Wirecard
Founded in the unassuming village of Aschheim in 1999, Wirecard grew fast to become a major player on the global market for payment processing. The company’s initial focus on handling transactions in the sectors of online gambling and adult entertainment was soon forgotten. Wirecard went public on the Frankfurt stock exchange in 2005, established a banking division in 2006 and raised EUR 500 million from its shareholders in subsequent years, for a series of acquisitions of Asian payment companies. By the early-to-mid 2010s, the company was widely recognized as a market leader for innovative payment technologies, at least in Germany. Year after year the management board boasted ever higher revenues, profits, and market values, leading to Wirecard’s inclusion in the DAX index in September 2018.
The board’s profit targets for the 2020s were ambitious. At the company’s investor conferences, taking place in glittering London and New York, CEO Markus Braun presented the latest innovations and forecasts: the “Vision 2020” and “Vision 2025” programs, released in May 2016 and October 2019, respectively, envisaged an increase in earnings (EBITDA) from EUR 560 million in 2018 to EUR 700 million in 2020, and EUR 3.3 billion in 2025. It was no coincidence that Markus Braun – known for his penchant for black turtleneck jumpers – was occasionally referred to as “Steve Jobs of the Alps”. Much of the company’s outward presentation was reminiscent of the tech giants in Silicon Valley.
Then, a sudden change in appearance. Starting on June 18, 2020, in a series of press releases the management board disclosed that Wirecard’s long-time auditing firm EY refused to certify the financial statement for 2019, since it turned out that bank balances in escrow accounts in the Philippines amounting to EUR 1.9 billion were missing. The accounts were hitherto assumed to contain profits from so-called third party acquiring, i.e., provisions that Wirecard received for referring clients to third parties who then processed the payments via Wirecard’s infrastructure. This business activity was responsible for large parts of the profit that the company claimed to have made in 2019 and preceding years. Now, as the profits from third party acquiring went missing, the board expressed its doubts to whether this business had ever existed at all. In response to these developments, creditors were eligible to terminate loans amounting to EUR 2 billion. On June 25, 2020, Wirecard filed for insolvency. During the seven days that had elapsed since the first announcement on June 18, the share price had fallen from EUR 100 to less than EUR 3.
Even though the legal investigation is still ongoing, the Wirecard case is already viewed as the largest financial fraud in the history of the Federal Republic of Germany. It differs from other fraud cases in that there were clear warning signs of fraudulent activity and financial misconduct at Wirecard long before the events of June 2020: in 2008, a German shareholder association made allegations of balance sheet manipulation (allegations that were, however, overshadowed by ensuing reports of undisclosed short selling by officials of the same association); in 2015, the Financial Times published a series of articles “House of Wirecard” and pointed out further balance sheet inconsistencies; in November 2015, the investment advisor J Capital Research revealed the lacking or scarce presence of Wirecard on markets outside Germany and suggested that the company was concealing missing profits by buying fictitious assets; in February 2016, a group of short sellers accused Wirecard, in the “Zatarra Report”, of money laundering; in early 2019, the Financial Times reported that an employee in Wirecard’s Singapore office forged contracts and used so-called roundtripping schemes intended to pretend regular business activities; finally, in October 2019 it was revealed that most of the clients of the third party acquirer Al Alam, responsible for large parts of Wirecard’s profits, were either unaware of service contracts with Al Alam or did not exist. The latter report led to a special audit by KPMG, which could not disprove these findings. Overall, an impressive string of accusations, which may have raised some eyebrows.
Wirecard’s response to criticism followed a constant pattern: the accusations were rejected across the board; critics were blamed for manipulating the market in favor of short sellers, and it was pointed out that financial statements were certified by auditors. If concerns about irregularities could not be allayed in this way, the findings were attributed to the nature of the global payment processing business which supposedly required deviations from the corporate management of the analog era. The strategy paid off: many investors and the German authorities misinterpreted the critical reports as malicious market manipulation. In February 2019, the German Federal Financial Supervisory Authority (BaFin) even imposed a short selling ban for several months, and in April 2019 it filed criminal charges against the two Financial Times journalists who had reported on the situation in Wirecard’s Singapore office.
All this raises the question why so many market actors did not take the earlier allegations seriously. Central pieces of evidence were freely available on the internet. Yet, the idle talk of Wirecard's management was enough to mislead their audience. The misperception appears to have multiple causes that are connected to basic biases: small investors often rely on supervisors and auditors, and may overestimate their capabilities; assessments by economists suggest that the so-called “confirmation bias” may be at play, i.e., people pay more attention to information that confirms their previous beliefs than to information that contradicts them; last but not least, the narrative of UK short sellers who attack the long-awaited German tech prodigy may have been so powerful that many German market participants failed to check the factual basis of Wirecard’s tale: a case of motivated beliefs. Overall, it seems that a behavioral economics perspective may be useful for the ongoing reform of the regulatory system.
Author: Timm Dusemund
Sources:
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