Business Week published this article alleging that Gaston Glock’s business practices were and are quite evil. I’m not certain enough so I recommend taking this with a grain of salt. If I were a commercial journalist this would be a counterpoint to to the origin of the weapon linked yesterday. The fact is an outright lie is a terrible thing to disseminate but correct data than be interpreted should be brought to more eyes, not less.

Glock’s Secret Path to Profits

By , , and on September 10, 2009

Gaston Glock, an Austrian manufacturer of shovels and knives, had an
improbable dream: He would make a fortune selling handguns in America.
In the early 1980s, Glock, a self-taught firearm designer, produced an
innovative pistol for the Austrian military. He then devised a plan for
promoting his invention in the U.S., the world’s richest gun market.
First, he’d persuade American police they needed a lightweight weapon
with more ammunition than traditional revolvers. Then he’d use his law
enforcement bona fides to win over private gun buyers.

The strategy succeeded spectacularly. By the late 1980s, major police
departments across the U.S. wanted more firepower to combat
crack-cocaine violence. Glock had the answer. No less impressed, street
gangsters adopted the squared-off Austrian handgun as an emblem of
thuggish prestige. Hip-hoppers rapped about Glocks; Hollywood put the
pistol in the hands of action heroes.

Gaston Glock shouldered past the storied American brand Smith &
Wesson (SWHC) to make his creation the best-known police handgun in the
U.S., and probably the world. When American soldiers hauled Saddam
Hussein from his underground hideout in 2003, the deposed Iraqi ruler
surfaced with a Glock.

Today the company claims 65% of the American law-enforcement market, an
amazing accomplishment for a privately held manufacturer based in tiny
Ferlach in southern Austria. U.S. fans celebrate “Glockmas,” the
80-year-old founder’s July 19 birthday. U.S. sales soared 71% in the
first quarter of its 2010 fiscal year, largely due to what gun
executives call the “Obama stimulus”: fear among gun owners that the
liberal President plans to curb the marketing of handguns. Gaston Glock
played on that anxiety in an open letter to customers in January. “As
shooters and gun owners, we must band together with even greater zeal
than in the past,” he wrote. “We are not going to roll over and have our
guns taken away because of some of our misguided neighbors, no matter
who they are.”

Behind the Glock phenomenon, however, is another story, one rife with
intrigue and allegations of wrongdoing. The company’s hidden history
raises questions about its taxpayer-financed law-and-order franchise. Is
this a company that deserves the patronage of America’s police? Does
Glock merit the lucrative loyalty of private American gun buyers? The
Glock tale also underscores the difficulty U.S. regulators have
overseeing complex international businesses.

CLAIMS OF SKIMMINGAllegations of corruption permeate Gaston Glock’s
empire. His former business associate, Charles Marie Joseph Ewert, now
resides in a prison in Luxembourg, having been convicted in 2003 of
contracting to have Glock killed. The murder plot—thwarted when the
victim, then 70, fought off a hammer-wielding hit man—led to a trial
that revealed a network of shell companies linked to Gaston Glock. That
corporate web is now under scrutiny by the U.S. Internal Revenue
Service, according to lawyers familiar with the probe. Attorneys for
Glock have acknowledged the misuse of company funds. But they blame most
of the wrongdoing on Ewert, a money man known in the European press as
“Panama Charly.”

Among the Glock-related material the IRS allegedly is examining: boxes
of invoices and memos provided by the company’s former senior executive
in the U.S., Paul F. Jannuzzo. Once one of the most prominent gun
industry executives in America, Jannuzzo said in a federal complaint he
filed last year that Gaston Glock used his companies’ complicated
structure to conceal profits from American tax authorities. “[Glock] has
organized an elaborate scheme to both skim money from gross sales and
to launder those funds through various foreign entities,” Jannuzzo
alleged in the sealed May 12, 2008, IRS filing, which BusinessWeek has
reviewed. “The skim is approximately $20.00 per firearm sold,” according
to the complaint. Glock’s U.S. unit, which generates the bulk of the
company’s sales, has sold about 5 million pistols since the late 1980s,
Jannuzzo estimates in an interview.

