wirecard scandal case study pdf

How the Wirecard scandal happened: Case study

(This article was updated on August 27, 2024 to add more historical detail on Wirecard's short sellers and the Financial Times' investigation.)

Wirecard has all the attributes of a truly great crime: originality, audacity,  narrative, notoriety and a great ending. It just might be the greatest accounting scandal of all time.

Wirecard was original because it combined accounting fraud with money laundering on an epic scale, meaning it simultaneously hid revenue and embezzled cash while also inflating other sources of earnings. No other major scandal has combined these two elements. Enron was a major fraud because in some of its accounting treatments it acted as if it was a bank. Wirecard took this to the next level.  It was a bank. 

Wirecard was audacious. It boldly ran vast sums of money through incongruous  business premises such as suburban houses in Europe or empty rice sheds in Asia. Management made no attempt to hide these glaring anomalies and boldly rejected all allegations . Even when Wirecard was on the very cusp of collapse, the management attempted to buy Germany's biggest bank, a truly audacious move.

The narrative of Wirecard will never be beaten. Here was an epic struggle, not between a company and some faceless regulator, but between two corporations; the Financial Times and Wirecard. They fought openly in the media and in courtrooms. They fought covertly in the shadows as dubious detective services hired by Wirecard  phished, monitored and intimidated FT journalists.

Like any great story, the odds were stacked against the good guys. In spite of mounting evidence, Germany's regulators defended Wirecard robustly, almost to the bitter end. Even juicier, it was alleged that the main perpetrator at Wirecard was a Russian spy, with the implication that the transactions overseen by Wirecard may have been used for intelligence gathering and as a shadow financial network to facilitate Russian intelligence operations. The FT was not just battling any company, it was battling a company backed by its regulator and a hostile intelligence agency. The stakes were high.

Although Wirecard is not as notorious as Enron, its senior officers were much higher  profile. The senior officers at Enron were finance guys. They focused on accounting treatments. Those at Wirecard were so much more. The former CEO, Markus Braun, modelled himself on Steve Jobs and presented himself as a visionary at the vanguard of the fintech revolution. The former COO, Jan Marsalek, ran a secret headquarters in Vienna next door to the Russian embassy.  He was a mystery man who's story may never be fully known.

The ending was epic. Wirecard collapsed almost overnight. The battle reiterated the tremendous importance of the free press. Those that  accepted the FT's arguments were able to avoid large losses. Marcus Braun is in custody as a court in Munich dissects the crime.  Marsalek escaped to Moscow with help from his intelligence contacts. Interpol issued a red notice for Marsalek in August 2020. He remains at large.  

The story of Wirecard is one of complete gullibility on the part of investors and regulators. Almost everyone believed the Wirecard story but for a handful of journalists, some short-sellers and, naturally, the Transparently.AI Manipulation Risk Analyser (MRA), which picked Wirecard as a possible scam from the moment it listed. 

Table of contents

Wirecard's global expansion.

• Short sellers and the FT assault

Wirecard accounting fraud

Using ai to predict accounting fraud, how wirecard got away with it, wirecard after listing: 2005, wirecard income manipulation, wirecard after its bank acquisition: 2008-2011.

• Wirecard business manipulation
• Wirecard after US money laundering case

Wirecard as the end approaches: 2018

• WIRECARD: THE AFTERMATH

Wirecard: The beginning

Wirecard was founded in a Munich suburb in 1999 in the dying embers of the dotcom boom. It was a payments processor that helped websites collect credit card payments from customers.

Elsewhere in Germany, Paul Bauer-Schlichtegroll, an Austrian businessman with a background in the porn industry, had a business to process wire transfers for Internet porn. By the early 2000s, his business was struggling because he cannot process credit cards. He needed an acquisition with access to credit cards or his business will die.

In 2000, Wirecard was an ideal target. Moreover, the company is in a weakened state after its key programmer, another Austrian named Jan Marsalek, caused a massive systems failure after "accidentally" routing all of the company’s Internet traffic through his own PC. The systems failure nearly crippled Wirecard, but it rebuffed the takeover offer.

In a stroke of luck, a burglary at its office in 2002 brings Wirecard to insolvency. Bauer-Schlichtegroll buys the company for half a million euros and merges it with his own. He keeps the Wirecard name, hires a consultant from KPMG, another Austrian called Marcus Braun, as the CEO. He also keeps the former hacker, Jan Marsalek, who will become Wirecard's COO in a few short years.

The mysterious systems failure and the burglary made for a highly dubious beginning. The rest of the Wirecard story is well known and so intriguing that we cannot do it justice here. Those who like a good yarn should read the book  or watch the documentary . The full timeline is here , courtesy of the Financial Times.

The potted history is that the company veers into online gambling under the new CEO. This is a fertile field for payments, since banks avoid gambling payments, and also for money laundering for those willing to circumvent national bans on online gaming.

The move into gambling, although profitable, requires global expansion. Wirecard desperately needs capital to realize its ambition. In 2005, Wirecard does a back-door listing on the Frankfurt exchange. Back-door listings are always a red flag since the listing company avoids the scrutiny of an IPO.

After listing, Bauer-Schlichtegroll sells all his shares – an even larger red flag. Upon listing, Wirecard has 323 employees and earns the bulk of its revenue from managing payments for online porn and gambling.

In 2006, Wirecard purchases a German bank, XCOM, which allows it to issue cards under its own name and to manage merchant money. The unusual merging of a banking and non-banking business muddies the numbers, forcing investors to rely on the company’s own ‘adjusted version’ of its accounts. 

In 2008, a German shareholder group alleges balance sheet irregularities. Wirecard appoints EY to conduct a special audit. EY clears the company and is hired as auditor. German regulators prosecute two investors who voiced the allegations but failed to reveal short positions in Wirecard.

In 2010, the US government charges a German national linked to Wirecard with money laundering. The prosecutor argues that Wirecard has laundered "at least" $1.5 billion of gambling proceeds. Wirecard stock plunges.

Marcus Braun appoints Jan Marsalek as the COO. In the following five years, Marsalek pivots the company away from gambling in Asia. He raises half a billion euros and accumulates a maze of obscure payments companies in Asia and the Middle-East.

These purchases have complex structures and the payments processing is essentially outsourced, obscuring the accounts. By 2015, three arms-length firms in Dubai, Singapore and Manila were generating more than half a billion euros in annual revenue, and all of Wirecard's profit. These outsourced providers were often located in isolated locations with no obvious signs of business of the scale recorded in Wirecard's accounts. 

In 2016, Wirecard acquires Citibank's prepaid credit card business. Pre-paid cards are regarded as a primary tool for money laundering.

On paper, the roll-ups become a key driver of Wirecard’s growth, which the company claims is enhanced by AI. 

In 2018, Wirecard has a larger market cap than Germany’s two largest banks and enters the Dax 30. Upon entry to the index of the country’s largest companies, Wirecard has no board committees, not even an audit committee. 

Figure 1: Market value. Source: Bloomberg, Transparently.AI

Based on its early history alone, with roots in pornography, gambling and subsequent accusations of money laundering, Wirecard should have provoked deep mistrust among investors and regulators. This is especially true due to the complexity of its accounts owing to the ownership of a bank. 

 Wirecard is a classic example of homo sapiens’ gullibility.

And yet, to this point the company was cheered as a national champion, constantly rated overweight or strong overweight by equity analysts, feted by investors, and staunchly defended and promoted by German regulators and politicians.

Wirecard is a classic example of homo sapiens’ gullibility.

Wirecard short sellers and the FT assault

To be sure, Wirecard had detractors over the years.

Short-seller allegations in 2008 were the first of many, all of which were were aggressively rebuffed, usually with the threat of legal action. The specific findings of EY's special audit in 2008 were never publicly  disclosed but the firm evidently found no evidence of material wrongdoing.

From April 2015  onwards, the FT began a long campaign against Wirecard , known as 'The House of Wirecard,' which revealed increasingly damning evidence. The initial allegations continued to focus on inconsistencies in Wirecard's balance sheet, as per the 2008 attack.

