• The London Financial

Wirecard: a giant’s collapse

Updated: Jul 18, 2020

Germany’s embattled fintech behemoth Wirecard AG filed for insolvency with a Munich

district court on 25th June, a week after a whopping $2.1 billion (€1.9 billion) was found

missing from its books, making it the first blue-chip of Germany’s esteemed DAX index

to fail. The unscrupulous skullduggery has left regulators and the market baffled as to

how such a glaring deception was allowed in the first place. The firm’s share price

tanked, reaching €1.28, (at the time of writing) losing about 98% of its value since the

week began. The company’s solitary listed bond plunged to 17 cents on the euro. To

exacerbate, the sudden collapse has left creditors with a hole of 3.5 billion euros ($3.9

billion).


The vicious sell-off of the stock came after shares were suspended on the floor of the

Frankfurt Exchange for 60 minutes on Thursday, June 25th, pending announcement of

the company’s insolvency. The announcement leaves the eminent German fintech player

with very few avenues. The resignation, and ensuing arrest (after turning himself in) of

long-serving CEO Markus Braun for false accounting and manipulative business

practices has not helped matters.


The crisis calls into question the authenticity of financial statements, which are the sole

prop buttresses the reliability of the firm, based on which investors, regulators and

creditors take decisions. This mismanagement is reminiscent of the Enron crisis that

shook the USA markets in the early 2000s.



Wirecard’s once-celebrated Ex-CEO Markus Braun. Source: AP


What really transpired?


The spiral commenced when EY (formerly Ernst and Young), the long-time auditor of

Wirecard refused to sign off on the 2019 books of the company on June 18th, claiming a

missing $2.1 billion (€1.9 billion). It was unable to confirm the existence of the amount

in cash balances on trust accounts, conforming to the findings of an external probe by

KPMG in April. EY cited “clear indications that this was an elaborate and sophisticated

fraud, involving multiple parties around the world in different institutions, with a

deliberate aim of deception.” KPMG was unable to verify €1 billion in revenue from

third parties in a six-month long probe. Wirecard insisted that the money was kept in an

escrow account in the Philippines. Chaos ensued, causing the shares to nosedive 80%

over two days of trade and CEO Markus Braun resigning on June 19th. The torrid 48

hours had more to offer- The two banks in which the money was alleged to have been

deposited washed their hands off the situation, with BDO Unibank Inc. (the other one

being the Bank of the Philippine Islands) publicly announcing that Wirecard “is not a

client of the bank” and the documents claiming the existence of a Wirecard account were

in-fact “falsified” and “carried forged signatures of bank officers.”


Matters waned further, with COO Jan Marselak suspended on the 22 nd and CEO Markus

Braun suggesting that Wirecard themselves had been caught up in a fraud of epic

magnitude- “It cannot be ruled out that Wirecard AG has become the aggrieved party in the case of fraud of considerable proportions”. Mr. Braun himself owns 7% of the

company’s stock. The corporation announced that the money “probably does not exist.”

Wirecard also pulled the plug on the release of audited results for the whole year 2019

and the first quarter of 2020, due to be published on the 19th of June. The failure of

publishing the audited accounts has left creditors with the right to terminate €1.75 billion

in a revolving credit facility loans to the company.


The cash-balance’s mysterious ‘disappearance’ has cast aspersions on the regulatory

authorities of Germany, which allowed Wirecard AG (WDI) to trade in the prestigious

Frankfurt DAX index in late 2018. The company soared, reaching a peak worth €25

billion ($28 billion) by market capitalization.


Once regarded as Germany’s hottest fintech prospect, the accounting fraud probe now

leaves the company mired in controversy and uncertainty. The creditors of Wirecard,

including Commerzbank AG and ING face an uphill battle of recouping losses and are in

for long drawn negotiations about clarity post-insolvency with administrators in exchange

for the extension of $2 billion in credit to Wirecard. Visa and Mastercard licenses are also

set to be revoked for the firm if clarity of the missing money isn’t found. Credit Rating’s

agency Moody’s lowered the firm’s rating by 6 levels, putting it just one tier above junk

debt on release of the news.


