00:04 GMT13 July 2020
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    Once-mighty German payments provider Wirecard filed for insolvency 25th June, mere days after admitting €1.9 billion missing from its accounts likely "didn’t exist", and ex-CEO Markus Braun was arrested on suspicion of fraud and false accounting.

    The cataclysm has propelled Wirecard to international infamy, with authorities in several countries probing its activities in an attempt determine precisely how the company got away with such flagrant and brazen criminality for so long.

    While it’s quite some fall from grace for the digital payments provider, which was once valued at a whopping €24 billion and forecast to be at the forefront of the global ‘cashless’ revolution, one could be forgiven for never having heard of the company before.

    ​For those wanting to understand a global financial scandal that’s been compared to the notorious collapse of Enron in 2001, here are the key facts.

    The Company

    Founded in 1999, Wirecard is a payments processor, offering companies the ability to accept credit cards and digital payments, in a manner akin to Apple Pay or PayPal, in stores, online or via mobile.

    The company makes its money, in theory, by receiving a commission for ensuring merchants receive the money they’re owed, and also selling customers services such as transaction analytics, in order to improve sales and track trends.

    Wirecard had 300,000 customers worldwide, and signed deals with sectoral giants such as WeChat, Apple and Google – a quantum leap from its humble origins 20 years ago, when its services were the sole preserve of online porn and gambling sites.

    ​Still, the durability of these industries meant the firm survived the early-2000s dotcom crash, and as online commerce became ever-increasingly standardised, and Wirecard’s credibility and scale grew in turn. Listed on the Frankfurt stock exchange 2005, by 2018 it’d supplanted Commerzbank from the exchange’s blue-chip DAX share index. By the start of 2019, its market value hovered around €17 billion, broadly the same footing as crisis-engulfed Deutsche Bank, with 15 times fewer workers and revenues.

    Now, it’s valued at a comparatively paltry €350 million.

    The Scandal

    It was also at the start of 2019 Wirecard’s eminence began to spectacularly unravel, due to the diligent reporting of the Financial Times’ investigative team, who highlighted a number of irregularities in the company’s accounting, notably in its Asian division.

    It wasn’t the first time Wirecard had been accused of dubious accounting practices – similar allegations were levelled in 2008, 2015 and 2016. Each time, Wirecard argued the charges were attempts to tank its shareprice by jealous, predatory competitors, triggering investigations by German market regulator BaFin, which invariably found in the company’s favour.

    Wirecard’s response to the FT’s reporting was no different, and neither was BaFin’s – the regulator launched a probe into potential links between the outlet and short sellers betting against the company’s stock.

    This time however, Wirecard couldn’t depend on friends in high places to whitewash its wrongdoing - eminent Singapore law firm Rajah & Tann was in the process of examining its accounts, and had uncovered serious evidence of impropriety.

    ​The catalyst for its investigation was a whistleblower in Wirecard’s Asia-Pacific headquarters, who’d been shocked when during a January 2018 meeting the head of the division’s accounting and finance office had openly and aggressively outlined a plan to ‘cook the books’ in order to secure a license from Hong Kong Monetary Authority, for issuing prepaid bank cards in the Chinese territory.

    The scheme centred on an illegal practice known as “round tripping” – a sum of money would be sent from a bank owned by Wirecard in Germany to a dormant “customer” company also owned by Wirecard in Hong Kong, appear momentarily on its balance sheet, then be sent back to Wirecard’s India office, appearing to local auditors like legitimate business revenue.

    A shocked staffer informed Wirecard’s legal department – the next month, another whistleblower in a separate department of the Asia Pacific also raised concerns about a contract he’d been sent by a member of the accounting team.

    The contract, with hydraulics and piping company Flexi Flex, appeared to have been secured and signed without the knowledge, consent or input of any of Wirecard’s lawyers, sales team or technology staff, yet indicated Wirecard was doing millions in business with Flexi Flex. It’s since been confirmed Wirecard has never had any business relationship with Flexi Flex, and a staffer simply copied the company’s logo from the internet, and pasted it onto a contract template he completed himself. A complete forgery, in other words.

    Doubling Down

    Rajah & Tann subsequently published a comprehensive report on its findings, which concluded Wirecard was involved in “forgery and/or of falsification of accounts”, as well as “cheating, criminal breach of trust, corruption and/or money laundering” in multiple jurisdictions. The bombshell revelations prompted a raid on the company’s offices by Singapore police – in response, Wirecard launched legal action against Singaporean authorities and the FT, and also employed private investigators to surveil and monitor hedge funds ‘shorting’ its stock, and journalists covering the story.

    The company spent much of the rest of 2019 acting business as usual, even issuing €500 million in bonds classified as investment grade by credit rating agency Moody’s – until leaked documents revealed profits at Wirecard units in Dubai and Dublin were fraudulently inflated, and customers listed in documents provided to auditor EY did not exist. Wirecard claimed the offending files weren’t authentic and denied any wrongdoing. Nonetheless, due to pressure from investors it appointed KPMG to conduct a special audit, which it says will clear it entirely.

    ​KPMG finally reported in April 2020, concluding it couldn’t verify arrangements responsible for “the lion’s share” of Wirecard’s profits 2016 - 2018 were genuine, and citing several “obstacles” to its work. In all, €1 billion of cash balances couldn’t be verified either, as the only evidence provided for the sum’s existence documents from a Singapore trustee that cut ties with Wirecard around the time the audit began. Two months later, German police raided Wirecard’s Munich offices after prosecutors launched a criminal investigation against chief executive Braun and the payment group’s three other executive board members. 

    ‘Unparalleled Scandal’

    The collapse of Wirecard has prompted the European Commission to launch an investigation into BaFin, to determine whether it broke EU law - the European Securities and Markets Authority is to carry out a "fact-finding analysis" and report back before 15th July.

    After the EMSA reports back, Brussels could seek legal action against the German regulator, which for its own part has conceded the Wirecard scandal is a “disaster” the organisation "had not been effective enough to prevent from happening”.

    German Minister for Economic Affairs Peter Altmaier also publicly called for an investigation into BaFin's role in the collapse while Finance Minister Olaf Scholz described the affair as an "unparalleled scandal."

    Whatever comes of the EMSA probe though, Wirecard’s creditors are owed almost US$4 billion – and gaping holes in the rules governing European accounting practices have been starkly exposed. How many, and which, other companies are involved in similar schemes presently is unknown.

    Related:

    Disappearing Billions: Scandal-Riddled Firm Wirecard Claims Cash Missing From Accounts Never Existed
    Ex-CEO of Scandal-Plagued Wirecard Arrested Amid Search for 'Missing Billions'
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    Scandal-Hit Wirecard Files for Insolvency Amid Allegations of Billions Missing From Accounts
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    fraud, crime, crisis, Wirecard
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