In November 2015, J Capital Research  recommended shorting Wirecard's stock based on allegations that the company's Asian operations were virtually non-existent. The report noted: "We have attempted to use Wirecard in many parts of the world and have found it virtually impossible outside of Germany to fund the prepaid cards or use Wirecard in payment for anything."

Wirecard quickly arranged a fake tour of its Asian  offices. Bank analysts were suitably impressed and rebuffed the allegations.

In a 2016 report , Zatarra Research detailed allegations of "widespread corruption and fraud", causing significant weakness in the share price, Once again  BaFin, the German regulator, came to Wirecard's defense launching an investigation into possible market manipulation by the principals of Zatarra.

As the frequency and seriousness of the allegations increased, Wirecard hired a PR firm and private investigators to fend off its attackers. This included a sustained hacking campaign against journalists, short-sellers and researchers. Nothing stuck and most of the company's detractors were scared off. 

(In 2022, Aviram Azari, an Israeli private detective, pleaded guilty to computer intrusion, wire fraud and identity theft charges relating to work done on behalf of Wirecard. We will get to that year in due course.)

In 2017. EY gave Wirecard a clean audit as the company completed its purchase of Citi's pre-paid card business.

In March 2018, the legal team at Wirecard's Singapore office began an internal investigation after a whistleblower report about illegal money flows. Marsalek quashes the report. Wirecard, meanwhile, has risen to a record valuation in the wake of the clean audit and Citi acquisition. Wirecard enters the prestigious DAX 30  in September.

Frustrated at inaction over the internal investigation, a whistleblower from the legal team contacts the FT in October and provides key information, including thousands of emails. FT published its first report using this information in January 2019.

In spite of the compelling evidence presented against Wirecard, BaFin instead investigates market manipulation claims against the FT. The Singapore regulator understands the importance of the FT claims and raid's Wirecard's Singapore offices in February. In response to this action by a fellow regulator, BaFin bans short selling of Wirecard stock.

In March 2019, the FT reveals that half of Wirecard's business is outsourced and  relates that its Philippine partner has no offices. Wirecard responds by suing the FT and the Singapore authorities. In April, Softbank gives Wirecard a vote of confidence with a 900 million-euro cash injection.  In September 2019, Wirecard cashes up again, raising 1.4 billion euros from bond investors.

Meanwhile, Wirecard uses false  information from a sting operation overseen by the  former head of Libyan foreign intelligence to support German legal claims of market manipulation by key journalists and senior officers of the FT.  Reporting on Wirecard is  put on ice while The FT conducts an internal investigation.

When this investigation ends, the FT resumes the attack. In October, the FT documents  evidence that Wirecard's reported earnings in Dubai and Dublin are inflated with fraudulent customers and bank statements. In December, the FT claims that cash managed by trustees in escrow accounts is included in the cash balances declared by Wirecard in its financial statements.

Wirecard appoints a special audit by KPMG to investigate the claims. The report is due by March 2020 but is delayed until 28 April, when KPMG announces it can't verify the arrangements responsible for Wirecard's outsourced profits. In other words, it could not verify that “the lion’s share” of Wirecard's reported net income from 2016 to 2018 was genuine. KPMG cited  “obstacles” to its work.

In June, Munich prosecutors launched a criminal investigation against CEO Braun and three other executive board members. 

The final bomb exploded on June 18, 2020, when Wirecard announced that €1.9 billion was “missing” from two Philippine bank accounts in June. On June 25, Wirecard filed for insolvency. 

Back to top

Wirecard was arguably the most complex and multi-layered fraud operation of all time. It was a brazen high wire act, so interlaced with online gambling, organized crime, Russian oligarchs, and the shadowy world of intelligence that we may never fully understand the true extent of its wrongdoings.

The Wirecard fraud was unique because it combined accounting fraud with money laundering on an epic scale, meaning it simultaneously hid revenue and embezzled cash while also inflating its earnings. 

Wirecard possessed the ideal attributes for accounting fraud: 

• It engaged in millions of transactions across international borders using a web of escrow accounts and offshore affiliates, some of which appear to have been owned by officers of the company. This made it impossible for an external observer to track revenue and difficult for auditors to verify cash balances; 
• It had non-existent margin on its legal business, making profits easy to manipulate;
• Its business activities were almost impossible to physically observe, making it difficult for an external observer to gauge the scale of activity undertaken within the firm;
• It was in a booming sector, meaning it could report exceptional growth without suspicion;
• Its accounts, being a mishmash of a banking and non-banking business clouded many of the red flags normally exposed by forensic accounting;
• It was seen as a national champion. Those who challenged the company were routinely investigated or even charged with market manipulation by German regulators. Being both a bank and a non-bank it crossed regulatory boundaries, making oversight difficult;
• Its operations were complex, making it difficult for an auditor to check if there really was cash in the bank.

We are often asked whether our AI-powered Manipulation Risk Analyzer (MRA) system works to predict manipulation and failure risk outside of the sample that we used in our testing.

There are several technical reasons why it does, and one very practical reason, which is that every fraud is unique. 

Our machine is not trained on the same pattern that repeats over and over again. To be sure, certain events repeat, we rely on that, but they do so in diverse and complex ways. This complexity provides an incredibly rich foundation from which our system can learn. 

Our system has taken learnings from 68,000 stocks with almost 700,000 stock-years of financial data, extending from 1994 through to 2024. There is virtually nothing out there that our system hasn’t seen before, albeit in different guises.

If ever a company might fool an AI-powered fraud-detection software, Wirecard had perhaps the greatest possibility.

That said, if ever a company might fool an AI-powered fraud-detection software, Wirecard had perhaps the greatest possibility. 

And that’s because Wirecard was so well suited for hiding inflated earnings, because actual cash holdings were not verified by auditors in the last three years of operation, and because AI algorithms for fraud detection are typically used by banks, not trained to look for fraud in banks. 

Provided cash holdings are not verified, and cash flows can be muddied by a complicit bank, a company will be free to engage in highly aggressive account manipulation with minimal trace. 

Complicate that picture further with a maze of international escrow accounts, and some genuine high margin, but subsequently hidden and embezzled revenue from money laundering, and you have a near bullet-proof fraud machine, a veritable fortress, except perhaps for traces of working capital strain mixed with abnormal accruals or investment activity.  

Since equity analysts rarely look at working capital and accruals, and are always impressed by expansion plans, these traces are rarely negative for the stock price. 

Wirecard’s formidable defenses meant that attacks by short-sellers and the FT over the years were never conclusive. Most relied on close scrutiny of Wirecard’s offshore affiliates, entities operating at arm’s length to the business.

These attacks demonstrated that the activities of these affiliates did not tally with Wirecard’s reported numbers. They also revealed that Wirecard appeared to be overpaying for international affiliates. 

But the attacks were piecemeal. They indicated accounting discrepancies at agencies in far-flung locations where fraud is prevalent. But there was always confusion whether the discrepancies originated at Wirecard, simply indicated misfeasance or whether the company itself was a victim of fraud. There was no killer blow.  

None of the attacks drew on forensic problems that were neatly discernible in Wirecard’s published numbers. On the contrary, Wirecard's reported numbers were so Byzantine that it was virtually impossible to discern anything meaningful from them.

Since AI-powered fraud-detection software relies on reported numbers, this is a possible stumbling block.

Moreover, it is rare for a company conducting legitimate business to hide, embezzle and inflate earnings all at the same time. This is the domain of fronts for organized crime. Unlike the FBI, AI software can’t use an army of IRS analysts to catch such a company on tax evasion. All the software has is the published numbers. It can’t use a complicated tax code.

Another complicating factor is the way that Wirecard evolved from a relatively simplistic payments company focused on porn and online gambling to a bank intertwined with a complex multinational entity. 

The nature of Wirecard’s money laundering changed over time. The methods used to inflate earnings evolved over time. The nature of the embezzlement also changed. As a consequence, Wirecard's numbers were never directly comparable from one year to the next, making it difficult to trace monkey business.

To be sure, we were uncertain how an AI system to detect fraud would cope with Wirecard.

Wirecard fraud: What the AI reveals

Wirecard betrayed the trust of gullible homo sapiens but would it also fool untrusting AI fraud-detection algorithms? We decided to put it to the test.