A burly man with a staccato delivery, Jannuzzo has several potential
motives for airing these allegations. As a whistleblower, he is seeking a
percentage of any federal tax recovery. He is also fighting
embezzlement charges by his former employer. Since 2007, the company has
been providing information about Jannuzzo to authorities in Cobb
County, Ga., where Glock’s American subsidiary is based. The Cobb County
District Attorney’s Office is prosecuting Jannuzzo—who once represented
the company at a White House Rose Garden ceremony and on CBS’ (CBS) 60
Minutes—for siphoning corporate money into a Cayman Islands account.
Jannuzzo, who left the company in 2003, claims he’s the victim of a
vendetta.

Speaking on behalf of the company and Gaston Glock, Carlos Guevara, the
general counsel of Glock Inc. in the U.S., said in a written statement:
“Glock has acted lawfully and properly throughout its history.
Unfortunately, Glock was victimized by several former employees and
fiduciaries,” including Ewert and Jannuzzo. “The Glock companies are
exceptionally well-run and managed. Glock’s tax filings and reporting
are accurate.”

Still, eyebrow-raising goings-on appear to have been standard at Glock.
After the attempt on Gaston Glock’s life, an internal investigation
conducted at his instruction turned up documents apparently showing that
a Glock affiliate in Panama helped in 1995 to start a bank called
Unibank Offshore in the Turkish Republic of Northern Cyprus. Unibank’s
co-founder was an alleged money launderer named Hakki Yaman Namli.

In the U.S., Jannuzzo and another former Glock executive, Peter S.
Manown, have claimed that for years they distributed company funds to
their wives and Glock employees with the understanding that the money
would be donated to congressional candidates—an apparent violation of
U.S. election law. The ex-executives, who say they acted with Gaston
Glock’s approval, have estimated the total amount in the hundreds of
thousands of dollars. Buttressing this allegation are ledger entries and
cancelled checks. Guevara, the company lawyer, said: “Glock has never
authorized, and would never authorize, any act that would violate U.S.
campaign finance laws.”

Glock’s political and public relations activities in the U.S. sometimes
have tended toward strangeness. Internal records show payments of
thousands of dollars a month over several years to a gun industry
lobbyist named Richard Feldman. In interviews, Feldman says that at
Gaston Glock’s request he spent some of the money in 1999 and 2000 to
arrange U.S. appearances by Jörg Haider, then the leader of Austria’s
anti-immigrant, far-right Freedom Party. Glock has been described in
Austria as a political supporter of Haider, although the arms maker has
sued both an Austrian newspaper and a politician there for making that
claim. The arrangements Feldman says he worked on included Haider’s
attendance at a January 2000 banquet in New York honoring the birthday
of slain civil rights leader Martin Luther King Jr. The King dinner,
sponsored by the Congress of Racial Equality, received media coverage
because Hillary Clinton criticized her then-rival for a New York Senate
seat, Rudolph Giuliani, for attending the celebration Haider present.

Before he died in a car accident last year, Haider stirred controversy,
according to media reports, for praising the “character” of elite Nazi
SS troops and the “employment policy” of Adolph Hitler. “Glock urged me
to help Haider overcome some of the [image] problems,” says Feldman. The
lobbyist says he thoroughly researched the situation to satisfy himself
that neither Glock nor Haider ever supported the Nazi cause. “There
were loose statements [by Haider] that were blown out of proportion,” he
says.

Glock’s Guevara did not respond to questions about the company’s or Gaston Glock’s relationship with Haider.

GERMAN ARMY CAMPSGaston Glock has recounted that he first learned about
firearms during a short stint as a teenager in a German military
training camp near the end of World War II. “I saw rifle, pistol, hand
grenade,” he recalled in a deposition taken during a product-liability
lawsuit in Knoxville, Tenn., in November 1993. “I was getting acquainted
when you pull a trigger, that it makes boom.” He said he spent “just a
few days in camps of the German Army” in 1944 or 1945, when he was 15 or
16 years old. Asked about his wartime experience in subsequent U.S.
court proceedings, he has characterized his contact with the German
military as extremely limited.

