ART MARKET / Mystery of Munich's missing millions: An inquiry is investigating why two galleries in Germany paid twice the market price for paintings. Was the money really spent on art?

FRIEDRICH Karl Flick, reputedly the third richest man in Germany, was among a group of six leading

citizens subpoenaed to appear before a parliamentary committee of inquiry in Munich two weeks ago. The cross-party committee, which has been at work for more than a year, is trying to determine why Munich's two great art galleries, the Alte Pinakothek and the Neue Pinakothek, bought so many paintings at around twice their market prices in the 1980s - but it is finding itself frustrated at every turn.

There is a clear implication that purchase funds may have been misappropriated during these transactions. The committee is investigating possible corruption among the administrators of the two great art galleries; the patrons involved with the paintings under investigation include Flick and Siemens, two of the biggest names in German industry. As much as DM10m (nearly pounds 4m) may have gone missing, according to Heiko Schultz, opposition MP and deputy chairman of the committee. Such a scandal is without precedent in the art world.

When the committee of inquiry began to dig into the documentation of the purchases, a chaotic and contradictory picture emerged. Bills had been submitted by mystery figures in Switzerland, even when the paintings had been supplied by well known dealers. Sometimes bills had been submitted by several different 'sellers' for the same picture. Customs declarations regularly claimed that paintings came from private collections when they had been supplied by dealers - in an apparent attempt to avoid import tax; in Germany no import duty is paid if a painting comes from a private collection. After more than a year's work the committee has failed to discover where any of the missing money went; the transactions went through Switzerland and are protected from inquiry by Swiss secrecy laws.

I went to the committee's penultimate session last month. I watched the deputies in their BMWs turn sharply into the sun-dappled courtyard of the Bavarian parliament house. They wandered into the old building with friendly Bavarian informality - many in their shirt sleeves. The 'picture scandal' team climbed the broad wooden staircase to committee room number one on the first floor.

Flick failed to appear before the committee on 25 April; a note from his Bavarian doctor informed parliament that he was residing in the 'south of the USA' for the sake of his health and was unable to travel. The other five did appear but none of them could remember very much.

As the proceedings unfolded, it became clear that this was as much a political as an artistic controversy. The Christian Social Union (CSU), the right-wing party which has ruled Bavaria for the past 40 years, has a majority on the committee of five to four. But apart from the committee chairman, Otmar Bernhard, only two CSU representatives turned up; they didn't speak and left after a couple of hours. In contrast, the four opposition MPs, two from the Social Democratic Party (SPD), one Free Democrat (FDP) and one Green, grilled each witness, making no secret of their belief that the missing money has gone into CSU party funds. Two witnesses were asked outright whether they had paid cheques into the Swiss bank account of the late CSU party chairman, Franz Joseph Strauss - thereby eliciting a tired protest from the chairman.

Political corruption has become as characteristic of Bavaria as fresh mountain air and onion-domed churches. Last year the CSU prime minister of Bavaria, Max Streibl, resigned over the 'Amigo affair' - he had received expensive holidays and other favours from a friendly aircraft manufacturer. And last month a new controversy erupted over payments made to the CSU by the millionaire tax dodger Eduard Zwick. German law limits corporate donations to political parties and there are frequent allegations of secret transfers.

The Bavarian parliament's 'picture purchase' committee was established just over a year ago at the request of the SPD, the largest opposition party. It should have reported in February - but new information came to light and witnesses were recalled for the April session. The new information concerned three paintings donated to the galleries by Friedrich Karl Flick. A letter received from the London dealers Harari and Johns last December established that the firm's price for a Baroque portrait by Ghislandi, shipped to the museum in December 1985, was pounds 150,000; Flick had paid pounds 304,000 for it and the committee wanted to know why. They had also discovered that Flick donated a Hogarth and a Lancret in 1984 in odd circumstances that involved two dealers selling the paintings to a third party in Switzerland.

Flick's name has a special resonance in Germany. Now 67, he inherited from his father, Friedrich Flick, a vast industrial empire ranging from the production of tanks and chemicals to paper handkerchiefs; it originally included 40 per cent of Daimler Benz. In 1975 Flick junior sold part of his Daimler holding for DM1.9bn (then pounds 370m) and was let off paying capital gains tax because he invested the money abroad 'in the national interest'; two German finance ministers were subsequently forced to resign over allegations that they had been bribed to let him off the tax - the alleged bribes took the form of payments into party funds. The long-running trial of the two politicians and the chief executive of the Flick empire caused a sensation in the mid-1980s; the bribery charges were not proven but both ex-ministers were fined for having failed to declare the party contributions or pay tax on them. The chief executive was given a two-year suspended prison sentence as well as a fine.

