Wirecard boss arrested over missing €1.9 billion

For over a decade Markus Braun was on top of the world, pioneering a new online payments system and hailing himself as the saviour of a cashless era. Now the former chief executive of Wirecard is under arrest after turning himself in to prosecutors in Germany on Monday night and has been charged with false accounting and market manipulation.

Munich prosecutors confirmed today that Braun was arrested on suspicion of having inflated the digital payment company’s balance sheet and sales through fake transactions to make it more attractive to investors and customers. Prosecutors say that Braun may have acted in cooperation with other perpetrators.

Braun resigned as CEO on Friday, suggesting the company may have been the victim of a massive fraud. Then on Monday the accountancy firm, EY, refused to sign off on Wirecard’s accounts, saying that a trustee of Wirecard bank accounts had attempted to deceive it and may have provided “spurious cash balances.”  There was a black hole of €1.9 billion in cash included in Wirecard’s financial accounts – roughly a quarter of its assets – which had probably never existed. Jan Marsalek, a board member and chief operating officer at Wirecard, was fired on Monday.

How the mighty have fallen. The company Braun built, one of Europe’s rare tech successes was once worth more than Deutsche Bank. Now the share price has fallen by more than 85% over the last three days  following the latest allegations. The company has now withdrawn its preliminary results for 2019 and those for the first quarter of 2020.

Since then, the two Filipino banks supposedly holding €1.9 billion in funds have denied that Wirecard was a client, and said that documents showing the accounts were forgeries. The Filipino central bank has said it appears that these funds had never entered the country’s financial systems.

Adding further to Wirecard’s disaster is the €2 billion in loans it owes a consortium of banks. These can now be freely terminated after the bank missed the June 19 deadline for the publication of audited annual results due to the scandal. The results of this audit had already been delayed three times.

But the bigger question surrounding this spectacular scandal is why Wirecard had not been brought down earlier. Wirecard, an online payments processor which was hailed in Germany as one of the country’s great tech wonders, has been the subject to questions about its accounting practices for over a decade.

Wirecard was first listed on the Frankfurt stock exchange in 2004 when Braun merged it with a defunct, but already listed, call-centre business. This move helped it to avoid scrutiny that accompanies a new listing. Initially it carved out a niche for itself by taking on business its rivals avoided, namely processing online payments for pornography and gambling sites.

Slowly, Wirecard expanded out of this niche, gaining respectability, though many remained scepticial. In 2008 short sellers focused on its balance sheet, launching a vigorous attack. However, an EY special audit cleared the company while the German financial regulator prosecuted the short sellers, and the problem seemed to go away. Indeed, in the following years Wirecard went from strength to strength. Enthusiasm for fintechs was everywhere and its revenue grew fifty-fold between 2004 and 2018.

Yet trouble returned. In 2015, journalist Dan McCrum of the Financial Times began to raise questions about its accounting, and the international acquisitions spree it had gone on. The payment of €340m for an Indian payments company which had gone for just €37m a few weeks previously raised eyebrows.

Anonymous short sellers targeted Wirecard again in 2016, betting on a stock crash after alleging money laundering problems. Once again, Germany’s financial regulators investigated the authors of the report for possible market manipulation.

Wirecard’s valuations continued to grow ever more astronomical. In October 2018 its share value was more than forty times its projected 2019 earnings as investors continued to pile in, and its Wirecard forecast a sixfold rise in profits by 2025.

In January this year, the Financial Times broke another story which may well have lit the powder trail leading to today. At the heart of the article was the allegation that a key Wirecard executive working in its Singapore office, Edo Kurniawan, was suspected of creating forged and backdated documents as well as engaging in accounting fraud. Worse still, a senior executive in Wirecard’s head office had been aware of at least some of these transactions, and even approved them.

An external investigation into the matter was at the time being held by a prestigious Singaporean law firm, but Wirecard was keen to assure the world it would be exonerated. Yet, documents provided by the law firm suggested otherwise. At the same time Wirecard was busy putting together its own internal investigation headed up by a board member who, it emerged, was implicated in some of the dealings. On February 8, 2019 its Singapore offices were raided by police who seized documents and questioned employees with charges to follow.

The scandal only continued to grow. Further revelations by the Financial Times in March through to April that year showed that half of all the company’s revenue came from three opaque partners, who routed a great deal of their transactions through a Wirecard business whose half-empty offices were based in Dubai.

Attempts to track the partners funnelling such transactions turned up companies which no longer existed, companies that claimed to have never have heard of Wirecard, and supposed head offices which were in fact fishermen’s cottages, empty warehouses, and a bus company in the Philippines. Wirecard responded by dismissing the investigations and raising its profit projections yet again.

In October 2019 yet another twist appeared, with evidence that the key offices in Dubai and Dublin had systematically inflated sales and profits. At long last that month an audit was begun – not by EY, its regular auditor which had given it a clean bill of health for over a decade, but by Big Four rival KPMG.

Finally, on April 28 KPMG declared it could not verify the profits of third parties at the centre of the scandal, and of Wirecard’s balance sheet. An audit by EY followed, revealing the missing €1.9 billion and bringing Wirecard to where it is now – its stock crashing, facing a growing list of legal actions and investigations.

The story does not end there. The scandal raises serious questions about the German financial sector and the manner of its regulation. Throughout the scandal, until May this year, the German regulator was more interested in investigating and attempting to prosecute Financial Times journalists and short sellers who had identified the anomalies.

These investors and journalists were also subject to more direct harassment in the form of surveillance by private intelligence and attacks by hackers for hire. As investigations get to the bottom of not only the fraud, but the extraordinary efforts made to protect a company dogged by scandals, it seems certain more will come out.