Using Transparently.AI's MRA , we reviewed how Wirecard looked on our system in 2005, 2008, 2012, and 2018. 

We chose these years because:

• 2005 gives us the first full year of results after the company listed.
• 2008 gives the first year of  ‘adjusted’ results after the bank acquisition.
• 2012 was when the company began to pivot to Asia after the US money-laundering case in late 2010.
• 2018 shows what the accounts looked like after four years of damaging investigative reporting by the FT and two major short-seller reports.

Directly after listing in 2005, Transparently.AI's MRA awarded Wirecard an accounting manipulation risk score of 86%. This was a back-door listing into a dormant company, so the 2005 results were pure Wirecard. 

Now, 86% is an exceptionally poor score, representing an "F" for accounting quality on our system and putting Wirecard in the 100th percentile for risk of account manipulation globally. The AI software ranked Wirecard as one of the worst companies globally for account manipulation risk in 2005. It doesn't get much clearer than that.

The AI software ranked Wirecard as one of the worst companies globally for account manipulation risk in 2005.

The system awarded Wirecard such a poor score because the company exhibited an exceptional number of patterns indicating potential manipulation, Wirecard was so bad that the list of risk signals for 2005 ran to almost two full pages in the Transparently.AI risk report. Enron, by comparison, ran to just over a page.

The AI software gave Wirecard the worst possible risk score on a number of categories including asset quality, growth signals, smoothing activity, investing activity, credit and working capital. It registered the second-highest risk score for accruals management, margin signals and corporate governance. It also warranted extreme care in other key risk clusters such as business manipulation, cash quality, income quality and gearing. 

It would be difficult to find a company with a worse pattern of account manipulation risk than was evident in Wirecard's financial statements for 2005.

Basically, our MRA likened Wirecard to a shadowy figure in an alley with a gun; something to be avoided.

High on the list of concerns, the MRA advocated extreme care in relation to business manipulation, income quality and cash quality.

Possible business manipulation was evident in abnormal cash flow and production patterns, and in unusual fixed asset sales: all classic signs of potential revenue manipulation. In relation to income quality,  effective tax paid was absurdly low in relation to reported earnings and non-operating income was abnormally high. Among the cash quality signals, net change in working capital did not align with reported sales growth.

When added together, these signals suggested that the relationship between income and cash generation in Wirecard's numbers did not make sense. Evidence of possible manipulation risk in any one of these risk clusters represents a serious concern. Evidence of possible manipulation in all three greatly magnifies the danger. 

Even worse, the system identified that Wirecard's reported growth appeared unrealistic. The system often flags this growth signal with high growth tech companies. In many cases, growth is genuine.

However, if growth is genuine, a company will not need to manipulate income or cash generation. When a growth signal combines with signals for business manipulation, income quality and cash quality, it signals extreme risk of manipulation. This was the case with Wirecard. 

Making matters worse, the system identified risk in relation to income smoothing,  accruals and margin signals.  Wirecard's reported return on productive assets in 2005 was 69.26%, almost 10 times higher than the regional sector median.

Only the top 5% of companies demonstrate this degree of profitability and rarely for more than a year due to exceptional earnings. Companies that achieve this level of ROA typically have a highly efficient workforce generating high sales in relation to the number of workers. Unfortunately, Wirecard generated below average sales per employee in the period shown in the figure. This was a very strong warning that earnings were indeed overstated.  

Figure 2:   An excerpt from Transparently.AI's Wirecard risk report for 2005

The bottom line is that Wirecard triggered almost every risk signal for income manipulation in 2005.

Wirecard asset quality

Asset quality is among the top priorities for assessing a firm's financial health. 

Asset quality at Wirecard was low because the balance sheet was packed with intangible assets. The ratio of intangible to total assets was more than six times higher than the regional sector average, representing an anomaly of more than three standard deviations.

Since the original Wirecard purchased was for a song and run  from a basement, and since  the company used for the listing held no assets, anyone with more than passing knowledge of Wirecard must have questioned what meaningful intangibles the company possibly own? 

In 2018, short-sellers accused Wirecard of inflating the value of intangible assets, such as its customer relationships and intellectual property, to make the company appear more valuable than it actually was. We would argue it was doing this for more than a decade before 2018.

One possible explanation for the large level of intangibles is that the owner overpaid for other acquisitions before listing. This would make sense if a majority owner wanted to back out immediately after listing. Investors familiar with backdoor listings by Chinese companies in Hong Kong will have seen this kind of activity a number of times.

It is simple asset stuffing. Usually the acquisitions are already owned by the controlling owner. This kind of activity is common in companies engaged in money laundering. 

Figure 3:   An excerpt from Transparently.AI's Wirecard risk report for 2005

This suspicion was reinforced in the MRA because Wirecard demonstrated a pattern of remarkably high discontinued operations for a small, young company. High levels of discontinued operations can also be a tell-tale sign of manipulated earnings but in this case we suspect that it was a means of washing money from money-laundering operations since most of the discontinued operations were sold for a profit. 

Other Wirecard concerns in 2005

This discussion provides a snapshot of the concerns raised by the MRA in relation to Wirecard shortly after listing in 2005. This list is by no means complete. For example, the MRA identified several red flags for poor corporate governance, the strongest being the high frequency of account restatement, abnormalities in the accounting standard used and the high level of audit fees.  

The company showed investing risk due to extremely rapid capex growth. This would not be abnormal for a genuine tech company. However, at this stage of its development, Wirecard was not actively acquiring fixed assets and the company’s hardware was in the basement of a small building along with our hacker/soon-to-be COO. 

A site visit would have raised an enormous red flag. Fake capex is a great way to embezzle cash and has been especially popular in restaurant chains and agricultural companies over the years. In this case, however, it is more probable that Wirecard was inflating its capex to hide operating costs and inflate its margins.

The company reported extremely low net debt to equity, in fact it was negative, and yet interest expense in 2005 in relation to borrowings was three times the regional median. Strange for a net cash company to pay punitive interest unless it is understating its debt.

The bottom line is that Wirecard’s 2005 accounts were frankly unbelievable. Virtually nothing in the financial statements made sense.

The bottom line is that Wirecard’s 2005 accounts were frankly unbelievable . Virtually nothing in the financial statements made sense. 

Our system showed that the company was exceptionally high risk. When combined with some human understanding of the company’s business, the software showed that Wirecard was not investable and probably a fraud

After the 2006 bank purchase, Wirecard’s accounts became increasingly muddied. The net effect was to water down the visibility of Wirecard’s account manipulation. We expected Wirecard’s risk score to decline after the bank purchase and this proved to be the case. The risk score for 2007 was 84% but fell to 70% in 2008 when Wirecard began offering its ‘adjusted’ accounts. The risk score subsequently fell to 66% in 2009, 57% in 2010 and 52% in 2011.

(It’s worth noting that according to our research, the risk that a company is manipulating its accounts and is at risk of failure jumps significantly when its MRA score exceeds 50%, so Wirecard is by no means out of the woods by 2011. If you would like our test data, please contact us. )

Regardless, subsequent events suggest that Wirecard’s account manipulation was not lessening. Rather, Wirecard was getting better at muddying its accounts and engaging in fraud practices that were less visible in its accounts.

In 2008, the AI software still suggested Wirecard was exceptionally high risk. Figure 2 shows an excerpt of the summary from the full company risk report that our system generates. Wirecard required extreme care on four categories and high caution on three further risk categories. On the basis of the MRA score, Wirecard was in the 95th percentile globally for account manipulation risk - still an exceptionally high risk proposition.

Figure 4: A snapshot from Transparently.AI's full Wirecard risk report for 2008

All of the red flags evident in the 2005 accounts were still present in 2008 and subsequent years, but slowly moderated. 

Business manipulation at Wirecard

Business manipulation provides a good example of this. In the 2008 accounts,  the MRA suggested extreme caution in relation to discretionary expenses, abnormal cash generation and asset sales. As noted, whenever the system flags business manipulation risk in conjunction with other red flags, we have found that it usually points to deep problems.

SG&A expenses, asset sales, and abnormal cash generation and  all rose dramatically in the wake of the bank purchase.

As it turns out, this was the period when Wirecard executives are reported to have routinely carried home bags of cash from the company safe. 