The suggestion that his gifts to the Munich galleries were used to cover donations to CSU party funds would have been put to Flick if he had turned up on 25 April. In his absence, the other witnesses firmly denied it. They included the present director of the Bavarian State Art Galleries, Johann Georg Prinz von Hohenzollern, his predecessor, Erich Steingraber, the head of the Culture Ministry's museum section, Wolfgang Eberl, and Munich's leading art auctioneer, Rudolf Neumeister - who acted as Flick's agent over the picture purchases. Neumeister and Flick were both friends of Franz Joseph Strauss.

All the acquisitions under investigation were made in the 1980s when Steingraber, a flamboyant Bavarian art historian, was in charge of the galleries; Prinz Hohenzollern was then his deputy.

During Steingraber's reign, which lasted from 1969 to 1987, the galleries acquired more than 1,000 paintings and sculptures; he became known as 'the great acquisitor'. There were many minor donations from artists and collectors but about 50 of his acquisitions were seriously expensive works which were bought on the

international market.

In previous sessions of the committee, Steingraber has given his evidence with angry elan, outraged that his actions should be questioned. In April, however, he appeared muddled and lost for words, particularly over the purchase of Ghislandi's Portrait of a Young Painter. The documents that survive in the galleries' files reveal that it was an extraordinarily complicated transaction - and provide a good illustration of the kind of deals under investigation.

The painting, a rare work by the greatest Italian portrait painter of the late Baroque period, was offered to Steingraber by Harari and Johns who sent it to Munich on approval in December 1985. Both Derek Johns and Philip Harari used to work at Sotheby's - Johns ran the Old Master department - and the firm they set up in Duke Street, St James's, sells high-quality paintings to museums and rich collectors.

Johns visited Munich in February 1986 and discussed the sale with Steingraber over breakfast, but that is the last we hear of the London dealers' involvement in the transaction. In April a bill for 800,000 Swiss francs (then pounds 304,000) arrived at the Munich gallery from one Max Wydler in Zurich; all that is known of Wydler, who died two years ago, is that he was a small-time art dealer and a friend of Flick's agent, Rudolf Neumeister. Flick signed two cheques for 400,000 Swiss francs and sent them round to Steingraber; Neumeister picked up the cheques from the galleries' headquarters and took them to Zurich in person.

Although it sounds a curious way to make a payment, there was no reason to suppose anything untoward had happened until Derek Johns revealed he had been paid pounds 150,000 for the painting, almost exactly half the amount Wydler billed the gallery for. 'We assumed Mr Wydler bought the painting for the Alte Pinakothek,' he told the committee.

Steingraber presumably knows the circumstances of all the galleries' aquisitions and he vehemently denies any wrong-doing. For instance, he says that Max Wydler, after he bought the Ghislandi from Johns, received a higher offer for it from a Milan dealer and therefore raised his price to the Munich gallery. It was only after Steingraber's retirement from the directorship in 1987 that the story emerged, for which he bitterly blames his successor.

There was a close fight over who should succeed him and a compromise candidate was finally settled on - Hubertus von Sonnenburg, the director of Munich's picture restoration laboratory, the Doerner Institute. 'It was my idea,' Steingraber told me regretfully. 'He was 60 and I said - what can he do in the five years before he retires? I was at fault.' Sonnenburg brought the affair out into the open within a year of his appointment; Steingraber argues that his successor did not understand the art trade and made a lot of fuss about nothing.

A quiet professional with a reputation for spotting fakes, Sonnenburg had been chief restorer at the Metropolitan Museum in New York before he came to Munich. He had never previously taken an interest in acquisitions or administrative issues but threw himself vigorously into his new job.

He was soon at loggerheads with both Steingraber and the Culture Ministry, who wanted to carry on buying pictures that Sonnenburg considered unworthy of the State Galleries. He told the parliamentary inquiry last summer that, after the initial battles, purchases were no longer discussed with him but organised by Steingraber 'from his sitting room, with the help of those who had remained true to him'. Sonnenburg described how he was called to the CSU chancellery in April 1988 and asked to sign a two-page document severely limiting his functions - notably, he was not to inquire into the circumstances of earlier purchases. He refused to sign.

