Money Men

1. Wirecard's rise: A fintech darling built on fraudulent foundations

"Wirecard was everywhere in Singapore, its credit card readers on shop counters, restaurant tables and in taxi cabs, and its big deal with Citigroup was supposed to give it a similar presence all across Asia."

From porn to payments. Wirecard's origins were rooted in the murky world of online pornography and gambling. Founded by Paul Bauer-Schlichtegroll, the company initially focused on processing payments for high-risk industries. As it grew, Wirecard positioned itself as a fintech innovator, offering cutting-edge payment solutions and expanding globally.

Smoke and mirrors. Under the leadership of CEO Markus Braun and COO Jan Marsalek, Wirecard crafted an illusion of rapid growth and profitability. The company used a complex network of subsidiaries and partnerships to inflate its revenues and profits, particularly in Asia. Key to this fraud were three partner companies - Al Alam, Senjo, and PayEasy - which were later revealed to be largely fictitious entities used to fabricate transactions and profits.

A German tech champion. Wirecard's apparent success story captivated investors and regulators alike. It became a darling of the German stock market, eventually replacing Commerzbank in the prestigious DAX 30 index. This status as a national champion made it difficult for skeptics to challenge the company's claims and practices.

2. The power of investigative journalism in uncovering corporate fraud

"I knew I'd have to learn the grubby business of reporting with sleeves rolled up and hands dirty."

Persistent investigation. Financial Times journalist Dan McCrum spent years investigating Wirecard, facing numerous obstacles and threats. His work, along with that of colleagues like Stefania Palma, involved painstaking research, on-the-ground reporting, and cultivating sources within and around the company.

Connecting the dots. The investigation required piecing together complex financial data, following paper trails across multiple countries, and uncovering the true nature of Wirecard's partnerships and subsidiaries. This often involved visiting remote locations to verify the existence of purported Wirecard offices or partners.

Battling corporate pushback. Throughout their investigation, McCrum and his colleagues faced intense pressure from Wirecard, including legal threats, surveillance, and attempts to discredit their work. Despite these challenges, they persisted in publishing their findings, gradually building a compelling case against the company.

3. Regulatory failures and the challenges of cross-border investigations

"The German authorities appeared to have better things to do than investigate the company."

National pride blindness. German regulators, particularly BaFin, were slow to act on allegations against Wirecard, often viewing criticism of the company as attacks on a national champion. This regulatory inertia allowed the fraud to continue and grow for years.

Jurisdictional complexities. Wirecard's global operations and complex corporate structure made it difficult for any single regulatory body to effectively investigate the company. This highlights the challenges of overseeing multinational corporations in an increasingly interconnected financial world.

Misplaced priorities. Instead of thoroughly investigating Wirecard, BaFin focused on allegations of market manipulation by short sellers and journalists. This misguided approach effectively shielded Wirecard from proper scrutiny and delayed the exposure of its fraudulent practices.

4. The role of auditors in enabling or exposing financial misconduct

"Ernst & Young was the full extent of the oversight, because there was no local audit firm preparing the figures for CardSystems."

EY's failure. For years, Ernst & Young (EY) signed off on Wirecard's financial statements despite numerous red flags. This failure raises serious questions about the effectiveness of the audit process and the potential conflicts of interest inherent in the auditor-client relationship.

KPMG's special audit. Under mounting pressure, Wirecard commissioned KPMG to conduct a special audit in 2019. Unlike EY, KPMG's forensic accountants took a more rigorous approach, ultimately uncovering significant discrepancies and lack of evidence for Wirecard's claimed revenues and profits.

Auditor responsibility. The Wirecard scandal highlights the critical role auditors play in maintaining the integrity of financial markets. It also exposes the limitations of current audit practices and the need for reform to better detect and prevent financial fraud.

5. Short sellers and whistleblowers: Unsung heroes in financial markets

"I knew what I would do if I were Markus Braun: blame Covid, fudge the audit when no one is paying attention and use the pandemic to reset the business. Wriggle, wriggle, wriggle, and off the hook he flies."

Early warnings. Short sellers like Matthew Earl and Fraser Perring (Zatarra Research) were among the first to publicly question Wirecard's financials and business practices. Their research and allegations, while initially dismissed, proved to be largely accurate.

Internal voices. Whistleblowers like Pav Gill, a former Wirecard lawyer in Singapore, played crucial roles in exposing the company's fraudulent practices. Gill's decision to share internal documents with journalists was a turning point in the investigation.

Facing backlash. Both short sellers and whistleblowers faced significant personal and professional risks for their actions. They were often subjected to legal threats, surveillance, and attempts to discredit their character and motivations.

6. Corporate intimidation tactics and the risks faced by journalists

"I imagined the knock. Hello officer, yes that is my car. Look, this might take a while, you better come in, I've got the number for the editor of the Financial Times here …"

Legal threats. Wirecard repeatedly threatened legal action against the Financial Times and individual journalists, attempting to silence critical reporting through intimidation and the prospect of costly litigation.

Surveillance and hacking. The company employed private investigators to track journalists and their sources. There were also numerous attempts to hack into the email accounts and electronic devices of those investigating Wirecard.

Reputational attacks. Wirecard and its supporters sought to discredit journalists by accusing them of market manipulation and collusion with short sellers. These allegations were amplified by some German media outlets, creating a hostile environment for investigative reporting.

7. The fall of Wirecard: A cautionary tale for investors and regulators

"Wirecard admitted that the €1.9bn wasn't missing, but in all probability didn't exist, and got round to firing Marsalek, who hadn't been seen in Munich since everything blew up the previous Thursday."

The house of cards collapses. In June 2020, Wirecard's fraud was finally exposed when EY refused to sign off on the company's financial statements. The revelation that €1.9 billion in supposed cash balances likely never existed led to a rapid unraveling of the company.

Aftermath and consequences.

• Wirecard filed for insolvency on June 25, 2020
• CEO Markus Braun was arrested
• COO Jan Marsalek disappeared and became a fugitive
• Thousands of employees lost their jobs
• Investors suffered massive losses
• German regulators faced intense scrutiny and calls for reform

Lessons learned. The Wirecard scandal serves as a stark reminder of:

• The importance of robust corporate governance and regulatory oversight
• The value of independent investigative journalism in exposing corporate malfeasance
• The need for auditors to maintain professional skepticism and independence
• The risks of national pride clouding objective assessment of companies
• The crucial role of whistleblowers and short sellers in financial markets

Last updated: January 24, 2025