Corruption case threatens Spain's ruling party - and its economy

Off-the-book payments to high-level members of the Popular Party – though possibly legal – could undermine Prime Minister Rajoy's government, both in Spain and among EU creditor nations.

Corruption allegations of alleged off-the-books payments to high-ranking officials of Spain's governing Popular Party – including Prime Minister Mariano Rajoy – are threatening to destabilize the government and damage its ability to steer the country through its economic crisis.

Spain’s biggest daily, El País, Thursday published what it said was a secret, handwritten accounting book kept by the PP’s former treasurer, the target of a court corruption investigation, that shows donations mostly from some of the country’s biggest construction barons, and regular payments to top party officials between 1990 and 2008, including 11 years of annual payments of 25,000 euros ($34,000) to Mr. Rajoy.

In total, more than 7.5 million euros ($10.2 million) in donations were allegedly transferred to party officials as undeclared salaries or used to buy suits, ties, and other apparel. The accounting book, of which El País published excerpts showing the names of the recipients, also shows cash payments to former party ministers, regional leaders, parliamentary leaders, and perhaps even to former Prime Minister José María Aznar.

The government and Rajoy have denied any wrongdoing and have blamed the leak on a conspiracy to derail policies meant to put Spain on a path to recover from its worst economic crisis in decades. “The PP only keeps a single accounting,” said María Dolores de Cospedal, the PP’s secretary general, herself also allegedly the recipient of cash.

“It’s very surprising that just as we are starting to recover [economically], all this information appears. Someone is trying to hurt the PP, the government, and the prime minister,” Ms. Cospedal said during a chaotic press conference Thursday.

The authenticity of the accounting book has not been certified by courts and the former PP treasurer, Luis Bárcenas, who allegedly kept the book, denied in a statement he ever kept a secret accounting of the PP’s finances. But Attorney General Eduardo Torres-Dulce said Friday that a new investigation over irregular financing of the PP had been opened, and that if necessary he would call Rajoy to testify.

Nor could Cospedal and the government explain an admission that seems to confirm the authenticity of the handwritten ledger. The Senate’s president, Pio García Escudero, admitted he indeed received around 30,000 euros that appear in the book, but only as a loan he later paid back. Most others mentioned in the book have denied ever receiving any money from Mr. Bárcenas.

Cospedal said that the admission doesn’t validate the rest of alleged payments, and that there is nothing wrong with the PP lending or advancing money to its leaders, as long as they are accounted for in party finances.

Other PP leaders not included in the shadow accounting have distanced themselves from the party and the government and called for a full investigation into the alleged illegal payments. The PP has promised full transparency and Rajoy has already ordered an internal and external audit of party finances, promising to prosecute anyone within the party for any wrongdoing.

Is it illegal?

Spain’s second-most important daily, El Mundo, with close ties to the PP, has also disclosed details about Bárcenas' alleged corruption scheme, describing the donations from construction companies as “commissions” for awarding contracts.

The paper also claims Bárcenas “has been threatening the PP’s leadership with identifying the recipients” of cash payments, and that if the government doesn’t find a “shortcut” for him to avoid prison, he will incriminate those involved. The government has also denied this.

Still, even if the authenticity of the alleged secret accounting book is confirmed, it remains uncertain whether Rajoy or the PP were involved in illegal activity.

The donations themselves are not illegal unless the PP didn’t report them to tax authorities, in which case the party could be responsible for minor tax evasion. It’s also not illegal for the PP to pay party officials, as long as the recipients report the income to tax authorities.

Indeed, from a legal standpoint, courts would have to prove not only that Bárcenas committed a crime by hiding party finances from the country’s regulators – in the process evading taxes – but also that Rajoy and other top leaders did indeed receive off-the-books payments, and that they were aware of their illegal nature.

To make things worse, Bárcenas on Wednesday handed the Spanish court investigating him evidence that he benefited from a controversial government fiscal amnesty, reporting 11 million euros in previously undeclared cash, for which he paid only a fraction of what Spaniards regularly pay in taxes. The court also uncovered a 22 million euro secret Swiss bank account Bárcenas kept.

A damaging affair

Even if Rajoy and the PP can’t be held legally responsible for any wrongdoing, the ethical and political implications could seriously damage the country’s stability ahead of a critical year in which the government’s credibility is as important as its economic policies.

Although the allegations are far from proven, opposition leaders and Spaniards are openly wondering whether the amnesty allowed Bárcenas and the PP to legitimize their dodgy accounts. More importantly, many say the controversy has exposed how the fiscal amnesty is allowing some of Spain’s richest people and companies to get away with years of tax evasion, all while the government asks Spaniards to endure draconian austerity measures and tax hikes.

All opposition parties are demanding Rajoy answer publicly to the allegations against him and the PP. Several smaller parties have called on Rajoy to resign and asked for early elections, an unlikely scenario.

An online petition calling for the resignation of Rajoy and his PP-led government has collected more than a half of its targeted 1 million signatures in just over 24 hours. Spontaneous small protests yesterday and today asked for the same. And the revelations come even as Rajoy and PP popularity among voters is plummeting.

Rajoy, who is scheduled to meet German Chancellor Angela Merkel in Berlin on Monday, has called for an extraordinary meeting of the PP’s leadership Saturday to decide how and when to confront the crisis. He will then give his version of the story of the alleged payments, party officials said today.

The government would like to avoid the embarrassment of being pummeled with media questions about the corruption scandal, precisely because Spain’s ability to plot a path to recovery depends on how much markets, creditors, and other governments – Germany being arguably most important – trust Rajoy’s word.