Cablegate: German Real Estate Corruption Scandal Implicates

Published: Wed 15 Sep 2004 01:07 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
SUBJECT: German Real Estate Corruption Scandal Implicates
Major Investment Funds
REF: Frankfurt 2923
Sensitive but unclassified; not for internet distribution
1. (SBU) SUMMARY: Frankfurt prosecutors will soon issue
corruption indictments against fund managers, architects,
and builders in a series of large real estate deals across
Germany. The alleged corruption includes bribes and a
number of transactions in which participants pocketed bogus
commissions from fictitious agents. The manager of
Germany's largest real estate fund and a prominent banker
are under arrest and are cooperating with police. More than
forty persons are under investigation in a case involving
more than a dozen real estate projects throughout Germany.
The scandal could seriously damage the credibility of German
real estate funds (managing nearly 70 billion euros in
public investment) and deal another blow to a weak
construction market. END SUMMARY.
2. (U) Frankfurt prosecutors are investigating a major
corruption scandal involving leading real estate fund
managers. The investigation began in 2002 with a corruption
case against a Deutsche Bank real estate manager, who
disclosed information concerning a major project in
Frankfurt -- the Investment Banking Center (IBC) -- and
claimed bribes in a "six-digit range" were paid to secure
building contracts. The manager of Deka Bank's real estate
fund (Germany's largest retail fund in the sector) was fired
last week for "irregularities" and then began to cooperate
with Frankfurt prosecutors. Another fund manager disclosed
information leading to three other cases. The weekly
magazine FOCUS (right-of-center with a circulation of around
770,000) cites alleged corruption in a dozen other projects
across Germany.
3. (SBU) Frankfurt chief prosecutor Wolfgang Schaupensteiner
-- one of Germany's leading crusaders against corruption -
stated publicly that although he cannot estimate the damage
to investors and shareholders, the indictments will break
"new ground" in their scale. The deals share a similar
pattern of corruption: in the final stages of a
transaction, participants bring in a fictitious real estate
agent and divide the commission among all parties. In an
earlier meeting with consulate representatives (reftel),
Schaupensteiner expressed concerns about his office's
limited resources to pursue complicated cases such as this
4. (U) The indictments may have an impact well beyond the
tainted firms and individuals. Bankers and fund managers --
already struggling with a depressed building market - worry
the scandal will damage the credibility of real estate
funds. The German Financial Supervisory Authority (BAFIN)
has launched an investigation into damage to investors.
Critics are using the scandal to question the viability of
major construction projects financed by real estate funds,
including the 450 million euro IBC building constructed for
(but never occupied by) Deutsche Bank.
5. (SBU) COMMENT: Although the full scale of corruption is
unclear, more arrests are certain and the scandal appears to
rank among the largest in Germany's recent history. The
ultimate damage could be greater to the extent that the
scandal undermines the credibility of popular real estate
funds. According to the Bundesbank statistics, real estate
funds open to the general public have 68.7 billion euros
under management. Contacts in the banking community speak
of a "grenade detonating" under an already weak market for
new construction. END COMMENT.
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