Wirecard Made It Up as They Went Along

Wirecard is a challenging fraud to explain. It’s a German fraud exposed by a British journalist, and it’s got some fuzzy parts, but I’m going to try.

Wirecard was a payment company. I saw it described as PayPal for Europe, but it was more than that. It seems to be a bit of PayPal, a bit of Venmo, that sort of thing. This fraud also comes with a movie if you want more. The documentary Skandal! is now on Netflix and it covers the Wirecard fraud.

Wirecard started off in 1999 in Munich, and almost went broke. In 2002 it made, Marcus Braun, a former KPMG consultant, its CEO. The company originally focused on payments for companies frequently turned down by traditional finance like gambling and porn sites. In 2005 Wirecard merged with Electronic Business Systems. This is important because it gave them a listing on the Frankfurt Stock Exchange. There’s nothing inherently wrong with this approach, but it avoids the scrutiny of an IPO. Wirecard used its publicly traded status to raise money including one round worth €500 million.

A year later Wirecard bought the e-bank XCOM. This is important because it gave them access to the Visa and Mastercard networks. With this Wirecard set out to become a global payment giant ultimately becoming the card processor for Aldi, Lidl, & several airlines. Wirecard also purchased a large number of Asian payment processors, many of them at alleged inflated values. Multiple articles describe the company’s structure as complex, making it difficult to compare to something like a traditional bank or traditional payment processor.

As it grew Wirecard acquired a prepaid card business from Citibank giving it a U.S. presence and at one point it held informal talks to merge with Deutsche Bank.

Critics kept nipping at Wirecard over its financial reporting, revenue determination, and perceived cash discrepancies. The responses from the company were aggressive, primarily a mix of deflection, legal threats, and smear tactics. The Financial Times took on Wirecard in 2015. A whistleblower dropped allegations in 2018. Core allegations included “roundtripping”, passing money through a 3rd party and bringing it back as revenue, recognizing money held for 3rd parties as revenue, and fraudulent financial statement filings.

Wirecard denied everything. They were audited by EY and insisted they were financially sound. Despite the lingering allegations, they managed to wring €900 million out of venture firm Softbank. KPMG was brought in to do a special audit. Wirecard claimed €1.9 billion in cash in a pair of bank accounts in the Philipines. KPMG indicated in their audit that they were unable to verify much of Wirecard’s revenue. Additionally EY and KPMG were unable to confirm the €1.9 billion in the Philippine banks,

Several months later CEO Braun resigned and Wirecard admitted that the €1.9 billion probably did not exist. This became a giant scandal in Germany. Wirecard was Germany’s answer to a global Silicon Valley firm. It was as if Germany’s Google or Apple was a fraud.

My take, based solely on external reports, is that Wirecard, as an organization, liked the edge. They liked to take shortcuts. The company started on the edge with businesses that were marginalized, like gambling and porn sites. Wirecard then backed into being public with an acquisition instead of going through the due diligence of a public offering. They then bought their way on the Visa and Mastercard network. None of these things in isolation are wrong, but they do seem to show a pattern of shortcuts.

The actual frauds appear to be primarily financial statement and revenue recognition frauds. Namely:

• Acquiring firms and showing their revenue as organic growth instead of acquired. There was no reporting analogous to same-store sales to indicate how the core business was doing. Acquisitions were shown as sales growth.
• Round Tripping – passing payments through third-party processors and bringing the funds back into the business as revenue to inflate financial statement revenues.
• Roughly half of Wirecard’s business was outsourced. They had licensing arrangements with payment processors in countries where they didn’t operate, but they recognized the revenue of those providers as their own.
• Cash held in escrow accounts and managed by trustees was reported as Wirecard cash.

This really looks like started as a tone-at-top problem. A lot of people, possibly including EY, looked the other way. People wanted Wirecard to succeed. It was a source of national pride. Wirecard was also, big, and complex, even dense in scope. It was also mean when it wanted to be. Braun was a charismatic CEO who dressed and acted like Steve jobs. Wirecard also had deep roots in a lot of politicians. Everybody was encouraged to look the other way.

As The Economist notes: “Neither equity analysts, asset managers, auditors nor regulators come out of the story well…everyone with influence over the firm, from board members to auditors and regulators, seems to have been complacent. In a darker version of events, the actions of some may have been complicit, even criminal.”

Ultimately Braun’s case is going to trial. Former Wirecard COO Jan Marsalek disappeared around the time of Braun’s resignation and is a fugitive from justice. He is believed to be hiding in Belarus.

Just to throw a twist into this story, this New Yorker article claims that at its core the Wirecard fraud was not a financial fraud, but was instead a massive money laundering operation primarily benefiting Russian oligarchs. It’s not a crazy theory.