The Wirecard saga
The fall of the German payment processor Wirecard's house of cards is the biggest financial scandal in Europe in recent history. For many years it was a chronicle of an announced mega-fraud until the advent of the corona crisis drummed the market and unveiled the farce. In this scandal, the German government is coming under increasing pressure both nationally and internationally. Moreover, the saga begins to be exploited for propaganda purposes by some German newspapers and some NATO-related NGOs, trying to create a vague Russian conspiracy around the story.
Banking analysts and notable audit firms were left with a red face after the collapse of Wirecard on June 18th, 2020. It was the date of the apocalypse announcing the biggest fraud in recent European history. For many years, until that fatal day, banking analysts and notable audit firms launched appeals in favor of the company, even as the sea of bad news swelled around the fintech company.
The comparisons are exhausted in the case that saw the German fintech giant Wirecard sink and its founder and former CEO, Markus Braun, in handcuffs. The latter, known as the German Steve Jobs, is said to be the mastermind of a multi billion euros international scam, with an associated money laundering ring, which immediately became the "German Enron case." Instead, we can compare the story to the fairy tale, "The Emperor's New Suit." A rather blatant fraud can last for a long time if the organizers of the crime are ruthless enough, and the conditions allow it. The first signs that the dress did not exist became apparent in 2008, but no German authority dared to say that the Emperor was naked. Most investors, professional analysts, and auditors do not care about these things, even if they are told to do so, as long as they can make money.
Until recently, the company, which is active in financial services and payments, appeared as a solid flagship and champion of German fintech and its strategy of digitization. Yet, what has happened makes not only the operators but also the German institutions themselves tremble from the ground up, as they did not see what was happening. Until a few months ago, the German media talked about a company that represented one of the greatest securities of the Frankfurt DAX 30. It was capitalized more than Simens and Deutsche Bank, only to suddenly discover that at least two billion euros worth of assets simply did not exist. Many who were supposed to be watching had not noticed or had pretended not to see it for a long time.
Precisely because of these failings, the Wirecard affair may set a dangerous precedent for the credibility of fintech and the institutions themselves. At this stage, the risk is that all the trust and monetary capital accumulated over the years will be lost and the danger is concrete since the first sign that the fintech universe is a bubble is slowly floating up. like a dumpling. Now, the fear is that what happened in Germany will spread like a black spot of exhausted oil.
In this case, the savers who trusted Wirecard are those who (obviously) suffered the cruelest damage. Being listed in DAX 30, it was also an automatic investment for pension funds around the world. But what is even more shocking and alarming is that the German system of governance has justified its failings in supervision by candidly claiming that it is unable to intercept such fraud: which shatters saver's confidence like nothing else in the world.
For more than 20 years, the Wirecard success story was a chronicle of an announced mega-fraud—a mixture of sordid deceptions of crooks magnified by the naivety of the German media. Below is the chronology of it.
1999: Wirecard is founded in a suburb of Munich, supported by venture capital in the last phases of the dotcom boom. Wirecard is a payment processor, helping websites to collect credit card payments from customers.
2002: After the group nearly went bankrupt, Markus Braun, a former KPMG consultant, takes over as CEO and merges Wirecard with a Munich rival, Electronic Business Systems.
2005: Wirecard enters the Frankfurt stock market by taking over the listing of a defunct call center group, a route that avoids the control of an initial public offering. It has 323 employees, and the core of its business is handling payments for online gambling and pornography. The first links to money laundering rings are visible.
2006: Wirecard enters the banking sector with the purchase of XCOM Bank AG. The renamed Wirecard Bank is authorized by Visa and Mastercard, which means that it can issue credit cards and manage money on behalf of merchants. This unusual hybrid of banking and non-banking transactions makes its accounts more difficult to compare with those of its peers and helps convince investors to rely on the company's adjusted balance sheet versions.
