“Germany’s Enron” Continues to Stagger Forward
It’s time to talk about Wirecard AG. In many respects, it’s yet another accounting fraud scandal – albeit a massive one. But now, inevitably, it also has become a money laundering scandal, courtesy of German law enforcement authorities – and also now U.S. authorities – which are looking into the alleged misuse of shell companies to facilitate the pursuit of pornography, gambling and marijuana distribution. And it’s a story that clearly will be with us for some time, like the Danske Bank disaster. We surely will be blogging on this scandal going forward.
The fallout from the massive, years-long accounting scandal involving Wirecard, the German-based fintech giant, recently has blossomed to implicate alleged money laundering failures by the company and even systemic failures on the part of German regulatory authorities. Wirecard, a payment processor publicly valued more than some of the world’s largest banks, has been in a free-fall since a bombshell report by the Financial Times (“FT”) on February 7, 2019 revealed Wirecard’s widespread accounting fraud after being tipped off by a whistleblower.
As with the Dankse Bank scandal, a whistleblower allegedly was instrumental in causing the financial house of cards to collapse. This is also a story of investigative journalism and its consequences. Please check out this YouTube video by a FT reporter describing the efforts by himself and his colleagues to investigate Wirecard, and what he believed occurred as a result.
This June, Wirecard filed for insolvency and disclosed that it owed creditors almost $4 billion and that 1.9 billion euros – two-thirds of the company’s 2019 revenue – was missing from its accounts. In an effort to calm investors, Wirecard announced earlier this month that James Freis – previously the director of the Financial Crimes Enforcement Network (“FinCEN”) – would serve as the new CEO just after German authorities arrested Wirecard’s longstanding CEO, Markus Braun, for his alleged role in the scandal. Wirecard initially hired Fries as a Compliance Officer but, in a shocking turn of events, appointed him as interim CEO the very next day.
Despite these efforts, Wirecard’s legal troubles continue to grow and new reports emerged last week implicating the company in various money laundering schemes entirely unrelated to the accounting fraud. In an even stranger twist: with the details of both scandals emerging, the spotlight has turned to the alleged inaction of Germany’s regulatory authorities – putting aside the issue of Wirecard’s own auditors – and how they can and should prevent future scandals.
Wirecard’s Alleged Accounting Fraud
Wirecard, which initially processed payments for gambling and adult websites, skyrocketed in value in recent years and expanded to process payments for major credit card companies. As part of this expansion, Wirecard focused on growing its presence in Asia and claimed it used third-party partners to process payments in Asian countries where the company did not have a license. Wirecard stressed its role as an innovator: it was no mere bank, it was a “disruptor” and processed payments more efficiently than staid financial institutions through its command of technology. Recent reports and investigations, however, indicate that this “growth” – particularly into Asia – was merely the product of a widespread accounting fraud scandal.
According to the FT, (former) Wirecard employee Edo Kurniawan concocted a scheme in 2018 to convince regulators at the Hong Kong Monetary Authority to issue the company a license for providing prepaid bank cards in the Chinese territory. As part of this “round tripping” scheme, the FT reported, Kurniawan and his colleagues began fabricating invoices and agreements to create a paper trail that they could show to auditors regarding transfers in and out of Wirecard for legitimate purposes. At the time, Wirecard was trying to take over the payment operations of a major international financial institution across 11 countries and 20,000 retailers in Asia.
Kurniawan’s finance team was tasked with monitoring the figures assembled by the various Wirecard companies in the region and providing these accounts to Wirecard. Instead, the team generated seemingly fake revenue via fabricated contracts, backdated sales agreements, and signed off on non-existent technology projects. Tellingly, no Wirecard lawyers, salespeople, or technology staff were involved in these supposed deals, nor did any emails or other correspondence exist with these purported customers and suppliers.
The FT, which reviewed certain documents and emails provided by the whistleblower, reported that suspicious transactions appear to have been designed to stop Wirecard’s entities from missing financial targets for businesses in the Philippines, New Zealand, Hong Kong, Indonesia, Malaysia and India. Missing profit targets could have called into question the company’s Asian expansion over the past decade.
