Lessons from a financial technology scandal
The Wirecard affair has exposed defective oversight in Germany and elsewhere
For 18 months, the Financial Times has reported on whistleblower allegations of accounting fraud at what was once Europe’s most valuable financial technology group: Wirecard. Since last Thursday, when the German payments company revealed auditors could not trace €1.9bn supposedly held in escrow accounts at two Asian banks, its shares have plunged 80 per cent. On Monday, Wirecard acknowledged that this cash probably does “not exist”. It is now clear that this is one of Europe’s biggest corporate frauds of recent years.
From the outset, the instincts of the German authorities have been to investigate not the alleged transgressor but the messenger, and investors who, suspicious of Wirecard’s model, had shorted its shares. Journalists from this news organisation have faced not just a misinformation campaign from Wirecard but investigations and even criminal allegations from Germany’s financial regulator and prosecutors.
In a sophisticated global economy, no country is immune to fraud. Yet as Wirecard fights for survival it is time for a reckoning by the German corporate and political establishment: of how this case happened, and why regulators and criminal authorities took no action against it for a year and a half.
The FT reported in January 2019 claims that staff had forged documents in Wirecard’s Asia headquarters to mislead regulators and auditors. Germany’s financial watchdog BaFin responded by launching a probe into the reporting and whether — as Wirecard alleged — it was an attempt at share price manipulation. After Singapore authorities raided Wirecard’s offices, BaFin imposed a two-month ban on short selling of the company’s shares, citing Wirecard’s “importance for the economy” and the “serious threat to market confidence”.
Last October, the FT published evidence that appeared to show that profits at key subsidiaries had been fraudulently inflated, and Wirecard’s auditors misled. German regulators still did not act against the company. In December, the FT reported on how a former Libyan intelligence chief funded a network of 28 private investigators following some Wirecard critics in London.
BaFin’s president Felix Hufeld on Monday admitted the Wirecard scandal was a “complete disaster”. But he defended last year’s two-month short selling ban. Olaf Scholz, Germany’s finance minister, insisted “the supervisory institutions worked very hard and did their job, which we see today”.
In reality the Wirecard affair is the most serious illustration since the “Dieselgate” episode four years ago of the tendency of Germany’s business world to close ranks against criticism. Officials and corporate bosses treat the raising of legitimate concerns as an assault on German patriotic interests — in Wirecard’s case blaming Anglo-Saxon speculators — not as a reason to probe and question. The case shows, too, how German capitalism favours corporations over shareholders. Short selling is seen not as a valid part of price discovery but a device for illicit manipulation. Searching questions must be faced, too, by Wirecard’s auditor, EY, over how it failed to spot the cover-up of what now appears a yawning hole in the balance sheet.
BaFin points out it had oversight only of Wirecard Bank’s banking arm, not the core payments processing business. Here, Germany is far from alone. Regulatory scrutiny of the mushrooming financial technology industry remains deficient. The inherent risks of financial activities are not blunted by enfolding them in a shiny “tech company” wrapper. That is just one of many lessons to be learnt from what is now a multibillion-euro scandal.