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What Wirecard reveals about regulating FinTechs

Wirecard's Founder, Markus Braun, was arrested on Monday evening after handing himself in, on suspicion of misrepresenting the payments company’s accounts and of market manipulation by falsifying income from transactions with so-called third-party acquirers.

Wirecard is an international supplier of electronic payment and risk management services. It offers products and services in the areas of mobile payments, e-commerce, digitization and finance technology. Some of its FinTech clients include Revolut, Pockit, Soldo and Curve — who depend on the German tech-darling for card issuance, account top-ups and other e-money services.

The arrest of Mr. Braun has been part of an ongoing saga since January 30th 2019 when the Financial Times reported that, in a presentation titled, Project Tiger Summary, potential violations of Singapore law were outlined including “falsification of accounts” and “money laundering”.

Singapore police raided the premises of Wirecard on February 8th, 2019 after Singapore police opened inquiries following the FT’s reporting, which cited the preliminary findings of an investigation by law firm Rajah & Tann that found evidence of a series of offences including forgery and false accounting.

Wirecard dismissed the allegations, labelling them as 'misleading and defamatory' and filed a lawsuit against the Financial Times for unethical reporting and announced legal action claiming market manipulation.

Criminal investigation were then launched by the public prosecutor's office in February against FT Journalist Dan McCrum on allegations of breaching Wertpapierhandelsgesetz - the German Securities Trading Act. The Federal Financial Supervisory Authority, BaFin, prohibited short selling of Wirecard shares for two months on February 19th 2019. In a statement, BaFin, outlined the move was not intended to show favourability for the company.

KPMG was then hired by Wirecard to investigate the alleged financial misdealings, however, the largely completed special investigation did “not produced any substantial findings” that would require any correction to the company’s annual financial statements for the 2016, 2017 and 2018 investigation periods.

On 28 April 2020, an independent investigation by KPMG into Wirecard found the German payments company did not provide sufficient documentation to address all allegations of accounting irregularities made by the Financial Times. Resultingly, Wirecard shares crashed 26%.

On 5th June, as part of a criminal investigation into misstatements made by CEO Markus Braun and other board members about the audit, Wirecard's Munich headquarters were searched by police.

The company then reported on 18 June 2020 that €1.9 billion was missing in cash from the company's accounts. The company admitted the €1.9 billion likely does not exist and it was told by EY, its longstanding auditor, that there were indications a trustee of Wirecard bank accounts had attempted "to deceive the auditor" and may have provided "spurious cash balances".

Braun resigned as CEO the following day to be replaced by James Freis. Over the two days, the company's stock fell 72%. Mr. Braun has since been arrested and granted bail for €5 million.

Despite this tumultuous story of Germany's FinTech poster boy, it is the German financial watchdog, Bundesanstalt für Finanzdienstleistungsaufsichtregulator, BaFin for short, that has come under significant national and international scrutiny. Criticism is perhaps deserved considering its failure to detect one of the country's biggest accounting scandals to date as Wirecard have acknowledged the possibility of a multiyear fraud.

What is peculiar about this case is that it isn't unexpected. The FT first reported financial mishandlings a year and a half ago hence crucial questions remain over why the regulator did not intervene earlier.

Although no one cause of regulatory inaction has been pinpointed, several factors may have caused the torpor. One such factor is the denial surrounding what was Germany's tech-darling. Those who doubted the legality of such an organisation was viewed as trying to undermine, if not sabotage, Germany's financial sector. Indeed, Fabio De Masi, member of The Left Party, described Wirecard as a "delicate homegrown plant that needed to be protected".

Other factors have also been highlighted such as a corporate culture circumspect of foreign speculators and the structural inability of the regulator to manage a payments company. One important fact to consider is that BaFin does not have the power to criminally prosecute.

BaFin did admit some of its failings in a mea culpa issued by its President, Felix Hufeld, stating that a range of public and private bodies, including himself, had not been effective in preventing the "complete disaster" that is the Wirecard situation.

BaFin's incapability of dealing within a complex, dynamic and ever-evolving environment has been cited as a key reason for its incapability of dealing with Wirecard. This stems from a lack of legal definition regarding the watchdog's remit within such a fluid environment which may explain its timidity in challenging Wirecard.

The lack of a clear sphere of authority, coupled with the inability to criminally prosecute resulted in accounting manipulations being overlooked. Furthermore, BaFin itself consists mainly of lawyers who take a parochial view of its role.

Under the narrow definition, Wirecard is regarded as a technology firm, and not a provider of financial services, pushing Wirecard further away from BaFin's oversight. This is all the more shocking considering Wirecard's place on the DAX - a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange - yet no one considered how it was overseen. In effect, BaFin, washed their hands with Wirecard.

Since the scandal, BaFin have become more proactive. They have installed a BaFin representative to sit-in on board meetings at Wirecard HQ in Munich to ensure regulatory compliance and have ringfenced Wirecard Bank, the payment lender owned by Wirecard. A payments ban has been initiated on the lender preventing certain assets being transferred to Wirecard.

Mr. Hufeld has also come out and defended the decision to hault the short selling of Wirecard shares for two months in February 2019 stating that the decision was made to uphold the rectitude of the markets and defend it against market manipulation. Mr. Hufeld went on to also say that the move was not to protect Wirecard from foreign trespass and that to summarise it as 'London vs Frankfurt' would be trivial.

The scandal will continue to unfold as Mr. Hufeld will testify in front of the Bundestag Finance Committee on July 1st but there is no doubt that this case must not happen again for the sake of confidence within the German banking system.

For this not to happen again, lessons need to be learned. It is clear that, in emerging industries that are constantly evolving, regulators not only need power but they also need strict definitions of their jurisdiction. Regulatory frameworks need to be proactive - flexible enough to deal with new service providers, but rigid enough to ensure no firms escape the regulatory net.

Germany's Minister for Economic Affairs demanded a full investigation of the Wirecard case on Tuesday. With this investigation, let's hope these lessons can be learned.


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