2008: The head of the German shareholder's association, Florian Homm, publishes an attack on Wirecard, suggesting irregularities in the accounts. At the time, Florian Homm was implementing a short-selling strategy against several companies in Germany, including Wirecard. EY was commissioned to conduct a special audit, and the following year replaced the small Munich-based company that had previously acted as the group's auditor. Finally, the German authorities pursue Florian Homm and some of his partners for stock exchange manipulation.
2010: The German Federal Financial Supervisory Authority BaFin opens an investigation into possible market manipulation following a report by the Internet whistleblowing platform Gomopa.net. Gomopa published information suggesting that Wirecard was mainly used by criminals to launder money. The German authorities prosecuted Gomopa's executives.
2011 - 2014: Wirecard collects 500 million euros from shareholders and makes purchases. It buys obscure payment companies throughout Asia in a series of bizarre deals, starting with Singapore, which becomes its headquarters. Wirecard's rapid growth and claims of superior payment technology attracts investors.
2015: The Financial Times (shortened to FT) starts publishing the House of Wirecard series on FT Alphaville, raising questions about inconsistencies in the group's accounts. When FT suggests that there seems to be a gap of 250 million euros in the group's balance sheet, Wirecard responds with letters from an English law firm and hires FTI Consulting in London to manage external public relations.
In October 2015, Wirecard announced its most significant acquisition: an Indian payment company with a 340 million euro transaction. An extensive media campaign followed, highlighting the potential and importance of developing the online payment market in developing countries, the future of a cashless economy.
In an investigation report, J Capital Research details that Wirecard's activities throughout Asia are much smaller than what is claimed. Wirecard says short-sellers paid the investigation. Investment bank analysts advise in favor of Wirecard, saying they performed a diligent analysis of the group's Asian offices.
2016: Short sellers anonymously publish a dossier of allegations of money laundering and fraud under the pseudonym Zatarra Research. Wirecard denies everything, and BaFin, the German financial regulator, investigates Zatarra and others for alleged market manipulation. A major witch hunt is organized by Wirecard in Europe through several security firms to identify the people behind Zatarra Research. The operation is successful, and the authors identified.
The German authorities ignored Zatarra's messages and persecuted the authors of the report. Furthermore, Wirecard went aggressively against all those who wrote negative comments on its commercial legality, including journalists from the Financial Times. Wirecard used lawyers, PR specialists, investment marketing agencies, paid journalists, social media trolls, social media bots, private detectives, and hackers to discredit and intimidate critical voices.
Swiss east affairs gmbh, a Zurich-based
intelligence and research firm, organized a mystery shopping investigation
operation. It reported that activities in India and Asia are virtually
non-existent. Many online services and sales facilities linked to the companies
acquired by Wirecard in Asia, Dubai, UK, France, and Italy are fakes. The
investigation estimated that Wirecard's plausible turnover from legal
activities would be 50 times lower than
that declared in Wirecard's financial statements. At this point, it must be
considered that the revenues in the balance sheet are fraudulent or obtained
from other illegal activities such as operating a massive money laundering ring
serving third parties in emerging markets.
Some non-existent addresses of structures related to the acquisition of Wirecard in India.
The reality of Wirecard in India. It consists of
a few squalid exchange offices in Chennai.
The truth of Wirecard in India resides in a few exchange and money transfer offices in Chennai.
Wirecard continues to claim to be a leading and rapidly growing player in the Indian and Asian payment and e-commerce markets. The enthusiasm of investors and sell-side analysts for the company's growth in India and Asia supports much of the current assessment and hope.
2017: A clean audit by EY and a marked improvement in liquidity generation has caused renewed investor enthusiasm for Wirecard shares, which have more than doubled their price. The group announces a transaction to take over payment processing operations in 11 additional Asian countries.
March 2018: At Wirecard's headquarters in Singapore, the group's legal staff begin an investigation of three members of the financial team. The probe is launched after a whistleblower has raised accusations about a plan to fraudulently send money to India via a third party in a type of scheme known as "round trip."
August 2018 - December 2018: Wirecard shares reached a peak of 191 euros, with over 24 billion euros capitalization. The group claims to have 5,000 employees who process payments for around 250,000 merchants, issue credit and prepaid cards, and provide technology for contactless smartphone payments. Customers include German discounters Aldi and Lidl, as well as almost 100 airlines and Alibaba, the Chinese Google.
