Wirecard Explained: The Biggest European Accounting Fraud?
“We are committed to creating more transparency and trust in all we do.” — Wirecard
In the past few days so much has gone down for a German financial institution that has opened so many questions for the country to answer. Germany’s Wirecard AG, which also goes by the name of Wirecard Card Solutions in the United Kingdom has discovered a whopping $1.9 billion missing from its account and nobody knows what happened. As a result, the regulators in the UK froze the company’s operations, trapping customers money in the middle of it as well.
Although, as of June 30, they are allowed to continue their work, the question still arises, “Where did the money go?” Let’s go back to how this began:
How Wirecard Works
The company started in Germany back in January 1999 with Markus Braun joining in 2002. Let’s dive deeper.
Wirecard is a payment processor. What it does it that whenever a consumer wants to buy an item online, they will provide their credit card details to the company which will deal with the issuing bank. It will collect your money from the bank and transfer it to the merchant, completing a payment. Honestly, it is a really interesting business as e-wallet applications are one of the trending software apps in the world of fintech. However, Wirecard promised technological upgrades unlike anybody else. Their modern technology tools involved e-card systems, barcode usages and several other encryptions & security features.
They quickly started getting the highlight over the past years; they started to make more money by doing that than everybody else. Due to this, they spread out in different areas, like Dublin, Dubai, and others, while Germany became their headquarters.
They worked on a mantra: that they are trying to build a cashless society, and this started to seem so true for everyone. Nobody wants to deal with wallets, credit cards and cash. Fintech is effectively trying to address this need, and Wirecard seemingly had the perfect solution. This perfect solution led to even bigger growth. In fact, by 2016, they were surfing the tides of reaching $25 billion of market cap. Until it all suddenly crashed right down to the floor.
Something Fishy?
As Wirecard expanded to different parts of the world, what many failed to realize was that it was actually on something that purely ‘invented’. I say this because as one may notice, Wirecard had branches in Dubai, Germany (main) and Dublin. For the countries where the branches were not present, they would use third party companies to process payments. These companies had the right licences to carry out such financial operations, which was all that they needed.
These 3rd parties were present in the Philippines, Singapore and Dubai. Interestingly, according to a report by Financial Times, the company in the Philippines was sharing their office with a bus travel company. Wirecard successfully convinced its financial audit partners (Ernst & Young) that they were sending processing money over to these third parties for distribution. In return, they would pay Wirecard commission which would go into an ‘escrow account’.
What Is An Escrow Account?
An escrow account is a rather simple deal. You (the Buyer) give your money to a third person to get a product from the Seller. Once you are satisfied with the product, the third person will hand over the money to the Seller.
In an escrow account, funds are kept in trust as two parties are completing a transaction. The trusted third party will secure the funds and they will be disbursed to the merchant-side after they fulfil their agreement.
So What Did Wirecard Do?
Wirecard convinced its auditors that instead of keeping money in their very own bank in Munich, Germany, they were keeping the cash in these escrow accounts. The latest figures the auditors received was around USD 1.9 billion.
By 2016, rumours erupted that the company was involved in illegal gambling. Later, thanks to some incredible investigative journalism by Financial Times, Wirecard was forced to hire 3rd Party auditors (KPMG) to investigate the reports constructed by Ernst & Young. The following is an excerpt:
The report said KPMG could not confirm “that the sales revenues exist and are correct in terms of their amount, nor can it make any statement that the sales revenues do not exist and are incorrect in terms of their amount”.
This special report was supposed to confirm the business which people were doubting due to FT’s and others’ journalism. Instead, KMPG raised more questions like why there were around 2 billion dollars in trustee accounts in the first place? More importantly, whether the money is even there or not?
When auditors went looking for the money in these trust accounts, they found absolutely nothing. An interesting term that has been circulating over this is that they found ‘a gaping hole’. Did EY lie about the money?
It’s not quite sure. As soon as it was discovered that there was no money, and only bank accounts, EY quickly confirmed that they too thought that the digital receipts they got seemed dubious. After this, the following is what happened to the Wirecard stocks:
But then:
I found this awesome correlation of events and the company’s share prices on the Internet:
Finally, CEO Markus Braun was arrested and stands accused of inflating the value of a business with third party companies. Now, there are questions if the third party companies present in Philippines and Singapore generated any revenue at all. On June 25, Wirecard filed for insolvency proceeding due to over-indebtedness.
Where is the money? Was it completely invented to inflate the business value? Or did someone take it away and it was never put where they said it was? Hopefully, time will reveal this.
Too Long; Didn’t Read?
Watch this video below for a complete summary:
