Germany to Revamp Financial Oversight After Wirecard Damage
Germany will be quick to overhaul its regulation of
financial companies to repair the damage caused by Wirecard AG’s collapse,
Deputy Finance Minister Joerg Kukies said.
“What we must do is analyze, by turning over every stone,
exactly where and how things went awry,” Kukies said at an event organized by
the publisher of Die Zeit newspaper.
The accounting scandal that brought down Wirecard has laid
bare significant cracks in Germany’s financial oversight, increasing pressure
on Chancellor Angela Merkel’s government after one of the country’s biggest
corporate failures.
Even with ample warning, German authorities failed to catch
accounting issues at the digital-payments company. Slow decision-making,
insufficient oversight and fragmented responsibilities created cracks that
allowed Wirecard’s problems to go undetected by officials.
Germany is one of relatively few countries to split
accounting enforcement between a private-sector watchdog and its markets
regulator, while the investigation of money laundering at non-financial
companies is handled by regional authorities. With the fallout risking the
country’s reputation as a place to do business, the government is now pushing
for reform.
The financial regulator, known as BaFin, has come under fire
for being slow to respond to allegations and temporarily banning short selling
of Wirecard stock last year, an unprecedented step that appeared to back
Wirecard. But the inefficient delegation of supervision duties helps explain
why it failed to dig up problems at the company.
“BaFin has no investigative powers -- that’s missing in
Germany,” Kukies said. “It needs similar competences as prosecutors.” Kukies
contrasted the regulator with the SEC, which does have those powers.
To consolidate financial enforcement, BaFin will be given
the authority to start investigations into company accounts, the Financial
Times reported on Sunday.
The government canceled its contract with the accounting
watchdog, called FREP, a Justice Ministry spokesman said in an email. The
contract will end at the end of 2021, and Germany is in the process of
reviewing the extent of reforms needed to ensure “functioning and transparent
capital markets,” he said.
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BaFin received documents alleging irregularities at Wirecard
in January 2019, yet it took more than a year to ask prosecutors to follow up
on suspicions of market manipulation.
The regulator asked FREP in February 2019 to investigate,
and since made multiple follow-up requests but hadn’t received a report on
Wirecard’s accounting, said a BaFin spokeswoman.
FREP assigned just one person to probe Wirecard, according
to Frankfurter Allgemeine Sonntagszeitung. The organization didn’t immediately
respond to a request for comment.
In the meantime, KPMG’s special audit, published in April
this year, couldn’t verify much of Wirecard’s historic revenue and profits.
Once lauded as one of Germany’s fintech stars, Wirecard
filed for insolvency last week after saying that 1.9 billion euros ($2.1
billion) previously reported as cash on its balance sheet probably doesn’t
exist.
Another key weakness in Germany’s regulatory regime has been
that BaFin doesn’t directly supervise Wirecard. Despite the fact that its
business was largely financial, the company was classified as a technology
company rather than a bank or insurer, for which the watchdog is responsible.
The company’s failure will harm Germany’s reputation for
years to come, Kukies said. “In the same way as we refer to Enron and WorldCom
today -- in 10 years’ time we’ll be talking about Wirecard.”
Burned Name
BaFin President Felix Hufeld is scheduled to testify to
parliament on Wednesday. He has acknowledged that his institution is among the
bodies responsible for the scandal at Wirecard, yet Hufeld defended the short
sale ban as being a legal duty following indications of manipulation in the
trading of Wirecard shares.
Other institutions have been more focused on deflecting
blame. Wirecard’s long-time auditors, Ernst & Young, last week accused
their client of “an elaborate and sophisticated fraud.”
Markus Braun, who resigned as chief executive officer as the
scandal unfolded, was arrested last Monday before being granted bail the
following day. Last week, Wirecard fired Chief Operating Officer Jan Marsalek,
a key strategist in the company and a close ally of Braun, without giving a
reason.
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