The enthusiasm of the market is immense.
Wirecard extends the media operation to increase investor euphoria by using PR specialists, investment marketing agencies, paid journalists, social media trolls, and social media bots. Any critical voice, who dares to question the regularity of Wirecard's accounts, is immediately silenced and stigmatized—branded as short-sellers or collaborators with short-sellers. Discredit campaigns were witnessed as well as systematic social media squabbles, legal pressure, and intimidation campaigns carried out through security companies. There is a climate of fear among German investigative journalists if they do not believe the narrative propagated by Wirecard. Personal repercussions such as stalking, psychological pressure, legal troubles for the employer, and the consequence of loss of employment were the worries among those journalists.
In August 2018, Wirecard replaced Commerzbank in the prestigious DAX 30 index, making it an automatic investment for pension funds worldwide. As the largest fintech company in Europe, it is seen as a rare German technology company capable of challenging the giants of Silicon Valley. Mr. Braun, whose personal stake in the group is now worth 1.6 billion euros, tells investors that sales and profits will double in the next two years. Markus Braun is stylized as the German Steve Jobs in the media.
January 2019: The FT publishes its first story on the Singapore investigation, which is immediately labeled as "fake" by Wirecard. BaFin begins investigating FT for an allegation of market manipulation.
February 2019: Singapore police raid Wirecard's offices. BaFin announces a two-month short-seller ban (a world premiere), citing "the importance of Wirecard to the economy" and the "serious threat to market confidence" after the stock price falls below 100 euros.
March 2019: The FT reports that half of Wirecard's business is outsourced, with payment processing handled by partners who pay a fee to Wirecard. When attempting to visit these partners in the Philippines, FT discovers a retired sailor and his family. They are confused to learn that their modest home is presumably the site of a multi-billion euros international payment organization. Wirecard announces that it will sue FT. Wirecard sues the Singapore authorities, challenging the criminal investigation. The Singapore prosecutor's office lists five Wirecard employees and eight Asian subsidiaries of the group as suspects.
Offices of a partner in the Philippines responsible for hundreds of millions of Wirecard payments.
Offices of a partner in the Philippines for online touristic reservations responsible for hundreds of millions of sales for Wirecard. In reality it is a company operating a single bus.
FT publishes further details on how
Wirecard processes outsourced payments. The agreements with three partner
companies in the Philippines, Singapore, and Dubai have been responsible for
most of the group's profits worldwide. Mr. Braun challenges FT's figures at a
press conference, calling them imprecise.
EY approves 2018 accounts with minor qualifications related to Singapore, and Wirecard announces a dozen new compliance measures.
April 2019: SoftBank has announced that it has agreed to put 900 million euros into Wirecard, providing a vote of confidence vital for Wirecard that had to face a counter-evaluation of its accounts. SoftBank has not, however, purchased a stake in Wirecard. Instead, it bought a convertible bond, a type of debt that can be repaid in shares rather than cash.
September 2019: Wirecard issues 500 million euros of bonds classified as investment grade by Moody's, the credit rating agency. Credit Suisse also sells the SoftBank convertible bond for 900 million euros to other investors.
The FT is served with court documents. Wirecard is suing for "abuse of trade secrets" connected with the January and February 2019 articles. Most of the German newspapers agree with Wirecard. Only the newspaper "Die Zeit" comments negatively on Wirecard in Germany.
October 2019: FT publishes documents indicating that profits from Wirecard units in Dubai and Dublin were fraudulently inflated and that the customers listed in the materials provided to EY did not exist.
Wirecard states that the documents obtained by FT are not authentic, and it reiterates that its staff and managers have done nothing wrong. Under pressure from investors, Wirecard appoints KPMG to conduct a special audit, which should exonerate Wirecard from irregularities.
November 2019: Wirecard acquires a company in China as the market entry in that country. The same month Wirecard transfers more than 300 million euros to some New Zealand accounts without any explanation.
