German Wirecard is one of the largest fintech companies in Europe. It has 5,800 employees in 26 cities and more than 313,000 customers, and in 2018 it overtook Deutsche Bank in terms of capitalization. The clients were offered services of electronic and mobile payments, risk management, issuing bank, credit, prepaid and cryptocurrency cards, including Crypto.com, TenX and CryptoPay. The company seemed to be doing well, but in June Wirecard was on the verge of collapse. So, on June 18, auditors announced a shortage on the balance sheet of € 1.9 billion, and then the shares fell 39 times. Moreover, on June 22, the head of the company Marcus Brown was arrested, on June 25, Wirecard management began bankruptcy, and users of the cards issued by it lost access to their accounts. How Wirecard went bankrupt, how the scandal affects the market and what it teaches the crypto industry,
Wirecard Takeoff History
Wirecard was launched in Germany in 1999 and helped sites collect credit card payments from customers. By 2002, in the wake of the collapse of the dotcoms, he was on the verge of ruin. At that time, the former KPMG consultant, Marcus Brown, joined the company, and has since become its permanent head. He merged the company with Munich rival Electronic Business Systems and re-qualified Wirecard to work with online casinos and porn sites. Other payment companies tried to avoid them, but customers with a dubious reputation helped Wirecard stay afloat in difficult times.
By 2005, Wirecard was listed on the Frankfurt Stock Exchange and opened a Visa and Mastercard credit card division. The company later entered into a partnership with American Express, Apple Pay, Alipay, Discover, China UnionPay, JCB and WeChat Pay. As a result, Wirecard was able to both process payments and issue credit cards. This is the complexity of the business model of the company - it’s difficult to understand the flow of payments from customers, companies and banks.
An important step in the development of Wirecard was the opening in 2007 of a unit in Singapore to serve the Asian market. At one point, the subsidiary was responsible for almost half of the business and made Marcus Brown a billionaire. Wirecard grew rapidly due to investments in Asian mobile payment companies, which allowed it to overcome the 2008 crisis.
However, in the same year, Wirecard raised its first suspicions of manipulating reporting. The head of the German Association of Shareholders (SdK) said the company's 2007 consolidated financial statements were incomplete and misleading. Wirecard hired the audit firm Ernst & Young (EY) to conduct an audit that did not reveal any irregularities. The author of the association’s report was prosecuted - he owned a stake in Wirecard and was able to capitalize on the fall in shares following the allegations.
In 2011–2014, Wirecard began to provide solutions for the growing popularity of wireless payments. This helped the company attract € 500 million from shareholders and begin aggressive international expansion. At this time, Brown bought up small payment companies throughout Asia, attracting more investors and accelerating the price of shares. By 2014, Wirecard went beyond Asia, opening offices in New Zealand, Australia, South Africa and Turkey. In 2015, she reached the Indian market, and in 2017, she bought Citigroup's prepaid bank card division, operating in 11 countries and serving about 20,000 retailers, which allowed Wirecard to enter North American markets.
However, with the profit, questions about Wirecard's financial statements also grew. In 2015, the Financial Times published a series of materials about the company, suggesting that there was a € 250 million hole in its balance sheet. Research firm J Capital Research said that Asian wirecard operations are much smaller than official data claims. Wirecard responded with allegations that the study was commissioned by those who wanted to capitalize on a decline in the company's shares. A number of analysts also noted that Wirecard, which was bought by expensive Asian companies, were small firms with low incomes, so they simply could not generate the revenue that the company claimed.
In 2017, Wirecard became the largest fintech company in Europe and passed the EY audit. All this fueled the enthusiasm of investors and the company's shares doubled in a year. Wirecard shares even entered the Dax-30 - the most important stock index on the Frankfurt Stock Exchange. This has made it an attractive investment destination for pension funds from around the world.
In 2018, Wirecard's stock price tripled, its capitalization reached € 22.5 billion - so the company became the largest company in Germany in terms of this indicator, ahead of such giants as Deutsche Bank and Commerzbank.
