FEATURE ANALYSIS OF A FRAUD Global Governance Lessons From Europe’s Enron FOR ITS SHEER SCOPE, DARING, AND SIZE, WIRECARD IS BEING COMPARED TO ENRON. WHAT HAPPENS NEXT SEEMS BOTH PREDICTABLE AND INEVITABLE. By Andrea Bonime-Blanc and Michael Marquardt ast June, members of the Wirecard supervisory board dialingL into a hastily convened emergency call could hardly believe what they were hearing. The fast-growing ­German­­financial­services­provider­that­they­were­charged­with­over- seeing only recently had been rumored to be in takeover talks with Deutsche Bank. Now, Wirecard board members were being told that €1.9 billion ($2.2 billion) in cash was missing and the company was €3.2 billion ($3.7 billion) in debt. Could Wirecard’s vast international business empire really have been based on lies and obfuscation? Indeed, it appears so. 36 Directorship January/February 2021 January/February 2021 NACDonline.org 37 FEATURE ANALYSIS OF A FRAUD KEY PLAYERS IN THE On June 25, 2020, Wirecard filed for clude organized commercial criminal WIRECARD STORY insolvency. Then, on Aug. 25, a court- fraud, breach of trust, false accounting, appointed administrator issued a press and market manipulation. All of the for- 1. Founders/Management Board release stating that it had been able “to mer Wirecard executives now awaiting tri- Oliver Bellenhaus, managing stabilize the ongoing business and create al have declared their innocence. director of Dubai-based Wirecard a basis for [Wirecard’s] continuation.” As unit (currently in jail awaiting trial) part of the stabilization efforts, all mem- OMINOUS QUESTIONS Markus Braun, CEO (currently in a bers of Wirecard’s management board—at Wirecard, like Enron until its own spectac- German jail awaiting trial) least those who had not already resigned or ular demise in 2001, had been on a wild Burkhard Ley, CFO of Wirecard fled Germany—and some 730 employees and aggressive trajectory of growth. When from 2006 to 2017 (in a German jail were let go. the dot-com bust threatened Wirecard’s for three months in 2020; released As of mid-December, senior Wirecard existence in 2002, Braun was recruited as on bail) executives including ex-CEO Markus CEO. With the benefit of hindsight and Jan Marsalek, chief operating Braun and former chief financial offi- courageous reporting—notably by the officer­(whereabouts­unknown) cer Burkhard Ley have been criminally Financial Times (FT)—it is clear that the Stephan von Erffa, head of charged and are awaiting trial in Germany. company’s lifespan was fueled by hubris accounting (currently in a German Another executive was released from jail as and a win-at-all-costs corporate culture. jail awaiting trial) a cooperating witness for the prosecution. Braun provided Wirecard with a cash in- Former chief operating officer Jan Mar- fusion, and under his leadership proceed- 2. Supervisory Board Members (2018) salek, who also served on the management ed to allegedly perpetrate an intentional Thomas Eichelmann, chair board, is a fugitive from the country. accounting fraud over a period of years Bettina Funk Wirecard leadership is accused of that escaped the notice of key stakeholders Stefan Klestil having conspired with others to inflate including regulators, auditors, and Wire- Anastassia Lauterbach revenues and its balance sheet by fak- card’s own supervisory board. Vuyiswa V. M’Cwabeni ing business with third-party partners, Now, in the aftermath of Wirecard’s in- Wulf Matthias said Anne Leiding, a spokesperson for solvency, and as lawsuits add up, regulators Iris Stöckl the Munich State Prosecutor’s Office, and stock exchanges are reevaluating their 3. Watchdogs during a press conference in which she checks and balances, looking to repair BaFin­(Germany’s­financial­ announced the charges. The creation of a fault lines, and taking aim mostly at the regulator) false impression of financial strength en- corporate audit function—both internal Deutsche Börse abled Wirecard executives to borrow €3.2 and external. Many corporate governance Financial Reporting Enforcement billion from banks and investors. observers expect to see regulatory reform Panel “In reality, it was clear, at the latest by in the European Union and in Germa- the end of 2015, that Wirecard’s real busi- ny on a scale akin to the Sarbanes-Oxley 4. Short Sellers and Investors ness was losing money,” Leiding told re- Act, the US federal law that was passed PRESS ASSOCIATED PHOTO ON PREVIOUS PAGE, Matt Earl and Fraser Perring, who porters in Munich. Wirecard executives in 2002 after corporate accounting scan- published the “Zatarra” report are also suspected of harming investors by dals—including at Enron, Tyco Interna- David Einhorn overpaying for acquisitions and for creating tional, and Worldcom—came to light. Fahmi Quadir and perpetuating a culture “characterized Sarbanes- Oxley essentially gave board au- by an esprit de corps and oaths of loyalty” to dit committees greater authority and thus 5. Third-Party Consultants/Advisors Braun as their leader. increased both the responsibilities and EY Braun resigned after Wirecard auditor oversight