Far from being an isolated incident involving a rogue employee, Kurniawan’s scheme purportedly was part of a larger accounting fraud lasting several years across the company’s Asian operations. Documents reviewed by the FT reportedly indicate that Munich-based executives Thorsten Holten, head of treasury, and Stephan von Erffa, head of accounting, were at least somewhat aware of the round tripping scheme.
Last spring, the company hired Singapore-based Rajah & Tann to conduct an eight-month investigation into the fraud. Their preliminary findings, disclosed in part by the FT in February 2019, revealed “strong and irrefutable inferences from the documentary evidence [that] there has been at the very least several accounting irregularities which take the shape of forged agreements. In the best-case scenario, the purpose behind these deliberate acts may be limited to the false creation of revenue, with no wrongful misappropriation of monies.”
Weaknesses in Germany’s Regulatory Framework
In the wake of the FT’s February 2019 reporting, Singapore police raided Wirecard’s offices in the city. Undeterred, however, Wirecard announced it was suing the FT for “unethical reporting.” Remarkably, Germany’s regulatory authority, the Federal Financial Supervisory Authority (“BaFin”), prohibited investors from betting against Wirecard shares for two months – the first restriction of its kind on an individual company in German stock market history.
Incredibly, BaFin also launched a criminal probe in April 2019 into the FT reporters and investors that raised alarms about the company’s accounting irregularities on the basis of potential market manipulation. As noted, this YouTube video describes that tortured odyssey. As we have blogged, financial corruption and suppression of the free press can go hand-in-hand.
In the ensuing year, the inaction against Wirecard among German authorities has been widely criticized by industry experts and politicians. Finance Minister Olaf Scholz called on lawmakers to quickly address how to strengthen regulations following the Wirecard scandal, which revealed glaring lapses by both auditors and regulators. Felix Hufeld, BaFin’s president, told attendees of a conference last month that “a whole range of private and public entities including my own have not been effective enough” at preventing the “complete disaster” at Wirecard.
Just yesterday, the European Securities and Markets Authority announced it was examining the supervisory response to Wirecard by both BaFin and Germany’s Financial Reporting Enforcement Panel (“FREP”), the private-sector body that monitors German companies’ accounts. Recent reports indicate that BaFin and FREP have sought to shift blame to the other for failing to detect and address Wirecard’s fraud.
Recent Investigations into Potential Money Laundering by Wirecard
Further exacerbating the company’s legal problems, Wirecard recently has found itself the subject of several money laundering probes. Last week, a spokesperson for the Munich public prosecutor announced that the office is now conducting several money laundering investigations into the company, the oldest tied to potential money laundering in 2010. The spokesperson declined to provide more details on the investigation.
Recent reports revealed that senior Wirecard employees were linked to an opaque network of British companies associated with money laundering. Recent corporate filings reveal the involvement of Wirecard staff in a network of hundreds of shell companies set up in the U.K. which were connected to pornography, gambling and dating websites.
U.S. authorities are also investigating whether Wirecard played a critical role in an alleged $100 million bank-fraud conspiracy connected to an online marijuana marketplace. The crux of the case involves two businessmen accused of conspiring with third-party payment processors to trick U.S. banks into approving credit card payments for marijuana products. Unnamed sources indicate that Wirecard served as both a payment processor and an offshore merchant bank in the conspiracy.
This is not the first U.S. investigation implicating the company. In 2015, German prosecutors also raided Wirecard at the request of U.S. authorities engaged in another, unspecified money laundering investigation. No further information has been reported on this investigation. And in 2010, the FBI investigated a German national living in Florida for operating an unlicensed money-transmitting business for payouts of illegal profits from gambling in online casinos. According to the Wall Street Journal, Wirecard was involved in transferring some of these profits.
Despite the current lack of details regarding these various money laundering probes, Wirecard is likely to remain in the news – and a thorn in Germany’s side – for months to come.
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