Markus Braun was replaced by James Freis as interim CEO on June 18th. Mr.Freis was

tipped to join the board as a compliance executive and has previously served as the chief

compliance officer of the German stock exchange. He now faces the prospect of steering

a sinking ship through a regulatory storm, with persecutors, shareholders, and creditors

looming. DWS, the largest stakeholder of Wirecard, is weighing legal steps to take

against the company. It is still unclear whether Wirecard’s subsidiaries (including

Wirecard Bank) will be involved in the regulatory and insolvency proceedings, with the

final say lying with the German financial regulatory body, BaFin (Bundesanstalt für

Finanzdienstleistungsaufsicht).


The payment processing giant has scrambled for a lifeline, appointing investment firm

Houlihan Lokey to find a ‘sustainable financial strategy’ to carry out. Wirecard is in

‘constructive talks’ with major creditors including Commerzbank AG, LBBW and ING.

It is looking for the continuation of business operations and suggested a restructuring of

debt and termination of business outposts.



Stock prices plummeted after the missing balances and insolvency announcements. Source: Google widgets


Wirecard: It all starts with a good intention


Wirecard AG is a relatively unknown online payments processing firm, linking

merchants, banks, and customers, as well as providing related financial services and loans

through its banking wing, Wirecard Bank. Founded in 1999, in a small Munich suburb of

Aschheim with modest origins, Wirecard hopped onto the dotcom bandwagon as a call

center operation and went public in 2000. The Dotcom bubble burst arrived soon enough,

leaving the pioneering business to restructure itself. Morphing into a secure online

payment provider, Wirecard was well received.


After hiring Austrian tech entrepreneur and the now fallen from grace Markus Braun as

CEO in 2002, the company began its remarkable rise into prominence as a payments

processor, one of the largest in Germany. In 2006, Wirecard makes a moved into banking

with the purchase of XCOM, and renaming it as Wirecard Bank, as well as acquiring a

license from Visa and Mastercard. Jan Marsalek, the erstwhile COO, was appointed in

2010. Wirecard straight away announced that the firm will function in English, with an

eye on global domination.


The willing adoption of technology in finance and Ecommerce made it a darling for

investors. In tandem with its mantra of a “cashless society”, Wirecard became one of the first players in the market to adopt the HCE (Host Card Emulation) technology, where a

smartwatch could be used for payments in 2016. Wirecard laid a business model- where

it penetrated young markets to innovate, create new payment methods that allow the fast

adoption of technology. This drive to revolutionize digital payments made Wirecard a

force to be reckoned with.


Under the Austrian’s leadership, Wirecard consolidated its position in the German

market, in as well as dabbling in Asia as a partner to AliPay and Wechat, as well as

linking up with obscure third-party vendors in Dubai, Singapore, and the Philippines.

Between 2014 and 2018, Wirecard made 11 acquisitions worth €1.3 billion, particularly

in the Asia-pacific region, in a set of oddly structured deals, with the abstruse acquisition

of an Indian payments firm in 2015 for €340 million. In 2016, Wirecard took a giant step

into the North American market by buying a prepaid payment business from Citigroup.


In the December of 2017, Markus Braun revealed that the company had received a €150

million loan from an undisclosed lender with his own shares pledged as collateral. The

company peaked in 2017-2018, when it briefly crossed Deutsche Bank on the Tec-DAX

index (with a then valuation of €21 billion ($24 billion), over Deutsche bank’s €20

billion), making it the most valuable financial services provider in Germany, despite

allegations over balance sheet discrepancies. Its revenue reached €1.5 billion, with a

balance sheet value of €5 billion. In 2017, it was proclaimed as one of Germany’s 30

most valuable companies. In 2018, Wirecard reported to have 5000 employees, with

250,000 merchants including over 100 airline companies, and a valuation of more than

“40 times that of next year’s expected earnings”. The fairytale didn’t end there- in 2019,

Wirecard secured an investment of €900 million from Japanese tech-fond conglomerate

Softbank, despite questions being raised over various dealings of the company. The same

year, Wirecard launched an investment grade bond issue worth €500 million, further

taking advantage of the goodwill on its side. Markus Braun seemed to be the beau ideal

leading a colossal fintech firm set to challenge Silicon Valley.



The stellar Y-o-Y figures reported by Wirecard. Source: Wirecard


In essence, the company’s announced profits and stellar growth seemed to make investors

flock at its door. However, this impressive record of accomplishment seemed to good to

be true and was not without its own scars. Despite Mr. Braun’s optimism and glitzy track

record, questions were being raised.


