What would you do if your credit card processor and merchant account supplier were fraudulent? That is the reality for many thousands of global companies that depended upon Wirecard, the Germany-based financial technology company that’s currently in bankruptcy proceedings, having committed, allegedly, sham practices for ages.
I will clarify the Wirecard fiasco in this post. It’s shocking due to the apparent widespread degree of fraud and the lessons for the digital payments market.
Wirecard headquarters near Munich, Germany. Source: Wikipedia.
A Sketchy Start?
Wirecard is a multinational payment processor, merchant acquirer, card issuer, and technology supplier. The company declared bankruptcy in August 2020. It was recorded on the German DAX, a notable stock indicator like the Dow Jones Industrial Average.
Wirecard started in 1999 as a payment-technology firm. In 2002, Wirecard’s then CEO, Marcus Braun (who’s now under arrest), altered strategy to processing payments for, mainly, gambling and porn sites.
In 2005, Wirecard raised funds by issuing shares in the Frankfurt Stock Exchange via a reverse IPO, having bought the record of a failed call centre company named InfoGenie. This allowed Wirecard to reevaluate going public and, some might say, avoid a lot of the scrutiny.
With the new funding, Wirecard obtained a German bank named XCOM, which held international merchant acquiring and card issuing licenses, thereby enabling the recently created Wirecard Bank to become both a global issuer and acquirer. Purchasing companies for their permits is fairly common.
The XCOM transaction transformed Wirecard to a sprawling, complicated company. In the ensuing 14 years, Wirecard allegedly used this sophistication to artificially inflate profits, conceal gigantic losses, forge contracts, and dupe investors, auditors, and regulators.
Rise and Fall
By 2006 to 2018, Wirecard expanded aggressively. It acquired several smaller, Asia-based payment processors, an Indian payments firm, and lots of Citibank-owned processing and prepaid-card portfolios in Asia and North America.
Company for Wirecard was, apparently, flourishing. At its summit in 2018, Wirecard’s public evaluation was $24 billion (approximately USD $28 billion at the time of writing). The firm had 5,000 employees and promised to process payments for 250,000 merchants worldwide along with its card-issuing and technology operations. Wirecard replaced one of Germany’s largest banks around the DAX-30 index.
So, what went wrong?
A lot. It’s helpful to examine the scandal’s deadline to know the degree of fraud, collusion, and deceit. The Financial Times, which exposed the apparent depth of the scandal, offers excellent coverage.
- 2015 and 2016. The Financial Times and short-sellers Start to probe. BaFin (Federal Financial Supervisory Authority, Germany’s principal financial regulator) sides with Wirecard. As far back as 2008, a small set of Wirecard shareholders complained about what they thought were accounting irregularities. Wirecard hired Ernst & Young, the accounting firm, to investigate. The complainants were silenced, two shareholders were prosecuted for insider trading, and Wirecard escaped unscathed. Ernst & Young would become Wirecard’s external auditor for another 11 years.
- 2008 through 2015. Wirecard expanded rapidly and, for the most part, avoided controversy. In 2015, however, a Financial Times report alleged significant accounting issues in, primarily, Wirecard’s payment-processing enterprise. Later in 2015, a group of short-sellers claimed that Wirecard’s operations in Asia were much smaller than reported by the business.
Nonetheless, Wirecard obtained a payment processor in India for, allegedly, $340 million (USD $401 million). The Financial Times later declared that Indian investors never obtained $175 million to $285 million in the sale.
- 2016. A group of short-sellers printed allegations from Wirecard, including money laundering. BaFin, the German regulator, researched but finally sided with Wirecard. This became a recurring pattern: Whistleblowers and journalists accuse Wirecard of improprieties, and regulators side with the business.
Unscathed, Wirecard acquired Citigroup’s North America prepaid-card business, providing Wirecard a foothold in the U.S.
- 2018 to 2019. In ancient 2018, a whistleblower at Wirecard’s Singapore office alleged that the company was defrauding investors by participating in”round-tripping,” a practice of selling something and then refunding the buyer afterwards — the marketed assets are never moved from the seller to the purchaser. The transaction is fake (and prohibited ).
Concerned workers in Singapore took this accusation seriously and initiated an internal investigation. In October 2018, the workers contacted The Financial Times, which published a report on Wirecard’s Singapore operations. Another BaFin investigation happened. Singaporean law enforcement became involved, resulting in a raid of Wirecard’s offices.
BaFin regulators, again, sided with Wirecard. BaFin declared a two-month prohibition on short-selling Wirecard’s inventory, asserting that Wirecard is too important to the health of the German economy.
- 2019. Fake companies and imitation gains. In March of 2019, The Financial Times published a report asserting that approximately half of Wirecard’s earnings and the majority of its profit are from referral fees with smaller chip partners. This isn’t unusual because most large chips work closely with merchant account providers and other partners.
But a lot of Wirecard’s processing spouses did not exist. They were fake. Indeed, when they tried to go to the offices of Wirecard’s partners in the Philippines, reporters discovered dwellings of uninvolved residents.
Wirecard’s response was to sue The Financial Times and the Singapore government, who previously had named five Wirecard workers and eight partner companies as suspects in a criminal investigation.
Ernst & Young, the auditors, approved Wirecard’s 2018 financial statements and recommended only minor compliance processes for Wirecard’s Singapore office.
- October 2019. The Financial Times reported that gains from Wirecard’s operations in Dubai and Ireland were inflated and even more of the business’s partners didn’t exist. Pressure mounting, Wirecard appointed KPMG, another accounting firm and a rival to Ernst & Young, to conduct an audit.
- 2020. Wirecard’s passing. Following a series of delays, KPMG released its reports. The findings stunned investors, BaFin, and the German authorities.
KPMG contested the validity of Wirecard’s profits from 2016 to 2018, citing a glaring lack of evidence, like no bank statements showing income received. KPMG couldn’t confirm at least 34 Wirecard customers and at least $1 billion in cash. Wirecard had fabricated at least three decades of profits.
In early June, German authorities raided Wirecard’s headquarters and launched a criminal investigation against Wirecard’s CEO and a number of other executives.
On June 16, two Philippine banks revealed that documents supplied by Wirecard to government to support $1.9 billion in cash balances were”spurious” (fake). Two days after, Wirecard declared the $1.9 billion is”missing.” Wirecard’s stock price dropped, and its creditors called in approximately $2 billion in loans.