Foreign Relations of the United States, 1952–1954, Germany and Austria, Volume VII, Part 2

863.00/12–1252

No. 836
The Officer in Charge of Italian and Austrian Affairs (Collins) to the United States High Commissioner for Austria (Thompson)

secret

[Washington,] December 12, 1952.

Dear Tommy: In an undated letter of about December 1 to Mr. Bruce, a copy of which is attached, Mr. Kenney advised that MSA wished to suspend aid to Austria unless there were overriding political considerations against such action because of the Austrian Government’s unsatisfactory performance of its commitments contained in the Donnelly–Figl agreement of June 3, 1952.¹ Although Ty Wood, who replaced Mr. Kenney shortly after the letter was despatched, has indicated he may withhold the sanctions until after the elections, we are increasingly anxious that a basis be found to wind up the dollar diversion investigation. A copy of our reply to Ty Wood is also attached.²

MSA’s position is far from clear because they refuse to state the essential conditions for liquidation of the affair. They insist that they must have evidence of sincere Austrian performance on the six June 3 commitments before it can be determined if the accounting standards appropriate for a recipient of U.S. aid have been met. Behind this stand is the fear they may some day have to explain the whole history of the investigation to the House Watch-Dog Committee. As the attached copy of Mr. Kenney’s letter shows, they are not yet tired of receiving accountants’ reports which no one seems able to translate into concrete proposals. For example, when Karasik and Surrey, the Washington firm of lawyers retained by the Creditanstalt, disclosed the results of the Limor audit, the Controller stated this information was insufficient and proposed the widening of the investigation to include other foreign subsidiaries of Austrian Banks.

While the Department is on strong grounds in pointing out the absurdity of jeopardizing the entire U.S. position in Austria for the sake of what now seem to have been relatively minor irregularities, we can hardly justify the meagre Austrian performance on the six points. This is all the more so since the Minister of Finance seems to be proceeding on the assumption that the action of the Parliamentary Committee on July 17 in taking note of the report of the Court of Accounts concluded the investigation. Whether he has underestimated the gravity we attach to this business or believes we are not in a position to press for further progress, he does not seem to have taken obvious steps to comply with the commitments, steps which to us at this distance do not seem to involve the political risks always mentioned in connection with the People’s Party’s involvement in this affair but which might be of major importance in Austro-United States relations. These might include the following:

1. Transmission of the completed Limor audit to you by the Austrian Government together with the answers to as many of the Andersen accountant questions as Weill, the New York associate of Karasik and Surrey, can prepare. It would be very strange if material now available in Washington could not find its way into the hands of Mr. Kamitz.

2. As to prosecutions it would seem feasible that the Minister of Justice prepare a report on the culpability under Austrian law of those involved in the diversions. Presumably this would be even less definite than the opinion already prepared by the Legal Division of the Embassy.

3. Similarly with respect to reimbursement of diverted U.S. funds the Austrian ERP Bureau, the Ministry of Finance and the National Bank could examine the views of the MEC Controller to determine the Austrian position on this point.

4. As to banking legislation, it would seem easy for the Austrians to submit alternate staff plans for a new charter of the National Bank which are believed to have been in existence since 1947. It would not be necessary to introduce these into Parliament but only to indicate that the matter was under consideration.

5. We have noted your views in Embtel 1410 November 22³ as to the possibility that the new Government will not renew the invitation for a bank survey group. Would you think this view would be maintained if the Austrians knew aid were cut off on just such a trifling pretext? Could we not get the assurances of the two major parties, through Figl and Schaerf, that the invitation would be given right after the elections?

6. We understand that Limor is in process of liquidation but have no word on other foreign bank subsidiaries. On this point the Government could indicate what action it has or contemplates taking. If the answer is negative, it could at least present an economic justification for keeping these subsidiaries in existence.

We make no claim that the above exhausts the possibilities which have been open to the Austrians since June. That nothing has been done except vague reports on Limor and some discussion of the composition of the banking survey group convinces certain groups in MSA that the Austrians are guiltier than the evidence indicates and furthermore never intend to take any remedial action.

We have no sanguine hopes that the Austrians even with the best of intentions could wind up this affair before the elections. It does seem possible, however, that some of the staff work could be initiated with a view to presenting an Austrian proposal for ending the investigation soon after the formation of the new Government. It is suggested that in separate talks with Figl and Schaerf you may wish to review the situation frankly. If the Austrians could go through with the operation described and if MSA agreed, then a statement like the one attached⁴ might be the final step. Pending the receipt of your comments, the above has not been presented to MSA. For the time being we shall proceed with them on the basis of the attached letter to Mr. Wood, that is, attempting to obtain the release of $15 million, the last tranche of the $35 million promised the Austrians for the first half of fiscal year 1953.

