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Wirecard implosion triggers blame game

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Deutschland has been in shock. Flak is flying in the European Union’s pre-eminent industrial powerhouse – widely viewed as a beacon for sensible and robust corporate life – over the implosion of payments processing group Wirecard.

The Munich-headquartered company, promoted to Germany’s Dax share index in 2018 (replacing Commerzbank), is the first member of the prestigious 30-strong market to ‘fail’.

Wirecard filed for insolvency on 25 June after disclosing a €1.9bn hole in its accounts that its auditor EY said was the result of ‘elaborate and sophisticated global fraud’. Its long-standing chief executive, Markus Braun, was arrested, accused of inflating the balance sheet. Wirecard initially said the missing cash was held in accounts at two banks in the Philippines but later said the money simply may not exist. Braun, who has denied wrongdoing, has been released on bail of €5m.

New developments and potential consequences to this still-developing tale are springing up daily – German prosecutors said yesterday that the head of a Dubai-based Wirecard subsidiary has also been arrested. It’s ugly stuff, and significantly more complex that a one-dimensional fintech dream gone (very) sour.

Wirecard’s history dates back to 1999 – the group is not a typical fintech pup. Rather than being part of Germany’s Berlin-focused fintech scene, Wirecard’s reputation is that of an established technology company that happened to work in finance (and also owns a bank) – a hybrid and even heroic Bavarian outlier slipping beyond various regulatory nets.

Crucially, the blame game is focused on this very point, with regulatory authorities accused of an ‘obvious hands-off approach’ and buck-passing.
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Germany’s financial regulator, has faced heavy fire. The watchdog’s president, Felix Hufeld, on 2 July branded the scandal “a massive criminal act”, an upping of the rhetorical ante after previously saying that “a whole range of private and public entities including my own have not been effective enough” at preventing a “complete disaster”.  

Hufeld has said that Wirecard was classified as a technology group, not a financial services provider, so it did not fall under BaFin’s jurisdiction. State authorities in Bavaria have said similar. People are asking ‘how’?

Hendrik Hagemann, a former banker who has worked in financial public affairs for more than 15 years, says: “Europe has been yearning for a ‘European Google’ [success story] and thus the stellar rise of a ‘don’t-they-do-something-with-the-internet?’ company was met with benevolent approval. Very few people in Parliament seemed to understand Wirecard’s business, on either the tech or the financial side.”

BaFin last year actually filed a criminal complaint against two journalists from the Financial Times – which has been running investigative stories on Wirecard for years – who had written about whistleblower allegations of accounting issues at Wirecard’s Singaporean subsidiary. Also last year the regulator imposed a two-month ban on short-selling the company’s stock. The FT’s Dan McCrum has recently shared a video (8min20sec) providing his perspective on the story:

Hagemann, who is managing partner for Germany at Rud Pedersen Public Affairs, says: “Signs that things may have been untoward were seen as being most likely untrue as ‘this is Germany, it cannot happen here’. But this was a hoax. The whole saga seemed to be portrayed as the ‘mean’ Financial Times attacking ‘us’ – Germany.”

A full investigation has been demanded by Peter Altmaier, Germany’s economy minister. “It’s really important to me that such a case never happens again — for the sake of confidence in the German banking system,” he said.

The country’s finance minister, Olaf Scholz, plans to give BaFin more power. “I want to give BaFin more control rights over financial reports, regardless of whether or not a company has a banking section,” he said in an interview with Frankfurter Allgemeine Sonntagszeitung (FAS), Reuters reported. Scholz’s proposal has not landed brilliantly some with some:

Practically for Wirecard, the company has installed a new interim chief executive, James Freis, who had only just joined as compliance head from Deutsche Börse. Germany’s largest bank, Deutsche Bank, is working with BaFin on possible support for Wirecard Bank, which continues to operate. In the UK, the Financial Conduct Authority gave Wirecard’s UK subsidiary the nod to resume e-money and payment services from 30 June.

Meanwhile, the European Commission has asked the European Securities and Markets Authority (ESMA) to investigate BaFin’s handling of Wirecard (with a deadline of 15 July). French economist Nicolas Véron has argued that the scandal should trigger a rethink of EU, not just German, financial reporting supervision. In a further development, London-based hedge-fund boss Crispin Odey last week said he plans to sue BaFin for millions in lost profit over its Wirecard short-selling ban.

In Germany and beyond, analysis has also begun as to consequences for the reputation of the fintech sector, even though Wirecard’s heritage differentiates the group from newer, typically Berlin-headquartered companies such as digital banking star N26.

“Wirecard was much older than most fintech firms – the firm kind of had a fintech ‘crown’ but was not a true fintech. Its DNA was much closer to the ‘older’ tech ecosystem of Munich,” reflects Hagemann. “Nevertheless it’s [Wirecard scandal] not a good result for the fintech industry overall.”
Reverberations will endure for investors, he says: “Regardless of what happens with politicians, ‘mom and pop’ investors in Germany will suffer for a long time. Ordinary people who had invested, say, €5,000, €10,000, €20,000 – they have lost a lot of money. But the sophisticated investors, for example hedge funds in London and New York, will not suffer.”
For Germany, a period of self-reflection and self-flagellation is underway as the analysis mounts and recriminations rage.

Author: Ian Hall