Depending on the context, frenetic asset turnover can be a way to boost earnings, to mask accumulated fake revenue or to launder money. 

At this stage, we suspect asset sales were used to extract money laundering profits from the business while aggressive accruals management had become the principal tool used to inflate earnings. It is difficult to see why a payments company would have any need for accruals and this was an enormous red flag.

Figure 5:   An excerpt from Transparently.AI's Wirecard risk report for 2008

Discretionary spending and SG&A can be used to boost revenue or can be used to mask embezzlement. They can also signal channel stuffing, although in the case of Wirecard, where turnover could be whatever the company claimed, it is difficult to see a need for channel stuffing.

The bottom line is that in 2008 the risk signals for Wirecard remained extreme. A prudent investor would only invest in such a company if management were holding their child hostage. 

A prudent investor would only invest in such a company if management were holding their child hostage. 

The risk scores for margin signals and for cash and income quality improved markedly in 2005. This is the key area where the addition of the bank improved Wirecard's ability to mask its fraud. Banks do not have operating cash flow in the traditional sense, they generate cash by adding leverage. Since Wirecard never had any true margin or cash generation on its main business, the addition of the bank was able to greatly improve its ability to show cash flow.

Valuations were low in 2008 because in June of that year  the stock price plummeted after the German shareholder association SDK accused Wirecard of having falsified its accounts for 2007. SDK said the company held customer cash in its own accounts to satisfy audit checks of its 2007 accounts. SDK also claimed that Wirecard inflated its near zero margins, probably the weakest accusation they could make and the toughest to prove. 

The accusations instigated a legal battle that resulted in Wirecard being cleared by an audit by EY and the director of SDK resigning and facing prison time for share price manipulation. Round 1 went decisively to Wirecard. 

Wirecard after the US money laundering case: 2012

As noted previously, Wirecard was implicated in a US money-laundering law suit in 2010. A subsequent shift away from online gaming and a lengthy audit inspection by EY after the allegations forced Wirecard to alter its business focus between 2010 and 2012. 

From 2011 onwards, Wirecard raised a total of EUR 500 million in equity from investors to fund a variety of obscure acquisitions across the globe, including its regional headquarters in Singapore. In later years, it also issued bonds. The company  pivoted to channeling funds from Russia as the revenue from gaming fell away.

In spite of the curtailment of manipulation due to the EY audit, Transparently.AI's MRA gave Wirecard a risk score of 58% for its 2012 accounts.  This put Wirecard in the 81st percentile for risk globally. The risk score remained high because Wirecard was engaged in new suspicious activities. 

As the company gained experience with using its bank and escrow accounts for offshore acquisitions, a less visible approach to account manipulation became available.

Specifically, Singaporean authorities have accused Wirecard of using the proceeds of offshore acquisitions to engage in “round-tripping” – a practice whereby sales and profits are inflated by sending money to a third party, usually by purchasing an asset for a highly inflated price. The proceeds are then used to buy fake services at inflated prices. 

Famously, in 2015 Wirecard agreed to pay €300 million for an Indian business only weeks after it had changed hands for €37 million . 

By 2012, offshore purchases were not quite at this scale. Nevertheless, reported transactions were sufficiently high  to allow a market capitalization of €2.4 billion.  

Wirecard continued to flash high-risk signals in critical areas

The capital raisings and associated round-tripping eased the squeeze on operating cash flow and interest payments. As a consequence cash quality and income quality appeared quite good.

Nevertheless, Wirecard's risk report for 2012 offered a full page of high-risk signals in critical areas such as asset quality, working capital, growth signals, accruals management, gearing, credit,  business manipulation and margin signals. The MRA risk score of 58% was high for a well-established and widely owned mid-cap company. 

As noted, absent the imposition of the bank on Wirecard’s numbers, we expect Wirecard’s risk score would have been far higher.  

Figure 6: An excerpt from Transparently.AI's full Wirecard risk report for 2012

Given Wirecard’s background, well known to investors at this stage and given its implication in a very large US money laundering lawsuit, a prudent investor would have avoided Wirecard based on the risk scores from the AI system in 2012.  Given the mixing of bank results, we think it remarkable that our system was able to capture the extent of manipulation risk that it did.

By 2018, Wirecard had entered the Dax 30, was trading at an incredible valuation and was able to raise capital at will. It was able to recycle capital raising into inflated offshore acquisitions, using the proceeds to fund round-tripping and possibly embezzle funds.

This is the line of argument that prosecutors in Germany and Singapore have taken. 

By 2018, however, the methods that Wirecard had developed and employed  since 2011 to implement fraud were becoming fully extended. 

Fraudulent accounting depletes future earnings and can only persist for so long before becoming unsustainable. By 2018, Wirecard had become increasingly reliant on bond finance. The company had been under attack from the FT and various short-seller reports for years. It is probable that those engaged in fraud at the highest levels had a sense that the writing was on the wall.

To the very end, the AI algorithms suggested that the risk of fraud at Wirecard remained high.

To the very end, the AI algorithms suggested that the risk of fraud at Wirecard remained high. The accounting manipulation risk score for 2018, the final year that the company published in accounts, was 53% - in the 75th percentile globally and very high for such a large cap company.

Although the overall risk score was somewhat lower in 2018 than in 2012, closer inspection reveals that Wirecard was flashing more extreme risk signals in latter years than between 2011 and 2015. That is because it was now showing signs of risk of corporate failure. It could no longer hide its fragility.

Figure 7 shows the summary of key risk signals in the Wirecard's risk report for 2018. Many of the risk signals from 2012 remain, notably those relating to margin signals,  growth signals, asset quality, accruals and working capital.

By 2018, the signals for business manipulation signals had ceased, suggesting the scrutiny from the FT was making it difficult for the company pursue its old tricks to inflate its cash flow generation. 

Figure 7:   An excerpt from Transparently.AI's Wirecard risk report for 2018

With scope for manipulation reduced, the 2018 accounts showed increased evidence of financial strain. Relative to 2012, the 2018 report showed deterioration on a number of fronts, notably income quality, cash quality, and corporate governance.

Years of fraudulent activity and increased reliance on debt left Wirecard in a weakened state. This is why signals for income and cash had begun to begun to re-emerge as serious concerns and why the collapse in investing activity was suspicious.

The AI fraud-detection software identified Wirecard as a highly dubious prospect from the moment it listed

It would be a stretch to say that Wirecard was a basket case with a risk score of 53% but interpretation has to be adjusted for that fact that the bank numbers seriously clouded the true picture of Wirecard’s numbers. 

Moreover 48% is an ominously high risk score for a large cap. 

Based on the company’s history, the frequency of attacks on its veracity, its nosebleed valuation, and its ‘adjusted’ accounting method, Wirecard was still not investable in 2019 on the basis of the AI system’s risk assessment.

Wirecard failed to fool an untrusting machine. The AI fraud-detection software identified Wirecard as a highly dubious prospect from the moment it listed until the time that it failed. 

We are confident that any prudent investor presented with the risk analysis we have discussed would have felt compelled to undertake deeper due diligence on Wirecard and found the company deeply suspect. 

Wirecard: Aftermath

The Wirecard collapse led to criminal proceedings in Germany, Singapore, Philippines and other locations.

The main trial of Markus Braun, the former CEO of Wirecard, began in late 2022 and is being held at a high-security courtroom at Stadelheim prison in Munich. Braun has already lost two civil cases.

His trial is proving exceeding complex due to a lack of hard evidence and is expected to last until the end of 2024 at the earliest. Markus Braun is accused of misrepresenting Wirecard’s accounts and of market manipulation by falsifying income from transactions with so-called third-party acquirers.

Oliver Bellenhaus, the head of Wirecard’s Dubai subsidiary, and Stephan von Erffa, who was in charge of accounting, are also on trial. Jan Marsalek, the former COO, is a fugitive and believed to be in Russia.

There have been many twists and turns since the prosecutions began.  In a recent article , the FT revealed allegations that Marsalek ran a Russian spy ring across Europe. The plot, as they say, thickens.

