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The Wirecard Scandal

What Is Wirecard?

Wirecard is a defunct German payments company that failed in June 2020 following a scandal in which it is accused of defrauding investors by claiming revenue and cash that proved to be nonexistent. Called the "Enron of Germany," the company had once been a high-flying financial technology company that, right up until the time of its collapse, was a member of the DAX 30 index, which tracks Germany's most valuable companies.

The fallout from the Wirecard scandal extended into the highest ranks of German politics and regulatory agencies and threatened the reputation of Ernst & Young (EY). EY is Wirecard's long-time auditor, and it's accused of failing to uncover the scandal earlier, although the accounting firm contends that Wirecard hid information from it. Some of Wirecard's top executives were arrested and charged by German prosecutors when nearly €2 billion went missing from the company's bank accounts just prior to its failure. One of its former executives remains at large, pursued by international authorities.

The U.K.'s Financial Times newspaper is credited with unearthing the scandal long before Wirecard failed but was criticized by the company and German regulatory authorities for allegedly being in league with short sellers to destroy the company's value.

Background Of The Wirecard Scandal

Wirecard was founded in 1999 in a Munich suburb to process credit card payments for internet websites. In 2002 it named Markus Braun, a former KPMG consultant, as chief executive officer. The company was then merged with rival Electronic Business Systems.[1]

In 2006 Wirecard purchased XCOM, which enabled the company to move into the banking business, issuing Visa and Mastercard credit cards. It also handled money on behalf of its merchant clients.[2]

The first allegation that suggested accounting irregularities at Wirecard first surfaced in 2008, including assertions that the company was counting customer deposits as its own and that its profit margins were suspiciously high. EY was appointed to conduct a special audit, which gave the company a clean bill of health. The following year EY was named the company's auditor. German authorities prosecuted two men for making the allegations, claiming they had not disclosed that they held positions in Wirecard stock.[2]

In 2010 Jan Marsalek was named chief operating officer, a position he held until the company failed 10 years later. He is currently being sought by the police and his last known whereabouts put him in Belarus (as of October 2020). He is reportedly the mastermind behind the scandal.

Growth Years

After raising €500 million in equity, Wirecard began acquiring several payments companies, most of them in Asia, which enabled it to grow rapidly. Its biggest deal was the €340 million acquisition of an Indian payments company.[2]

In 2015, the FT began raising questions about the company's accounting practices. At about the same time, some investors raised similar questions. However, Germany's financial regulator, BaFin, sided with Wirecard, which claimed the reports were the work of short sellers looking to drive down the company's then soaring stock price.[2]

In 2016 Wirecard bought a prepaid payment card business from Citigroup, putting it into the North American market for the first time. In 2017, following a clean audit from EY, Wirecard's stock more than doubled in price, which enabled it to buy Citi's payment processing operations in 11 Asian countries.[2]

By August 2018 Wirecard's stock had hit an all-time high of €191 per share, valuing it at more than €24 billion, making it Europe's most valuable fintech. It replaced Commerzbank, Germany's second-largest bank, in the Dax 30 index. The company claimed at the time it had 5,000 employees with 250,000 merchant customers.[2]

Accounting Irregularities

In January 2019 the FT began publishing stories about irregularities in Wirecard's operations in Singapore, one of its biggest markets. This sparked a criminal investigation there and a raid by police on the company's offices.[2]

At the same time, BaFin announced an investigation into the FT over alleged market manipulation as well as a two-month ban on short selling the company's stock. It cited Wirecard's "importance for the economy" and the "serious threat to market confidence" after Wirecard's share price fell below €100, nearly 50% below its all-time high. In March Wirecard announced it was suing the FT and Singapore authorities, challenging the criminal investigation.[2]

Yet, through all this, the company was able to raise money. In April 2019 Wirecard said it received a €900 million cash injection through a convertible bond issue from SoftBank, the Japanese conglomerate and high-tech investor, and in September it issued €500 million of investment-grade bonds.[2]

The KPMG Special Audit

In October 2019, under pressure from investors, Wirecard appointed KPMG to conduct a special audit. This was after the FT published articles alleging that profits in some of Wirecard's units outside Germany were fraudulently inflated and that some of its customers did not exist.
In April 2020, following a month's delay, KPMG published its audit results, in which it said it could not verify "the lion's share" of Wirecard's reported profits from 2016 to 2018 and complained that the company obstructed its work.[2]

On 5 June 2020, German police raided Wirecard's offices after Munich prosecutors launched a criminal investigation into the CEO and the company's three other executive board members. This followed BaFin's filing of a criminal complaint against the company, which it said made potentially misleading statements to investors ahead of the KPMG report.[2]

Missing Money And Insolvency

On 16 June 2020, Wirecard disclosed that €1.9 billion of company funds that were supposedly held in two Philippine banks was "missing" while the two banks disavowed ever having it. On 18 June Marsalek was suspended and the next day Markus Braun resigned. Four days later he was arrested on suspicion of false accounting and market manipulation.[2]

On 22 June 2020, the company conceded that the missing money probably did "not exist." Three days later, it filed for insolvency, owing creditors €3.5 billion.

Wirecard Scandal Aftermath

EY, Wirecard's auditor for a dozen years, faced criticism for its failure to uncover the fraud, despite years of allegations that the company was running a scam. For example, it failed to detect that most of Wirecard's missing money was held at Citadelle Corporate Services in Singapore, whose owner was later charged by authorities there with falsifying letters confirming bank balances.

EY, which has been sued by Wirecard shareholders and Germany's regulator of auditors, Apas, claims it was duped by Wirecard. The auditing firm also took credit for exposing a fraud "expertly designed to circumvent all the checks and balances."

Subsequently, in September 2020, EY's global chairman and CEO, Carmine Di Sibio, said "audits should play more of a role in the future to detect material frauds," something the auditing profession had previously said is not its responsibility.

BaFin also came under fire after the disaster, particularly for going after Wirecard's critics, such as the FT, while going out of its way to protect the reputation of a German company. In July the European Securities and Markets Authority launched a "fast-track" investigation into Germany's regulatory supervision of Wirecard, including that of BaFin and FREP, the private-sector body that monitors German companies' accounts.

Felix Hufeld, BaFin's president, called the debacle a "scandal" and a "total disaster."

German Finance Minister Olaf Scholz said the scandal "raises critical questions about supervision of the company, in particular with regards to accounting and balance sheet control," and called for lawmakers to study how to beef up regulation.

Summary

Wirecard is a defunct German payments company that failed in June 2020 following one of the biggest corporate scandals in the country's history. For years the company, which had been a member of the DAX 30 index, managed to avoid answering questions about its accounting practices, mainly in its Asian subsidiaries.

Just prior to filing insolvency, Wirecard announced that nearly €2 billion was missing from the company's bank accounts, which is now alleged to have never existed. The company's CEO, Markus Braun, and several other top executives were arrested and charged with fraud.

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