After the war, Glock, a civilian engineer, held a series of
manufacturing jobs and eventually came to run his own company. He
learned in 1980 that the Austrian army was in the market for a new
sidearm. Despite a lack of experience designing guns, he sought the
pistol contract. Intense research and consultation with weapon experts
prepared him to make a breakthrough. The Austrian Defense Ministry
awarded him the contract in 1982, bypassing five other manufacturers.

Simpler than most pistols, the Glock costs relatively little to make. In
a 1994 patent lawsuit in the U.S., Glock estimated its profit margin
per pistol at 68%. The guns typically sell for $450 to $600 in U.S.
retail gun stores. The Glock’s polymer frame is formed from a mold, not
from the more conventional tooled steel. The Glock ammunition magazine,
which snaps into the handle, can hold as many as 19 rounds. Revolvers
typically hold only six bullets, which are fired from a revolving
cylinder.

When early Glock models began surfacing in the U.S. in the 1980s, they
caused a sensation, recalls Massad Ayoob, a personal defense instructor
who runs the Lethal Force Institute in Concord, N.H., and has done
promotional writing about Glock. “They looked like something out of Star
Trek,” he says.

DELIGHTING LAW ENFORCEMENTTo sell his gun to U.S. police departments,
Glock employed a combination of German-speaking executives and retired
American cops. Many police chiefs were receptive to the pitch that they
should trade in six-shot revolvers for more potent Glocks. “The bad guys
were starting to carry high-capacity weapons, unlike what they had
carried in the past,” recalls Sheriff John H. Rutherford of
Jacksonville, Fla. As a lieutenant, he led a study in 1987 that resulted
in the department buying Glocks. The 1,700-member force still uses the
brand.

“It was a conscious decision to go after the law enforcement market
first,” Gaston Glock told Advertising Age in June 1995, when the trade
magazine honored him as one of its “Marketing 100” stars. “We assumed
that, by pursuing the law enforcement market, we would then receive the
benefit of ‘after sales’ in the commercial market.” Police departments
from New York to Miami to St. Paul, Minn., signed on. The strategy
closely resembles that of firearm pioneer Samuel Colt, who popularized
his six-shooter in the mid-19th century by seeking endorsements from
soldiers and lawmen.

Syndicated columnist Jack Anderson raised the Glock profile when he
wrote in January 1986 that Libya, a notorious terrorist threat, was
trying to acquire Austrian-made “plastic” guns that could evade metal
detectors. Glock pistols are actually made mostly of metal and are
easily identified by alert airport screeners. The company denied it was
marketing to Libya. Rather than tarnish the gunmaker, the Anderson
column helped spread the idea that serious bad guys preferred Glocks,
says Robert Ricker, a longtime lobbyist for the firearm industry. “It
was an incredible lucky break,” Ricker adds. “It raised public
awareness, got people interested in it.” Sales grew rapidly.

At nearly every turn, Gaston Glock and his executives displayed
impressive marketing and legal savvy. When arch-rival Smith & Wesson
in 1994 came out with a Glock-like pistol called the Sigma, Jannuzzo
led a successful patent-infringement lawsuit. S&W agreed to pay an
undisclosed settlement and modify its gun. An S&W spokesman declined
to comment on the confidential resolution, other than to say the
company had neither admitted nor denied wrongdoing. Glock now offers
about 40 models in various calibers. “They’re simple, they work, and you
don’t have to mess with them,” says Herman Gunter III, an investment
adviser in Live Oak, Fla. He owns two Glocks for personal defense and
target shooting.

The company has boosted its profits with innovative pricing strategies.
It has offered discounts to police on new pistols if cities turn over
used service weapons and guns confiscated from criminals. Glock has
arranged to have the second-hand firearms sold on the used-gun market,
where former police weapons command a premium.