Share performance over 2019-20. Source: Wirecard


BaFin, Financial Times, whistleblowers, and short sellers: the whole kit and caboodle


The sudden demise of June 2020 was long-time coming, given the warning signs. The

first attacks on Wirecard started as early as 2008, where it was accused of balance sheet

irregularities by the head of a German shareholder association, prompting a special audit

by EY. This heralded the start of a long history of association between Wirecard and EY,

with the latter replacing a small Munich firm as its auditor. The critic was subsequently

persecuted by authorities and was handed a prison sentence for ‘price manipulation’.


In 2015, the Financial Times launched its scathing lambaste on Wirecards’s accounting

and disclosure practices through their ‘House of Wirecard’ series, reporting a €250

million hole in the books of the German conglomerate. The Financial Times were

adamant that the corporation had inflated sales and profits in order to seem more

attractive. In response, Wirecard proposed legal action and hired London based PR firm,

FTI consulting to look after its external public relations.


The same year, J Capital Research, an independent research firm registered in Hong

Kong and USA reported (based on primary research) that the Asian side of Wirecard’s

business was more phony than genuine: "Wirecard is ostensibly spending heavily to acquire growth in Asia by buying companies in Vietnam, Laos, Cambodia, Singapore and

India. We visited several of these acquisitions and found either string operations or no

presence at all. We think that fictional assets in Asia may be hiding the uncomfortable

truth that there is no profit." The Research firm also reported that they found “little

evidence of legitimate acquiring volumes”. The report also added- “Wirecard's original

and possibly only market is the online gambling netherworld… the company bears

significant risk of fraud, default, reversed transactions and merchant insolvency”

suggesting an unsavory business model. They signaled that the stock of the company be

shorted. Shorting, or short selling, is when an investor borrows shares and immediately

sells them, hoping he or she can scoop them up later at a lower price, return them to the

lender and pocket the difference.


The Co-founder of J Capital Research Tim Murray decided to “step away” after things

got really murky – “there was speculation about kidnap threats. We were hacked. We

suspected it was probably being used by Russian mafia to launder funds through illegal

gambling.” Wirecard predictably disparaged the report citing that J Capital

“fundamentally misunderstands the Wirecard business model”, while also questioning the

independence of the firm.


This was not the first-time critics have been targets for hacking campaigns. In a report by

the Citizen Lab, a part of the University of Toronto’s Munk School, an India linked

hacker-for-hire group by the name of ‘Dark Basin’, was responsible for 28,000 web

pages created by hackers for personalized “spear phishing” attacks designed to steal

passwords from targets including advocacy groups and journalists, elected and senior

government officials, hedge funds, and multiple industries, in a campaign that has

spanned for years. With regards to Wirecard, the report concluded the “unifying thread

behind this targeting was its aim at individuals who held short positions in Wirecard AG

around the time of the targeting and financial reporters covering the Wirecard AG

case.” The orchestrators of the attacks have not been found to date.



A page from the 'Zatarra Leaks' website, a page produced by hackers. Source: The Citizen Lab


The substantive challenge to Wirecard’s facade of honesty arrived the following year, in

the form of a report by anonymous and low-key Zatarra Research. Incorporated in the

British Virgin island, the company was previously unheard of, making it a ghost entity,

comprising of “investment professionals, analysts and forensic researchers.” It emerged

online just hours on February 24th, before releasing its singeing report. Zatarra Research

vilified Wirecard’s accounting practices and accused the company of “wide scale

corruption and corporate fraud.” Zatarra’s bearish report was filled with incriminatory

evidence, claiming the company was involved in “money laundering and transmitting

illegal monies to the USA”, and that they (Zatarra) aimed to “profit from the fall in the

stock.” The 102-page report connected Wirecard to money laundering for offshore poker

operations. Numerous hedge funds in the UK and the USA were also heavily shorting the

companies’ stocks, making it one of the most shorted stocks on the pan-European Stoxx

600 index, as per Markit data.