of the committee. KPMG EY said it could not verify the €1.9 billion Given the sheer scope, daring, and size McKinsey supposedly held in escrow on behalf of the of Wirecard’s fraud, comparisons to Enron PwC third-party partners. are both inevitable and predictable. The Altogether, the formal charges made business community and the public began against Wirecard’s leadership team in- asking two ominous questions: Where was 38 Directorship January/February 2021 the board? And where were the regulators? After all, the Wirecard Examining Wirecard’s evolution in retrospect, the business was fraud was not discovered by these governance stakeholders but and did anything but the “usual.” It was founded in 1999 to provide instead by a cadre of short sellers and FT journalists, ultimately payment processing largely for gambling and pornographic web- aided by lower- level whistleblowers who were paying much closer sites, according to a detailed FT timeline that it published on June attention than those lawfully entrusted and compensated to do so. 25, 2020, as part of its five-year-plus “House of Wirecard” inves- tigative series. Wirecard, backed initially by venture capital, grew BUSINESS AS UNUSUAL through acquisition, eventually expanding into banking. In 2005, What seemed like the sudden demise of Germany’s premier Wirecard began trading on the Frankfurt stock exchange by acquir- publicly traded fintech company was a shock to most in the ing a defunct call center’s listing, thus avoiding any scrutiny result- global investment world, and seemingly to Wirecard’s super- ing from the more traditional route of going public. It moved into visory board, shareholders, and most of its 5,300 employees banking by acquiring XCOM, which it renamed Wirecard Bank. (as of June 2019). Unsurprised were astute readers of the FT The FT reported that the “unusual” banking and non-banking hy- and those who paid attention to the reports of Wirecard in- brid “makes its accounts harder to compare with peers, and helps vestors, including hedge funds and short sellers, and at least persuade investors to rely on the company’s adjusted versions of fi- three daring Wirecard employees in Singapore who became nancial statements.” (See “Wirecard: Key Milestones and Reputation whistleblowers. Risk” on page 40). A SAMPLING OF LARGE CORPORATE FRAUDS Wirecard­filed­for­insolvency­in­June­2020­after­admitting­that­billions­of­dollars­in­cash­probably­did­“not­exist,”­ making it one of the biggest corporate scandals in EU history. Below is a list of some of the larger recent US and global corporate frauds and their consequences. AMOUNTS INVOLVED YEAR COMPANY COUNTRY CRIME CONSEQUENCES (FINES/LIABILITY/ LOSSES) Systemic­existential­ US $74B losses Liquidation fraud 2001 Systemic­existential­ US $175B losses Liquidation fraud $70B­in­fines­ Deepwater Horizon UK Restructuring and other costs environmental disaster 2012–2020 $35B­in­fines­ Emissions cheating Germany Compliance reforms 2020 2016– (as of December 2020) scandal Compliance­reforms,­execu- tive compensation clawbacks, Malaysia and 1MDB corruption $3.9B­in­fines and industry prohibitions; United States scandal several­ex-employee­criminal­ 2020 guilty pleas $2B+ in fraud losses Systemic­existential­ Bankruptcy, additional con- Germany (and counting) fraud sequences to be determined Source: Gloom to Boom: How Leaders Transform Risk Into Resilience and Value by Andrea Bonime-Blanc (Routledge, 2020) January/February 2021 NACDonline.org 39 FEATURE ANALYSIS OF A FRAUD In the annals of scandal, Germany has been home to its fair American corporate directors tend to follow the “noses in, fingers share. While Volkswagen (emissions), Siemens (bribery), and out” dictum, German supervisory board members tend to act more Deutsche Bank (spying and LIBOR issues) emerged intact, any along the line of “eyes on, hands off.” While it is difficult to gener- number of lesser-known German businesses wracked by scandal alize across hundreds of well-managed and ethical publicly traded have not been as fortunate. What these scandals all seem to have corporations in Germany, it is fair to say that supervisory boards in common, though, is repeated systematic failures of German and tend to get less deeply involved in the operations of the companies European governance and regulatory watchdogs. they serve than their American counterparts. Germany’s corporate governance code mandates a two-tiered Even the most vigilant, skeptical board may be led to believe board model comprising management and supervisory boards, corporate management over external sources armed with potential the latter of which most closely resembles the boards of American axes to grind. Some of the problems revealed by the Wirecard fraud, companies. The roots of the two-tiered corporate governance struc- in the opinion of these authors, stem from Germany’s business cul- ture go back more than a century, with well-intentioned measures ture overall and fundamental deficiencies in corporate governance enacted to allow workers greater influence and support for their practices more specifically.