Reporting manipulation charges
Over the past two years, Wirecard has constantly fought back on allegations of misrepresentation of its financial statements. In March 2018, the company's Singapore office launched its own investigation into three members of its own financial team suspected of manipulating reporting. By October, the investigation was virtually terminated.
In January 2019, the Financial Times (FT) published a series of articles about the Singapore investigation. Wirecard executives immediately called the allegations false. But the German Federal Financial Supervisory Authority (BaFin) has launched an investigation into market manipulation. In February of that year, FT wrote that Wirecard Singapore’s management has manipulated financial reporting in several Asian countries to obtain a license in Hong Kong to issue prepaid cards in China. The scheme looked like this: a large amount of money was transferred from a bank in Germany, it was displayed on the balance sheet in Hong Kong, then it was transferred to a fictitious client who transferred it to the Indian unit so that it would be credited for revenue. FT noted that the scale of fraud was insignificant compared to consolidated revenue. Journalists wrote that two top managers in Germany knew about fraud, and suggested that in this way they hid the failure to fulfill financial goals.
In the same month, Singapore police raided the office of Wirecard. This led to a fall in its shares by 40%. The company denied all allegations and filed a lawsuit against FT, accusing the publication of conspiracy with investors playing down quotes. After that, BaFin banned the short-term trading of securities of the company for two months , arguing that it is “the importance of Wirecard for the economy” and “a serious threat to market confidence ” in case shares fall below € 100.
In March 2019, FT reported that half of the Wirecard business is actually outsourcing, and payment processing is carried out by partners who pay Wirecard commission. Trying to find the offices of some of these Wirecard partners in the Philippines, the publication discovers a retired sailor and his family, who are puzzled to learn that their home is the office of an international payment service. Singapore authorities accused five Wirecard employees and eight Asian subsidiaries of the group of fraud and misrepresentation.
In the same month, Rajah & Tann law firm, hired by Wirecard in February 2019 for an internal investigation, found signs of misrepresentation by several employees of the Singapore office, but emphasized that the leadership in Germany did not know anything about it, and the regulatory standards were not violated . Employees were fired, and the stock won back its fall.
Last April, FT published additional information on outsourcing Wirecard payment processing. According to the publication, most of the company's profits came from three non-transparent partners in the Philippines, Singapore and Dubai. Brown refuted these figures, calling them inaccurate. Ernst & Young's audit, with minor modifications, confirms the correctness of the 2018 report. In the same month, BaFin again sided with Wirecard and filed a criminal complaint against several short sellers and two FT journalists after Wirecard accused them of negative reporting, which was created to lower the price of shares.
In October 2019, FT published documents showing that Wirecard employees probably overestimated sales and profits at its Wirecard subsidiaries in Dubai and Dublin, which misled the EY auditors for almost a decade, as the customers listed in the documents provided to it never existed. In December, the publication said that Wirecard used deposit accounts of the company and several partner trustees to increase cash balances.
Wirecard continued to deny the allegations, but under pressure from worried investors hired KPMG to conduct a special audit, which was supposed to "clear" the name of the company. It lasted six months, its results were published at the end of April 2020. As a result, the auditors were not able to check some of Wirecard’s transactions with third parties in 2016−2018. They also found that the only evidence of the company's € 1 billion account was documents provided by a Singaporean trustee who broke off ties with Wirecard at the same time the audit began.
After the publication of the KPMG findings, Wirecard shares went down again, and then BaFin banned the opening of short positions on them until April 18.
Hot June 2020
In June, BaFin finally turned its attention from Wirecard critics to the company itself. June 5 prosecutor's office conducted a search of the headquarters of Wirecard, after open a few days earlier case against Marcus Brown and three other members of the Executive Board of the company on suspicion of divulging misleading information that could influence the share price.