The report was met with restraint on the market, but still managed to set the share price

tumbling by 25%. Markus Braun immediately responded to the “slanderous” and

“baseless allegations” and promised legal action. German financial watchdog, BaFin

opened an investigation into Zatarra’s actions for market manipulation in collusion with

short sellers. BaFin did not concern itself with Wirecard and focused “solely” on Zatarra

Research. Zatarra also revealed to Reuters that they were in touch with the United States

Secret Services, while BaFin did not respond to their findings. Mr. Roddy Boyd, the

Editor of Foundation for Financial Journalism, in a study of its Indian dealings, slated Wirecard as a ‘roll-up’. A roll-up is a term used to describe a company primarily built

through the acquisition of smaller companies at a rapid pace. Critics argue that roll-ups

are a way to use generated revenue to mask problems with organic growth.


Meanwhile in the May of 2018, within the Singapore office of the company, an internal

investigation was launched by in-house legal staff, looking into three members of the

finance team after a whistleblower revealed backdated contracts and creative accounting

practices, implicating senior Wirecard official Edo Kurniawan, accusing fraud on a large

scale to “launder money” via third parties. Markus Braun assured the Reuters that the

issue was a “non-event”, despite preliminary evidence from the findings of externally

hired law firm Rajah & Tann suggesting “serious offences of forgery and/or of

falsification of accounts”, according to a Financial Times report released in 2019.

Wirecard called the Financial Times report “inaccurate, misleading and defamatory.” The

Singapore authorities were “looking” into the matter while Munich authorities looked the

other way as the misconduct did not take place on German soil.


In the background, the Company was doing better than ever, with investors and creditors

herding together to fund the company, poised to do better than ever. The company’s

shares peaked to €191 in August 2018, with a wide-spread bullish outlook towards the

company.


Matters came to the fore in the January of 2019, when Financial Times launched a series

of deprecations against the company, backed by the claims from an insider from the

Singapore office. The whistleblower emphasized concern over the lack of actions being

taken against the corporate fraud committed by a blue-chip institution. The Financial

Times report pushed the Singapore authorities to raid Wirecard’s regional office and

seize electronics and laptops. The Financial Times article led to the share dropping 44%

within a week of its publishing.


Wirecard categorically rejected the story, raising “substantial doubts” over the

whistleblower story. The tumble of the stocks urged German regulatory body BaFin to

put a ban on the short selling positions of the stock for two months starting February

2019. This was the first time BaFin had taken such a measure for a single company

outside of the 2008 financial crisis, where it had banned short selling on a cohort of

stocks. It cited Wirecard’s “importance to the economy” and the threat the Financial

Times reports had on “market confidence” as reasons for the ban. In addition, BaFin

announced that it would investigate Financial Times for “market manipulation.” The

BaFin also announced that it would not be looking into Wirecard’s financial reporting, as it was under the purview of the German Financial Reporting Enforcement Panel,

Germany’s quasi-governmental accounting regulator.


In the remainder of 2019, the Financial Times released a series of reports that listed third

parties that processed payments on behalf of Wirecard with offices in the Philippines,

Dubai and Singapore and paid a hefty commission for it to the German firm. This

outsourced business made up a lion’s share of Wirecard’s revenue and subsequent profits.

The Financial Times reports included inflated sales and profit figures, as well as staff

tallying discrepancies, in order to mislead prime auditor EY. In some cases, offices were

understaffed, as seen in Wirecard’s Dublin and Dubai office, while in other cases, there

were no offices present. In an amusing encounter, Financial Times revealed that while

visiting the registered office address in the Philippines, they were instead greeted by a

retired sailor and his family, who were non-privy to the fact that they lived on the

supposed site of an international payments operations setup.

While visiting the offices of Al Alam, a Dubai based third party acquirer’s office, the

Financial Times uncovered a “threadbare” operation, with 6-7 employees, despite the

acquirer generating half of Wirecard’s international profits in 2016. They also reported

that the firm has almost no online presence, despite being a staple in Wirecard’s payment

routing networks. The Financial Times also released further exposés slamming Wirecard

for opacity regarding money from third party processing operations being held in “trustee

accounts.” A trustee account holds pooled money of the beneficiaries- the merchants and

the processors. Any money in the trustee accounts should not be accounted for as cash.

The Financial Times revealed that said money was included in Wirecard’s net cash flow,

treated as a non-restricted, cash equivalent. Wirecard responded with a staunch defense-

“management believe that trust accounts held in third-party acquiring business is cash

equivalent, part of operating cash flow and not restricted.”


