In 2005, a little-known startup called Wirecard
joined the Frankfurt stock exchange. The payments processing company soon became
a unicorn, eventually surpassing Deutsche Bank, Germany’s biggest bank, in value
and attracting notable investors such as Softbank. Despite allegations of accounting irregularities
over the years, Wirecard grew to become Europe’s largest financial technology company
worth $28 billion at its peak. “The former CEO of Wirecard has been arrested
on suspicion of falsifying accounts. This after the German payments firm disclosed
a $2.1 billion hole in its balance sheet.” Then in June 2020, it filed for insolvency,
finding itself at the centre of one of the biggest financial
scandals in history. In the autumn of 2018, Munich-based Wirecard
was added to a stock index of the 30 leading German companies, also
known as the Dax index, displacing the country's second
largest bank in the process. It was a huge moment for the fintech industry
to see a European company with the means to compete against the
tech-titans of Silicon Valley. It was in 2008 that the first allegation of
accounting irregularities was lobbed at Wirecard. In the wake of the attack, Wirecard appointed
EY, one of the world’s biggest accounting firms, to conduct
a special audit. It soon became Wirecard’s chief auditor
and would sign off the company’s accounts for more
than a decade. Following the first allegations, German authorities
prosecuted two men who stood to benefit from Wirecard’s
stock performance. As more allegations of financial misconduct
surfaced over the next few years, a pattern
began to emerge. First, Wirecard would aggressively
deny any accusations of malpractice. When the German regulators investigated, those
officials sometimes focused their sights on the accusers instead of looking
into the claims against Wirecard. As a result, some financial analysts and
investors continued to heap glowing praise onto the
tech darling. While Germany’s financial regulator denied
that it was protecting Wirecard, the company continued to emerge unscathed after
each attack and it became emboldened. Some critics of Wirecard were harassed and
threatened with legal action claiming that they, in collusion with short sellers,
had published damning stories to manipulate
its share price. Undeterred by the negative coverage, Wirecard’s
share price doubled in 2017 after reporting significantly improved
revenue streams. By the summer of 2018, Wirecard’s share
price hit a peak of €191, valuing the company at more than
$28 billion. It claimed to have 5,000 employees and process
payments for 250,000 merchants, and its clients included major European
supermarket chains and airlines. Despite Wirecard’s meteoric rise, troubling
reports that its books couldn’t be trusted continued to
stalk it. An independent research company said its Asia
operations were far smaller than claimed. In an attempt to quell suspicions of financial
impropriety, Wirecard orchestrated a tour of its Asia offices to impress
the investment bank analysts. As allegations of accounting fraud mounted,
why did BaFin, the German financial regulator, not investigate the
claims against Wirecard? Many analysts believe that Wirecard was seen
as a rare homegrown tech champion that needed to be protected and that any attack was an
affront to Germany and its finance sector. In February of 2019, BaFin even announced
an unprecedented two month ban on investors betting against Wirecard as its share price
fell below €100, citing Wirecard’s “importance for the economy” and the “serious threat
to market confidence”. Some also point to Germany’s corporate culture
which tends to be wary of foreign speculators and the fact that many of these allegations were
made outside Germany, like British newspaper the Financial Times, accusations
which BaFin have denied. Critics have argued that the country’s
regulatory system is not equipped to deal with a payments
company like Wirecard. Unlike regulators in other countries, BaFin
doesn’t have the power to bring criminal charges or the oversight to investigate
potential accounting malpractice. BaFin, along with the European and German
central banks, also considered Wirecard a technology company even
though it owned a bank. German politicians have questioned that decision
as BaFin, the local government, Munich prosecutors and the country’s accountancy watchdog FREP
have tried to shift blame for the fallout. “Huge questions. I mean
is it an Enron type situation? Well yeah because Europe has
got massive egg on its face. They wanted a big tech giant,
they ignored a lot of the facts. What about the regulators?
What about the auditors?” Wirecard is a payment processor that
facilitates debit and credit card transactions. Its payment systems collect money from the
consumer’s bank that issues the card and then delivers that money to the merchant
so that it arrives in their account. Wirecard makes money by taking a
percentage of every transaction they process. There are hundreds of payment
processors doing the same thing, so how did Wirecard
become so successful? Well, it marketed itself as the leader in
payment processing systems and claimed it used a
superior technology. As more of the world started to shift towards
a cashless society, Wirecard seemed well positioned to capitalize
on this trend. However, it was its rapid expansion, particularly
in Asia, that caught the attention of investors. According to hedge funds and independent analysts
such as J Capital Research and Zatarra Research, Wirecard bought shell companies that acted
as third party payment processors, which could handle transactions in territories
its licenses didn’t cover. In return for Wirecard bringing them business,
these companies paid commission into escrow accounts, which was claimed
to total more than $2 billion. But in reality, these third-party businesses,
which accounted for all of Wirecard’s operating profits, were allegedly much smaller,
and in some cases, weren’t real. “The relationships there are all
authentic, have been checked and we can 100% reject these allegations.” Following more accusations of fraudulent practices,
Wirecard hired KPMG to conduct a special audit. However, it couldn’t verify whether
these escrow accounts were genuine. Then when EY went to complete its 2019 audit
it found that the escrow accounts that held all of the company's operating profits were
fake, and the $2 billion didn’t exist. CNBC reached Wirecard, which declined to comment
on the accusations or the investigation itself. One of Germany’s biggest accounting scandals
has only created more questions than answers. Regulators are under the spotlight as investigators
worldwide try to work out how Wirecard was able to portray itself as a highly
profitable business for so long. Wirecard’s auditor EY
is also facing scrutiny for failing to check Wirecard‘s
bank statements for three years. The fallout has also impacted Softbank,
who's reputation as an astute tech investor has taken another hit following
the failed IPO of WeWork. But it’s likely that German business will
be hit hardest as trust in the country‘s authorities has been eroded, dealing a heavy
blow to its reputation as a financial centre. Hi guys, thanks for watching our video. We’d love to know your thoughts on
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