What is the €3.5 billion Wirecard scam?

Almost a month after the controversial financial services giant Wirecard declared bankruptcy in Germany, the country’s Economy Minister Peter Altmaier said he would attend an extraordinary meeting of the German parliament’s finance committee next week and provide full information, Reuters reported.

Wirecard, which offered electronic payment transaction services, risk management as well as physical and virtual cards, collapsed on June 25, owing creditors more than €3.5 billion (almost $4 billion) after disclosing a gaping hole in its books that its auditor EY said was the result of a sophisticated global fraud. The company’s new management had been in crisis talks with creditors but pulled out “due to impending insolvency and over-indebtedness”.

What exactly happened at Wirecard?

For many years, there had been complaints of accounting irregularities against Wirecard, and matters came to a head in 2019 after the Financial Times published a series of investigations into those claims. Media reports and whistleblowers alleged the company had faked its sales transactions to inflate revenue and profits.

Wirecard had then defended itself and aggressively hit back against critics, even suing the Financial Times.

Later in 2019, the accounting firm KPMG was called in as an outside auditor to run an independent probe. In April 2020, KPMG dropped a bombshell, revealing that it could not verify cash balances of €1 billion, and was unable to trace vast sums of advances to merchants. The findings led to calls for the removal of Wirecard’s CEO Markus Braun.

In June 2020, the accounting firm EY, Wirecard’s auditor for over a decade, refused to sign off on the company’s 2019 accounts, saying it had been provided false information about company accounts, and could not confirm whether balances worth €1.9 billion existed – around a quarter of Wirecard’s whole balance sheet.

Wirecard insisted the missing money had been sent to two banks in the Philippines — a claim that was refuted by both the banks as well as the country’s central bank, which said that the money had never entered its monetary system.

Braun resigned on June 19, and three days later, the company admitted of a “prevailing likelihood” that the €1.9 billion did not exist. German authorities arrested Braun on June 23.

On June 25, Wirecard filed for insolvency after talks with creditors failed.

Following the bankruptcy announcement, EY said there were “clear indications” of “an elaborate and sophisticated fraud involving multiple parties around the world”, adding, “even the most robust and extended audit procedures may not uncover a collusive fraud”.

Fallout of the scam

Founded in 1999, Wirecard offered electronic payment transaction services in all continents. At its peak, the company was valued at $28 billion, and was among the 30 listed companies on Germany’s prestigious DAX stock index. It now holds the dubious distinction of being the first DAX listed company to go bust, barely two years after it was first included.

According to a Reuters source, Wirecard faked two-thirds of its sales, meaning there would be no way it would be able to repay all its debt, notwithstanding all the legal challenges it will face. It owes its creditors around €3.5 billion, out of which €1.75 billion come from 15 banks plus a €500 million issued in bonds.

The scandal has caused significant public outrage, and there have been calls to introduce regulatory reforms. “If legal, legislative, regulatory measures are needed, we will embrace them and implement them,” German Finance Minister Olaf Scholz said. “A scandal like Wirecard is a wake-up call that we need more monitoring and oversight than we have today”.

The head of Germany’s federal financial regulatory authority BaFin has also called the Wirecard debacle a “total disaster”. BaFin has itself faced criticism for its handling of the case, as well as for filing a criminal complaint against two journalists of the Financial Times.

The accounting firm EY is also at the receiving end of public anger. According to Reuters, the “Big Four” firm could also face a wave of litigation, which would include class action suits by shareholders and bondholders.

Prosecutors are now investigating former CEO Braun for suspicion of misrepresenting Wirecard’s accounts and of market manipulation. He has been released on bail of €5 million. The company’s former chief operating officer Jan Marsalek is believed to be hiding in Russia and is under the protection of the country’s intelligence agency, according to The Moscow Times.