What would you do if your credit card processor and merchant account provider were fraudulent? That’s the reality for many thousands of worldwide businesses that relied on Wirecard, the Germany-based financial technology firm that is now in bankruptcy proceedings, having committed, allegedly, sham practices for years.
I’ll describe the Wirecard fiasco in this post. It’s shocking because of the apparent widespread level of fraud and the lessons for the digital payments industry.
A Sketchy Start?
Wirecard is a multinational payment processor, merchant acquirer, card issuer, and technology service provider. The company declared bankruptcy in August 2020. It was listed on the German DAX, a notable stock index similar to the Dow Jones Industrial Average.
Wirecard launched in 1999 as a payment-technology company. In 2002, Wirecard’s then CEO, Marcus Braun (who is now under arrest), shifted strategy to processing payments for, mainly, gambling and pornography websites.
In 2005, Wirecard raised funds by issuing shares in the Frankfurt Stock Exchange through a reverse IPO, having purchased the listing of a failed call center company named InfoGenie. This allowed Wirecard to expedite going public and, some would say, avoid much of the scrutiny.
With the new capital, Wirecard acquired a German bank called XCOM, which held international merchant acquiring and card issuing licenses, thereby allowing the newly created Wirecard Bank to become both a worldwide issuer and acquirer. Purchasing companies for their licenses is fairly common.
The XCOM transaction transformed Wirecard into a sprawling, complex business. In the ensuing 14 years, Wirecard allegedly used this complexity to artificially inflate profits, hide massive losses, forge contracts, and dupe investors, auditors, and regulators.
Rise and Fall
From 2006 to 2018, Wirecard expanded aggressively. It acquired several smaller, Asia-based payment processors, an Indian payments company, and several Citibank-owned processing and prepaid-card portfolios in Asia and North America.
Business for Wirecard was, reportedly, booming. At its peak in 2018, Wirecard’s public valuation was €24 billion (roughly USD $28 billion at the time of writing). The company had 5,000 employees and claimed to process payments for 250,000 merchants worldwide in addition to its card-issuing and technology operations. Wirecard replaced one of Germany’s largest banks on the DAX-30 index.
So, what went wrong?
A lot. It’s useful to examine the scandal’s timeline to understand the level of fraud, collusion, and deceit. The Financial Times, which exposed the apparent depth of the scandal, offers excellent coverage.
- 2015 and 2016. The Financial Times and short-sellers begin to probe. BaFin (Federal Financial Supervisory Authority, Germany’s principal financial regulator) sides with Wirecard. As far back as 2008, a small group of Wirecard shareholders complained about what they believed were accounting irregularities. Wirecard hired Ernst & Young, the accounting firm, to investigate. The complainants were silenced, two investors were prosecuted for insider trading, and Wirecard escaped unscathed. Ernst & Young would become Wirecard’s outside auditor for the next 11 years.
- 2008 through 2015. Wirecard expanded rapidly and, for the most part, avoided controversy. In 2015, however, a Financial Times report alleged significant accounting problems in, primarily, Wirecard’s payment-processing business. Later in 2015, a group of short-sellers claimed that Wirecard’s operations in Asia were much smaller than reported by the company.
Nonetheless, Wirecard acquired a payment processor in India for, reportedly, €340 million (USD $401 million). The Financial Times later alleged that Indian shareholders never received €175 million to €285 million from the sale.
- 2016. A group of short-sellers published allegations against Wirecard, including money laundering. BaFin, the German regulator, investigated but ultimately sided with Wirecard. This became a recurring pattern: Whistleblowers and journalists accuse Wirecard of improprieties, and regulators side with the company.
Unscathed, Wirecard acquired Citigroup’s North America prepaid-card business, giving Wirecard a foothold in the U.S.
- 2018 to 2019. In early 2018, a whistleblower in Wirecard’s Singapore office alleged that the company was defrauding investors by engaging in “round-tripping,” a practice of selling something and then refunding the buyer later — the sold assets are never transferred from the seller to the buyer. The transaction is fake (and illegal).
Concerned employees in Singapore took this accusation seriously and initiated an internal investigation. In October 2018, the employees contacted The Financial Times, which published a report on Wirecard’s Singapore operations. Another BaFin investigation occurred. Singaporean law enforcement became involved, leading to a raid of Wirecard’s offices.
BaFin regulators, again, sided with Wirecard. BaFin announced a two-month prohibition on short-selling Wirecard’s stock, claiming that Wirecard is too important to the health of the German economy.
- 2019. Fake companies and fake profits. In March of 2019, The Financial Times published a report claiming that roughly half of Wirecard’s revenue and most of its profit are from referral fees with smaller processor partners. This isn’t unusual as most large processors work closely with merchant account providers and other partners.
But many of Wirecard’s processing partners did not exist. They were fake. Indeed, when they attempted to visit the offices of Wirecard’s partners in the Philippines, reporters discovered dwellings of uninvolved residents.
Wirecard’s response was to sue The Financial Times and the Singapore authorities, who earlier had named five Wirecard employees and eight partner companies as suspects in a criminal investigation.
Ernst & Young, the auditors, approved Wirecard’s 2018 financial statements and recommended only minor compliance procedures for Wirecard’s Singapore office.
- October 2019. The Financial Times reported that profits from Wirecard’s operations in Dubai and Ireland were also inflated and that even more of the company’s partners did not exist. Pressure mounting, Wirecard appointed KPMG, another accounting firm and a competitor to Ernst & Young, to conduct an audit.
- 2020. Wirecard’s demise. After a series of delays, KPMG published its reports. The findings shocked investors, BaFin, and the German police.
KPMG challenged the authenticity of Wirecard’s profits from 2016 to 2018, citing a glaring lack of evidence, such as no bank statements showing income received. KPMG could not confirm at least 34 Wirecard clients and at least €1 billion in cash. Wirecard had fabricated at least three years of profits.
In early June, German authorities raided Wirecard’s headquarters and launched a criminal investigation against Wirecard’s CEO and several other executives.
On June 16, two Philippine banks disclosed that documents provided by Wirecard to authorities to support €1.9 billion in cash balances were “spurious” (fake). Two days later, Wirecard announced that the €1.9 billion is “missing.” Wirecard’s stock price crashed, and its creditors called in approximately €2 billion in loans.
Following its CEO’s resignation, Wirecard’s new management acknowledged the colossal scale of a multi-year accounting fraud, adding a “prevailing likelihood” that €1.9 billion that was supposed to be in its accounts does not exist.
On June 25, following the arrest of its former CEO, Wirecard announced that it would file for insolvency (bankruptcy).