The public prosecutor’s office in Germany is currently investigating Dax-listed FinTech giant, Wirecard, after it filed for insolvency on June 25. The company currently stands accused of a very broad list of offences, including: commercial fraud, balance sheet forgery, market manipulation, embezzlement of assets and money laundering.
The claim that Wirecard faked transactions worth billions to artificially inflate its balance sheet, sales revenues and share price, enabling the company to obtain loans of €3bn, has led investors to believe their money is now lost. There is also the suspicion that millions were stolen through sham transactions with partner companies and that Wirecard was involved in international money laundering on a massive scale.
Such is the scope of Wirecard’s business that it was only a matter of time before stories began to link the FinTech giant with gambling-related businesses to increase the intensity of the scandal. The latest news to hit the headlines concerns the processing of payments for the Malta-based gaming company, CenturionBet, which was shuttered in 2017 for laundering money for Italy’s Ndrangheta crime organisation.
Wirecard continued to do business with CenturionBet, which was incorporated in Malta but owned by a Panamanian shell company, until 2017 when its gambling licence was suspended by Maltese authorities. CenturionBet ceased trading after an anti-mafia raid saw 68 people arrested. Since then more than 30 people have been sentenced for mafia-related crimes linked to the case.
Such is the scale of the financial and political intrigue currently surrounding Wirecard that the story of missing billions and multiple arrests of top executives is to be turned into a documentary by German broadcaster RTL. The Wirecard’s drama is expected to show the circumstances that led to the financial scandal, alongside a history of the company and its executives and is set for an early 2021 release.
The docu-drama aims to shed light upon: “what former CEO Markus Braun, CFO Alexander von Knoop, and COO Jan Marsalek knew, what moves they agreed upon, and whether differences among them crept up along the way.” Markus Braun, the company’s long-time billionaire boss, resigned just as the scandal went public and was subsequently arrested. He was released at the end of June on bail of €5m, but was swiftly rearrested in July. Two other high-ranking former managers of the company were also arrested in July, while Marsalek continues to evade the police. And here the conspiracies ratchet up another level.
An Interpol red notice has been issued and a request made to Russian authorities for the immediate arrest of Marsalek as he is believed to have relocated to either Russia or Belarus – though not before having given the impression that he’d fled to the Philippines. His alleged personal connections with Russia’s GRU intelligence service and that he was funding his own militia in Libya have only added to the clandestine intrigue surrounding the meltdown of Wirecard.
Russia has not yet responded to Interpol’s request, but is unlikely to do so if Marsalek, as predicted, turns out to be one of their agents (see FT article) – https://www.ft.com/content/511ecf86-ab40-486c-8f76-b8ebda4cc669
Mr. Marsalek oversaw the company’s relationships with third-party firms that processed payments for Wirecard in markets where it didn’t have licenses. Revenue from those partnerships represented a large proportion of Wirecard’s business, and have become the focus for investigators. The company said in a June 22 statement that it was “unsure” about the nature of its business with these parties.
A key point in the story of Wirecard is the FinTech’s association with the gaming industry. Founded in 1999, Wirecard initially focused upon handling payment transactions for adult-entertainment and gambling websites on the Internet. The company flourished during the early Internet gambling boom, but when the US banned the payment processing of online gaming in 2006, a key pillar of Wirecard’s earnings fell away. Braun and Marsalek, who by then controlled the company, embarked on a course of international expansion. Braun was responsible for promoting the business to investors, while Marsalek built up an international network of companies, which form the core of what appears a sophisticated Ponzi-style scheme.
The fallout in Germany
On June 22, 2020, German DAX-listed Wirecard AG (Wirecard) had to admit to the high probability that alleged bank balances on trust accounts in the amount of €1.9bn did not exist. The auditors EY had already considered this possibility a few days earlier and refused certification for Wirecard’s 2019 accounts.
The price of Wirecard shares fell to almost zero within a few days. The German Federal Financial Supervisory Authority (BaFin) launched an investigation and criminal proceedings were initiated against the parties involved, including the auditors. Wirecard filed for bankruptcy on June 25 due to impending illiquidity and over-indebtedness.
In addition to the obvious inconsistencies at Wirecard, the role of the auditors at Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (EY) is also been investigated. EY has been auditing Wirecard’s annual financial statements since 2012 and, despite repeated signs of irregularities, issued unqualified audit certificates to the company until 2018. EY is being accused of inaction over the accounting irregularities and for failing to check Wirecard bank statements for three years.
Lawmakers in Germany grilled Finance Minister, Olaf Scholz, and Economics Minister, Peter Altmaier, at a closed-door meeting of the parliament’s finance committee in July. Following the meeting, Mr. Scholz presented a reform plan to strengthen financial oversight of companies in Germany after markets watchdog BaFin came under fire for failing to act on tips and suspicions raised about Wirecard for over a decade. The plan would give BaFin greater investigative powers.
Numerous high-ranking politicians, including Chancellor Angela Merkel (Christian Democratic Union, CDU) and Vice-Chancellor Olaf Scholz (Social Democratic Party, SPD), are also involved in the affair. As recently as September 2019, when reports of irregularities had been circulating at Wirecard for four years, Ms. Merkel was heavily promoting the group on a business scouting trip to China.
As finance minister, Mr. Scholz is responsible for BaFin, which failed to properly scrutinise Wirecard for years and failed to act on reports of opaque money flows and possible balance sheet forgeries at Wirecard since 2015. In fact, rather than investigate, BaFin issued a ban on short sales and filed criminal charges in 2019 against journalists, whom it accused of manipulating the share price by negative reporting.
Scholz’s state secretary, Jörg Kukies, a former banker at Goldman Sachs, met with Wirecard CEO Braun for confidential talks as late as November 2019 and several high-ranking German and Austrian politicians were in close contact with Wirecard or were active as lobbyists for the corporation.
The wider scope of the affair
The fallout from the scandal is not restricted to Germany. Account holders in multiple markets have seen their accounts frozen and face issues retrieving their funds, while investors in the company look set to lose fortunes on the shares and loans granted to the business.
Fallout on the gaming sector has been relatively low-key at this stage. However, in addition to the latest breaking news concerning Wirecard’s transaction processing past with CenturionBet, GVC was also forced to make a statement on July 30, refuting claims linking it with Wirecard. Newspaper reports claimed that the UK tax office had launched a probe into GVC’s former Turkish business in connection with Wirecard.
GVC responded by issuing a statement that there is “no evidence of any link between the HMRC investigation and the payment service providers (Wirecard),” as shares in the company fell sharply due to the story. Many more operators linked to Wirecard could face similar scrutiny by tax officials and the press as this story continues to unravel.
In the UK, hundreds of thousands of Wirecard user accounts were frozen by the UK financial regulator in late June and were slowly unlocked throughout July as Pockit, Anna Money, Curve, Fair FX and other Wirecard accounts were caught up in the mess. The Financial Conduct Authority (FCA) ordered the payment processing firm behind these accounts, Wirecard Card Solutions Ltd, to suspend UK operations following the accounting scandal at its German parent company.
Wirecard is authorised under the Electronic Money Regulations 2011. Under these regulations, it’s required to ring-fence any money deposited in a bank account so it’s separate from its own cash. However, such accounts are not protected under the official Financial Services Compensation Scheme like a standard current account or savings account and the FCA has not confirmed whether these account users will see all their money returned.
What happens next?
The Wirecard AG scandal is expected to spark a revamp of how the European Union carries out financial supervision, as the collapse has shown that previous attempts to bolster financial watchdogs at the EU level have been found wanting. The EU is also considering stronger regulations for audit committees. Due to Wirecard’s connection with the gaming sector, money laundering measures are expected to be beefed-up yet again.
When Wirecard filed for insolvency in June after 1.9 billion euros ($2.2 billion) of cash went missing, the scandal breached “all three lines of defence” meant to protect EU investors; regulations and corporate governance, auditors, and supervision from public authorities. Calls were made in 2017 to revamp the European Securities and Markets Association for exactly this purpose, as well as its sister agencies, but were watered down by individual national governments. The scale of the Wirecard scandal might change the minds of the EU politicians – perhaps not in the short-term, but wait till this hits Netflix.