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Home , Enron, Jan Marsalek, Markus Braun, Martin Schirdewan, PayPal, Wirecard

LETTER FROM

THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY 220 I Street, N.E., Suite 200 Washington, D.C. 20002 202-861-0791 www.international-economy.com ’s Scandal [email protected] The largest fraud in the country’s postwar history.

By Klaus C. Engelen

hile all of Europe broke. When Wirecard took the place of the world electronic payment trans- is still in the grip of Commerzbank AG in the DAX in action services as well as the issuing of of the worst pan- September 2018, the fintech’s shares physical cards. According to its promo- demic in a century, were worth about €20 billion. tion material, Wirecard authorized and Germany’s po- Its Austrian CEO , processed payments for about 280,000 Wlitical and financial establishments are who owned 7 percent of Wirecard, merchants, issued credit and prepaid also haunted by the Wirecard AG scan- was a billionaire. Now Braun (51) is in cards, and provided technology for dal. It is turning out to be the largest detention awaiting trial with two other contactless payments. case of accounting fraud in the coun- company executives. His second-in- Clients included German discounters try’s post-war history. The sad story is command (40), also Aldi and Lidl as well as nearly one that most of the political and financial Austrian, who was in charge of the hundred airlines. Since January 2006, establishments at all levels aided and company’s Asian business, has van- the group included a with a full abetted the mega-fraud. ished, and is pictured on a Europe- German banking license. At its peak, On June 25, 2020, Wirecard, a wide police search list. Wirecard had 5,300 employees. darling of investors for years, filed for “Over the past decade Wirecard insolvency after revelations that €1.9 GERMAN FINTECH DREAM has fueled its expansion by buying SHATTERED billion ($2.14 billion) was “missing” smaller payment processing busi- from its balance sheet, supposedly Wirecard, based in Aschheim near nesses and groups of customers deposited in escrow accounts at two , is now an insolvent global around the world, including a 2017 reputable Philippine . payments company that operated move to take on 20,000 merchant cli- The marks the largely behind the scenes of online ents of , spread over eleven first time that a member of the DAX, commerce. Founded in 1999, the com- Asia-Pacific countries,” reported the the blue-chip index of now forty ma- pany started by processing payments jor German companies trading on the for gambling and pornography, before Klaus Engelen is a contributing editor Frankfurt , has gone offering its customers in many regions for both Handelsblatt and TIE.

WINTER 2021 THE INTERNATIONAL ECONOMY 9 Letter from Berlin

Financial Times. “The deal was in- an independent investigation of the failings and absurdities leading to the tended to make the company a house- company’s books. During the follow- protracted Wirecard disaster. The Free hold name across the region.” ing months, Wirecard’s top manag- Democrats took the lead in pushing ers predicted confidently that KPMG for a committee of inquiry, especially KEPT DIGGING would vindicate its accounting and Frank Schäffler, who sits on the su- After the Financial Times began rais- deliver a final repudiation to its critics. pervisory board of Germany’s Federal ing grave questions about Wirecard’s But things turned out quite differ- Financial Supervisory Authority accounting practices, the company ently. On April 28, 2020, the publica- (BaFin). cast such criticism of its global busi- tion of KPMG’s report saw Wirecard Schäffler considered BaFin’s ness model as the work of market shares in the DAX crash 26 percent as weak internal controls for employees manipulators and their journalistic investors learned that KPMG investi- who were speculating on Wirecard helpers. When Dan McCrum, who stock without respect for conflicts of led the Financial Times investigation A single auditor was charged interest as a scandal. Together with his on Wirecard along with his colleague Free Democrat colleagues, he forced Stefania Palma, published his story to work on Wirecard, and the German ministry to under- “Wirecard’s suspect accounting prac- little progress was made. take a special inquiry into Wirecard tices revealed” on October 15, 2019, trades by BaFin employees. In another the headline should have been an alert blow to the regulator’s reputation, to Germany’s supervising agencies gators had faced obstacles in their at- BaFin issued a press release in January and institutions and a wake-up call tempt to verify that large parts of the 2021 saying that it had suspended an to investors and creditors. “Internal business were real. Wirecard shares employee in its securities supervision company spreadsheets, along with re- fell again the next day, to close down department for in struc- lated correspondence between senior another 8 percent. tured products of Wirecard stock. members of Wirecard’s finance team, The KPMG report, as it trans- Also embarrassing was that appear to indicate a concerted effort pired, was also the end of “Project Ralf Bose, the head of the Auditor to fraudulently inflate sales and profits Panther,” an audacious plan by CEO Oversight Body, the agency that reg- at Wirecard businesses in Dubai and Braun to take over Ireland, as well as to potentially mis- with its valuation of €14 The Wirecard scandal marks lead EY, Wirecard’s tier-one auditor.” billion, roughly the same as Wirecard, McCrum and Palma go on: “In its but with assets of €1.4 trillion. First the first time that a member defence, Wirecard has claimed that FT reported by Bloomberg, Braun had of the DAX, the blue-chip reporters have facilitated market ma- hired McKinsey consultants to work index of now forty major nipulation in collusion with sell- out a plan according to which the new ers. These allegations have been wide- combined “Wirebank” would by 2025 German companies trading generate €6 billion in additional profit on the Frankfurt stock Germany’s political and and could double its stock market val- exchange, has gone broke. uation to €50 billion. Such a takeover business elites were blinded would offer a way to hide the massive by the rise of what some saw Wirecard fraud in the huge balance ulates auditors in Germany, was re- as a “German PayPal.” sheets of both companies. lieved of his duty over personal deal- When EY, Wirecard’s auditor for ings in Wirecard shares weeks before over a decade, refused to sign off on the collapse. ly circulated in the German media and the 2019 accounts, forcing Braun to In the wake of the scandal, the are the subject of a legal complaint in admit that €1.9 billion of its cash prob- government decided to terminate its Germany, an investigation by BaFin, ably did not exist, Wirecard’s bank- contract with the Germany’s private- the German financial regulator, and a ruptcy could not be avoided. sector accounting watchdog, the probe by prosecutors in Munich.” Financial Reporting Enforcement In an effort to counter the dam- GOVERNMENT FAILINGS Panel. It is expected that in the coming aging Financial Times accusations, Opposition parties in Germany’s reform effort, BaFin will get a broader in October 2019 the company hired have been able to expose mandate to start enforcement actions KPMG, EY’s competitor, to conduct many of the spectacular government on financial reporting on its own.