Disclaimer: Views presented in this blog are the author’s own opinion and do not constitute financial research or advice. Both the author and Transparently Pte Ltd do not have trading positions in the companies it expresses a view of. In no event should the author or Transparently Pte Ltd be liable for any direct or indirect trading losses caused by any information contained in these views. All expressions of opinion are subject to change without notice, and we do not undertake to update or supplement this report or any of the information contained herein.

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Policy Conservatism and the Wirecard Scandal

• First Online: 11 September 2024

Cite this chapter

• Alfio Puglisi 27  

Part of the book series: Ius Gentium: Comparative Perspectives on Law and Justice ((volume 116))

Germany is considered the European FinTech champion. The recent Wirecard Scandal has raised concerns over Germany’s financial policy approach and sheds light into how financial crime can be hidden behind innovation. The aim of this chapter is to explain why and when German officials have applied a conservative approach towards financial technologies both from an historical perspective and through policy analyses. In doing so, the chapter case study is the recent Wirecard Scandal. I apply a political economy framework to shed light on the influence of regulation on innovation and the tight network of regulators and financial actors in the innovation system of Germany. Results show that regulatory avoidance can be hidden behind German’s regulatory architecture where the centralization of powers within BaFin supervisory authority limited the foresight of the Wirecard Scandal.

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Höpner and Jackson ( 2001 ).

Arner et al. ( 2017 ); Zetzsche et al. ( 2017 ).

Hardie and Howarth ( 2013 ).

EBA ( 2017 ).

Aßländer and Burkatzki ( 2023 ); Teichmann et al. ( 2023 ).

Ranchordás ( 2015 ); Von Schomberg ( 2012 ); Sabel and Zeitlin ( 2010 ).

Hardie and Howarth ( 2013 ); Friesendorf and Blütener ( 2023 ).

Handke ( 2012 ); Hasan and Kruse ( 2023 ).

Aßländer and Burkatzki ( 2023 ).

Handke ( 2012 ), p. 238.

Hasan and Kruse ( 2023 ).

E.g., article 26 of KWG; article 55 of VAG.

Lindemann ( 2006 ).

Cumming et al. ( 2019 ).

Gary et al. ( 2011 ); Ranchordás ( 2015 ).

Sec. 2 of the Act established BaFin FinDAG.

Handke ( 2012 ), p. 239.

Handke ( 2012 ).

“The government [can] override or preempt, at no cost to itself, supervisory actions directed at troubled banks, thus keeping such banks open and risking higher costs to society in the future” Quintyn Taylor, p. 7.

E.g., Quaglia ( 2008 ).

Leonhardt ( 2019 ).

IMF ( 2011 ); Rothstein and Schulze-Cleven ( 2020 ); Hardie and Howarth ( 2013 ).

Choulet ( 2016 ).

Bundesbank ( 2021 ).

E.g., Streeck ( 2009 ); Baccaro and Benassi ( 2017 ).

Thelen ( 2004 ).

Diamond ( 1984 ); Ramakrishnan and Thakor ( 1984 ).

Allen and Gale ( 1999 ); Bencivenga et al. ( 1995 ).

Sirri and Tufano ( 1995 ).

C.f. Hildermeier and Villareal ( 2011 ).

Maggio and Powell ( 1991 ).

Friesendorf and Blütener ( 2023 ).

Jackson et al. ( 2004 ).

Jackson et al. ( 2004 ), p. 1.

Federal Ministry of Finance ( 2019 ).

Hall and Soskice ( 2001 ); Thelen ( 2004 ).

For example, in commercial law, recent regulatory experiments faced regulatory challenges in the application of the Trade Regulation Act (Federation), “The governments of the Lander (local government) shall be authorised to issue ordinances to test out simplifications, particularly to facilitate start-ups and take-overs of companies” BMWI, p. 80 Annex.

Bafin ( 2022 ).

Hackethal ( 2005 ).

Behr and Schmidt ( 2015 ); Choulet ( 2016 ).

Deeg ( 1999 , 2001 ).

Deeg ( 2001 ).

McKinsey ( 2021 ).

Hall and Soskice ( 2001 ), pp. 59–60.

Statista Research Department ( 2023 ).

Deeg ( 2001 ); Grossmann ( 2006 ).

Deeg ( 1998 ).

Langenohl ( 2008 ).

Deeg ( 2001 ); Langenohl ( 2008 ).

Haag ( 2020 ).

Flogel and Beckamp ( 2019 ).

C.f. Aßländer and Burkatzki ( 2023 ).

Fischer and Pfeil ( 2004 ).

Kreditwesengesetz, or KWG.

Krahnen and Schmidt ( 2004 ).

FAZ 1/26/01 in Westrup ( 2007 ), p. 27.

Busch explains the challenge of German unification and European integration. He highlights the regulatory relationship between the Bundesbank and BaFin, especially during the regulatory reform that concluded the establishment of BaFin.

Cable ( 1985 ); Dyson ( 1986 ); Shonfield ( 1965 ).

Owners of German corporations very often turn over control rights to financial institutions in the form of proxy voting rights.

Jackson and Thelen ( 2015 ). This is valid for the oversight of Wirecard corporate governance.

Eyre and Lodge ( 2000 ).

Gary et al. ( 2011 ).

“Apologists argue that German officials cannot increase domestic investment because the state has an unusually small role in investment or has recently constitutionalized debt brakes that further limit its fiscal space or has a set of ordo-liberal beliefs that amount to prohibitions on certain policy actions or even ‘sticky’ consumption levels that don’t respond to increased household income” Wade ( 2020 ), p. 504.

Crouch ( 1985 ).

Massoc ( 2020 ), p. 138.

Zimmerman ( 2010 ); Streeck ( 2009 ); Vitols ( 2001 ).

Stam and Garnsey ( 2007 ); Haddad and Hornuf ( 2019 ).

BMWI Report ( 2021 ).

Reuters ( 2020 ).

Jones ( 2018 ).

Lutz ( 2020 ).

Vogelsang ( 1989 ).

Bonefeld ( 2012 ).

Hayek ( 1972 ), p. 66.

In the German context, Joseph Keith, the director of policy studies, argues that ‘responsible policies, which work with and through the market to achieve [the] wider social aims’ of a well-integrated society (Joseph 1975 , p. 3).

Barba Navaretti et al. ( 2018 ); Cantner and Kösters ( 2009 ); Earl and Gault ( 2006 ); Muniesa and Lenglet ( 2013 ).

Krahnen and Schmidt ( 2004 ); Rostow ( 1959 ).

For example, “national supervisors tend to be biased. They tend to be a little too soft on: “their domestic banks and sometimes a bit too protective. European banking supervision balances this bias” Nouy ( 2017 ).

Dorfleitner et al. ( 2017 ).

A total of 433 FinTech businesses with operations in Germany were identified. The other 87 businesses either did not begin their operations before 2016 or else are no longer active. The study was conducted between between 2007 and the end of 2015 (Dorfleitner et al. 2017 ).

Bartel ( 2021 ).

Capgemini ( 2020 ).

E.g., for an overview of German’s public administration please consult Jann ( 2003 ).

Investments were mainly concentrated in the area of Blockchain.

Chazan ( 2016 ).

BMWI ( 2019 ).

Dr. Jorg Kukies, State Secretary, of the Federal Ministry of Finance states: “A healthy innovation culture needs opportunities to test out new technologies and processes. The handbook is an important tool to give security to decision-makers in companies and administrations as they deal with experimental spaces. Confidence in the content, purpose and scope of statutory experimentation clauses plays a crucial role in decisions to invest in innovative solutions” (BMWI 2019 , p. 21). What does experimentation look like in practice? The e-government project of Saxon supports the electronic delivery of services. In this project, the experimentation clause in Section 20 of the eGovernment Act of Saxony authorised start-up and small firms’ exemptions from the application of various rules of Saxony on administrative procedures to develop the e-Government project (BMWI 2019 ).

See Hall and Soskice ( 2001 ); Deeg ( 2001 ).

Hall and Soskice ( 2001 ); DZ Bank ( 2015 ).

DZ Bank ( 2015 ).

DZ Bank ( 2015 ); BMWI ( 2019 ).

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Brandl and Hornuf ( 2020 ).