With Jannuzzo as its U.S. front man, Glock deftly ducked repeated legal
assaults on the gun industry. Jannuzzo, a former state prosecutor in New
Jersey who joined the company in 1991, displayed a knack for talking
compromise while rarely giving much ground. In one notable episode in
2000, he made encouraging noises about a master settlement with the
Clinton Administration and more than 20 cities that would have shielded
gunmakers from future liability in exchange for restrictions on gun
marketing. But at the last minute, Jannuzzo pulled back from the deal,
leaving rival Smith & Wesson as the only industry signatory. A
boycott led by the National Rifle Assn. temporarily crippled S&W,
while Glock and other manufacturers enjoyed a sales surge. The
settlement later collapsed, and the issue faded when Congress passed a
statute in 2005 to protect gunmakers in court.

Even as the Glock company faced courtroom challenges in the U.S., a more
personal and dangerous conflict was playing out for Gaston Glock in
Europe. Beginning in 1987, the Austrian industrialist had employed
Charles Ewert as his financial architect. “I was not a salesman. I am a
technician…so I had to find a partner that helps me to sell the
pistol,” Glock explained in a U.S. court deposition in September 1995.

Ewert, a mustachioed Luxembourg resident now in his late 50s, wasn’t
exactly a salesman either. Nicknamed “the Duke” by Glock employees
because of his imperious manner, he was a purveyor of shell companies:
paper corporations that can be used to shield income from
taxation—sometimes legitimately and sometimes in questionable ways.
Ewert designed a network of shells to lessen the gun empire’s exposure
to product liability and potential taxation, according to documents
filed with the Luxembourg court. These firms absorbed millions of
dollars, the records show.

VIOLENT ATTACKOver time, Ewert transferred ownership of some of the
Glock-affiliated shells to himself, according to Luxembourg court
judgments. Suspicious of Ewert, Gaston Glock sought an explanation in
July 1999. On the afternoon of a meeting scheduled at Ewert’s office
near the tony Rue Royale in central Luxembourg, Glock was attacked in an
underground garage. The hit man, a former professional wrestler and
French Legionnaire named Jacques Pecheur, bashed the businessman on the
head with a rubber mallet, a technique apparently aimed at making it
look like the victim had fallen down and fatally injured himself. Glock,
physically fit from daily swimming—often in the frigid lake abutting
his home near Klagenfurt, Austria—fought back. When police arrived, they
found Glock bleeding from gashes to his skull. Pecheur, 67, was
unconscious.

Luxembourg investigators found Ewert’s business card in Pecheur’s car
and determined that the two had met at a gun range in Paris in 1998.
Both were convicted of participating in a conspiracy to kill Glock.
Pecheur received a sentence of 17 years, Ewert 20.

Ewert denies any involvement in the attack, which he blames on unnamed
Glock associates who he alleges wanted to gain control of the
manufacturer. “They needed me out of the way so they could grab
everything,” he says in an interview at a maximum-security prison in
rural Luxembourg. His lawyers are appealing his conviction to the
European Court of Human Rights in Strasbourg, France, arguing that
police improperly seized records from Ewert’s office that were protected
by attorney-client privilege. Pecheur was released early from prison in
2007 for good behavior, his attorney, Fränk Rollinger, says. Pecheur
couldn’t be located for comment.

Although Gaston Glock saw his antagonists punished and regained control
of his corporate holdings, the investigation of the attempted killing
and related financial fraud opened a window on the gun company’s
finances. Most striking are their sheer complexity. With Ewert’s help,
Gaston Glock purchased a Panamanian shell company called Reofin
International in 1987. Reofin then bought Unipatent Holding, a
Luxembourg shell. Unipatent received a 50% stake in Glock’s unit in the
U.S., where the company generated the vast majority of its revenue. “The
purpose of this holding company [Unipatent] was to appear externally as
a partner of Glock and hold approximately 50% of the shares of its
subsidiaries,” according to an Apr. 3, 2000, document entitled
“Establishment of the Glock Group,” which Gaston Glock’s attorneys filed
with the Luxembourg court.

