Wirecard scandal

Wirecard's combined banking (through its subsidiary Wirecard Bank) and non-banking operations (mainly payment processing) makes its financial results harder to compare with peers, so the investors had to rely on adjusted version of the financial statements of the company.[5] The “adjusted” accounts, unlike the reporting adhering to International Financial Reporting Standards, resulted in inflated earnings and cash flow figures.[11]

Red flags were raised as early as 2008 when the head of a German shareholder association attacked Wirecard's balance sheet irregularities. After EY conducted a special audit in response to the criticisms, it took over as the main auditor for Wirecard and would remain so for the rest of the company's history. As a response, German authorities prosecuted two persons due to insufficient disclosure of holding Wirecard's stock.[5]

In 2015, the Financial Times reported what it saw as a significant gap between the short-term assets and liabilities in Wirecard's payment business. This is a result of Wirecard's taking only a small commission from its payment processing volume, and the transient payment flow through Wirecard's accounts were adjusted to reflect Wirecard’s small cut.[12] As a response, Wirecard retained services of Schillings, a UK law firm, and FTI Consulting, a public relations agency in London.[5] Later in 2015, J Capital Research published a report recommending shorting Wirecard's stock as it sees the company's Asian operations to be much smaller than claimed.[13] In 2016, a critical report published by a previously unknown entity named "Zatarra" lead to share price crashes, prompting BaFin to launch an investigation on market manipulation.[10][14]

Critics point to Wirecard's global acquisitions to mask trouble with organic growth by adding revenues from external sources, a tactic referred to as a rollup. Early criticisms were directed towards Wirecard's purchase of smaller businesses at significantly above market value. In 2015, Wirecard purchased an Indian payments group at €340m, despite the founders of those businesses failing to raise funding while valuing their key asset at €46m.[15] Wirecard responded to the reports by claiming its payment technologies are superior and arguing the current rapid growth of the cashless fintech industry justifies such valuations.[16] A series of deals involving Wirecard's “buy and build” strategy, which intends to buy customers for the company's payment services, has been criticized as structured in an unusual manner, resulting in difficulty in verifying €670m of intangible assets.[17]

In 2018, Southern Investigative Reporting Foundation (now the Foundation for Financial Journalism) concluded after a seven-month investigation that according to documents filed, at least €175m from Wirecard’s €340m purchase of an India-based payment processor in October 2015 were not transferred to the seller.[11]

In January 2019, Financial Times reported on irregularities uncovered by Wirecard's Singapore investigation, which began in March 2018 internally but whistleblower feared was being squashed. Edo Kurniawan, head of accounting for Wirecard's Asian-Pacific operations, was accused of creating forged and backdated contracts in order to artificially inflate profit, creating questions as to the reliability of Wirecard's balance sheets.[18] At one instance, €37m was moved between Wirecard subsidiaries and external businesses, in a practice known as "round-tripping." A preliminary report commissioned by Rajah & Tann and seen by the FT points to several years of book-padding across Wirecard’s Asian operations, with some degree of knowledge at Wirecard's Munich operation teams.[19]

Despite the report, no actions were taken against key personnel named in the report. Singaporean authorities raided Wirecard as part of an ongoing investigation in February 2019.[20] BaFin banned short-selling for two months citing falling investor confidence.

Third-party acquirers are local companies who process transactions on behalf of Wirecard for clients, with which Wirecard then pays a commission from processing fees. According to Wirecard, they are used in transactions where Wirecard does not hold the necessary license, or when the nature of the transaction is unsuitable for direct processing on the part of Wirecard. According to internal whistleblowers, as of 2018 transactions originating from third-party acquirers account for half of global transaction volumes reported by Wirecard.[21] Due to Wirecard's singular approach to counting its cash reserves, the cash held in trustee accounts of its third-party acquirers are counted in the balance sheets.[22] In 2019, it was reported that half of Wirecard's worldwide revenue and almost the entire profit are processed through three opaque and poorly audited third-party processors.[23]

Wirecard announced lawsuits against the Singaporean authorities and the Financial Times in response to the allegations.[24][25]

Wirecard has a pattern of unusually aggressive tactics towards those who raise questions about the company's business operations or accounting. In 2019, the company hired former head of Libyan foreign intelligence Rami El Obeidi to conduct sting operations against journalists and public shortsellers.[26] Mr. El Obeidi presented evidence that the Financial Times colluded with shortsellers,[27] which the newspaper rejected after an investigation by an external law firm.[28]

BaFin conducted multiple investigations against journalists and short sellers because of alleged market manipulation, in response to negative media reporting of Wirecard. BaFin lacks the authority to investigate Wirecard's core business or its accounting practices, and in fact, only has authority over Wirecard's bank business subsidiary.[29][30]

As revealed by KPMG's special audit, Wirecard's long time auditor EY failed to verify the existence of cash reserves in what appeared to be fraudulent bank statements.[26] The special audit also revealed inability to verify the majority of Wirecard profits from 2016 to 2018.[26] During the special audit, Wirecard made misleading statements to investors, resulting in a criminal investigation after a complaint was referred to prosecutors by BaFin.[5]

Sell side analysts were almost universally positive until as late as February 2020.[31][32] Analysts at Goldman Sachs had a "Conviction Buy" rating until as late as September 2019.[33] Commerzbank analysts who were positive on the shares even dubbed FT articles questioning the company "fake news".[34] Analysts at Bank of America Merrill Lynch were among the very few skeptics. In 2018, they questioned Wirecard’s poor positioning within the German e-commerce payments market,[35][36][37][38] and raised concerns related to financial controls.[39]

With respect to criticisms against Wirecard, a set of smaller investors has long been supportive of the company by joining in both the company's and regulator's accusations against short-sellers and market manipulation. Critics cite the German regulator, press and investor community's tendency to rally around Wirecard against what they perceive as unfair attack.[40] Softbank invested with a €900m cash injection in 2019.[41] After the company's failure was made public, Softbank's executives blames what they see as failures on the auditor's part,[42] and announced plans to sue EY for damages,[43] joining other efforts to launch legal actions against the auditor.[44][45]

After initially defending BaFin's actions, its president Felix Hufeld later admitted the Wirecard Scandal is a "complete disaster."[46] In response, the European Commission calls for an investigation on whether BaFin broke EU rules on financial reporting.[26] Berlin announced strengthening of regulations on accounting,[26] beginning by severing ties with, the Financial Reporting Enforcement Panel (FREP), the quasi-official account watchdog and transferring the duties to BaFin.[47][26] Investors joined calls for union-wide regulation on market rules[48] and for a EU body in charge of regulatory actions.[49] The FT noted that FREP only has 15 employees with an annual budget of €6m.[50] FREP was thought to be too under-resourced to adequately audit Wirecard, and only concluded that the published accounts were inadequate after the company became insolvent.[50]

On 1 September 2020, the German parliament announced that will organise an inquiry in order to fully investigate the reasons why the government failed to prevent corporate fraud.[51] The scandal has highlighted the close ties between German politicians and Wirecard.[50]

CEO Markus Braun was arrested shortly after his resignation.

COO Jan Marsalek disappeared shortly after he was suspended from the management, and was later traced to have fled to Belarus.[52] He is a fugitive wanted by the German police.

Christian Bauer, the company's former Asia manager and son of Paul Bauer-Schlichtegroll, former Chairman of the advisory board, died in Manila, Philippines.[53] Bauer was very close to Jan Marsalek.[54]

In 2020 the FinCEN Files showed that Aktif Bank helped launder money for Wirecard.[55][56]