Gualini ( 2004 ); BMWI ( 2019 ):;

Gualini ( 2004 ).

See Simonis ( 1998 ). The German government, the Association of German Banks, the European Commission and the Bundesbank all support the elimination of the three-pillar German system, but change has been strongly resisted by Land governments (Hardie and Howarth 2009 ).

Hardie and Howarth ( 2009 ).

Elite interviews is a form of data to collect information or context whereby the researcher conducts interviews with experts and high-level profile individuals on specific subject matters about events and processes.

EC ( 2017 ).

Gary et al. ( 2011 ); Brandl and Hornuf ( 2020 ).

C.f. Massoc ( 2020 ); Mitchell ( 2016 ).

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Seldeslachts et al. ( 2017 ).

Black ( 2002 ).

Rahman and Thelen ( 2019 ); Cumming et al. ( 2019 ); Arner et al. ( 2016 ).

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Puglisi, A. (2024). Policy Conservatism and the Wirecard Scandal. In: Goldbarsht, D., de Koker, L. (eds) Financial Crime, Law and Governance. Ius Gentium: Comparative Perspectives on Law and Justice, vol 116. Springer, Cham. https://doi.org/10.1007/978-3-031-59547-9_13

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Scandal-Tainted WIRECARD Files for Bankruptcy - Accounting Frauds Case Study

CASE Research Paper Forthcoming

10 Pages Posted: 7 Mar 2023 Last revised: 11 Apr 2023

Baranidharan Subburayan

School of Business and Management, Christ University

Date Written: March 2, 2023

This case study examines the scandal at Wirecard AG, a German payment processing and financial services company, which filed for insolvency in June 2020. The scandal involved accounting fraud and misreporting of revenue, and was first uncovered by Financial Times journalists in 2019. The case study looks at the background of Wirecard AG, the details of the scandal, the company's response, and the eventual filing for insolvency. The case study concludes by discussing the implications of the scandal for the company, its shareholders, and the financial industry as a whole.

Keywords: Wirecard AG, Insolvency, Accounting Fraud, Misreporting, Revenue, Financial Services, Payment Processing, Scandal, Germany, Financial Industry

JEL Classification: G32, G38, M41

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Baranidharan Subburayan (Contact Author)

School of business and management, christ university ( email ).

Bangalore Bangalore, KS India

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Wirecard: The Downfall of a German Fintech Star

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What are the wider supervisory implications of the Wirecard case

The paper discusses the policy implications of the Wirecard scandal. The study finds that all lines of defense against corporate fraud, including internal control systems, external audits, the oversight bodies for financial reporting and auditing and the market supervisor, contributed to the scandal and are in need of reform. To ensure market integrity and investor protection in the future, the authors make eight suggestions for the market and institutional oversight architecture in Germany and in Europe.

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This paper examines the antecedents and consequences of the collapse of Wirecard AG, in June 2020, the “German Enron.” Specifically, we investigate how the Wirecard’s ineffective corporate governance under the German’s financial regulatory system fails to serve their stakeholders, and how its management’s unethical behavior of earnings manipulation contribute to significant financial collapse for the company, and lead to the destruction of shareholders’ value. This paper examines how the internal and external governance and monitoring mechanisms failed to uncover the vast fraud at the German payments group at a much earlier stage. Furthermore, we find evidence consistent with the hypothesis that the continuous pressure of meeting or exceeding consensus on earnings estimates, management’s performance compensation based on the growth of Wirecard’s stock price, and the lack of proper supervision from the board of directors ultimately create the opportunities for management to manipulat...

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Following the recent financial scandals that have dominated the international scene (Enron, Parmalat, Worldcom, Madoff ...) due mainly to cases of fraud and breach of confidence, the attention given to mechanisms against these practices is increasingly growing. Indeed, to minimize conflicts of interest and potential fraud risk, the shareholders put in place various mechanisms of corporate governance (internal and external) to reduce managerial discretion and the potential for behavior deviant. Among this array of means of control, the agency theory considers the board of directors as the most appropriate mechanism to discipline management and force managers to act in the interests of shareholders. This article deals with the theme and highlights the role of governing bodies, in particular the board of directors, in the fight against fraud, through, on one side, the audit committee and ethics to convey within organizations, and on the other hand, the use of external audit and the participation in the construction of legal system of investor protection as a means of limiting the possibilities of accounting manipulation of leaders, to regulate conflicts and reduce the information asymmetry between principal and agent. In other words, recourse to an independent external auditor can be considered as a mechanism encouraging or forcing the individual or individuals, to whom Responsibility has been delegated, to act in the interests of the organization partners.

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In the wake of the global financial crisis, this article considers the tort liability of financial supervisory authorities to depositors and other investors following the failure of a bank or other financial institution. The analysis is comparative, with the primary focus being on the member states of the European Union. Consideration is given to the five liability categories or standards which are employed by EU member states in such cases. These are (1) a public law illegality standard; (2) a standard of ordinary fault/negligence; (3) a standard of gross fault/negligence; (4) a requirement of bad faith; and (5) complete immunity from liability. It is also shown that on the application of general tort principles claims by depositors against financial supervisors face a range of obstacles, including difficulties in establishing fault and causation, and conceptual difficulties based on the nature of the damage (the pure economic loss issue), liability for omissions and for the deliberate acts of third parties, liability for the exercise of judicial or 'quasi-judicial' functions, and the 'protective purpose of the norm' principle. Finally, consideration is given to alternative means of redress which may be available to depositors in such cases. Keywords: tort law, comparative law, liability of financial supervisors, governmental liability.

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Since the 1990’s the global capital movements in the world economy took new direction: the previous scruples of the activity of transnational companies have disappeared. The global phenomena of market-oriented liberal economic policies swept aside the formal objection and uncertainty against international working capital flows. The general conviction was that the markets are more effective regulators than governments, parallel with the confidence that transnational companies are the most successful forms of market efficiency. Then came the crisis of 2008, and since the Lehman Brothers has felt, the governments, specialists and scholars are searching for a better equilibrium of regulation of the financial markets. I am deeply concerned that we are just at the beginning of the road towards a better or at least safer global financial market. The study is analyzing three levels of regulation of financial markets: (1) global, (2) regional and (3) national efforts made to avoid a next crisis. On the global scale, the IMF-FSB cooperation is examined, and among this the Early Warning Exercise. On the regional level the study compares the USA governmental regulation based on the Dodd Frank Act and the EU’s legal instruments on preventing the upcoming crises, basically the European System of Financial Supervision. As for the national level, a non-Eurozone member state’s current regulation is analyzed (Hungary) to show how the global and regional sources can influence a national legislation. The main point of the study is to show the contradiction in the method of data collection of the supervisory authorities. Despite of the urgent need of well-functioning early warning systems, the new institutions and procedures are determined to fail as a consequence of false data collection. Keywords: financial crisis, financial supervision, early warning system, shadow banking JEL: G28, G32

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Please note you do not have access to teaching notes, wirecard scandal. a commentary on the biggest accounting fraud in germany’s post-war history.

Journal of Financial Crime

ISSN : 1359-0790

Article publication date: 7 March 2023

The purpose of this paper is to illustrate how the Wirecard scandal has highlighted the need for further reforms in Germany and Europe, exposing institutional and market oversight weaknesses, particularly in terms of market integrity and investor protection.

Design/methodology/approach

To provide a comprehensive picture of the situation, this paper is based only on relevant studies, which focus on the topic of interest, namely, the context of the Wirecard collapse in June 2020. It also examines how internal and external governance and monitoring mechanisms failed to uncover major fraud within the German payments group earlier.

This study shows that this is by no means an isolated or unpredictable incident, and the allegations of accounting fraud had been known for several years, thanks to warnings from the Financial Times . In addition, the paper reviews the serious shortcomings revealed in the Wambach report. The report provided private details of the Wirecard audit and documents on the relationship between Wirecard management and the auditor. All of this can serve as a reference point for institutional and market oversight architecture in Germany and Europe and pave the way for future research.

Originality/value

The paper contributes to the literature by highlighting the implications of the Wirecard scandal and the lessons that can be learned from what was one of Germany’s biggest corporate scandals especially at a time when many are already affected by the impact of COVID-19 on the entire financial services industry.

