 1990s revelation that the right-wing ruling party, the Christian Democratic Union, was accepting secret donations through shadowy slush funds.

Asked by a CBC reporter why it took the Canadian justice system 10 years to return the fugitive, Mr. Nemetz replied: "Ask your Canadian officials, please."

It's not clear when Mr. Schreiber's trial will begin, and much coverage in the German media was devoted to speculation about whether it will start before the country's national elections on Sept. 27. If Mr. Schreiber resorts to the argument that most of the disputed money was for bribery, and not himself, many Canadians will likely be shocked that a G7 country ever supported such a policy.

Even former prime minister Brian Mulroney, who accepted at least $225,000 in cash from Mr. Schreiber for what Mr. Mulroney said was an "international mandate" to promote armoured vehicles, has said he was completely unaware of the practice until after he took the cash.

"I, quite frankly, was surprised to learn ... as the years went by, that international companies operating in Europe were indeed operating in ways inconsistent with Canadian laws, because they were making either political contributions or bribes, and writing them off on their taxes," Mr. Mulroney testified before the Oliphant inquiry.