There were two people with whom Sonnenburg clashed over aquisition policy at this time: Wolfgang Eberl, head of the Museums Section of the Bavarian Culture Ministry, and Heribald Narger, the finance director of Siemens, Germany's largest public company.

Eberl had charge of distributing government funding between Munich's various museums and had overseen Steingraber's expenditure. Narger runs the Ernst von Siemens Kunstfonds, a charitable foundation which supports the arts. The foundation had frequently helped Steingraber with purchases, either by buying a share in a picture or by providing a loan. Narger told the parliamentary inquiry last year that it was 'infamous' to suggest that Siemens would have contributed to CSU party funds in order to avoid tax.

In 1990 Sonnenburg decided to bow out and resigned his directorship. He has moved back to New York as the Metropolitan Museum's director of restoration. The new director of the Bavarian Galleries is Steingraber's former deputy, Johann Georg Prinz von Hohenzollern.

The revelations over the internal workings of the galleries began with the so-called 'Daubigny affair'. Charles Francois Daubigny (1817-78) was a minor French landscape painter who counts among the forerunners of Impressionism. In 1986 Steingraber bought a six-foot Landscape near Auvers for DM1.6m (then pounds 564,000), an unheard of price for Daubigny; the auction record for his work is pounds 72,500.

Within weeks of taking over his new post, Sonnenburg received a letter from the author of a standard work on the artist, Robert Hellebranth, alleging that the Landscape near Auvers was not by Daubigny; a week later he received a second letter from a Munich dealer to the same effect. Sonnenburg investigated and concluded that they were right.

The painting had been bought from a Zurich dealer called Peter Nathan with the help of a bridging loan from the Ernst von Siemens Kunstfonds. When Sonnenburg told Nathan the painting was a fake and asked him to take it back, all hell broke loose. It turned out that Nathan had not really been asking DM1.6m for the picture, merely DM600,000 ( pounds 188,500). The extra DM1m was left over from a previous deal, an early Toulouse-Lautrec purchased from him in 1984. Nathan's price for the Lautrec had been DM4.2m ( pounds 1.1m); Steingraber had paid DM3.2m ( pounds 844,000) and told Nathan that he could add the missing DM1m to the price of the next painting he sold to the galleries.

This odd procedure had been adopted to avoid seeking parliamentary approval for buying the picture; any purchase by the Munich galleries that costs more than DM2m of public funds has to be referred to parliament. The DM3.2m purchase price was made up of DM1.995m from gallery funds and DM1.205m from the Siemens Kunstfonds. Steingraber has told me that he always sought to avoid getting parliamentary approval. 'You can't afford long bureaucratic delays if you want to secure good paintings from dealers,' he said.

When Sonnenburg dug into the galleries' files he did not find invoices from Peter Nathan. For both the Lautrec and the Daubigny, the invoices came from L Valery, c/o Mme H Romanens, 96-98 rue du Rhone, 1200 Geneva; in the case of the Daubigny, the invoice asked for payment to be made to a clerk called Victor Ender at the Schweizerische Bankgesellschaft in Zurich. Mr Valery has never been traced; Madame Romanens denies all knowledge of him while Victor Ender invokes Swiss banking laws to refuse any comment on the transaction.

Both Steingraber and Peter Nathan continue to argue that the Daubigny is genuine and have found several art historians who agree. The experts who would normally be consulted on the artist, however, agree with Sonnenburg; Jack Baer, the London dealer who acts for the National Gallery, told me: 'No one who has two good eyes could take it for a Daubigny.' It is probably not an out-and-out fake but a 19th-century painting to which some hopeful added a Daubigny signature, according to Sonnenburg.

After Sonnenburg had the painting removed from the walls and put in store, it was rescued by the Culture Minister, Hans Zehetmair, who hung it in his office, saying that visitors needed an opportunity to make up their own minds. It is now back in the Neue Pinakothek with a label that reads: 'French School 19th century, Daubigny?'.

And Prinz Hohenzollern is doing all he can to retrieve its reputation. A major exhibition of the Barbizon School of landscape painters - to which Daubigny belonged - is planned. Hohenzollern tells me that the aim is to settle the painting's attribution; all the scholars in the field will be invited to attend a symposium on the painting.

It was this painting that first drew the attention of Heiko Schultz, the SPD vice-chairman of the inquiry committee, to the galleries' purchases. He and a colleague from the Green party, Ulrike Windsperger, asked questions in parliament which led to the curious background of the transaction being revealed, piece by piece. They looked at other purchases and found many more odd transactions.

