Fury over Wirecard AG puts regulators in the frame
Published 24-Jun-2020 by Nick Kochan
The Collapse of Wirecard has sent German markets and shareholders groups into paroxysms of anger. The much vaunted long-termism of German investors could not be more at variance with the behavior of the Wirecard board. Hence the frustration with regulators.
German shareholder groups are now demanding an investigation of how the country’s financial regulator handled Wirecard, following the arrest of Wirecard’s ex-chief executive Markus Braun. Regulators were timid and incompetent in dealing with Germany’s most serious alleged fraud in decades, they say.
Braun, who quit last week and handed himself in to the authorities on Monday, faces allegation that the company artificially inflated Wirecard’s balance sheet and revenue to make it more attractive for investors and clients.
One shareholder group said that the German Federal Financial Supervisory Authority (BaFin) has been far too formalistic in regulating Wirecard, a card processing company. BaFin – whose remit includes supervising financial institutions and maintaining broader market integrity – has not had direct oversight of Wirecard group. However, it was responsible for regulating the company’s German banking unit. It also authorises the members of the lender’s management board.
“We need a special audit into to investigate what went wrong in the case of Wirecard. We cannot accept that there is a big payments service provider who is a member of the Dax index, and nobody in the upper echelon is taking responsibility for how it was supervised”, said Gerhard Schick, the chairman of the Berlin-based Finanzwende /Finance Watch Germany.
A €1.9 billion black hole has been found in Wirecard’s balance sheet, preventing the signing off of its 2019 financial report, and causing a dramatic fall in its shareprice. The company admitted the scale of the fraud on Monday.
Wirecard was “a complete disaster” and “a shame” for Germany, said Felix Hufeld, BaFin’s president.
The company is a component of the Dax index of the Frankfurt Stock Exchange’s 30 largest companies. Wirecard AG told Regulatory Intelligence is was “not making any further statements.” A BaFin representative said when contacted by Regulatory Intelligence, “I can only confirm that Wirecard Bank AG is supervised by BaFin. I ask for your understanding that for reasons of confidentiality I generally do not comment on individual banks.”
Said Finance Watch’s Schick, “BaFin is systematically failing to cope with complex situations where it does not have a clearly defined legal remit,”
“The regulation of payments providers has not kept track with globalisation. Global payment providers should be supervised on a European level by the European Central Bank,” he said.
Another German shareholder group pinpoints regulatory incompetence. “Checking of the balance sheet should not have been left to the company auditors. BaFin should have checked the balance sheet,” said Tilman Massa, chief executive of the Koln-based Association of Ethical Shareholders
“The arguments put forward by Wirecard, when criticism became public, were not convincing.”
Greater mandatory compliance is required for financial institutions, said the organization.
“We want stronger regulation and compliance to ensure this doesn’t happen again. It doesn’t appear that BaFin has been quick off the mark. Question marks over its (Wirecard’s) finances have been going on for years.”
The largest German banks are also encountering regulatory pressures, said Massa. “Financial institutions like Deutsche Bank are struggling with compliance issues, and these are always raised at their AGMs”.
Matthew Earl, a London investor and analyst who published the first of a number of reports on Wirecard in February 2016 under the Zatarra company name, said, “BaFin has been shown to be unfit for purpose. Whistleblowers and shortsellers have been highlighting transgressions for a long time. But BaFin decided to target the messengers.”
As the claims of fraud were building, BaFin accused critics of spreading false information about Wirecard and manipulating the market in its shares, said Earl.
Public prosecutors in Munich wrote to Earl in 2016 saying that they were planning to prosecute him for market manipulation, citing a report into Wirecard compiled by BaFin. The prosecution did not proceed.
“They attempted to build a case against me for highlighting the problems in my research. They brought a preliminary prosecution. They drew up the blueprint and handed it over to the Munich Public Prosecutor. It wasn’t successful,” said Earl.
A number of media operations investigating the company’s financial data have faced legal proceedings alleging market manipulation.
‘Large numbers of people have raised concerns because it has the hallmarks of a monumental fraud. It’s just surprising that BaFin didn’t think to investigate,’ said Earl.
Police were similarly deterred for a long time from taking action by the regulators’ view that external forces were targeting the company to damage its reputation. “The public prosecutors were totally blindsided. BaFin told them that the company was clean and the allegations were inaccurate and made up by people who were trying to manipulate the share price. This had the affect of deterring people from voicing further criticism,” said Earl.
A campaign of intimidation was mounted against Earl and others. “The aggressive response by the company was traumatic. They had me under surveillance, cars were parked outside my house, I was subjected to legal threats, for three years my emails and phone were hacked. It was tough going for a while. You know you’ve hit a nerve to warrant such a response,” said Earl.
As evidence accumulated alleging financial mismanagement, Earl said doubts about the German regulator’s analysis intensified. “When the public prosecutor realised that there was another side to the story, they decided that they no longer trusted (BaFin) as a reliable source of information, and they decided to act independently,” said Earl.
The company’s German headquarters was raided on June 5, and an investigation was launched into its management.
The company’s status as a German financial technology leader won it regulatory protection, said Roddy Boyd of the Foundation for Financial Journalism, an investigatory journalistic group in Wilmington, North Carolina. Boyd was an early critic of the company’s accounting practices.
They “were defending a company perceived as a German pioneer. It was a creative technology company and there are not many of them in Germany.”
“They (Wirecard) filed the compliance forms on time in all the jurisdictions where they operated. They created the simulacrum of compliance and they had the compliance staff, they checked the regulatory boxes.”
“The evidence of fraud was beyond cute accounting or dubious business decisions,” said Boyd.
“It’s a disaster for BaFin. It’s very difficult to quantify their professional error. Their mistakes transcend professional standards. It goes beyond incompetence. They spent a great deal of time and money to blind themselves to the facts.”
The prospects for Wirecard Bank, a regulated institution and an integral part of the card processing operation, are uncertain, said Boyd. “Would you want to be a counterparty to that bank, or have any clearing exposure to a bank whose holding company has billions of dollars gone and it’s not coming back. What are their options? BaFin can seize the bank or they can provide a guaranteed receivables facility and run off the bank like an insurance company. You don’t have a lot of options.”
“The bank is the holy grail,” said Earl.
Wirecard Card Solutions Limited (WCSL), part of Wirecard AG, is licenced by the UK’s Financial Conduct Authority under the Electronic Money Regulations 2011 for the issuing of Electronic Money.
An FCA spokesman said that WCSL “is a fully owned subsidiary of Wirecard AG and as WCSL is a regulated firm that we supervise, we are in close daily contact with the firm as well as with other relevant international regulators.”