April 28th, 2020: The KPMG report is published. The audit firm says it cannot verify that the "lion's share" of Wirecard's profits reported from 2016 to 2018 were real, citing several "obstacles" to its work. KPMG is also asking for 1 billion euros in cash balances. The only proof of the sum was a document provided by a Singaporean trustee who cut ties with Wirecard when the special audit began.
Mr. Braun tells investors that "EY informed us this morning that they have no problem signing the 2019 audit". The publication of the results is postponed until June 2020, a delay attributed to the coronavirus. Any irregularities are denied.
June 5th, 2020: The police search the Wirecard offices after Munich prosecutors launched a criminal investigation against Chief Executive Officer Markus Braun and the three other members of the executive committee of the payment group. The search follows a criminal complaint filed a few days earlier by BaFin, the German financial control body. The charge relates only to potentially misleading statements made by Wirecard to investors before the publication of the KPMG report.
June 16th, 2020: Philippine banks report that documents received from EY indicating a presence 1.9 billion euros in balances are "fake."
June 18th, 2020: Wirecard should publish the certified results for 2019. Instead, it announces that 1.9 billion euros are "missing."
June 19th, 2020: Markus Braun resigns. Wirecard announces that it is in "constructive talks" with banks that have the right to terminate 2 billion euros in loans due to a lack of certified accounts.
June 22nd, 2020: Wirecard recognizes for the first time the potential scale of multi-year accounting fraud, warning that the 1.9 billion euros in cash probably "does not exist."
The payment company states that it considers "whether, how, and to what extent these activities were carried out for the benefit of the company", and adds that "The financial data may not be reliable." Wirecard's second-in-command, the COO Jan Marsalek, who had direct supervision of the areas concerned, is dismissed and disappears without a trace.
June 23rd, 2020: Mr. Braun is arrested on suspicion of false accounting and market manipulation. A spokeswoman for the Munich Public Prosecutor's Office reports that Wirecard's former board of directors is under investigation.
June 25th, 2020: Wirecard announces it will file for insolvency.
July 2020: Rumors are put out on the street, claiming that Mr. Marsalek is hiding in the Philippines. Others say he is in China, or in North Korea, Belarus, or Russia. Others report that he is hiding in a villa near Moscow under surveillance by the GRU, while some consider him be a Russian agent or a financer of mercenaries in Libya.
The disappearance of Mr. Marsalek is also instrumentalized for propaganda plans by some German newspapers and a few NGOs tied to NATO, like bellingcat. They try to create a vague Russian conspiracy in the Wirecard affairs, creating a scapegoat, demonizing Jan Marsalek, which consequently diverts the public's attention from all others responsible for the Wirecard disaster.
Russia is not commenting on the rumors, and it also declares to have no information about Marsalek's whereabouts. According to this, there are no criminal proceedings against him in Russia, nor is there an extradition request.
Nevertheless, the German government is coming under increasing pressure. The newspaper "Der Spiegel" reports that Chancellor Merkel traveled to China with former Defense Minister Karl-Theodor Zu Gutenberg, who was consulting with Wirecard about entering the market in China. The newspapers also report that Finance Minister Scholz has been aware since February 2019 that the Financial Supervisory Authority is suspicious of Wirecard’s irregularities.
The opposition demands clarification, especially from the Finance Minister and the Chancellor's Office. The Greens and FDP threatened to set up a committee of inquiry in the Bundestag if the investigation failed to be carried out; the Left Party already considers it "inevitable."
Producer Nico Hofmann, head of the film company Ufa, announced that the saga of Wirecard will be a movie. "The Wirecard case not only provides the material for a unique economic crime thriller, but it is also a drama among kings; between cunning crime and the belief in technology," says Nico Hofmann.
There are all of the facets of our economic coexistence in this story. Severe mistakes in supervision, the complacency of the financial sector, political naivety, Germany shining as a technology location, fintech bubbles, disinformation campaigns, persecutions, propaganda, spies, Asia, China, Dubai, Moscow and power fantasies that consider the international stock market to be a civil war.