There was the Max Liebermann bought for pounds 580,000 in 1986 when it had been on offer the year before at pounds 315,000; there was the Zurburan bought for pounds 530,000 in 1984, four months after it had been sold in a Sotheby's auction for pounds 230,000, to name only two paintings out of a long list (see box on page 69).

They also found some very odd bills. A fine portrait by Sir Thomas Lawrence was bought from Agnew's, the Bond Street dealers, but the only bills for the painting that have survived are from someone called Otto Freimuller and a firm called Scudo AG, both located in Zug, Switzerland; Agnew's assure me that they know nothing of either.

Some five or six paintings were sold to the galleries by Lazar Herner, who used to run London's Hallsborough Gallery, and his son Richard, who briefly owned Colnaghi's, the famous Bond Street emporium. Both Herners have in the past had business backing from a German food tycoon, Rudolf Oetker, who now owns Colnaghi's himself. He is also a patron of the Munich galleries but there is no indication that he knew about the pictures the Herners were selling them.

Most of Lazar Herner's bills were sent to Munich typed out on the notepaper of the Baur au Lac Hotel in Zurich, a famous waterside luxury hotel. This enabled the Munich galleries to claim that they had bought the paintings from a private collector, rather than a dealer. When I queried this with Prinz Hohenzollern recently, he told me that a retired dealer counted as a private collector for the purposes of import duty; moreover, it didn't matter how short a time the painting had spent in his collection. Several of the paintings Lazar Herner sold the galleries had been bought at auction a few months before.

It does not look as if the Bavarian committee of inquiry will succeed in sorting out what really happened. The CSU chairman, Dr Otmar Bernhard, has stressed that there is no proof that money has disappeared or that anyone has received money secretly. He accepts that some of the prices paid by the galleries were very high but points out that the paintings were purchased from abroad and the inquiry cannot compel foreign witnesses to attend. 'The documentation of the deals is very vague,' he told me. 'We need to have absolute proof.'

It may be that the Munich affair is going to remain one of the great unsolved mysteries of the art world. On the other hand, if there has been wrongdoing, it only requires one participant to become disgusted and spill the beans for all to be revealed. Since Eduard Zwick began to sing about his payments to CSU politicians last month - after the arrest of his son in a Bavarian tax clean-up - the possibility that a disgruntled art historian, civil servant or patron will break ranks cannot be ruled out.-

Some of the galleries' expensive purchases

Max Liebermann's Munchner Biergarten, purchased from Schneider, a Frankfurt dealer, in April 1986 for pounds 580,000. (The painting was offered to Hans Pieter Buhler, a Munich dealer, for pounds 315,000 in April 1985.)

Francisco Zurburan's The Entombment of St Catherine, purchased from Lazar Herner, a London dealer, for pounds 530,000 according to an invoice dated 7 November 1984. (The painting was sold for pounds 230,000 at a Sotheby's auction in New York on 7 June 1984.)

Sir Joshua Reynolds's Portrait of Capt Philemon Pownall, purchased from Lazar Herner, for pounds 260,000 according to an invoice dated 11 June 1984. (The painting was sold for pounds 132,000 by Christie's in London on 16 March 1984.)

Vittore Ghislandi's Portrait of a Young Painter, purchased from Max Wydler, a Swiss dealer, for pounds 304,000 according to an invoice dated 12 May 1986. (The painting was sent to Munich on approval by the London dealers Harari and Johns in December 1985. According to Derek Johns, Max Wydler paid him pounds 150,000 for the picture and he 'assumed Mr Wydler bought the painting for the Alte Pinakothek'.)

William Hogarth's Portrait of the Rt Hon Richard Mounteney, bought for pounds 160,000 from Lazar Herner, according to an invoice dated 10 October 1983, or from Max Wydler, according to an invoice dated 5 December 1983. (It was sold by Christie's on 22 April 1983 for pounds 66,000.)

Henri de Toulouse-Lautrec's Le Jeune Routy, purchased for pounds 1.1m from Peter Nathan, a Swiss dealer, according to evidence given to the inquiry. The invoice, dated 14 July 1984, came from 'Mr L Valery'. (Nathan paid the Bernoully family in Switzerland pounds 315,000 for it.)

Charles Francois Daubigny's Landscape near Auvers, purchased from Peter Nathan for pounds 190,000, according to inquiry evidence. The invoice, of 7 April 1986, came from 'L Valery'. (Top auction price for a Daubigny was pounds 72,500.))