The Wirecard Scandal

By Amna Khan

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Wirecard was a German founded payment processor and e-commerce company. While it initially helped websites collect credit card payments from customers, Wirecard quickly diversified and expanded, going as far as creating their own bank and starting to issue start-up banks with their own cards. Wirecard’s rapid growth from an obscure Munich based company into a German fintech icon featuring in the prestigious Dax 30 Index[1], kicked off after its takeover in 2002 by former KPMG consultant, Markus Braun.

However, in June 2020, Mr. Braun’s empire collapsed as Wirecard filed for insolvency, days after it acknowledged that 1.9 billion euros it claimed to have on its balance sheet probably never existed. Since then, Mr. Braun, the company’s CEO, has been arrested alongside three other executive board members. Meanwhile, authorities continue their search for Wirecard’s former COO, Jan Marsalek, who has vanished in the wake of the scandal.

Wirecard the Story – Rising Suspicions

In less than a fortnight, Wirecard has gone from Europe’s most hyped fintech company to insolvency, all but extinguishing its value that was worth almost 20 billion euros as recently as April 2020. While it may seem that Wirecard’s demise came out of the blue, it is actually the culmination of years of rising suspicions about the company’s seeming miraculous expansion and success, alongside questioning of murky accounts and income that could not be traced.

While criticism began as early as 2008, Wirecard’s demise started in 2015, when the Financial Times began to publish its House of Wirecard series on FT Alphaville. The publications outlined numerous oddities in the company’s accounts, such as multimillion acquisition fees spent in Asia that Wirecard named as “customer relationships” on balance sheets. Wirecard justified this as an effort to buy customer portfolios of established companies. However, the vague label allowed them to leave certain key elements undisclosed, such as the name of the company, for how much it was acquired, and how much these customer portfolios were worth in future sales and transactions. But, despite the FT’s questioning and the publishing of an anonymous dossier relating to money laundering allegation by whistleblowers, Wirecard continued to grow. In fact, its shares doubled in price after improved cash generation reports and a clean audit form EY in 2017 (its official auditor since 2009). The following year, the company continues to resist allegations, and joins the Dax 30 Index in September 2018, becoming Europe’s largest fintech.

Wirecard the Story – The Biggest Accounting Fraud in Post-War Germany

In spite of Wirecard’s seeming infallibility, the FT continued its efforts, and in April 2019, it discovered that more than half of Wirecard’s profit came from commissions paid by three partner companies in the Philippines, Singapore, and Dubai. None of this was told to investors, and all three of these companies were located and run in very questionable circumstances. For instance, its Philippines based partner who accounted for more than 100 million of Wirecard’s sales shared an office with a bus company. Moreover, all three of these partners were supposed to be connected to Wirecard’s subsidiary in Dubai, ‘Card System Middle East’, yet for all the sales recorded and reported, whistleblowers claimed that none of this money went through Card System’s accounts. Additionally, In October 2019, the FT further reported that Wirecard’s profits in Dublin and Dubai were fraudulently inflated, and customers listed in documents provided to EY did not exist.

The FT’s struggle seemed to be working, as Wirecard appointed KPMG to conduct a special audit that would verify the company’s accounts from 2016 to 2018, already approved by EY, in order to calm investors. However, by March 2020, when KPMG’s audit was supposed to be concluded, the accounting firm postponed its publication to April. Meanwhile, EY received documents claiming to be from a trustee in the Philippines that listed 1.9 billion said to be held in accounts at two banks in the country.

The KPMG audit is published on April 28, but the firm declared that it could not verify the arrangements responsible for “the lion’s share” of Wirecard’s profit from 2016 to 2018 were genuine, citing several obstacles to its work.

In early June, Germany’s financial watchdog, BaFin, who supported Wirecard throughout the years, while taking biased actions against journalists and investors, finally submitted a criminal complaint against Wirecard, concerning potentially misleading statements made by the company to investors ahead of the KPMG report.

On the 16th of June, EY is informed by two banks in the Philippines that documents supposedly detailing 1.9 billion euros in balance were fake. Two days later, after a u-turn by EY, who for the first time refuses to sign off the company’s accounts, Wirecard announced that 1.9 billion is missing. This is crucial as Wirecard had an outstanding debt of more than 2 billion Euros with banks that have the right to terminate the loan agreement if no audited account is published, who agreed to refrain from action until June 26. However, Wirecard filed for insolvency a day earlier, after admitting for the first time the potential scale of a multiyear accounting fraud.

The Aftermath

By far the biggest fallout of this scandal is EY’s inability to spot discrepancies in the accounts they signed over the years, and BaFin’s gross neglect of its duties and powers by refusing to investigate Wirecard for market manipulation. Both, EY and BaFin are currently facing lawsuits from former Wirecard investors. Wirecard’s fall from grace has thrust corporate governance and industry regulation in Germany firmly in the spotlight, with the government now calling for regulatory reform.

What does this mean for lawyers?

Outside of the obvious insolvency, and white-collar practice work to be done, an accounting scandal like Wirecard’s could also result in some interesting work for banking/finance and corporate lawyers. If clean audits cannot be trusted, especially in uncertain times, banks and investors will not lend and invest readily which becomes problematic for companies. This is where these practitioners can come into advice their clients on the best codes of conduct and internal disciplinary measures to implement in order to restore the confidence of investors and banks. Firms with good multi-practice experience could be well suited to capitalise on situations like this, especially if they provide services to other fintech companies like Wirecard, who may be subjected to the most scepticism.

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Key Takeaways

· Financial Times led the charge in investigating Wirecard which exposed the false amounts in their balance sheet

· Investors were puzzled by Wirecard’s rapid growth

· Has corrupted the trust in accounting firms worldwide

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References [1] The DAX 30 is an index comprising the 30 biggest companies, by market capitalization and liquidity, trading on the Frankfurt Stock Exchange (FSE).