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The Wirecard Scandal
The emperor has no clothes
In 2018, German officials finally had their champion. No longer would fintech companies only exist in the US and China. No longer would the greatest European tech firms be Skype and Spotify. Politicians in Berlin were clinking champagne glasses, toasting the German competitor to the American PayPal. Finally, there was a company that could bring Continental Europe up to speed with the tech industry and the US and China. That champion was Wirecard.
Sure Wirecard was a bit unconventional. It may have started mainly as a payments processing site for pornographic websites, but those were in the early days. Plus, why be judgmental about a legitimate sector of the economy? Only Americans would be so prudish as to discount a company for being involved in a less-than-savory industry. Yes, some of Wirecard’s executives were a bit mysterious and not always on the level. But it’s startup culture! Fake it to make it. The company was promising to develop a host of new financial instruments, including million-dollar reloadable debit cards.
Private investors were also interested. If Wirecard could create an entire new payments infrastructure it would be worth tens of billions, maybe hundreds of billions of dollars. Were there concerns about the culture of Wirecard? Of course, but it’s hard to argue with a company that’s making money hand over fist. The company’s market cap reached $28 billion in 2018, landing them a spot in the prestigious DAX stock index. And again, it’s the startup world. Company cultures are often strange.
Then there was a concerning 100-page report published anonymously in 2016 that accused Wirecard of money laundering and outright fraud, but it was never substantiated. In fact, the German financial regulatory authority, BaFin, had initiated criminal proceedings against the group that published the report. Apparently those anonymous “whistleblowers” were actually in cahoots with short sellers and published the report to make Wirecard stock tank. Why would you trust an anonymous report, anyway? The fundamentals of the business were sound, and auditors were declaring Wirecard’s profits to be legitimate.
Battle lines were drawn. Those attacking Wirecard said that something was amiss about the firm’s finances. The company’s history was questionable. The company’s revenue model not entirely clear. Wirecard’s defenders said the detractors were just investors trying to make a fortune off short selling. Many of these defenders were legitimate, as by this point Wirecard had customers all over the globe and had positive revenue streams.
In the end it was even worse than anyone thought.
Wirecard was fraudulent from day one. They created a massive money laundering scheme to evade American anti-gambling regulations. They created millions in false profits and then used that fake money to buy fake companies in Asia to explain where the money went. They even created fake bank cubicles staffed with Filipino actors to do video calls with auditors. Those who began to suspect something amiss were alternately bribed and harassed. Wirecard hired companies staffed with ex-spooks from European spy agencies to follow their detractors and apply pressure as necessary.
This whole time Wirecard’s biggest champion was the German government. In 2019, the Financial Times published a report that said some of Wirecard’s transactions were fraudulent. BaFin, which is the German equivalent to the American SEC, immediately jumped into gear… by promptly launching an investigation into the Financial Times. Wirecard had successfully convinced BaFin that the Financial Times, one of the longest-running financial publications in the world, was illegally scheming with short sellers to tank the price of Wirecard stock. BaFin, which again is the German government office tasked with regulating financial institutions, took the company at its word.
Eventually BaFin resorted to desperate measures. They banned the short selling of Wirecard stock entirely. Those who believed Wirecard was fraudulent had no way to signal their dissatisfaction in the markets. Those that owned Wirecard stock could sell it, but without a short sell mechanism there was no way for the market to respond to the mounting evidence that Wirecard was a sham. To be fair, there was some evidence that the editor for the Financial Times had improper conduct with a black market short seller. But the only entity that provided evidence of Financial Times malfeasance was Wirecard itself, not exactly an unbiased party. This convinced yet another round of funders, and the Japanese company Softbank invested an additional $1 billion.
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As it turns out, the Financial Times story was the beginning of the end. KPMG announced that it had not received sufficient documentation regarding Wirecard’s assets in June 2020. The fake Filipino banks, while convincing on camera, were unable to temporarily wire money to an auditor’s holding account. That month, the bombshell of bombshells finally dropped: Wirecard announced that $2 billion it claimed to have never actually existed. The stock dropped 85 percent in three days. Company executives were arrested and convicted. Some went into hiding and are still on the lam today. The party was over.
The story is shocking, but there’s a larger lesson to be had. Governments should not pick national champions. Once a company has the unofficial, let alone official, support of the government, its potential will never be reached. Germany wanted to show the world that they could create a world-beating tech company. It was a bit unlucky for Germany to pick a firm that was a wholesale fraud, but these partnerships never end well. At best, picking a national corporate champion results in a bloated firm that always leans on government to protect it from competition. At worst, a government helps to facilitate a vast criminal enterprise.
Everything in hindsight is 20/20, but even so, it’s amazing BaFin protected their paper tiger for so long. Their early history was sketchy. Their executives mysterious. Both Visa and Mastercard had fined Wirecard millions of dollars long before their problems surfaced. The FBI had investigated the firm in 2010. With all this baggage, the idea that the organization tasked with protecting the German financial industry would instead use the atomic option of banning short selling is nothing short of astonishing. Governments shouldn’t choose their champions, they should create a market environment that champions choose.