What just happened?

The Wirecard incident is one of Europe’s biggest accounting fraud scandals. It shook confidence in corporate Germany as Wirecard was forced to file for insolvency last month after admitting that €1.9bn of its cash probably did not exist.[1] This has triggered a criminal probe into the group’s former executives as well as an EU investigation into BaFin, Germany’s financial regulator.[2]

What does this mean?

Wirecard, a defunct German company was founded in 1999 and offered payment transaction services in all the continents.[3] The company was valued at $28 billion and was among the 30 listed companies on Germany’s prestigious Deutscher Aktien Index (DAX) stock index.[4] In 2008, there was an attack on Wirecard suggesting balance sheet irregularities and in 2015, the Financial Times began raising questions about inconsistencies in the company’s group’s accounts.[5] In 2018, a probe was launched. after an internal whistleblower raised allegations about a plan to send money to India via third parties in a type of scheme known as “round tripping”.[6]

In 2019, it was alleged that the company was faking two-third of its sales transactions to inflate revenue and profits as it was unfeasible for the company to repay all its debt.[7] KPMG’s report stunned the investors after it was unable to verify the existence of half of the payment group’s business and the cash balances of €1 billion.[8] Furthermore, in June 2020, the accounting firm EY, which has been 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 the company accounts, and could not confirm whether balances worth €1.9 billion existed.[9]

In its defence, Wirecard insisted that the money had been sent to two banks in the Philippines.[10] However, on 16 June 2020, the Philippine banks BPI and BDO informed EY that the documents supposedly detailing €1.9 billion in balances are spurious[11] and the country’s central bank said that the money had never entered its monetary system.[12] After announcing that €1.9 billion is missing, the former Wirecard chief executive Markus Braun was arrested for a second time[13] following the collapse of the company on 25 June 2020, owing its creditors more than €3.5 billion.[14]

How does it impact the legal sector?

In the wake of the Wirecard scandal, there have been calls to introduce the regulatory reforms. The German finance ministry has unveiled a sweeping reform of financial regulation in the country as pressure mounts on the authorities over their failure to properly police the disgraced payments company.[15] BaFin, the financial regulator will be equipped with sovereign powers to intervene directly and immediately in the public companies, according to the draft of an action plan distributed by the finance ministry.[16] Furthermore, the action plan will also strengthen APAS, the body that oversees auditing firms in Germany and give it the power to impose tougher sanction on rule-breakers.[17] Companies would be obliged to replace their auditor every 10 years.[18]

In the longer term, fintech firms can expect to face increased scrutiny in relation to both their operational and financial affairs as the UK regulators are currently consulting on new rules aimed at improving the resilience of firms across the financial services.[19] In the UK, the Financial Conduct Authority have temporarily imposed restrictions on Wirecard’s UK subsidiary to protect the interests and money of the consumers who use Wirecard.[20] Furthermore, there will be a significant impact on the fintech industry as several UK fintech firms rely on Wirecard UK’s services for operational support to issue prepaid cards and process payments.[21]

Written by Samriti Rudhra

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References:

[1] Guy Chazan and Olaf Storbeck, ‘Germany to beef up financial regulation after Wirecard scandal’ Financial Times (24 July 2020) https://www.ft.com/content/77d6b91f-0cf9-48dd-a08d-2c46dafe9791 accessed 24 July 2020.

[2] Olaf Storbeck, ‘EY prepared unqualified audit for Wirecard in early June’ Financial Times (23 July 2020) <https://www.ft.com/content/568d5f9f-ebbe-48fc-a7b7-0ebf34c3cb83> accessed 24 July 2020.

[3] Dan McCrum, ‘Wirecard: the timeline’ Financial Times (25 June 2020) < https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b36868db> accessed 24 July 2020.

[4] ‘Explained: What is the €3.5 billion Wirecard scam?’ The Indian Express (22 July 2020) <https://indianexpress.com/article/explained/wirecard-scam-explained-6517530/> accessed 24 July 2020.

[5] Dan McCrum, ‘Wirecard: the timeline’ Financial Times (25 June 2020) < https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b36868db> accessed 24 July 2020.

[6] Dan McCrum, ‘Wirecard: the timeline’ Financial Times (25 June 2020) < https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b36868db> accessed 24 July 2020.

[7] ‘Explained: What is the €3.5 billion Wirecard scam?’ The Indian Express (22 July 2020) <https://indianexpress.com/article/explained/wirecard-scam-explained-6517530/> accessed 24 July 2020.

[8] Olaf Storbeck, ‘EY prepared unqualified audit for Wirecard in early June’ Financial Times (23 July 2020) <https://www.ft.com/content/568d5f9f-ebbe-48fc-a7b7-0ebf34c3cb83> accessed 24 July 2020.

[9] ‘Explained: What is the €3.5 billion Wirecard scam?’ The Indian Express (22 July 2020) <https://indianexpress.com/article/explained/wirecard-scam-explained-6517530/> accessed 24 July 2020.

[10] ‘Explained: What is the €3.5 billion Wirecard scam?’ The Indian Express (22 July 2020) <https://indianexpress.com/article/explained/wirecard-scam-explained-6517530/> accessed 24 July 2020.

[11] Dan McCrum, ‘Wirecard: the timeline’ Financial Times (25 June 2020) < https://www.ft.com/content/284fb1ad-ddc0-45df-a075-0709b36868db> accessed 24 July 2020.

[12] ‘Explained: What is the €3.5 billion Wirecard scam?’ The Indian Express (22 July 2020) <https://indianexpress.com/article/explained/wirecard-scam-explained-6517530/> accessed 24 July 2020.

[13] Olaf Storbeck and Guy Chazan, ‘Former Wirecard CEO rearrested and accused of long-running fraud’ Financial Times (22 July 2020) <https://www.ft.com/content/3c122d1b-660f-40db-9ac2-e8d724ffd3fa> accessed 25 July 2020.

[14] ‘Explained: What is the €3.5 billion Wirecard scam?’ The Indian Express (22 July 2020) <https://indianexpress.com/article/explained/wirecard-scam-explained-6517530/> accessed 24 July 2020.

[15] Guy Chazan and Olaf Storbeck, ‘Germany to beef up financial regulation after Wirecard scandal’ Financial Times (24 July 2020) https://www.ft.com/content/77d6b91f-0cf9-48dd-a08d-2c46dafe9791 accessed 24 July 2020.

[16] Ibid

[17] ibid

[18] Ibid

[19] Harry Eddis and Jean Price, ‘UK response to Wirecard insolvency highlights the importance of operational resilience’ (Linklater's, 3 July 2020) <https://www.linklaters.com/en/insights/blogs/fintechlinks/2020/july/uk-response-to-wirecard-insolvency-highlights-the-importance-of-operational-resilience> accessed 24 July 2020.

[20] Ibid

[21] Ibid

Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.