Ferdinand Piëch, the former head of Volkswagen who is known as the patriarch of the German motor industry, denied knowledge yesterday of a company slush fund to pay for prostitutes and mistresses of company workers, in a trial that has called into question the national system of labour relations.

Mr Piëch, who is at the heart of Porsche’s current takeover of Volkswagen, said that no one had reported to him the tales of sex and sleaze haunting Europe’s largest car manufacturer.

The 70-year-old entrepreneur was testifying at the trial of two senior employees accused of defrauding the German company.

The defendants, Klaus Volkert, the works council chief, and Klaus-Joachim Gebauer, a human resources executive, say that they did not cheat VW. On the contrary, they were beneficiaries of a company-run system of rewarding union leaders with escort girls, visits to brothels, sponsorship of mistresses, cash gifts during overseas business trips, jewellery for wives and even free Viagra. The intent was to buy the support of the workforce in tricky management decisions – and, the defence team maintains, it had high-level approval.

“I very much condemn that there have been irregularities at Volkswagen,” said Mr Piëch, who was chief executive between 1993 and 2002, when the alleged offences took place. “Had I heard about this I would have vehemently taken steps to stop it.”

In the witness stand of the Brunswick courtroom, Mr Piëch replied with clipped, slightly irritated answers. His nervousness stemmed in part from the need to guard his reputation and his family honour – he is the grandson of Ferdinand Porsche, who helped to set up Volkswagen for Adolf Hitler – and in part because the whole system of German labour relations is now under scrutiny.

In large companies, worker representatives sit on the supervisory board and unionists are drawn into important investment decisions. The attempt to ease the lives of top workers came at a time when VW was introducing a four-day week and when decisions had to be taken about manufacturing cars abroad. If Judge Gerstin Dreyer ends up accepting the arguments of the defence team the much-praised consensus model of industrial relations will look very suspect.

Mr Piëch acknowledged that he had heard rumours about Mr Volkert having a Brazilian mistress on the company payroll but said that he had not pursued the matter: it was not his task to deal with rumours. Mr Piëch nonetheless had a reputation for wanting to know every detail of the company and having his own network of informants. The defence team argues that he must at least have known of the special account, codenamed 1860, through which all payments for the worker representatives were chanelled.

The former VW boss – now supervisory board chairman – replied that the company had about 6,000 or 7,000 bank accounts and there was no reason why he should have been aware of this one. The company is hoping that the buck will stop with Peter Hartz, former head of human resources, who was found guilty last year of breach of trust after admitting that he awarded bonuses worth €1.9 million (£1.4 million) to Mr Volkert.

On Tuesday a secretary named only as Silke W explained how she was ordered to find a flat in Brunswick where union leaders could be entertained by prostitutes. She found a place with an underground garage and a lift that went almost to the door of the flat so that the men could come and go unrecognised. She also witnessed her boss, Mr Gebauer, arranging for prostitutes in Bratislava. Mr Volkert’s mistress was particularly troublesome, ringing her up to change flight and hotel bookings – all made and paid for from the VW account.

Mr Volkert faces 48 separate charges of breach of trust and, if found guilty, up to ten years in jail. Mr Gebauer, who administered the system, faces up to five years’ imprisonment.

The trial continues.

Beetle drive

— Volkswagen means people’s car

— The company has its origins in a 1933 meeting between Adolf Hitler and Ferdinand Porsche

— The original car never progressed beyond a prototype

— The first Beetles were produced in 1949, under the control of the German Government

— By 1955 VW was producing 1,000 cars a day

— European production of the Beetle saloon ceased in 1977, followed by the cabriolet in 1979

— Production of Beetles and VW vans continued in Brazil until 1993 and still continues in Mexico

Sources: www.volkswagenspares.com; www.volkswagen.co.uk

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