Wirecard: The story of the missing €2 Billion



On the 18th of June, 2020, an announcement was made by Ernst & Young (EY) Germany, the auditor for Wirecard, that sent shock-waves of gargantuan proportions throughout the financial world. Mind you, the proclamation was made right in the middle of the COVID - 19 crisis, with daily cases rising across Europe and the financial markets already tumbling due to the precipitated circumstances. The auditor announced that it could not sign off on the balance sheets because a "black hole" was detected in them. They were unable to locate close to 2 Billion Euros (169,898,000,000 INR :) ) cash that the company had reported. The amount represented nearly 25% of the balance sheet total and it seemed to have vanished into thin air!


This announcement revealed what has turned out to be the biggest financial scandal in a year which has already seen its fair share of tumultuous events. Before we dissect this accounting scandal and explain how this black hole came to be, let us look at the nature and history of this Fintech company that was once the darling of the German stock market.


So what does Wirecard do?


Wirecard, German office.


Wirecard is essentially an online payment processing company. It acts as a mediator of financial transactions between merchants(businesses) and other parties. One of the main services it offers is that it helps collect credit and debit card payments from customers. It offers a host of services to ensure smooth and secure electronic transactions and charges fees for the same. It belongs to a class of companies such as Visa and PayPal that manage your transactions for you whenever you swipe your card to pay for those high heels or gaming consoles. It also provides financial services such as the issuing and processing of physical cards.


TIMELINE


History: An inglorious past (1999-2008)

Wirecard was founded in Munich, Germany in the year 1999, in the later stages of the dot com boom. It was backed by a venture capitalist and started by processing payments for online gambling and adult websites. As the company began to grow, it moved into banking with its acquisition of XCOM bank. After the acquisition, it tried to re-brand itself into a more general-purpose payments processing firm. One way that it managed to do so was by transferring these " early clients" to other processing partners. It would refer its clients to these partners and these partners would, in turn, share a part of their fees with Wirecard as commission.


Growth: rising profits and questionable practices(2009-2018)

This was a golden age for the growth of Wirecard where it was growing at a rapid pace based on its secure and superior payments technology. This growth story was tainted by constant allegations regarding accounting inconsistencies as illustrated by allegations raised both in late 2008 and in 2015. This was followed by a publication by an anonymous group of short-sellers alleging that Wirecard was involved in money laundering activities. Wirecard responded to these allegations by denying any wrongdoing and charged the anonymous group for trying to manipulate its stock price for profit.


A clean chit from its auditor EY in 2017 combined with the rapid growth of the firm led to renewed investor enthusiasm for Wirecard shares, which resulted in its share price nearly doubling. It also managed to make a name for itself in Asia by taking over Citi Bank's payment processing operations across 11 countries. Wirecard shares hit a peak of 191 Euros per share in August 2018, valuing it at more than 24 Billion Euros. In September, it replaced Commerzbank in the prestigious Dax 30 index, making it an automatic investment for pension funds around the world. By this point, it had become Europe's largest fintech, seen as a rare German tech company that could stand up to the giants of the Silicon Valley.


Little did anyone know the reality that was about to unfold thanks to the relentless and persistent effort of the Financial Times(FT), an international daily newspaper company based in London, England.


The collapse: From Singapore to Germany(2018-2020)


From stock market star to scandal


The fall began with an investigation inside Wirecard's Singapore headquarters where the group’s legal staff began an investigation into three members of the finance team. The probe is launched after an internal whistle-blower raises allegations about a plan to fraudulently send money to India. The investigation seemed to have been squashed. Concerned whistle-blowers brought this to the attention of FT which went on to publish an article on the Singapore scandal in January 2019. FT was then charged and was being investigated for market manipulation. In March of 2019 FT published another article that showed that half of Wirecard's business is outsourced, with the payments processing handled by "partners" who pay Wirecard a commission.


Attempting to visit some of Wirecard's partners in the Philippines, FT discovered a retired seaman and his family, who are shocked to learn that their house is supposedly the site of an international payments business. FT was onto something and they knew it because they discovered that many of these "partners" that Wirecard seemed to earn revenue from did not exist!!!Fast forward to October 2019, FT published another article that indicated that the profits that Wirecard units showed in Dubai and Dublin were grossly inflated and that the customers they listed simply did not exist!Wirecard responded by saying these allegations were baseless and that they had done nothing wrong. Under pressure from investors to prove its innocence, It appointed KPMG to conduct a special audit, which it says will clear it of wrongdoing.


Wirecard’s “Partner” company office address,Philippines.


Usually, in circumstances where a firm is trying to absolve itself from any wrongdoing, it hires an independent/external entity to conduct an unbiased and just investigation and give it a clean chit. KPMG was hired to fulfill that purpose. The results of the much-awaited audit were "inconclusive". KPMG stated that it could not verify if the profits generated between 2016 to 2018 were genuine and that it faced several "obstacles" in carrying out its work.


EY, around this time, received documents from a trustee stating that around 1.9 Billion Euros was held by two banks in the Philippines. It was just the way the company's cash flow was set up and that they had directed the money there. Now since EY had to verify this information, they approached these Philippine banks to ask them about the cash. On June 16, the Philippine bank's BPI and BDO informed EY that documents supposedly showing €1.9 billion in balances are “spurious”. This was it, ladies and gentlemen. The company had nowhere to hide anymore. The Philippines central bank stated that no money to the tune of 2 Billion Euros had entered its territory from Wirecard. The game was over. The COO Mr. Marsalek was suspended, followed by the resignation of Mr. Markus Braun, the CEO.On 22nd June, Wirecard announced to the world that a multi-layered accounting fraud had taken place and that the cash did not exist. It filed for bankruptcy on 25th June and is expected to be dismantled by selling off its subsidiaries within a few weeks. Potential buyers have expressed interest in buying parts of Wirecard, bringing the once illustrious tech company to its ignoble end.



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