Import only for cash

Volkswagen

One of the richest Egyptians accuses the VW subsidiary Škoda of doubtful business practices. A manager allegedly demanded bribes.

At the age of 16, Mohamed Shafik Gabr decided to become a successful businessman. He founded a bicycle messenger service in Cairo, and later he bought an oil trading company. At the beginning of the 1990s, Gabr started to import cars from Europe.

He looked for models which were inexpensive and solid - and he found what he was looking for in the Volkswagen Group: the Czech subsidiary Škoda seemed suitable for the Egyptian market. Gabr became a general importer, built up a distribution network and sold up to 8000 cars a year. It was a success story which benefited both sides. Škoda became popular in the Middle East, Gabr's wealth grew and is currently estimated at over 700 million US dollars.

So it is all the more surprising that the partnership ended abruptly after 23 years. In 2016 Škoda terminated the contract. The company did not disclose the reasons. But Gabr's company Artoc Auto felt that it had been punished - and expressed a dreadful suspicion: it claimed that the contract had been terminated because Artoc had repeatedly refused to pay bribes.

According to internal documents, the importer accused a Škoda manager of ‘corruption and continuous disruption of the cooperation with Artoc’. It claimed that the manager had tried to blackmail Artoc. It alleged that Škoda had not systematically examined earlier hints.

Škoda confirms that it has received ‘a complaint made in Egypt’. The company also stated that its own investigations had not shown any indications of any ‘misconduct by our members of staff’.

Škoda is facing expensive litigation which will also explore the question of the business practices which the motor manufacturer VW and its subsidiaries are prepared to use. Is this now the next scandal in the long list of embarrassments for Volkswagen?

The relationship between Škoda and Artoc is complicated, or at least it has now become so. The partners have cooperated since 1994, initially on a rather informal basis. They trusted each other and often shook hands to seal their agreements. But the motor manufacturer wanted to change all that. In 2016 Škoda presented the Egyptian partner with a new importer agreement which allegedly complied with international standards. But Artoc was afraid that this contract would mean losing rights which they had enjoyed for decades. So Škoda's partner refused to sign. Soon it was issued with a termination notice.

The importer was angry. Allegations of corruption were made: from 2011 the accused Škoda manager was alleged to have demanded repeated side-payments for cars that were delivered. When Artoc refused to pay, the manager is claimed to have delayed, reduced or stopped deliveries.

As a result, the importer allegedly received significantly fewer cars than it could have sold on the Egyptian market. According to Artoc, this conflict has contributed to a reduction of turnover by 79 percent in 2016 alone.

But Artoc claims that Škoda and Volkswagen did very little to remedy the problems. Being the manager of the company, Gabr travelled to the VW headquarters in Wolfsburg three times to present his complaints. But the situation did not improve.

The only certainty now is that neither side has any interest in future cooperation. Škoda has already appointed a new importer in Egypt. And Artoc is considering taking further legal steps, including litigation in the USA. One of Artoc's investors comes from the United States.

And unfortunately for Škoda, Gabr is not just a simple car dealer who can be dismissed as a troublemaker. He is a respected art collector and philanthropist with a good reputation. His foundation regularly holds events in Cairo, London or New York. They are attended by politicians and diplomats. One of the speakers at such events was the former British Prime Minister, Tony Blair. 

Gabr has already mobilised allies in his dispute with Škoda. Even the Egyptian Ambassador in Berlin has evidently become involved: in February he apparently met a representative of VW. The Volkswagen representative is said to have promised that he would try to arrange an agreement with Artoc. Škoda did not make any response.

An out-of-court settlement would be the easiest solution for both parties. The compensation which Gabr claims apparently runs to hundreds of millions. According to Gabr, he has invested 260 million dollars in the dealer network and in advertising for Škoda. Years of litigation, on the other hand, would involve risks, even for Artoc: it is not clear whether the Egyptian can justify his allegations beyond any doubt.

In the legal dispute Artoc argues, among other things, on the basis of the written record of a phone call which was allegedly conducted between the importer and the accused Škoda manager. According to this record, the manager asked for money. The money was to be handed over ‘in cash’, ‘from one hand to the other’. His alleged request was: ‘no invoices, no bank accounts’.

Škoda does not comment on this document, but internally it doubts whether the document is sufficient proof. It considers that the context and authenticity of the record cannot be determined. Artoc on the other hand is ‘confident that the responsible public authorities will verify the evidence’.

Whether he is guilty or not, the Škoda manager has now left the company. At his own request, it is claimed.

Simon Hage