In response to the reports, Wirecard decided to sue the Financial Times- “Our objective is to seek a halt to the incorrect use of business secrets for the purposes of reporting, as well

as damages,” Wirecard said in a statement. In addition, legal suits were launched against

the Singapore authorities. Markus Braun rubbished the reports and announced a host of

compliance measures for Wirecard. In December, under pressure from investors, audit

firm KPMG was hired as a special external auditor to exonerate itself of the “faulty”

allegations of the Financial Times.


A snippet from Wirecard's Q3 2019 results. Source: Wirecard


KPMG, covering a “major share” of the operating profit of the firm between 2016-2018,

were “not sufficiently able to forensically trace the existence of the transaction volumes”

to the tune of €1 billion in missing bank statements of escrow accounts, citing “obstacles”

to their work. In tandem with KPMG’s findings, released on April 28th of 2020, the

audited financial reports for the full year 2019 and the first quarter of 2020 of Wirecard

by EY were postponed three times- from March to the end of April and then again to

June. Deka Investment, a 1.3 per cent stake holder in Wirecard, called for a further

investigation into Wirecard’s third-party acquiring following the postponement of the

results. Activist investors, led by British fund manager and regular short seller Sir

Christopher Hohn, publicly called for the removal of Markus Braun by the board of

Wirecard, which “is legally obliged to intervene.”


Mr. Braun remained optimistic over the signing of the audited accounts, but patience was

running thin amongst the authorities. In a turn of events, Wirecard’s offices in Munich

were raided on the 5th of June, on the request of BaFin, which alleged wrongdoing on

Wirecard’s part. The current crisis started when the cash-trail hit a dead-end in the Philippines, with EY being informed by the BPI and BDO that the documents requesting

proof of €1.9 billion were “spurious.”


Wirecard’s quarterly publications for the past year. Due to scandal and controversy,

Wirecard has withdrawn publications of its 2019 FY and 2020 Q1 results. Source: MarketScreener


The Big shorts: Prophesizing the collapse

Following the tailspin of the stock starting with the missing balances, the Wallstreet

Journal reported that short sellers of Wirecard’s stock were in for a hefty windfall in the

region of $2.6 billion. Vocal critic and former shareholder of the company, Chris Hohn’s

Children’s Investment Fund alone made £100 million from shorting Wirecard’s shares.

The windfall comes after years of wrangling with Wirecard’s seemingly bottomless

resources and legions of lawyers under its payroll. Some firms informed that they spent

years shorting the stock below the threshold, so as to not trigger any suspicion from the

company. In 2016, at the time of Zatarra Research’s report, €1.2 billion of the company’s

shares were taken on loan, approximating to 23 per cent according to Markit. It has been a costly endeavor- despite a hefty payday in the end, many previous short bets were

obliterated by surges in the stock price.


Short sellers continued to appear over the years, despite the companies aggressive efforts

to deter them. Short sellers and critics listed the companies lack of accounting

transparency attracted them to short the stock, like moths flying to a light. Years of

clandestine acquiring, lending, and financing operations cast serious doubts over the

company’s long-term sustainability and risk exposure. The company’s debt hit the roof

from expansions, reaching €1.3 billion in September 2018 from a comparably paltry €100

million in 2012, with little clarity over where it was used and how it was used. Despite

outperforming the industry average growth rate consistently, the absence of financial

disclosure regarding shifting clients to different providers, fees from third party sellers,

interest generated from financing loans to merchants prompted heavy bets against the

company.


Many critics and avid short sellers of the stock also recalled substantial legal fees in

fighting the company, as well as encounters with “being followed” by company hired

private investigators. Such activities persuaded many to give up on their shorts, in fear for

their own safety. Dan McCrum, the spearhead of the Financial Times’ attack on

Wirecard, revealed after the company filed for insolvency on June 25th that he was “going

a little bit mad and paranoid”, often believing that he was being followed. Wirecard

launched criminal proceedings against Mr. McCrum in Germany following his

investigations into the company’s affairs. “Today is a partial vindication for myself and

other critics”, said Fraser Perring, one of the authors of the vehement report on Wirecard

by Zatarra Research in 2016. This is absolution and exoneration for Mr. McCrum and

other persistent critics, who have fought tooth and nail for their position.


