The Wirecard Story: A Billion-Dollar Scandal Unfolds

Wirecard was a German payment processing company that made headlines for all the wrong reasons. It was founded in 1999 by Markus Braun and Oliver Bellenhaus.

The company's growth was meteoric, with revenues skyrocketing from €1.5 billion in 2010 to €7.3 billion in 2018. This rapid expansion caught the attention of investors and regulators.

But behind the scenes, Wirecard was struggling with financial irregularities. In 2018, the company's auditor, KPMG, expressed concerns about the legitimacy of some transactions.

As the investigation unfolded, it became clear that Wirecard's management had been involved in a massive accounting scandal.

Wirecard was once considered one of the most promising tech firms in Europe, founded in 1999 and processing payments for consumers and businesses.

It had nearly 6,000 employees in 26 countries around the world. Braun, the company's chief technology officer, had led the company since 2002.

Braun was also the company's largest shareholder, with holdings of just over 7%. He sold €155 million worth of stock to meet a margin call.

The company reported revenues of over €2 billion in 2018, or more than four times the figure from 2013. Shares hit an all-time high above €190 in September 2018.

At that point, Wirecard was worth more than €24 billion. Braun was a regular on the tech conference circuit, often speaking of the transformational power of data and technology.

The company's success story began to unravel in January 2019, when the Financial Times reported suspicious transactions in Singapore. Wirecard denied the report, but its shares plummeted.

Authorities in Singapore said they would investigate in February 2019. Another blow landed late last year, when the FT published a report and company documents suggesting inflated profits and sales at Wirecard outposts in Dubai and Ireland.

Wirecard again denied the allegations. An investigation by KPMG published in April found the company had not provided enough information to fully explain issues raised by the FT.

For more insights, see: The New York Times Company

In 2020, a series of crimes in Germany exposed the truth behind Wirecard's fraudulent financial reporting. The company's accounting practices were called into question, and regulators and auditors began to investigate.

Finance minister Olaf Scholz described the scandal as "extremely worrying" and called for quick action to improve oversight of companies like Wirecard. The Federal Financial Supervisory Authority, or BaFin, is actively investigating whether Wirecard violated rules against market manipulation.

Wirecard's shares plummeted to less than €3 ($3.36) after the scandal broke, reducing the company's market value to just €330 million ($370 million).

A fresh viewpoint: Wells Fargo Cross-selling Scandal

On September 24, 2018, Wirecard was officially promoted into the DAX 30, replacing Commerzbank.

This marked a significant milestone for the company, with its market capitalization briefly surpassing €24 billion, making it more valuable than Deutsche Bank.

An internal investigation into wrongdoing at Wirecard's Singapore office was buried by management, but a whistleblower later came forward with internal documents.

The whistleblower, a former head of legal for Wirecard Asia, had been ousted after informing management in Munich about the wrongdoing.

COO Jan Marsalek had assured the whistleblower that the issue would be handled, but it wasn't.

Internal documents published by the Financial Times in October 2019 appeared to show fraudulent revenue and forged customers originating from the Dubai and Dublin offices.

Wirecard's board responded by commissioning an independent audit from KPMG, but the company's Q3 2019 report still contained several instances of deception.

The whistleblower was later revealed to be Pav Gill, Wirecard's senior legal counsel based in Singapore.

The Skandal! documentary, released in 2022 on Netflix, is a must-watch for anyone interested in understanding the Wirecard scandal. It's a gripping exposé of the company's fraudulent financial reporting, and how Financial Times journalists and KPMG uncovered the truth.

The documentary delves into the "lying, the spying, the dirty tricks" that Wirecard's management employed to deceive investors and regulators. It's a shocking look at the lengths to which the company went to cover up its financial misdeeds.

The documentary features interviews with key players, including whistleblowers and investigators who worked tirelessly to expose the truth. It's a testament to the power of investigative journalism and the importance of holding corporations accountable for their actions.

The Skandal! documentary is a sobering reminder of the dangers of corporate greed and the need for robust regulation to prevent such scandals from happening in the future.

The combination of factors that led to Wirecard's downfall is a perfect storm of poor judgment and inaction. Criminal actions by management were a major contributor to the scandal.

Institutions such as BaFin failed to intervene early on, instead opting to file complaints against critics and short sellers of the company's stock. This lack of oversight allowed the company to continue its fraudulent activities unchecked.

A deep desire for a German tech success also played a significant role in Wirecard's collapse, as it created a culture of complacency and a willingness to turn a blind eye to suspicious behavior.

A combination of factors enabled the scandal to take place, including criminal actions by management and a deep desire for a German tech success.

The company's management engaged in a series of fraudulent accounting activities to inflate its profit, despite allegations to the contrary.

BaFin, the German financial regulator, took little action against the company before its eventual collapse, opting instead to file complaints against critics of the company and short sellers of the company's stock.

Intriguing read: List of Largest German Companies

Wirecard's complex corporate structure and opaque acquisitions made it difficult for investors to verify the company's financial results, allowing for inflated earnings and cash flow figures to go unnoticed.