10 THE INTERNATIONAL ECONOMY WINTER 2021 Letter from Berlin

FREP was established in the af- In the Bundestag hearings on supervision, to Martin Schirdewan, termath of the accounting scan- Wirecard so far, both the ruling coali- member of the , dal. The body has only fifteen staff tion parties were taken to account for the Wirecard Bank was categorized members, and operates under a mod- their failings. For the Merkel-Scholz- as a “less significant institution” and est yearly budget of €6 million. Söder coalition of SPD and CDU/ as such would be supervised directly What came out in the Bundestag CSU, the Wirecard collapse can be by the “national competent author- hearings was that BaFin in early 2019 seen as a huge embarrassment and a ity,” meaning BaFin and FREP under asked FREP to start a probe into chance for opposition parties, espe- Germany’s two-tier system of finan- Wirecard in reaction to reports by cially the FDP, the Greens, and the cial reporting enforcement. the Financial Times of allegations by Left Party, to attack the government. According to Enria, BaFin was whistleblowers of accounting manipu- How this will play in the coming na- responsible for the decision not to lation. A single auditor was charged to tional elections is not yet clear. designate Wirecard AG as a financial work on Wirecard, and little progress It’s plain that Germany’s politi- was made. That is taken as an indica- cal and business elites were blinded The Wirecard disaster makes tion of how much is wrong with the by the rise of what some saw as a a mockery of long-standing two-tier system of enforcing of finan- “German PayPal,” and defended for cial reporting in Germany. too long BaFin’s notion of short sell- reform efforts in Germany Heavy criticism regarding the ers and their media helpers badmouth- and the to German two-tier system of financial ing a promising German fintech. improve financial market reporting enforcement also came from The Bundestag’s hearings on the Paris-based European Securities Wirecard reached up to Chancellor supervision, audit regulation, and Markets Authority, which was Angela Merkel, asking about her pro- and accounting enforcement motion of Wirecard in China. Before to better protect investors Opposition parties in her China visit in September 2019, former defense minister Karl-Theodor and creditors in a global Germany’s Bundestag have zu Guttenberg, then a Wirecard lobby- market place. been able to expose many of ist through his firm Spitzberg Partners, the spectacular government met with Merkel to request her help in . As Bloomberg not- trying to persuade Chinese officials to ed, Wirecard AG as a financial hold- failings and absurdities. open doors for Wirecard in the digital ing company would have had to op- payment market in China. After the erate under much stricter accounting charged with investigating the events visit, Merkel confirmed through her controls. As Enria noted in the letter, leading up to the collapse of Wirecard. chief economic adviser Lars-Hendrik Wirecard was not subject to payments In November 2020, ESMA presented Röller that she had been able to make oversight as the firm’s services and a “Peer Review” assessing the events her plea. Other high officials from the entities did not qualify as a payment leading to the collapse of Wirecard coalition parties also have acted in system or payment scheme. and how the dual supervision by support of Wirecard with or without Why the major business areas of BaFin and the FREP failed to meet the being paid. Wirecard were barely supervised— challenge. and misused for creating fake sales and , the financial policy HOW WIRECARD profits as well as becoming a global AVOIDED SUPERVISION spokesperson of the Greens party in money-laundering operation—is high the European Parliament, concluded Overlooked by many was that only on the list of questions for investiga- that the Wirecard report by ESMA the Wirecard Bank—a not-so-large tions on Wirecard’s bankruptcy. shows that the German system of joint part of Wirecard AG’s worldwide op- The Wirecard disaster makes a financial reporting enforcement by erations—was supervised. Most of the mockery of long-standing reform ef- BaFin and FREP was unworkable. “If Wirecard Group, seen as Germany’s forts in Germany and the European confidentiality rules thwart effective leading fintech success story, was not Union to improve financial market communication between the authori- even designated as a financial holding supervision, audit regulation, and ac- ties and they sometimes disagree on company. counting enforcement to better pro- their respective roles, it becomes too According to a letter from tect investors and creditors in a global easy for fraudsters,” he stated. Andrea Enria, head of ECB banking market place.