• Wirecard scandal
• Financial sector
• Lessons learned
• Wambach report

Acknowledgements

Disclosure of potential conflicts of interest : The authors have no relevant financial or non-financial interests to disclose.

Teichmann, F.M.J. , Boticiu, S.R. and Sergi, B.S. (2023), "Wirecard scandal. A commentary on the biggest accounting fraud in Germany’s post-war history", Journal of Financial Crime , Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFC-12-2022-0301

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Dan McCrum in London and Stefania Palma in Singapore

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

One year ago, Edo Kurniawan, a jovial 33-year-old Indonesian who runs the Asia-Pacific accounting and finance operations for global payments group  Wirecard AG , called half a dozen colleagues into a Singapore meeting room. He picked up a whiteboard pen and began to teach them how to cook the books.

His company would soon become one of Germany’s most valuable financial institutions, but as  Mr Kurniawan  spoke, the task at hand was to create figures that would convince regulators at the Hong Kong Monetary Authority to issue a licence so Wirecard could dole out prepaid bank cards in the Chinese territory. 

The group was seeking to take over payment operations from Citigroup, covering 20,000 retailers in 11 countries stretching from India to New Zealand. Regulatory approvals in every territory were crucial, even if it meant inventing numbers to be used in the Hong Kong licence application. 

Mr Kurniawan then sketched out a practice known as “round tripping”: a lump of money would leave the bank Wirecard owns in Germany, show its face on the balance sheet of a dormant subsidiary in Hong Kong, depart to sit momentarily in the books of an external “customer”, then travel back to Wirecard in India, where it would look to local auditors like legitimate business revenue. 

In isolation, Mr Kurniawan’s scheme might have appeared to be the act of a rogue employee in the provincial outpost of a little known financial group. But the account of what happened, in a preliminary report on the investigation by one of  Asia’s most eminent legal firms , indicated it was part of a pattern of book-padding across Wirecard’s Asian operations over several years. Documents seen by the Financial Times show two senior executives in the Munich head office had at least some awareness of the round-tripping scheme: Thorsten Holten and Stephan von Erffa, respectively the company’s head of treasury and head of accounting.

The revelations call into question the figures reported by one of Europe’s few technological success stories, a German  fintech group that has grown into a €20bn global payments institution. Before the FT exposed the existence of  the investigation last week, the group was more valuable than  Deutsche Bank or  Commerzbank , whose place it has taken in Germany’s main stock market index. Wirecard is a favourite of retail investors, who saw its rapid expansion into Asia as a sign that it can challenge the world’s biggest banks for primacy in the $1.4tn market for payments. 

Markus Braun has run the company since helping to recapitalise it in 2002, an investment which made the 49-year-old Austrian a billionaire. In the field of digital money, Wirecard presents itself as best in class. 

In response to the news of the preliminary investigation, Wirecard initially said no material compliance findings had resulted. This week the company told the FT that while its investigation was ongoing, it had made no conclusive findings of criminal misconduct and it would be wrong to draw conclusions from the preliminary report. 

It is not the first time the group’s accounting practices have been  called into question . Accusations of suspect accounting were levelled in 2008, 2015 and 2016. Each time Wirecard has alleged market manipulation, sparking investigations by the German market regulator, BaFin.

This time questions about its Asian operations began internally, prompted by a whistleblower left stunned by Mr Kurniawan’s January meeting last year. Notifying Wirecard’s senior legal counsel in the region on March 26, the whistleblower identified two senior finance executives, James Wardhana and Irene Chai, as accomplices in the book-cooking operation. A separate whistleblower also raised concerns in February, and on April 3 that person supplied the compliance team with a suspect contract they had received via Telegram, the encrypted messaging app.

Daniel Steinhoff, Wirecard’s head of compliance in Munich, flew in to Singapore for a briefing. On April 13 he ordered the email archives of these individuals “mirrored”, with copies seized. 

Compliance staff, who evidently found the accounts of the whistleblowers credible, soon found enough in the documents to warrant a snap investigation, codenamed Project Tiger. They called in Singapore-based  Rajah & Tann , which sent in a team of former prosecutors. 

On May 4 R&T submitted a preliminary report, running to 30 pages of bombshell allegations: evidence in the documents of “forgery and/or of falsification of accounts”, as well as reasons to suspect “cheating, criminal breach of trust, corruption and/or money laundering” in multiple jurisdictions. 

The trio in Singapore, led by Mr Kurniawan, appears to have been fabricating invoices and agreements to create a paper trail which could be shown to auditors at EY, as if money was moving in and out of Wirecard for legitimate purposes.

The job of his finance team was to oversee the figures put together by the various Wirecard companies in the region, then supply the accounts to head office. But the book-keepers were also putting together contracts and signing off on technology projects. 

Not only were there no emails from certain supposed customers and suppliers to Wirecard, the preliminary investigation found that Wirecard lawyers, salespeople and technology staff did not appear to be involved in the deals either.

For example, in March last year Mr Wardhana, sitting at his computer, sent himself a digital copy of the logo for Flexi Flex, a hydraulics and piping company with offices in Singapore and Malaysia. The image was on invoices he presented to colleagues for payments, according to documents seen by the FT. These documents, including contracts for the supply and purchase of obscure software products signed by Mr Kurniawan, made it appear Flexi Flex was doing substantial business with Wirecard. 

In an April 9 2018 email chain, Mr Wardhana drafted answers for queries from EY in Germany needed to close out that year’s audit. He described Flexi Flex as “a new client engaged in 2017” which generated €4m of revenue for Wirecard Malaysia. 

Wirecard has since confirmed it had no genuine business relationship with Flexi Flex. Mr Wardhana’s email also attributed €3m of Hong Kong revenue to Right Momentum Consulting, another third party business partner. The Kuala Lumpur address for the company on documents seen by the FT could not be traced. 

The R&T preliminary report said: “We may draw strong and irrefutable inferences from the documentary evidence there has been at the very least several accounting irregularities which take the shape of  forged agreements . In the best-case scenario, the purpose behind these deliberate acts may be limited to the false creation of revenue, with no wrongful misappropriation of monies.” 

Suspect transactions, while individually small in the context of  Wirecard revenues , appear to have been designed to stop Wirecard entities missing profit targets, by filling holes after the end of a financial year with fake and backdated sales agreements according to the preliminary report and certain emails reviewed by the FT. 

Wirecard told the FT on Wednesday that, subsequent to R&T’s preliminary report, a separate internal investigation with access to accounting systems determined that the allegations were unsubstantiated and no regulations were broken. Notwithstanding those findings, the external R&T investigation — ongoing for more than eight months — reflected a commitment to good corporate governance, it said. 

Since 2012 the company has raised €500m from shareholders, and spent it on a collection of obscure payments companies. Missing profit targets could have called into question the basis of Wirecard’s Asian expansion over the past decade.

R&T’s preliminary review of the documentary evidence and whistleblower testimony identified potential for accounting irregularities in numbers reported to Germany for businesses in the Philippines, New Zealand, Hong Kong, Indonesia, Malaysia and India.

It also indicated another potentially significant issue. Singapore and Hong Kong, like Germany, have put in place strict reporting requirements to combat money laundering. Suspicious transactions, such as those identified by Project Tiger, should be brought to the attention of the authorities in a reasonable timeframe. 

As the owner of a bank, and as a member of the Visa and Mastercard payment networks, Wirecard has a responsibility to file such reports. It distributes hundreds of millions of euros in credit and debit card transactions every day. It is a gatekeeper with responsibilities to help police flows of cash as governments try to restrict the ability of criminals and terrorists to move money. Wirecard this week said it has complied with applicable regulatory requirements. 

Yet, faced with evidence that a rogue unit in its fast-growing Asian business was forging documents, inventing money flows and sending real cash out the door to fictitious suppliers, the reaction of senior executives in Munich was curious.

A briefing document dated May 7 2018 was prepared for a meeting of Wirecard’s four most senior executives. Alexander von Knoop, chief financial officer, thanked the author in an email following the meeting “for the great job you are doing to clarify the circumstances and to prevent Wirecard Group from any financial and reputational damage”. 

