The Wirecard scandal was a series of corrupt business practices and fraudulent financial reporting that led to the insolvency of Wirecard, a payment processor and financial services provider, headquartered in Munich, Germany. The company was part of the DAX index. They offered customers electronic payment transaction and risk management services, as well as the issuance and processing of physical cards. The subsidiary, Wirecard Bank AG, held a banking licence and had contracts with multiple international financial services companies.
Allegations of accounting malpractices have trailed the company since the early days of its incorporation, reaching a peak in 2019 after the Financial Times published a series of investigations along with whistleblower complaints and internal documents. On 25 June 2020, Wirecard filed for insolvency after revealing that €1.9 billion was "missing",[2][3] and the termination and arrest of its CEO Markus Braun.[4] Questions have been raised about regulatory failure on the part of Federal Financial Supervisory Authority (BaFin), Germany's top financial watchdog, and possible malpractice of Wirecard's long time auditor Ernst & Young.
Rise of Wirecard
The company was founded in 1999. After Markus Braun joined as CEO in 2002, the company focused on online payment services, starting with porn and gambling websites as clients.[5] By taking over the listing of InfoGenie AG, a defunct call centre group, Wirecard entered the Neuer Markt stock market segment, an action that has been criticised as avoidance of proper scrutiny during an initial public offering (IPO). This was achieved through a decision in an InfoGenie general meeting to transfer the non-listed Wirecard to InfoGenie AG by way of a capital increase against investment in kind, making Wirecard a stock corporation listed in the Prime Standard stock market segment through a reverse IPO. A clean audit from EY in 2007 allayed investors concerns. Wirecard was included in the TecDAX since 2006[6] and in the DAX since 2018.[7] In 2018, Wirecard shares reached a peak, valuing the company at €24bn.
Causes of downfall
Wirecard is suspected to have engaged in a series of fraudulent accounting activities to inflate its profit.[9] Despite the allegations, BaFin ultimately took little action against the company before its eventual collapse, opting instead to file complaints against critics of the company and short sellers of the company's stock.
Accounting irregularities
Wirecard's combined banking (through its subsidiary Wirecard Bank) and non-banking (mainly payment processing) operations make its financial results harder to compare with peers, so investors had to rely on adjusted versions of the financial statements of the company.[10] The "adjusted" accounts, unlike the reporting adhering to International Financial Reporting Standards, resulted in inflated earnings and cash flow figures.[11]
Red flags were raised as early as 2008 when the head of a German shareholder association attacked Wirecard's balance sheet irregularities.
Aftermath
Convictions
During June 2023, Singapore's State Court sentenced James Wardhana, Wirecard's international finance manager to 21 months and Chai Ai Lim, Wirecard Asia's Head of Finance, to 10 months of imprisonment.[45]
In November 2023, the United States District Court for the Southern District of New York sentenced Aviram Azari, the founder of an Israeli intelligence firm, to 80 months of imprisonment and 3 years of supervised release, as well as the forfeiture of the proceeds from his hacking activities.[46]
Investors
With respect to criticisms against Wirecard, a set of smaller investors has long been supportive of the company by joining in both the company's and regulator's accusations against short sellers and market manipulation. Critics cite the German regulator, press and investor community's tendency to rally around Wirecard against what they perceive as unfair attack.[47]
See also
Further reading
- Summary of a series of Financial Times investigations which exposed the scandal.
External links
- Documentary about the Wirecard fraud by Deutsche Welle
References
- Arno Schuetze, Alexander Hübner. Police raid Wirecard headquarters as administrator kicks off asset sales Reuters, 2020-07-01, retrieved 2021-04-26^
- Wirecard: Scandal-hit firm files for insolvency BBC News, 25 June 2020, retrieved 25 June 2020^
- Germany's beleaguered Wirecard to proceed with business after insolvency