Red flags were raised as early as 2008 when a German shareholder association attacked Wirecard's balance sheet irregularities, but the company was able to respond by hiring a new auditor, EY, which would remain the company's auditor for the rest of its history.

The Financial Times reported a significant gap between Wirecard's short-term assets and liabilities in its payment business in 2015, but the company was able to respond by hiring a UK law firm and a public relations agency to manage the situation.

Wirecard's "buy and build" strategy, which involved purchasing smaller businesses at significantly above market value, was criticized as being structured in an unusual manner, making it difficult to verify €670m of intangible assets.

A whistleblower feared that Wirecard's internal investigation into irregularities in its Singaporean operations was being squashed, but no actions were taken against key personnel named in the report.

Former Wirecard CEO Markus Braun was arrested shortly after his resignation, and former COO Jan Marsalek disappeared shortly after being fired, only to be found to have fled to Belarus.

A fresh viewpoint: Apax Partners Assets under Management

Sell side analysts were almost universally positive about Wirecard until as late as February 2020.

Analysts at Goldman Sachs had a "Conviction Buy" rating until as late as September 2019.

Commerzbank analysts who were positive on the shares even dubbed FT articles questioning the company "fake news".

Analysts at Bank of America Merrill Lynch were among the very few skeptics, questioning Wirecard's poor positioning within the German e-commerce payments market in 2018.

BaFin's regulatory failure was a significant contributor to the Wirecard scandal. The agency lacked the authority to investigate Wirecard's core business or accounting practices, and instead only had authority over its bank business subsidiary.

BaFin's president, Felix Hufeld, later admitted that the scandal was a "complete disaster" and called for an investigation into whether the agency had broken EU rules on financial reporting.

The European Commission also called for an investigation, and the German parliament announced an inquiry to fully investigate the reasons why the government failed to prevent corporate fraud.

Here is a summary of Wirecard's financial data in millions of euros:

In June 2020, Wirecard announced that financial data for the previous years might be incorrect, and the public prosecutor's office assumed that the company had manipulated balance sheets since 2014.

Wirecard's financial data shows a steady increase in revenue and assets over the years, but the company's net income is surprisingly stable, with only a slight increase from 2013 to 2018.

The company's revenue grew from €482 million in 2013 to €2,016 million in 2018. This is a significant increase, but it's worth noting that the company's net income only grew from €83 million to €347 million over the same period.

Here is a summary of Wirecard's financial data in millions of euros:

In June 2020, Wirecard announced that its financial data for previous years might be incorrect, and the public prosecutor's office assumed that the company had manipulated its balance sheets since 2014.

BaFin's lack of authority to investigate Wirecard's core business or accounting practices hindered its ability to prevent the scandal. This structural blind spot led to a lack of scrutiny that might have prevented or curtailed the fraud.

KPMG's special audit revealed that Wirecard's long-time auditor EY failed to verify the existence of cash reserves in what appeared to be fraudulent bank statements. This failure of oversight was a critical factor in the company's ability to commit fraud.

BaFin's president, Felix Hufeld, later admitted that the Wirecard scandal was a "complete disaster". This admission came after the European Commission called for an investigation into whether BaFin broke EU rules on financial reporting.

The Financial Reporting Enforcement Panel (FREP) was criticized for being under-resourced, with only 15 employees and an annual budget of €6m. This lack of resources made it difficult for FREP to adequately audit Wirecard.

Investors joined calls for union-wide regulation of market rules and for an EU body in charge of regulatory actions. This call for reform highlighted the need for stronger oversight and accountability in the financial sector.

The German parliament announced an inquiry to investigate the reasons behind the government's failure to prevent corporate fraud. This inquiry would ultimately lead to changes in the country's regulatory framework.

BaFin's repeated defense of Wirecard in the face of mounting public evidence of misconduct became a scandal in its own right. This defense further eroded public trust in the agency and its ability to regulate the financial sector effectively.

On a similar theme: 2003 Mutual Fund Scandal

The collapse of Wirecard triggered a wave of criticism directed at BaFin from virtually every corner of German society. Politicians, investors, and the media all demanded answers about how a company listed on the DAX could grow so large through fraud.

Reports emerged that some BaFin staff had personally traded Wirecard shares while the agency was involved in monitoring the company. This revelation highlighted a troubling lack of internal controls and ethical standards within the agency.

Some investors were quite vocal in their support of Wirecard, even going so far as to join the company's and regulator's accusations against short sellers and market manipulation.

A notable example is Softbank, which invested €900m in Wirecard in 2019. They later announced plans to sue EY for damages after the company's failure was made public.

Wirecard's global acquisitions were a key factor in its expansion, with critics accusing the company of using these deals to mask trouble with organic growth.

In 2015, Wirecard purchased an Indian payments group for €340m, despite the founders valuing their key assets at €46m.

The company's "buy and build" strategy involved purchasing customers for its payment services, with some deals structured in an unusual manner that made it difficult to verify €670m of intangible assets.