The email also announced that Jan Marsalek, Wirecard’s chief operating officer, had been appointed to co-ordinate the inquiry, “to get the necessary pressure on the investigation”, Mr von Knoop said.

Mr Marsalek, a 38-year-old Austrian with a military haircut, tailored suits and novelty solid gold credit card, was renowned within the company. He was also the management board member responsible for the Asia-Pacific region. 

Wirecard’s lawyers in Singapore warned Mr Marsalek’s proposed role presented “a perceived and potential conflict of interest”. He was a material witness of fact who had worked closely with Mr Kurniawan on certain projects, they said. 

R&T said in a May 9 email that his appointment could “invite forceful queries by regulators and enforcement agencies”. It was a potential conflict which could be managed, but that “in the worst case the investigation may be seen as fatally flawed to begin with — with the consequence that regulators and enforcement agencies may swoop in suddenly to conduct a full investigation of their own”.

One matter under scrutiny was Wirecard Singapore’s relationship with a third party, Matrimonial Global. R&T believed a sales agreement with the company had been backdated. A November 8 2017 email from Mr von Erffa pointed to Mr Marsalek’s knowledge of the deal. Outlining the transaction, it said “Jan will support us for contracts and communication etc.”

Ms Chai appears to have thought he had a stake in Matrimonial Global. On January 9 last year she wrote to a colleague: “If not mistaken this agreement is something like the one with Wirecard Dubai, I think the company belong to Jan.” 

The colleague replied: “Yup, is the additional ‘revenue’ that was put in last Q [quarter].” 

Wirecard told the FT that Mr Marsalek does not own Matrimonial Global, and that he has had no involvement in the investigations. 

The COO had worked closely with Mr Kurniawan for years. For instance, a few days before the end of 2015 a Wirecard subsidiary in Indonesia, Aprisma, needed income of €3.3m to hit its profit target for the year. The two men discussed options. The target was reached thanks to what was described as an “additional project from Jan”, according to subsequent emails. The backdated sales agreement which resulted did not appear to be genuine, according to R&T’s preliminary report. 

A year later Mr Kurniawan and Mr Marsalek had worked together to provide answers to questions from EY during a tough audit, according to documents seen by the FT. 

In October 2015, Wirecard agreed to pay €325m for a collection of businesses in India, its biggest-ever takeover. The deal came after the FT published a series of articles highlighting apparent inconsistencies in Wirecard’s accounting and what looked like a growing hole in its balance sheet. The India deal attracted the attention of sceptical analysts and investors, who reported difficulty finding the scale of operations the company claimed. Inside Wirecard, EY directed a team at the end of 2016 to take a close look, now that a full year of ownership had passed. 

In April 2017 Mr Kurniawan told a colleague he could not sleep because of Hermes, Wirecard’s main business in India. And the entity’s CFO, appointed only months before, submitted a disclaimer to the Hermes board that he “should not be held in any way responsible” for many of the documents relating to the 2016 audit, due to his recent arrival. EY eventually signed off on the revenues Wirecard reported. 

The clean audit in early 2017 helped to reassure investors. Wirecard’s share price proceeded to quadruple, amid global enthusiasm for fintech companies. 

Yet some of the documentary evidence placed in front of R&T, and since seen by the FT, raises fresh questions about the scope of accounting irregularities and the authority extended to the young book-keeper in Singapore. 

Indeed, a central question remains. What did management in Munich know about Mr Kurniawan’s activities, and what should it have known? 

A February 15 2018 email chain indicates that some in Germany were at least made aware of a version of the round-trip scheme Mr Kurniawan had sketched on the whiteboard weeks earlier. Documents show that Mr Holten, whose signature was needed to authorise payments from head office, wrote: “I need to know the whole cash flow.”

Mr Kurniawan replied 13 minutes later with a plan to move €2m into India, via Wirecard Hong Kong and an outside entity. “Hope it’s clear?” he asked. 

“Very good, thx,” Mr Holten replied. Copied into the email was Mr von Erffa, whose signature would also be required. 

When the FT broke news of the investigation last week, Mr Kurniawan was still head of international finance and his alleged accomplices were still employed. The company on Wednesday said certain individuals had been temporarily assigned to other roles, pending the outcome of the probe, and any disciplinary action would be determined by the evidence. 

Wirecard also said there had been significant developments and substantial new information taken into account since R&T’s preliminary report.

A whistleblower, who initially approached the FT due to the apparent lack of action, this week said: “If a payments company can do this, how can you have trust in the system?” 

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The Wirecard Scandal: Uncovering Fraud and Financial Misconduct at a Leading Payment Processor

An analysis of the allegations, investigation, and impact of the wirecard scandal on customers, stakeholders, and the financial industry.

Wirecard was once a leading payment processor in Germany and other regions. In 2020, it became involved in a major scandal, known as Wirecard Scandal . This event shook the financial industry. It also raised serious questions about the company’s business practices.

This blog will explore Wirecard’s background. It will discuss the allegations of fraud and financial misconduct. An investigation and legal proceedings followed these allegations. The blog will also cover the scandal’s impact on customers and stakeholders. We will also examine the lessons learned and reforms implemented in the wake of the Wirecard scandal.

Background On Wirecard Scandal

Markus Braun founded Wirecard in 1999 and served as its CEO until he resigned in June 2020 during the scandal.

The company, listed on the Frankfurt Stock Exchange , offered payment processing services to merchants and consumers globally, covering credit card payments, online banking, and mobile payment services. The financial industry adored Wirecard for its rapid growth and success, and many considered its shares a safe investment.

Allegations Of Fraud And Financial Misconduct

In June 2020, the Financial Times published an article. The article alleged that Wirecard had inflated its revenue. They also claimed the company boosted its profits through fraudulent activities. This included the creation of fake sales contracts. They also manipulated accounting records.

These allegations were based on documents obtained by the Financial Times and interviews with former employees of the company. Wirecard denied the allegations and launched a legal action against the Financial Times, but the damage had been done. The allegations of fraud and financial misconduct sparked a major investigation by German authorities and the Financial Times. German prosecutors began investigating Wirecard in 2018, revealing that the company had violated accounting rules for years.

In June 2020, Wirecard fired its chief operating officer, Jan Marsalek, who later fled to Russia and remains a fugitive. Authorities arrested Markus Braun, but they later released him on bail.

Investigation And Legal Proceedings

As the investigation progressed, it became clear that Wirecard had engaged in a massive accounting fraud, with billions of euros in missing cash and assets.

Critics targeted the company’s auditor, EY, for not detecting the fraud and for issuing false audit reports. In July 2020, Wirecard filed for bankruptcy, and the Frankfurt Stock Exchange delisted its shares.

Impact On Customers And Stakeholders

The Wirecard scandal had major implications for the company’s customers and stakeholders. Many merchants who relied on Wirecard’s payment processing services were left in the lurch, and some lost significant sums of money as a result of the fraud. Investors in Wirecard also suffered heavy losses, as the value of the company’s shares plummeted.

The scandal also raised broader concerns about the financial industry and the effectiveness of financial regulations and oversight.

Lessons Learned And Reforms Implemented

In the wake of the Wirecard scandal, there have been calls for reforms to improve the transparency and accountability of financial companies. The German government has announced plans to tighten financial regulations and increase the powers of financial watchdogs.

The EU has also proposed new rules to strengthen corporate governance and improve the audit process. It is hoped that these reforms will help prevent similar scandals in the future.

In conclusion, the Wirecard scandal was a major financial scandal that exposed widespread fraud and financial misconduct at a leading payment processor. The scandal had significant implications for customers, stakeholders, and the financial industry, and it highlighted the need for stronger financial regulations and oversight.

Companies, investors, and regulatory authorities have implemented reforms following the scandal. However, they must remain vigilant to prevent similar scandals in the future.

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I cannot understand why the auditors were not called to order and instructed to compensate stakeholders who relied on the audited financial statements. The statements were showed in court to reflect overstated and nonexistent assets. It seems like gross professional misconduct for which no-one will be held accountable. Where are the authorities?

True reckless behavior was a fact, yet.no one was arrested. Very bad.

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WireCard Scandal

• December 2020

• Sultan Qaboos University

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