All of them Crooks and Cooking the Books: Wirecard announces €1.9bn “missing”

July 1, 2020

3 min read

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What's going on here?

In the largest accounting scandal in postwar European history, Wirecard, the German fintech payment processor, faces allegations of fraud for fabricating over €1.9bn of cash.

What does this mean?

Following accusations of a catalogue of fraud and irregularities, it emerged on 18 June that €1.9bn was “missing”, before Wirecard suspended its CEO and subsequently conceded 4 days later it was in fact “likely the money never existed”.  Its CEO Markus Braun has been arrested, its share price has dropped by 98% and Wirecard, formerly Europe’s largest fintech, has filed for insolvency.  

A payment processing business that processed billions of payment transactions annually, Wirecard took card details from consumers’ online purchases, collected the money from the cards’ issuing banks, and ensured it ended up in the merchants’ account.  Wirecard’s intense growth allegedly relied on it boasting the best technology in the payments processing industry, combined with the growing shift to a cashless society.  But the part of its business which had grown significantly was in fact entirely fabricated.  

Where it didn’t have its own licences in countries to process payments, Wirecard used three “partner companies”.  Wirecard managed to convince its auditors it was sending lots of payments processing to these partners in Dubai, the Philippines and Singapore, and that they were paying Wirecard a large commission.  It told its auditors that instead of this cash (from Ireland, Dubai and Germany) flowing into its Munich bank (Wirecard AG), it had placed it in “escrow” accounts held in Singapore.  Escrow accounts are accounts which are overlooked by trustees and can be used by multiple people.  EY failed to independently verify with the Singapore banks the existence of these, instead relying on (doctored) screenshots provided by Wirecard and it’s “third-party trustee”.

What's the big picture effect?

The UK licence of Wirecard has been ordered to cease all regulated activities by the FCA, the UK’s financial regulator, meaning accounts held with financial apps using Wirecard technology were frozen for a limited period of time.  At the time of writing, pre-paid card customers of U Account, Pockit, Curve and Anna Money should shortly be able to access their funds.  

Following a complaint submitted by Germany’s financial watchdog, BaFin, Munich prosecutors have launched a criminal investigation into market manipulation, amongst other irregularities, as have the German audit authorities, which continue to investigate the group’s accounting.  Shareholders and short-sellers have filed civil and criminal lawsuits.  Softbank, who invested in Wirecard last month, are suing EY and a class action lawsuit has been filed against EY on behalf of Wirecard’s investors (although Wirecard is de facto absolved as a defendant, thanks to its insolvent status).

The collapse has placed EY under intense scrutiny and further scrutiny by the FCA.  Independently verifying cash is held is an easy, standard audit procedure from “day-one training at audit school”.  The fraud is just one of several accounting scandals the Big Four accounting firm has been involved in this year, following its headline-hitting involvement with a Dubai gold company (see our article here) and also NMC Health.  The FRC (Financial Reporting Council), the UKs audit regulator, is in the process of “reforming” the audit sector, following a number of high-profile accounting failures in recent years (see our article here).  

The collapse could also spell trouble for the world of cryptocurrency.  Following the demise of Wavecrest in January 2018, Wirecard had filled the gap in the market dealing with the interface converting crypto to the fiat world – as the sole entrant willing to take the risk with fluctuations in crypto value and emerging regulatory scrutiny.  Fiat is a term used to describe cash or currency issued by governments and regulated by a central authority such as a bank, not usually backed by gold or other commodities, such as British Sterling – as opposed to crypto which is created on a decentralised blockchain by cryptographic technology.  With Wirecard’s partner crypto-cards potentially rendered useless, the same crypto-investor entities will once again be searching for alternative solutions.  Whether this time around any other corporate will be as keen to fill the gap remains to be seen.

Report written by Sophie Belcher

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