The short bets (loaned shares) against the company rose in the beginning of 2016,

following the release of Zatarra Research & Investigation’s report, as well as Financial Times’ reporting in 2019. Source: HIS Markit


‘Chinks’ in the regulatory armor


The aftermath of the fall of the once dominant giant has raised some obvious questions

on the German regulatory authorities, who are left with a tedious and expensive cleanup

procedure. They have been susceptible to sleeping on the wheel on various occasions in

the past- when Volkswagen manipulated Diesel engines to cheat on emissions tests,

Siemens being accused of bribing officials for foreign contracts, Deutsche Bank breaking

money laundering rules, and allowing BerlinAir and Solarworld to go bust- the list is

quite illustrious and long.



BaFin faces a regulatory storm following the Wirecard scandal. Source- Photo-Alliance


BaFin falls particularly under the radar with this one- as Dan McCrum put it- Wirecard

seemed to have the “ear” of regulatory authorities. Only in 2019, as the events developed,

BaFin’s chief, Felix Hufeld conveyed at a press conference that his organization could

“not simply pin a Sheriff's badge to our lapel and ride off to arrest anyone we are

suspicious of.”


Following the breakneck pace of events in 2020, Felix Hufeld emerged with a resolute

defense of BaFin’s actions- “It starts with looking at complete failure of a senior

management, despite many, many hints to discover the facts,” he said. “It goes on to the

scores of auditors who couldn’t dig up the truth and it goes on with a whole range of

private and public entities including my own who have not been effective enough to

prevent something like that happening.” He claimed that Wirecard’s activities were a

“shame” and the implications of the scandal were a “disaster”. Mr. Hufeld praised the

longstanding critics in his statement too- “I salute those, let it be journalists, analysts or

yes, let it be short sellers, who have been digging out inconsistencies persistently and

rigorously. We don’t know the facts today, nobody knows the right facts today, including

those who asked the right questions.” He was supported by Germany’s Finance minister, Olaf Schulz, who asserted that the regulators “worked very hard and did their job.” To all

intents and purposes, this goes on to say a lot about the “job” done by the authorities. The

Economy Minister, Peter Altmaier, voiced his disbelief- “We would have expected such a

situation anywhere in the world, but not in Germany.”


Theoretically, BaFin is only supposed to monitor the activities of Wirecard’s banking

wing, Wirecard Bank. This has given BaFin a way out of sorts- at a press conference on

the 23rd of June Felix Hufeld declared Wirecard was a “technology” firm rather than a

financial one directly supervised by his institution, despite of Wirecard brandishing its

full banking license. Such regulatory deficiencies point to the inefficiencies of the

system. On June 28th, the newspaper, Frankfurter Allgemeine (FAZ) reported that in lieu

of the January 2019 events with respect to Wirecard, BaFin commissioned Germany's

Berlin-based financial accounting inspectorate FREP, but only one employee was tasked.

In an Op-ed in the Financial Times, Bernd Zeisemer, the chairman of the Cologne School

for Journalists, was critical of BaFin- “BaFin, Germany’s financial markets watchdog,

failed particularly miserably as an institution.” He called out their “bureaucratic excuses”

and their targeting of journalists, who were mere seekers of truth.


Many have come out since the crisis to criticize the management of the company.

Investors seek legal action against the company, and for once, have been left puzzled by

the events. Twitter warriors who defended the company are silent. A select few have

raised questions on EY and its functioning. Akshay Naheta, the executive who

shepherded Softbank’s investment in the German giant took to Twitter to express his

alarm regarding EY’s handling of the issue-“As an organization that is meant to protect

all stakeholders, creditors and shareholders, in companies, both public and private, they

have materially failed in their fiduciary duties.” The ability of EY as an independent firm

has been questioned- The firm’s failure to detect fraud for 3 years as well as reliance on

screenshots from Wirecard and third-party confirmations has stoked the fire further.

German shareholder group SdK has launched criminal proceedings against the auditor for

“negligence of its professional duties.” German auditing watchdog

Abschlussprüferaufsichtsstelle (APAS—Auditor Oversight Body (AOB)) has also

launched an investigation into EY’s work.


What next? An uncertain future


The confusion that followed the missing money balances was expected- on-the-edge

creditors and bondholders sought clarity from the regulators regarding the extension of loans to the company, while the company looked to steady the ship by darting for an

extension of the credit line. BaFin’s credibility as Germany’s sovereign authority for

financial markets has taken a hit, but it now faces a chance at redemption following the

termination of the contract with Financial Reporting Enforcement Panel (FREP), the

accounting watchdog, responsible for examining financial reporting of publicly listed

companies. The FREP is a private sector body, that was given pseudo-governmental

powers following the Enron scandal in 2004. The FREP worked in tandem with BaFin to

regulate financial bodies in Germany. All of FREP’s regulatory and supervisory powers

have been shifted to BaFin, according to the Financial Times.


