The Wirecard scandal is starting to look like one of the worst financial disasters in Europe since the 2008 financial crisis, says the Wall Street Journal. In this short video documentary, the Wall Street Journal – available as part of your BizNews Premium subscription – sets out how the problems unfolded. The Wirecard collapse, say analysts, has led to questions about financial regulation in Germany, which has been promoting itself as a base for financial services companies. Wirecard’s auditors EY face legal action in connection with the disappearance of billions of dollars. Wirecard also has tentacles in Africa. – Editor
Wirecard, an online payment company that was once the darling of Germany’s fintech industry lost nearly $12 billion dollars of market value and filed for insolvency, just days after revealing a $2 billion dollar hole in its balance sheet.
Paul J. Davies: What’s happening at Wirecard looks like being one of the worst financial disasters in Europe since the financial crisis.
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Matthew Earl: You would have to stretch back a long period of time to have an implosion of this magnitude in Europe.
The missing Wirecard money was supposed to be held in 2 trust accounts. The auditors investigating the company said they couldn’t find it.
Paul J. Davies: This $2 billion is essentially equivalent to all the profits that wildcard has made in more than a decade.
Everyone is wondering, where did that money go?
Paul J. Davies: Nobody knows at the moment whether it exists, whether it ever existed or not.
Here’s what we know. Let’s rewind and start with what wild card actually does.
We are a global fintech company with 20 years of payment experience.
The German company provides software and systems that link retailers, consumers and the financial system.
Paul J. Davies: So essentially what they do is they collect payment details from people who want to buy stuff online or even in stores. They collect those details from their cards and then they perform the role of confirming, settling, processing that whole transaction when you buy anything online, whether it be a holiday, some goods or services. A lot of their background was in gambling and pornography or adult entertainment.
Over the years, the company began to bloom as commerce shifted online and away from cash payments. It attracted interest from giants like Softbank and Credit Suisse. Their stock grew almost sixfold between 2016 and 2018, but some have questioned why Wirecard’s business model and whether the company was actually worth its market valuation.
Matthew Earl: I think it was around October 2015 when I used to write a blog and one of the readers of the blog contacted me and said have you ever looked at this company called Wirecard? I hadn’t, I had never heard of Wirecard.
Matthew Earl is a short seller, meaning he tries to make money by betting that a certain company’s share price will fall. In 2016, Earl published a report accusing Wirecard of malpractice.
Matthew Earl: The main accusation was that they had probably been instrumentally involved in this processing illegal gambling, US-facing illegal online gambling monies.
The company denied those allegations and Earl said he stopped short-selling its stock some years ago. Starting early last year, a new wave of Financial Times articles on the company’s global operations led to Wirecard calling in KPMG for special audit.
Paul J. Davies: This audit was supposed to demonstrate that a bunch of the business that people had said they doubted was really real.
KPMG said it wasn’t able to determine the answer to some of those questions.
Paul J. Davies: One of the biggest questions was why there was a bunch of money supposedly in some trusted accounts and whether that money was really there.
When auditors went looking for the $2 billion of cash that Wirecard said was in 2 trust accounts in the Philippines. What they found was a gaping hole. Electronic scans of documents confirming the accounts had been sent to Ernst & Young, but;
Paul J. Davies: Its main auditor finally said that these documents weren’t reliable and that they thought they’d been deceived.
Wirecard’s story then began to unravel quite rapidly. CEO Markus Braun stepped down. Wirecard said that the missing $2 billion probably didn’t exist and then.
Anne Leiding Munich Prosecutor: “Yesterday evening, we have arrested the former chairman of the board of management Dr Markus Braun, here in Munich after he had arrived from Vienna.”
Paul J. Davies: What he stands accused of is inflating the value of the company through feigning business with these third party acquirers.
Braun has consistently denied wrongdoing and his lawyers didn’t respond to a request for comment. The partner companies in question were supposed to process payments for Wirecard in countries where it didn’t have full licences to operate, but it couldn’t be determined whether they generated any revenue for the company at all. In a matter of days, the company had filed for insolvency proceedings, citing over-indebtedness. Matt Earl, the short seller, says even if he’s not making money from Wirecard’s latest woes, he’s glad that people are starting to see the clearer picture.
Matthew Earl: Obviously, the more pieces that you begin to put into that puzzle, the clearer the picture becomes.
There’s still a big question over whether or not that $2 billion dollars actually exists. Wirecard executives have advanced 2 theories.
Paul J. Davies: One is that the numbers were completely made up, the revenue was never there and that Wirecard was simply trying to inflate the value of its business in order to make its shares more attractive, in order to borrow more money. The other option is that some of this business did exist, but for whatever reason, it wasn’t really being done on behalf of Wirecard and the money was never put where it was supposed to be put and in fact, it has been in all or in part taken by some other people somewhere.
