Dawn raid in Vienna

Staff at the European Commission's competition directorate (DGIV) in Brussels like to refer to the June 23 events as a "dawn raid" ­ in fact they were unannounced house searches of the seven biggest banks in Vienna. The men from Brussels struck at the civilized hour of 9.00am, calling at each institution's front door and asking to see the chief executive. The investigators even postponed searching three of the seven banks until the next day.

DGIV was acting on a tip-off well over a year old, so it didn't expect to catch Austrian bankers with their trousers down. The investigators were polite but firm, relying on chaps from the Austrian economics ministry to do the tough stuff, like opening cupboard doors. "We don't force locks and we don't strip-search people," says a source close to the Brussels team. They were looking for any files and computer documents that referred to meetings of the so-called Lombard Club.

There is no secret in Austria about the Lombard Club, a lunch held once a month at the hotel Bristol by chief executives of Austria's top banks, at which they discuss everything from the euro and the world economy to interest rates and next month's menu.

But Karel van Miert, the EC's competition commissioner, and his staff, felt there was enough evidence to suggest that these top Austrian lunchers were running a cartel - swapping business-sensitive information and even agreeing targets for the interest margins they charged their customers.

A month after the raids, which yielded a haul of documents and computer files, van Miert was able to boast that he thought he'd made a "good catch".

That remark infuriated Austrian bankers. Central bank governor Klaus Liebscher complains: "I didn't find it very neutral. If you're in the middle of a procedure then you should keep silent."

By the end of August the banks still hadn't heard from Brussels, and the results of a preliminary investigation weren't expected to be out until the autumn, or perhaps the end of the year. They don't know whether a formal case will even be heard. Andreas Treichl, head of Erste Bank, one of the raided banks, said on television that the investigation should be taken seriously, since the EU concept of a cartel was very broad. "EU cartel law is so comprehensive," said Treichl, "that market information in the framework of a trade association can come into question." Treichl was jumped on by his peers who felt he'd already said too much.

Most top bankers have grown cautious after their initial outburst. They will only say what they've said before: "It wasn't a cartel. Surely we're allowed to meet for lunch occasionally. If we were operating a cartel it wasn't very successful: our interest margins are the second-lowest in Europe. Moreover, there are 1,000 banks in Austria, and we represent only 3% of the European Union. Why don't they go after the big fish?" Walter Rothensteiner, chief executive of Raiffeisen-Zentralbank puts the affair in perspective: "Ten years ago the Austrian government advised the banks to do such things. This is a kind of Relikt [throwback] of that time. But this is not EU stuff, it's only an Austrian affair."

On the surface Austrian banking looks highly competitive. Interest margins are low. As central bank governor Liebscher says: "It's an orderly system, with well-established standards, and the managers are correct. It's not as if we had insolvencies and bad management".

The Brussels authorities aren't interested in such excuses, nor in the observation that, if there was a cartel, it clearly didn't work. "No cartels work, that's in the nature of cartels," retorts a commission source. "But that isn't a reason not to investigate. If there's a law it has to be upheld."

DGIV has never successfully prosecuted a financial cartel, say Brussels-watchers. But this case may not prove to be as good a catch as van Miert is hoping. With the advent of the euro next year the opportunity for national banks to fix interest margins will all but vanish. A successful conviction would be of almost historical interest. The bigger targets that DGIV should probably be concentrating on are France's mutual agricultural credit system and Germany's state-guaranteed Landesbanks, say Brussels sources. "The EC has often taken a benign view of price-setting by banks," says a Brussels lawyer, "because of the involvement of the [national] central bank. It's never bothered to pursue it in France or Italy. So I find this case strange. It's probably a very political thing."

Conspiracy theorists see it as an attempt to deal a blow to the Austrian banking system, because it has such low margins, before European monetary union knocks down national barriers. Others, as an attempt to embarrass Austria just before it assumed the presidency of the EU in July. "Absolutely not," say commission sources. "We're totally apolitical."

What convinced van Miert's team that it had grounds to investigate? The trigger, literally, was pulled by Gerhard Praschak, co-head of Oesterreichische Kontrollbank (OeKB), who shot himself on April 26 1997, posting a dossier of embarrassing evidence to various newspapers and political parties. Praschak's main message, apart from a harrowing account of how jobs are parcelled out among Austria's political elite, was his view that OeKB was being forced by its major shareholders, Bank Austria and Credit- anstalt, to bear the brunt of losses on various east European projects, which then would be paid for under guarantee by the state, or the City of Vienna. An independent audit has since rejected the allegations made by Praschak .

But almost as an afterthought, Praschak added to his dossier what appears to be an agenda for a Lombard Club meeting, scheduled for May 8 1996, which clearly indicates a set of interest parameters and aggression limits on various products that are to be negotiated.

The Austrian press, headed by weekly news magazine profil, went to town on the Praschak dossier, but particularly the reference to the Lombard Club. profil even forecast a DGIV investigation. Lawyers for the far-right Freedom Party (FPÖ) contacted Ronald Feldkamp of DGIV in mid-May 1997 but were told there was no investigation. So the lawyers compiled their own dossier of Lombard Club evidence, including Praschak's one-page agenda, and sent it off to DGIV. They heard nothing until a letter came in March 1998 saying that the dossier didn't provide enough evidence. In early June this year the FPÖ's lawyers wrote to DGIV again insisting that FPÖ members - Austrian citizens - were being ripped off by a bank cartel against which no action was being taken. "We heard nothing, and then came the raid," says FPÖ lawyer Huberta Ghennef.