WINTER 2021 THE INTERNATIONAL ECONOMY 11 Letter from Berlin

WAVE OF LITIGATION accountancy partnerships in the world, Assisted by the consulting firm It is not surprising that news articles was dissolved. In response to Enron, Roland Berger, Scholz came up with a predict a coming wave of litigation, WorldCom, and other notable account- seven-point plan to restructure BaFin, especially against EY, Wirecard’s au- ing scandals, the U.S. Congress came including a “forensically trained task ditor for ten years. up with new benchmark legislation force” for audits, and better data. EY came out after the insolvency and regulation to improve the supervi- When presenting this reform plan, with the blatant statement: “There are sion of financial reporting for public Scholz drew attention to the new draft clear indications that this was an elab- companies by passing the Sarbanes- orate and sophisticated fraud, involv- Oxley Act in July 2002, with its far- Wirecard cast such criticism ing multiple parties around the world reaching extension of U.S. laws to the in different institutions, with a delib- rest of the world. of its global business model erate aim of deception.” EY auditors as the work of market for years were unable to get proof of RADICAL OVERHAUL NEEDED manipulators and their whether or not there was money in the It took more than half a year after faked escrow accounts with banks in Wirecard’s bankruptcy before em- journalistic helpers. Asia. battled Finance Minister Olaf Scholz For a decade, EY’s reputation as (SPD) forced BaFin’s bosses out, ar- legislation, the “Act to Strengthen one of the Big Four accountancy and guing that BaFin “needs to be reorga- Financial Market Integrity.” auditing firms has helped to rebuff nized, so that it can fulfil its supervi- Hopefully Scholz has looked at sory role more effectively.” the February 6, 2021, issue of The There is talk of Felix Hufeld, head of BaFin Economist reacting to his seven-point “Germany’s Enron disaster since 2015, and his deputy Elisabeth roadmap. “The finance minister wants Roegele, who was in charge of finan- to hire more experts, in particular audi- with a difference.” cial market supervision, were pushed tors: currently, only five of the roughly out without naming any successors. 2,700 employees of the watchdog are criticism of Wirecard’s questionable “More ‘bite” for a more flexible auditors.” The Economist also quotes reporting and business practices. and effective Financial Supervisory from Party, Business and financial daily Authority, and a promise to focus who sits on the Wirecard committee. Handelsblatt sees the broad reshuf- more heavily on preventive action De Masi draws attention to what is fling of EY’s top management and and to investigate suspicious cases urgently needed but not addressed by the positioning of former German more swiftly and efficiently” is the the finance minister: BaFin needs to Finance Minister Theo Waigel (CSU) German government’s lesson from the become independent from the finance to chair an independent commission of Wirecard disaster. ministry. experts as moves to regain lost confi- Scholz, who at times backed the That is also the key demand dence in the accounting firm. Former controversial BaFin stance of sus- coming from the investigators at the German Economic Minister Brigitte pected market manipulation by short EU level, the Paris-based European Zypries (SPD) will also be part of the sellers and journalists, and disregarded Securities and Markets Authority, commission in a possible effort to get press allegations against Wirecard, which published a fact-finding report both leading German political par- now wants to pursue three overarching on the Wirecard disaster. ESMA sees ties on board. In a convoluted reshuf- “a heightened risk of influence by the fling of top personnel, EY’s German Let’s make Berlin’s finance Ministry of Finance given the frequen- head since 2016, Hubert Barth, will ministry also responsible for cy and detail of reporting by BaFin, step down and take other European sometimes before actions were taken.” responsibilities. the Wirecard calamity. From ESMA’s rebuke, one can It is also not surprising that there conclude that much of what BaFin is talk of “Germany’s Enron disas- goals: Make supervision and auditing did and didn’t do in the Wirecard cri- ter with a difference.” When Enron, more effective; streamline internal sis was what Scholz’s ministry was an American energy company, de- structures and procedures and allocat- involved in. So let’s not bash BaFin clared bankruptcy in October 2001, ing responsibility more clearly, and too much, and let’s make Berlin’s fi- its accountant Arthur Anderson, supervise the financial market more nance ministry also responsible for the then one of the five largest audit and effectively. Wirecard calamity. u

12 THE INTERNATIONAL ECONOMY WINTER 2021