In the spring, Wirecard was supposed to publish the financial report for 2019, but postponed its release several times due to delays from EY, which delayed the publication of its Wirecard audit for 2019. As a result, on June 18, Ernst & Young auditors said that they could not find € 1.9 billion ($ 2.1 billion) in trust accounts of trustees in two Philippine banks, BDO Unibank and Bank of The Philippine Islands - about a quarter of its balance sheet. The Central Bank of the Philippines said that money never entered its money systems, and both banks denied having transactions with Wirecard. The authorities launched an investigation into some of the company's employees. EY also stated that during the completion of the 2019 audit, it was provided with false information regarding escrow accounts, which the company has already reported to law enforcement agencies. “ There are clear signs that it was a carefully designed and sophisticated fraud involving several parties around the world, ” the EY statement said.
This led to a collapse in Wirecard stock quotes. In just a few days, stocks lost more than 95% of their value, falling from € 104 to € 2.65. Bonds issued by the company in June by € 500 million fell below € 0.40 apiece.
In response, Wirecard said it was a victim of fraud, that it will work with Ernst & Young to clarify and resolve the situation, and also removed the chief operating officer.
The Wirecard affair has caused a huge response in German business and regulatory circles. On June 22, BaFin CEO Felix Hufeld admitted that the Wirecard scandal was “a complete disaster,” and criticized the inaction of his own organization. Several major officials called for a revision of regulation to tighten it.
A number of major investors and shareholders of Wirecard (DWS, Deka Investment) said they were discussing legal steps against the company. EY also faced a class action lawsuit by Schirp & Partner, a Berlin law firm, and lawyer Mark Liebscher on behalf of affected shareholders and investors. Claims against Ernst & Young are expected to ultimately exceed € 500 million.
Marcus Brown resigned on June 19, and James Frace, chief compliance officer of the company, became Wirecard CEO. On June 22, Wirecard for the first time recognized the scale of many years of fraud with reporting, saying that the missing € 1.9 billion probably simply does not exist. On the same day, Marcus Brown was arrested by German police on charges of overstating the company’s income and misrepresenting its balance sheet. A day later, he was released on bail of € 5 million. Former COO Jan Marsalek is also under investigation and is allegedly hiding in Asia.
On June 25, the Board of Wirecard filed a lawsuit in a Munich court to open bankruptcy proceedings "because of the threat of insolvency and excessive debt." While bankruptcy will affect only the parent company of the group, the possibility of bankruptcy and subsidiaries is also being studied. According to Reuters, Wirecard's debt to creditors is about $ 4 billion, of which € 1.3 billion ($ 1.5 billion) were to be repaid within a week. But despite the fact that the balance of the subsidiary Wirecard Bank is about € 1.4 billion, lenders have little chance of getting their money back. According to Reuters, she falsified data on two-thirds of her sales, which means that there is not enough money to pay off all debts, and now the company's creditors are preparing to write off loans as bad loans.
The collapse of Wirecard was reflected in the cryptocurrency market. On June 26, the British financial regulator FCA suspended the activities of its UK-based subsidiary Wirecard Card Solutions, which processed electronic payments and prepaid cards. As a result, users of the Payoneer payment system, as well as prepaid cards Pockit, Anna Money, FairFX, Curve, Crypto.com, Boon, CardOneMoney, Pockit, U Account, McLear Ring, Morses Club, Holvi and others lost access to their money. However, already on June 29, the regulator lifted the restrictions, and Wirecard Card Solutions started working again, returning customers the opportunity to use cards.
What does the scandal with Wirecard teach the crypto industry
Wirecard - this is not a one-day company caught in the fooling of naive private investors. This is the largest fintech company in Europe, which has repeatedly passed audits from leading companies and received financing from large banks.
However, she managed to manipulate financial reporting and draw billions that were not there. It is hard to believe that the company’s management did not know this - in the end, in the case of its good faith, it would be most interested in getting to the bottom of the truth and removing any inconsistencies. Yes, it was not easy to suspect something was wrong with a simple private investor - even professionals were burned. But to say that the collapse of Wirecard was a complete surprise, too, is impossible - accusations of financial dishonesty haunted her for many years.
For the cryptocurrency market, this is a good and obvious lesson - not to trust anything blindly and not to take a word of assurances from companies caught in fraud. Were there no organizations on the cryptocurrency market claiming that their coins were fully secured and then losing money? However, this does not teach the market anything, and suspicious projects continue to appear. Someday, regulators will get to them.