Germany’s top brass are looking for “radical reforms”, as per a statement by Jörg Kukies,

Germany’s deputy finance minister. “We have to think about how the regulatory regime

should be changed,” he said in a statement to the Financial Times. While Mr. Hufeld,

head of BaFin did not see the need for an upheaval, he pointed out that measures will be

reviewing laws later, and as of now, the organization is in “crisis mode”.


A long road ahead


The insolvency announcement of the company seemed to jolt global regulators awake-

The Financial supervisory body of Britain, the Financial Conduct Authority (FCA),

revealed on 29th June, that it had placed restrictions on all of Wirecard’s Britain based

services, till it satisfied all their concerns, “for example that all clients’ money is safe.”

The suspension has left hundreds of thousands of accounts blocked and a Wirecard UK

rep told the Reuters that it was working with the FCA to lift the suspension “as quickly as

possible”. A Munich court on the same day announced that it had appointed Michael

Jaffe to handle the insolvency proceedings of Wirecard. Singapore’s regulatory authority,

Commercial Affairs Department (CAD), also reported that it was working with the local

police to look into Wirecard’s Singapore dealings.


The Anti-Money Laundering Council (AMLC) of Philippines, where the ball dropped,

promised a “thorough” investigation into the activities of Wirecard and its associated

third parties- with three of particular interest, namely, Centurion Online Payment

International, PayEasy Solutions and ConePay International. The central bank governor

of Philippines, Benjamin Diokno, also the chair of the AMLC, said that they task force

was “willing to talk to all parties involved to clean up this mess”, and that “no money had

entered the country” according to preliminary findings, and that the “perpetrators”

dragged the country into the scandal to “cover their tracks”. The missing €1.9 billion hit a

dead-end in Philippines when the BDO and the BPI banks rubbished claims that the money was held with them, and that there was no evidence of such accounts ever

existing.


The EU also called an investigation into BaFin and its handling of the situation,

mentioning a “breach in union law”. The Paris based European Securities and Markets

Authority (ESMA) will probe further into the shortcomings of BaFin, and if sufficient

breaches of said law are found, the ESMA could instruct BaFin to adopt working reforms

and start providing direct instructions to the German institution, in accordance with EU

legislation. There is also growing clamor in Germany to launch a parliamentary inquiry,

led by liberal member Frank Schaeffler who told the Reuters- “The fact that the BaFin is

waiting 15 months for a report from the FREP despite indications of irregularities is

absurd”, he said. “It’s like shooting cotton balls at an elephant.”


On 29th June, the beleaguered Company announced that it would “continue operations”

till the insolvency proceedings are announced, causing a dead cat bounce of its stock,

which jumped 160% to €3.34 following the announcement (29 Jun, 5:29 pm GMT+2).


The Shares of the company bounced back temporarily following the announcement that

the company sought to continue operations on June 29th. Source: Google widgets


A classic case of “One bad apple spoils the barrel”?


The real question that needs to be answered, particularly for anxious investors and

venture capitalists is this- Is Wirecard representative of all such ‘too good’ stories emerging on an unprecedented rate? The answer seems to be no. However, the tale

of the fall of one of Europe’s largest colossus does spin a cautionary tale of wariness and

prudence. This crisis will also rudely awaken white-collar regulatory establishments and

institutions across the world to conduct some introspection and soul-searching of their

own, along with the necessary tightening of internal controls, risk compliance and

accounting quality. Only time will reveal the true extent of the Wirecard scandal.

Meanwhile, there are a lot of skeletons to be dug up from unvisited closets.


Wirecard is not the first and will certainly not be the last business giant that collapses due

to corporate wrongdoing and fraud. It is time for a larger discussion on good governance,

and on the need for sharper, more effectual, and more transparent compliance procedures,

that could save millions in tax-payer money, as well as prevent high-profile corporate

scandals of such epic proportions. As the ever-precise, age-old philosophers put it- “It is

pointless to cry over spilled milk”.



By Advait Lath - Undergraduate Economics student, based in India


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