By Dragan Vitorovic
Every financial scandal of medium or big magnitude is necessarily a political scandal.
The German Bundestag decided last September to launch a full-fledged inquiry related to the fraud scandal originating from the Wirecard misdeeds. So far it seems that Olaf Scholz, German Finance Minister, will be under a lot of pressure, judging by the reaction coming from various political parties (looming elections have been scheduled for 26 September 2021).
Wirecard scandal, which was not possible to thwart even within the COVID19 pandemic, resulted in a loss of reputation, serious financial damages, and a developing crisis of trust that reverberates through different continents. It also serves as a reminder to the public why the conservative approach to finance could remain the gold standard.
The infamous company was valued at more than 28 billion USD in 2018. This company was hailed as a complete success of the German fintech scene, and even replaced Commerzbank on the DAX 30 index. For a company founded in 1999, which moved from payment provisions to online pornography and from gambling sites to banking, this almost sounded too good to be true. Wirecard substantiated its rapid expansion on the use of Big Data tools, Artificial Intelligence, effective adoption of digitalization, and on the catchy narrative of “the economy of tomorrow’s world”.
Point of no return
Eighteen June, the year 2020. Markus Braun, who is the largest shareholder and Chief Executive Officer of Wirecard, goes viral and explains to stakeholders via YouTube that the EY, the company’s auditor, is unable to verify 10.5 billion USD in cash, that was supposedly held in two Philippine banks. In his short speech, Braun used the word “fraud”, presenting the company as a victim. The second part of Wirecard drama could begin.
Financial Times vs. Wirecard
The first part of the dramatic fall of Wirecard involved the investigation conducted by Financial Times. Financial Times started investigating the numbers presented by Wirecard in 2019, emphasizing the notion that there are loopholes in the complex business model that soon might transform into a serious risk to a company’s operation.
The concern was mainly raised around third-party transactions, while numbers presented in reports did not fit. Journalists from the Financial Times encountered various hurdles during the investigation, both from the institutional and the unofficial perspectives, including filing the court cases, threats, intimidation, and pressure. Additionally, FT journalists mentioned in their online messages that Wirecard and circles around the company did not refrain from hacking journalists’ e-mails and cameras. Something did not feel right, as journalists would say later in their interviews.
Regulatory Capture: moving beyond Psychology
Besides Financial Times from London, Düsseldorf-based Handelsblatt was also interested in Wirecard’s meteoric downfall and launched the series “Handelsblatt Crime”, which deals exclusively with his “German Enron”, as sometimes depicted in media. When combined with the analytical presentation from the Financial Times, one may grasp a broader picture of this scandal, while receiving the answer how it was possible that no regulatory agency stepped in before June 2020.
The first part of an answer, is, according to a well-known German finance newspaper; s podcast, psychology. The company was possibly seen as a company which vests a national pride (the title of this introductory article is an inversed version of „Amazon, Apple, Google? Deutschlands Antwort lautet: Wirecard“ (Amazon, Apple, Google? Germany answers: Wirecard) seen in German newspapers at a time).
The company had serious investors worldwide, such as SoftBank (after all, “serious” is a relative term), well-positioned intangible assets, such as goodwill and reputation which had been built over time, and a solid economic narrative. Bad things were kept under the carpet, and although signals of overstretched business model became too obvious, many stakeholders suffered from cognitive dissonance when it came to Wirecard.
Despite their experience and common business sense, bankers have provided huge amounts of loans to the company. Additionally, there were no proper internal controls, partially because reputation is not intrinsically developed, but comes from another source, so the management of the company could not fully understand if the certain business decisions were detrimental or arrived as a result of genius-level planning. If everyone praised their activity, everything was possible, seemed to top management of Wirecard. While journalists checked the facts, performed worksheet tests, and had their suspicion that a specific form of money laundering takes place, the business world delivered to Wirecard.
That might be one of the reasons why the company, despite finding itself in a “going concern” crisis, blatantly continued in channeling funds to third parties worldwide. Up to this point damages to the customers reached ten billion USD, while half of them still have not been reimbursed.
The second part of the answer, closely related to the first, is the possibility that the case of Wirecard suffered from regulatory capture. CFA Institute describes regulatory capture as a phenomenon that occurs when a regulatory authority, created for the purposes of public interest, advances the special interest of a specific interest group within the jurisdiction of the regulatory authority. The regulatory capture results in the promotion of specific interests, instead of protecting and promoting the interest of the public.
It would be far-fetched to argue that BaFin, a German regulatory agency, had fallen victim of regulatory capture, however, this institution filed a case against two journalists who reported on Wirecard and had introduced a ban on shorting Wirecard’s stock. Besides the state regulatory agency, certain top-notch management firms partially ignored the red flags, such had been the case with EY.
Other companies that had direct business cooperation with Wirecard include McKinsey, which provided advisory services, PwC, that after the scandal was blown in the open pledged to review the corporate governance mechanism, and KPMG, who, after a tense exchange of reports, letters, and promises in May and June 2020, did not provide the “bill of clean health” and opened Pandora’s box far and wide. It could be argued that this scandal partially was a failure of state regulatory agencies and the company’s auditors.
Political Dimension
Swiss Radio and Television claimed in June 2020 that this will emerge into a full political scandal. Political parties involved in the debate are well-informed and after reading their reports, blogs, and speeches, it is hard to predict how this may reflect on the career of some of the leading figures in German politics. Some politicians, such as Christian Lindner, chairman of FDP, claim that there is an issue of institutional mistrust, which has been placed into the highest-decision-making circles, and that company, which had been seen as national pride, obtained political support for such demeaning behavior.
Do Not Jump to Conclusions
The scandal surrounding Wirecard is still far from over, and the final part of the drama is drawing close. News agencies and specialized finance journalist will continue their analysis and investigations, possibly uncovering other spurious activities related to this company. Political ramifications of Wirecard’s fraud may not be fully observable, at least not in close future. The company whose leaders have been arrested for market manipulation, negligence, and accounting fraud, to name a few, had a strategic design to acquire Deutsche Bank at some point in the future, attempting to conceal Wirecard’s mishandlings through the M&A process. However, instead of a merger with Deutsche Bank, Wirecard might become an excellent case study of corporate governance failure combined with structural mismanagement and unfulfilled geopolitical dreams.
One is certain – after documented stories pertaining to the second person in charge, shady and dodgy Jan Marsalek, who is reportedly on the loose, wanted by Europol, but also under the protection of Russian secret service, not even the high-class writers of spy novels would be ashamed of such plot.
Author: Dragan Vitorovic
(The views expressed in this article belong only to the author and do not necessarily reflect the editorial policy or views of World Geostrategic Insights).
Image Credit: Reuters