LETTER FROM BERLIN THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY 220 I Street, N.E., Suite 200 Washington, D.C. 20002 202-861-0791 www.international-economy.com Germany’s Wirecard Scandal [email protected] The largest accounting 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 Markus Braun, 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 smartphone 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 Jan Marsalek (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 bank 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 Munich, is now an insolvent global around the world, including a 2017 reputable Philippine banks. payments company that operated move to take on 20,000 merchant cli- The Wirecard scandal marks the largely behind the scenes of online ents of Citibank, 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 stock exchange, 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 FINANCIAL TIMES 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 finance 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 insider trading 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 Deutsche Bank Ireland, as well as to potentially mis- with its stock market 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 short 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 Bundestag 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 Enron accounting scan- Wirecard so far, both the ruling coali- member of the European Parliament, 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 European Union 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.