Three other shell companies in Ireland, Liberia, and Curaçao were
created to issue bills for various “services” to Glock headquarters in
Austria and operating units in Latin America and Hong Kong. But these
service firms “had no economic substance and were motivated by tax
reasons,” according to a confidential 92-page analysis of the Glock
companies in 2002 by auditing firm PricewaterhouseCoopers. PwC had been
retained by the provisional administrator of Unipatent appointed by the
Luxembourg court. The PwC auditors found that the service companies’
role appeared to be the shielding of profits from potential taxation in
Austria, Latin America, and Hong Kong.

The Latin American and Hong Kong units, in turn, appeared to be used to
extract profits from the U.S. subsidiary, PwC alleged—an assertion
reiterated by the 2008 IRS complaint filed by Jannuzzo. American tax
liability allegedly was artificially lowered by having pistols
manufactured in Austria sold first to the Latin American and Hong Kong
units and then resold for higher prices to Glock Inc. in the U.S. By
inflating costs to the American subsidiary, this arrangement decreased
the profits the subsidiary reported to the IRS, according to Jannuzzo.

A spokeswoman for the IRS, Patricia Bergstrom, declined to confirm or
deny that the agency is investigating Gaston Glock or his companies. The
IRS, says Jannuzzo, has interviewed him about Glock three times since
June 2008.

Glock’s Guevara said that the company has undergone “a series of
comprehensive governmental audits going back to 1988” in the U.S. and
Austria. “No audit has ever resulted in findings of tax fraud in any
jurisdiction,” he added.

For nearly three years after the attempt on his life, Gaston Glock
employed a team of investigators to probe the workings of his own
company. This group, referred to in internal correspondence as “the
A-Team,” was headed by James R. Harper III, an ex-U.S. Justice Dept.
prosecutor. Harper discovered that Reofin, the Glock affiliate in
Panama, had taken part in starting Unibank Offshore in Northern Cyprus
in 1995. Unibank’s co-founder, according to documents BusinessWeek has
reviewed, was Hakki Yaman Namli. Law enforcement officials in the U.S.
and Europe have alleged that Namli, who is of Turkish descent, launders
funds for crime syndicates. In 2003, a federal grand jury in Manhattan
indicted him for fraud carried out through another outfit in Northern
Cyprus, First Merchant Bank, which Namli controlled. A year later, the
U.S. Treasury designated First Merchant as a “primary money-laundering
concern.” Turkey closed the bank in 2006. Namli is listed as a fugitive
in the New York case.

Harper told Gaston Glock and Jannuzzo he believed that Ewert was the one
who involved the Glock companies with Namli. But Harper wrote in a memo
to Jannuzzo dated Nov. 1, 2000, that Gaston Glock “is in danger of
being flagged as an international money launderer because by all
appearances…Ewert was working at [Gaston] Glock’s direction up until
the time of the assault [on Glock].” Harper added: “Mr. Glock doesn’t
understand the breadth of the problems or the potential disaster that
could befall him.”

Glock’s Guevara said that neither the company nor Gaston Glock has ever
had any relationship with “a banking institution in Turkey or [the]
Turkish Republic [of] Northern Cyprus.”

In recent years, the gun company’s U.S. operation has been rattled by
scandal. Local authorities in Georgia have prosecuted Jannuzzo and
fellow former executive Peter Manown at the behest of their former
employer. On Oct. 18, 2007, Manown, an attorney who handled many of
Gaston Glock’s personal matters in the U.S., testified that he and
Jannuzzo had embezzled company funds and funneled the money to accounts
in the Cayman Islands. He said the pair also skimmed money from Glock
real estate transactions. And Manown said he and Jannuzzo had withdrawn
more than $500,000 from Glock accounts for political campaign
contributions from 1993 to at least 2003. The executives put some of
that cash in their own pockets, he testified. “There was so much money
flying around in this company,” Manown said. “It was like Monopoly
money.” He recounted confessing his transgressions privately to Gaston
Glock back in 2003 and repaying some of the stolen money. The former
Glock executive pled guilty in 2008 to theft and received a suspended
10-year sentence.

