US Supervision Unpopular and Potentially Illegal

When companies run afoul of the law, U.S. courts have sent monitors to ensure it doesn't happen again, but the supervisor's powers might actually violate German laws.
Quelle: Bloomberg
Larry Thompson will be facing a tough crowd.

Volkswagen is nervously awaiting the arrival of Larry Thompson, a 71-year-old former deputy attorney general who has been appointed to monitor the world's largest carmaker.

As part of a plea deal that VW struck in January with US authorities in the aftermath of its emission cheating scandal, Mr. Thompson will oversee reforms and investigations at Volkswagen. The lawyer, who in the past investigated the bankruptcy of US utility Enron and former President Bill Clinton’s affair with Monica Lewinsky, is supposed to look into the origin of the fraud and is tasked, by the Americans, with preventing it from happening again.

VW isn’t the first German firm to make such a deal. Rival Daimler and engineering conglomerate Siemens used to have US-appointed watchdogs in the house. Construction firm Bilfinger, as well as Commerzbank and Deutsche Bank are currently under the oversight of monitors.

“When it comes to prosecution of offenses abroad, the companies prefer the US interference over trials in America,” said a lawyer who was part of several US investigations into German firms. After all, such a deal often saves them expensive court proceedings that could potentially interrupt their business in the United States.

In June, German firms will know just how far the US judiciary can go on German ground.

But these monitors are expensive, and are operating in a legal grey zone in Germany. Monitors are allowed to inspect every nook and cranny of a company at any time, view any document they please and sit in on any board meeting. The nature of their work often clashes with German labor and privacy laws. An insider said that former FBI chief Louis Freeh, who was appointed monitor at Daimler in 2010, “didn’t care much about privacy.”

In the era of President Donald Trump’s “America first” policy, German executives are even more worried that sensitive data end up in the wrong hands. Mr. Freeh himself recently told Handelsblatt that some of these US demonstrations of power in the form of American oversight in German companies have gone too far.

Industrial giant Bilfinger, which has had an American monitor since 2013, is feeling the financial strain. Instead of the €50 million ($55 million) originally earmarked for overhauling the internal monitoring system, the company will now have to spend almost €100 million, as ordered by its monitor, Swiss lawyer Marc Livschitz.

Experts estimate that monitors and their teams of up to 50 people can cost more than €10 million per year. Winfried Huck, professor for international business law at the Brunswick European Law School, criticized that this imposition of U.S. law on German companies therefore happens at the “expense of shareholders.”

With this in mind, VW is now holding its breathe. What exactly Mr. Thompson will do at the car company is not yet clear.

“We don’t know what to expect,” said an executive who preferred to remain unnamed. Insiders assume the supervisor will move to separate the division responsible for developing engines from the one that measures emissions. After all, the lack of separation was what made the emissions cheating scandal possible.

A manager who will be working with Mr. Thompson said that it’s likely the overseer will install an independent division to watch over emission standards.

Another member of the research and development staff said: “Mr. Thompson will want to know why manipulation wasn’t uncovered earlier.”

Some employees are feeling rattled since they don’t know if German or American rules apply to the investigation. Some even wonder if they should bring a lawyer when they’re being questioned.

The case of Commerzbank showed that the two countries' laws clash in the deals that appoint American watchdogs to German firms. The banks is currently being monitored as part of a deal made after Commerzbank was found guilty of violating US sanctions against Iran. As well as being monitored, the firm also paid $1.45 billion in fines and Commerzbank was forced to fire five employees that were involved in the illegal Iran deals. One of them, Lars Chistiansen, was responsible for making transfers for an Iranian client. “I’ve never committed any offence,” he said, claiming he was only following orders by his employer.

In contrast to the American court ruling, the German court ruled that the layoff was illegitimate. But because of the deal made with the US court, Commerzbank has been forced to appeal the decision. The case will be heard at the Federal Labor Court in June. Then German firms will know just how far the US judiciary can go on German ground.


Harald Schumacher, Martin Seiwert and Saskia Littmann are reporters at WirtschaftsWoche, a sister publication to Handelsblatt. To contact the authors: [email protected], [email protected].