Wirecard

Wirecard was a German financial services provider and one of the fintech stars of the DAX index. The company, which specialized in payment processing and issuing, collapsed in 2020 following the revelation of a massive accounting scandal involving €1.9 billion in missing funds. Its rapid insolvency triggered widespread financial market turmoil, numerous international investigations, and profound reforms in German financial regulation.

History

The company was founded in 1999, initially focusing on processing payments for online gambling and adult entertainment industries. Under the leadership of Markus Braun, who became CEO in 2002, Wirecard pursued an aggressive growth strategy through acquisitions, including the purchase of Wirecard Bank in 2006. It gained a critical banking license, allowing it to offer a full suite of financial services. The company's expansion into Asia, particularly through operations in Singapore and the Philippines, was heavily promoted. Its 2018 entry into the DAX, replacing the venerable Commerzbank, was hailed as a symbolic victory for the European fintech sector and cemented its reputation as a blue-chip stock.

Business model and operations

Wirecard presented itself as a one-stop shop for electronic payments, offering services ranging from payment processing for merchants to digital banking and issuing of prepaid cards. Its core technology involved managing the transaction flow between merchants, card schemes like Visa and Mastercard, and acquiring banks. A significant and later controversial part of its operations involved so-called third-party acquiring (TPA) partners, primarily in Asia, which were said to handle business in regions where Wirecard had no direct license. The company reported soaring revenues and profitability, which attracted major investors and partners, including SoftBank and global technology firms.

Accounting scandal and collapse

For years, allegations of accounting fraud were raised by investigative journalists, notably from the Financial Times, and by short sellers. Suspicions centered on the TPA partners and whether the reported revenues and cash balances were fictitious. In June 2020, the company's long-time auditor, EY, refused to sign off on the 2019 accounts, citing the inability to confirm the existence of €1.9 billion held in trustee accounts at two Asian banks. Wirecard claimed the money was in the Philippines, but the Philippines' central bank stated the funds never entered the country. This admission revealed the balance sheet was a fabrication, leading to the arrest of Markus Braun and the flight of Jan Marsalek. Wirecard filed for insolvency in Munich shortly after, in one of the largest corporate fraud cases in postwar German history.

Legal proceedings and investigations

The collapse triggered a global web of legal actions. In Germany, former CEO Markus Braun and other executives faced trial in Munich for fraud, market manipulation, and breach of trust. The fugitive Jan Marsalek remains the subject of an international manhunt. Authorities in Singapore convicted several local officials for forgery and cheating. The scandal also ensnared the German financial watchdog, BaFin, which faced severe criticism for pursuing short sellers and journalists instead of investigating Wirecard. A parliamentary inquiry, the Bundestag committee of inquiry, was established to investigate the profound regulatory failure. Separate investigations were launched by the ESMA and authorities in the United Kingdom and United States.

Impact and aftermath

The Wirecard scandal had a seismic impact, eroding trust in German corporate governance and the auditing profession. It exposed critical weaknesses in BaFin and the FREP, leading to a major overhaul of German financial regulation intended to strengthen oversight of fintech companies. The European Union subsequently moved to tighten rules for statutory auditors and enhance corporate transparency. Investors, including large pension funds and retail investors, suffered total losses, while partner banks like Commerzbank and Aareal Bank faced significant writedowns. The case became a textbook example of corporate fraud in the digital age, permanently damaging Germany's reputation as a financial center and leading to widespread calls for greater investigative financial journalism.

Category:Financial services companies of Germany Category:Corporate scandals Category:Companies that filed for insolvency in 2020