Wirecard expanded its international presence through subsidiaries, with Wirecard Asia Pacific founded in Singapore in 2007.

The company introduced virtual prepaid credit cards for online payments in 2008 and a fraud prevention suite for fraud detection in the following year.

Here is a list of some of Wirecard's subsidiaries:

Wirecard also expanded into new markets, including the US, South America, and China, with the acquisition of various companies such as Prepaid Card Services from Citigroup in 2016.

Wirecard's expansion strategy involved a series of opaque acquisitions, which critics argue masked trouble with organic growth by adding revenues from external sources.

The company's "buy and build" strategy, aimed at acquiring customers for its payment services, was structured in an unusual manner, making it difficult to verify €670m of intangible assets.

In 2015, Wirecard purchased an Indian payments group for €340m, despite the founders valuing their key assets at €46m.

This tactic, referred to as a rollup, allowed Wirecard to rapidly expand its presence in the cashless fintech industry, but raised concerns about the company's accounting practices.

At least €175m from the €340m purchase were not transferred to the seller, according to documents filed by Wirecard.

As the company continued to grow, it became clear that a change in structure was necessary to accommodate its increasing operations.

The company's founders decided to transform it into a bank, allowing it to offer a wider range of financial services to its customers.

This decision was made after the company's revenue from lending services exceeded 50% of its total revenue, making it a natural fit for a bank.

Related reading: List of Largest Companies by Revenue

By becoming a bank, the company could now offer deposit accounts and other financial services to its customers, increasing its revenue streams.

The company's founders also saw an opportunity to expand its services to include small business lending, which would allow it to tap into a new market.

With its new bank status, the company was able to offer more competitive interest rates on loans and deposits, making it an attractive option for customers.

Wirecard was founded in 1999 with a focus on processing credit card payments for online vendors. Initially, its clientele consisted primarily of porn and gambling sites.

In 2002, Markus Braun joined as CEO and injected capital to keep the company afloat during the dot-com bubble.

Wirecard Asia Pacific was founded in Singapore in 2007. This marked the company's entry into the Asian market, setting the stage for its future international expansion.

In 2008, Wirecard introduced virtual prepaid credit cards for online payments. This innovative move helped the company establish a strong presence in the digital payment space.

The following year, 2009, saw the introduction of a fraud prevention suite for fraud detection. This added layer of security helped to build trust with customers and partners alike.

In 2014, Wirecard expanded to New Zealand, Australia, South Africa, and Turkey. This rapid expansion into new markets showcased the company's ambition and growth potential.

The company's presence in the United States was established in 2016 with the purchase of Prepaid Card Services from Citigroup. This strategic move helped Wirecard tap into the vast US market.

In the same year, 2016, Wirecard acquired a South American Internet payment service provider in Brazil. This marked the company's entry into the Latin American market.

In 2019, SoftBank invested in Wirecard. This significant investment helped fuel the company's continued growth and expansion.

As of November 2019, Wirecard began to be represented in China with the acquisition of AllScore Payment Services from Beijing. This milestone marked the company's entry into the massive Chinese market.

A fresh viewpoint: 1992 Indian Stock Market Scam

Wirecard's expansion into new markets was a key aspect of its company structure. By 2017, the company had a major presence on all continents.

Wirecard's global reach was further solidified with the acquisition of Citi Prepaid Card Services in the US, which was completed in 2017. This move was expected to increase the company's fiscal-year EBITA by $20 million.

One notable subsidiary was Wirecard Card Solutions Ltd., a wholly owned subsidiary based in the UK, which held an e-money license and issued virtual cards. This subsidiary provided mobile payment applications and Wirecard's own mobile payment app, Boon.

Wirecard's operations in the Asia-Pacific region, the Middle East, and Africa have been strengthened since 2014. The company entered the Indian market in 2015 with the acquisition of the Great Indian Retail Group's payment business.

Here is a list of some of Wirecard's subsidiaries:

In 2020, Wirecard's UK-based businesses were sold to Railsbank, a start-up sponsored by Visa.

Wirecard's exposure to insolvency was a ticking time bomb, and it was largely due to its aggressive expansion strategy. The company had been growing rapidly, but it was doing so with debt, not profits.

By 2018, Wirecard's debt had ballooned to €3.4 billion, which was a significant increase from the €1.5 billion it had in 2015. This rapid expansion put a huge strain on the company's financials.

Wirecard's auditors, KPMG, were aware of the company's financial struggles and had been expressing concerns about its accounting practices. However, the company's management was more focused on meeting quarterly targets than addressing these concerns.

The company's financial struggles were further exacerbated by the collapse of its payment processing business in India. This business was a significant contributor to Wirecard's revenue, and its collapse had a huge impact on the company's bottom line.

In 2018, Wirecard's CEO, Markus Braun, was forced to admit that the company had overstated its profits by €1.9 billion. This admission was a major blow to the company's reputation and led to a significant decline in its stock price.

Expand your knowledge: Brookfield Business Partners