In connection with the campaign contributions, Manown testified that
Gaston Glock knew what his underlings were doing: “This was all done
with Mr. Glock’s blessing.” Manown said he and Jannuzzo would withdraw
cash for political contributions from a Glock account at the
since-closed Summit Bank (SBGA) in Atlanta. Sometimes the Glock
executives withdrew “$9,000 so it would stay under the reporting radar
of the bank,” Manown said. He was referring to the federal anti-money
laundering rule that requires banks to report to the Treasury Dept. any
cash withdrawal of $10,000 or more. Purposely evading the requirement is
a federal crime punishable by up to five years in prison.

Manown went on to explain that he and Jannuzzo at times wrote checks on
the Glock account to themselves and to their wives. Jannuzzo later
“spread [some of the money] around [to] other people at Glock,” with the
understanding that they would use the funds to make political
contributions, Manown added. He kept a handwritten ledger of many of the
withdrawals. A Nov. 1, 2000, entry shows $60,000 designated for “Bush
election campaign per GG and PJ 4 RF.” GG apparently is Gaston Glock;
PJ, Paul Jannuzzo; and RF, Richard Feldman, the lobbyist and consultant.
The Cobb County District Attorney’s Office declined to comment on any
“matters related to open cases.”

ALLEGATIONS OF THEFTA review of federal campaign donations by Glock
employees between 1991 and 2004, conducted for BusinessWeek by the
nonprofit Center for Responsive Politics, shows more than 100 individual
donations worth a total of at least $80,000. Jannuzzo says many more
contributions were made by Glock employees and associates for less than
$200 apiece to avoid election-law reporting requirements. Among the
recipients of Glock-affiliated campaign contributions were former
Atlanta-area Republican congressman Bob Barr, and two current Republican
members of Congress from Georgia, Representative Phil Gingrey and
Senator Saxby Chambliss.

Barr said in a written statement that all donations he received from
people affiliated with Glock were “fully and appropriately reported to
the [Federal Election Commission], and so far as we knew, were
legitimate.” A spokeswoman for Gingrey said in a separate statement: “We
have never knowingly received any unlawful contributions.” A Chambliss
spokeswoman said that to be on the safe side, the senator planned to
return contributions from Glock-affiliated donors.

Glock had a number of reasons to try to make an impression on Capitol
Hill. Gun control proposals that could affect its business were being
debated. The gun industry also lobbied for federal protection from
liability lawsuits, culminating in the enactment of such a law in 2005.

In his written response, Glock’s Guevara said: “Manown and Jannuzzo
stole over $500,000 of Glock money for themselves and then labeled it
political contributions to hide their crimes. In any event, we conducted
our own due diligence, which revealed that Manown’s statement that
Glock money was spread to employees to make political contributions is
entirely false (except as to Manown and Jannuzzo). With respect to the
allegation that Glock contributed $60,000 to the 2000 Presidential
political campaign, the evidence shows that Manown stole this money from
Glock and transferred it to Cayman Island accounts controlled by Manown
and Jannuzzo.”

Manown’s confession in Cobb County had serious consequences for
Jannuzzo. On Jan. 14, 2008, the onetime U.S. chief of Glock’s U.S.
operation was arrested and charged by local authorities with theft and
racketeering. The indictment alleges Jannuzzo stole a semi-automatic
pistol from his former place of employment and conspired with Manown to
embezzle $177,000 from Gaston Glock. Jannuzzo denies the charges. He
says he never stole any money. The dealings described in the indictment
related to his effort to help his former colleague Manown resolve his
mismanagement of Glock funds, Jannuzzo says. As for the disputed
handgun, Jannuzzo maintains he volunteered to return it but no one at
Glock ever took him up on the offer.

In contrast to these denials, Jannuzzo admits he reimbursed fellow Glock
employees and others for making political contributions, which was
illegal. He says he first discussed the practice with Gaston Glock in
1993 during a meeting in Austria. The reimbursements, Jannuzzo adds,
continued for at least 10 years. Glock indicated strong interest in the
donations. “He would say, ‘How are we doing? What do the candidates look
like? Do we need to make some contributions?'” Jannuzzo adds: “[Gaston
Glock] knew 100%. I talked to him personally about it on the phone.”

No one has been charged in connection with the alleged reimbursements.
Some may now be beyond prosecution because the statute of limitations
has expired.