BaFin Efficacy Called into Question for Wirecard Handling

Last February, BaFin responded to whistleblower allegations and critical media reports by banning short-selling in Wirecard and filing criminal charges against journalists.

22 June 2020 UPDATE – Former CEO Markus Braun was arrested on suspicion of having inflated Wirecard’s balance sheet and sales through fake transactions, possibly in cooperation with other perpetrators. Bail was set at EUR 5 million.

BaFin (Germany’s Federal Financial Supervisory Authority) is under fire for failing to properly respond to multiple red flags last year an accounting fraud at Wirecard, a German payments firm which now appears to have misplaced EUR 1.9 billion.

Last Thursday (18 June), Wirecard revealed that it was unable to release its 2019 results as promised after its auditor EY was unable to find EUR 1.9 billion in cash recorded on its balance sheet.

“There are indications that spurious balance confirmations had been provided from the side of the trustee,” Wirecard said, painting itself as a victim of deception or fraud.

“Previously issued confirmations by the banks were no longer recognised by the auditor. All parties involved are endeavoring to clarify the matter as quickly as possible,” said Wirecard chief executive Markus Braun. “It is currently unclear whether fraudulent transactions to the detriment of Wirecard AG have occurred.”

Braun – who has been at the company’s helm since 2002 – resigned on Friday (19 June) after the company’s stocks lost more than 70 percent of its value. The company has also temporarily suspended its outgoing chief operating officer Jan Marsalek.

Two Asian banks

According to Wirecard, the banks managing the escrow accounts where the missing EUR 1.9 billion were meant to have been deposited were two Asian banks with “investment grade ratings”.

However, BSP (Bangko Sentral ng Pilipinas) governor Benjamin Diokno dispelled any hope of recovery over the weekend by confirming that none of the missing Wirecard funds ever entered the Philippine financial system.

“The international financial scandal used the names of two of the country’s biggest banks ― BDO [Unibank] and BPI [Bank of the Philippine Islands] ― in an attempt to cover the perpetrators’ track,” Diokno said.

Both BDO and BPI further confirmed they did not have any business relationship with Wirecard, and described documents purportedly showing that the company has deposits with the two banks as fake.

“Wirecard is not a client of the bank. The document claiming the existence of a Wirecard account with BDO is a falsified document and carries forged signatures of bank officers,” BDO said.

Cash does not exist

On Monday (22 June), Wirecard declared that the missing EUR 1.9 billion in cash likely does not exist, and that it was looking at whether its third-party acquiring business processed payments that may have not been conducted “for the benefit of the company”.

Since whistleblower allegations of accounting fraud emerged more than 18 months ago, the Financial Times has been reporting that Wirecard staff conspired to fraudulently inflate sales and profit at subsidiaries, specifically at the third-party acquiring business now in question. A KPMG forensic audit was also ultimately unable to attest to the revenue of the business.

BaFin is now investigating Wirecard’s accounting, its disclosures to investors, possible market manipulation by the company, and possible insider trading by the now-former CEO Braun. But this represents a stark contrast to Bafin’s response to the Wirecard allegations when they emerged last year.

Last February, BaFin responded to the whistleblower allegations, the critical FT reports, and a raid on Wirecard’s Singapore offices by banning short-selling in the company for two months, a step it has never taken before for an individual company.

BaFin also filed a criminal complaint against two British journalists, justifying it as a move to ‘protect market confidence’ amid evidence of coordinated attacks against Wirecard by short-sellers.

Slow to clamp down

An op-ed in the FT by Bernd Ziesemer, chairman of the Cologne School for Journalists, says BaFin “failed particularly miserably as an institution.”

“For too long, [BaFin] found all kinds of bureaucratic excuses to avoid looking into Wirecard seriously. When it finally did, BaFin’s regulators did not target company management but rather the journalists behind the critical reports and also unnamed hedge funds.”

According to famed short-seller Carson Block, cited in a Bloomberg report, investors’ losses would have been “a fraction of what they are” if BaFin had taken a different approach.

In a separate interview with GlobalCapital, Block said of Germany and its regulators that there is a “deliberate willingness to look the other way to market transgressions from companies, as long as they are employers in the country”.  He likened the way Germany acted to protect Wirecard to “something that China or Russia would do”.

Meanwhile, Breakingviews notes that this is not the first time BaFin has “appeared slow” to clamp down on possible financial malfeasance, pointing to decades of scandals at Deutsche Bank involving billions of euros in suspicious activity with Russia and with Denmark’s Danske Bank.

The general impression of the weakness of German financial regulation will do little to help Frankfurt’s efforts to lure financial institutions away from post-Brexit London, the post says.

Salvage job

As it stands, Wirecard is said to be negotiating with at least 15 commercial banks for an extension of EUR 2 billion in credit facilities, though it breached the loan terms by not releasing its annual report as scheduled.

Most of the banks are said to be leaning toward an extension to allow them to better assess the potential impact of a default on their balance sheets. However, a prolonged extension could be seen as delaying an insolvency, which is illegal under German law.

Wirecard said it’s in “constructive talks” with its lenders, and has hired investment bank Houlihan Loke to come up with a financing strategy.

Meanwhile, Moody’s Investors Service has cut Wirecard’s credit ratings six levels, putting it one step from the lowest tier of junk.

Following Braun’s resignation, a new CEO, ex-Federal Reserve Bank of New York attorney James Freis, has taken charge and is tasked with salvaging what he can of Wirecard.

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