With best regards.

Most sincerely,⁵

[Attachment]

The Deputy Director for Mutual Security (Kenney) to the Acting Secretary of State

secret

Washington, undated.

Dear Mr. Bruce: I should like to invite your attention to certain problems regarding Austria which have raised once again the question of future allotments of aid.

You will recall that last spring, largely on the basis of reports received from Arthur Andersen and Company, MSA and the Department of State acted jointly to withhold the final allotment of Austrian FY ‘52 aid pending the receipt of certain assurances from the Austrian Government. These assurances concerned measures which the Austrian Government would take to correct abuses in the Austrian banking system which had been revealed by the audit investigation, and were promptly supplied in the form of six specific commitments contained in a letter from Chancellor Figl to Ambassador Donnelly, dated June 9, 1952. A copy of this letter is attached.⁶

A cable which recently arrived from our Mission in Vienna regarding implementation of the fourth commitment in Chancellor Figl’s letter has prompted us to review the progress made on this as well as the other five assurances. The review indicates a record of nonperformance which causes us grave concern.

Assurance No. 1

Although the Austrian Government originally promised that a report on the Limor subsidiary of Creditanstalt would be available on 1 September 1952, the report has not yet been received. Meanwhile, we have received information from our Mission which tends to indicate that the report, if presented at all, will be so limited as to be of little value.

Assurance No. 2

The Austrian Government has offered no reimbursements to the United States Government, and the MSA Controller is now reviewing the various specific cases involved to determine what reimbursements can be required as a matter of United States law.

Assurance No. 3

I have no knowledge of any steps which the Austrian Government has taken to revise the Austrian banking statutes.

Assurance No. 4

We have received from our Mission a statement indicating that the present Austrian Government does not wish to employ outside technical assistance to survey its banking system, preferring to wait until after the election next spring. The Embassy in Vienna has expressed its doubts as to whether the present government could give effective assurances that the new government would carry out the banking survey, and implies that negotiations on the whole subject would have to begin again.

Assurance No. 5

As indicated above, we have received no report on the investigation of Limor. As far as I have been informed, the Austrian Government has undertaken no investigations of other partially owned foreign subsidiaries and has not required the liquidation of any such subsidiaries.

Assurance No. 6

As far as I have been informed, no disciplinary action of any nature has been taken against any individual, group or association in connection with the findings of either the Austrian Supreme Court of Accounts or the firm of Arthur Andersen. While Mr. Draper and I were in Vienna last August, we were assured by officials of the Austrian Government that they, together with the Mission, would scrutinize the investigation reports with great care and would take firm and prompt action where such action was required. The Legal Division of USCOA has prepared a brief on the various cases involved and has left no reasonable doubt that grounds exist, if not for prosecution, at least for other types of disciplinary action on a wide variety of transactions.

The imminence of the Austrian elections, and the fact that the present government is serving only on an interim basis, complicates greatly the problem of obtaining full compliance on these commitments. The Austrian Government undertook the commitments, however, in full knowledge that an election was pending, and almost five months elapsed in which action could have been taken. The fact that satisfactory performance was obtained on none of the commitments leads us to suggest that we revert to the position of June, 1952 and suspend further allotments of aid until action is forthcoming.

I understand from members of my staff that this action has already been broached with the appropriate regional bureau of the Department of State. They were informed of the State Department’s desire that, for political reasons, no action should be taken at this time which might affect the outcome of the Austrian elections. I am prepared, of course, to accept your judgment on the political factors involved. However, under present circumstances, I cannot with conviction assure the United States Congress that adequate steps are being taken to insure that funds allotted to Austria are properly handled. Accordingly, I feel compelled to express my desire that further allotments of aid to Austria be suspended pending action by the Austrian Government which would give us some assurance that aid funds were not being dissipated. Unless there are overriding considerations of a political nature to the contrary, MSA would wish to take prompt steps to this end.

I would appreciate hearing from you as to your views on this matter.⁷

Sincerely yours,

W. John Kenney

1. Regarding this agreement, see footnote 4, Document 803.
2. Not attached to the source text, but see Document 838.
3. Telegram 1410 reported that both People’s Party and Socialist leaders were opposed to an announcement of a bank study until after the Austrian elections, although the People’s Party leaders were the most concerned about this subject. It stated that if the bank survey was not inaugurated immediately, the earliest it would be initiated was sometime in March 1953. (863.14/11–2252)
4. Not printed.
5. The source text has no signature.
6. Not attached to the source text, but see footnote 4, Document 803.
7. For Bruce’s reply, see his letter to Wood, Document 838.