German Payment Processing Giant Wirecard Implodes After $2.1bn Hole Found in Books

  • CEO Markus Braun allegedly created $2.1bn with fake transactions
  • Company filed for insolvency after banks said they would call in $1.5bn in loans
  • Auditor EY is facing lawsuits for not spotting discrepancies until it was too late
  • Wirecard started primarily as an online gambling payment vehicle
Laptop showing "404 error" of missing Wirecard funds
Markus Braun, ex-CEO of Wirecard, has been arrested and his former company has filed for insolvency following the discovery of $2.1bn in allegedly fake transactions. [Image:]

CEO arrested after resignation

German payment processor and financial services company Wirecard has filed for insolvency after an accounting scandal revealed that account balances of €1.9bn ($2.1bn) were likely created out of thin air. As news of the situation started coming out last week, Wirecard CEO Markus Braun resigned. Braun was arrested on Monday and released on €5m ($5.7m) bail on Tuesday.

Shares in Wirecard, which made the list of Germany’s top 30 companies in 2018, have plummeted, losing almost all of their value.

instructed Wirecard to stop all regulated activities

Britain’s Financial Conduct Authority (FCA) has instructed Wirecard to stop all regulated activities, meaning that customer funds are potentially frozen. Among those affected are likely many online gamblers who use Wirecard-branded Mastercards for getting money in and out of gaming accounts.

Wirecard was founded in 1999. When Braun was brought on in 2002, he focused the young company on processing payments for the online gambling industry. The company eventually acquired Click2Pay, which was once one of the top e-wallets for online gaming transactions.

Warning signs were there

Red flags about the company began popping up in January 2019 when the Financial Times (FT) reported that Wirecard had forged and backdated contracts related to transactions in Singapore. Wirecard denied the report and sued FT, claiming that the media outlet was trying to manipulate the market. The damage had been done, however, and Wirecard’s stock plunged.

Then, in September 2019, FT published alleged Wirecard internal accounting spreadsheets. Wirecard hired the accounting firm KPMG to conduct an independent audit. Though the company claimed in March 2020 that KPMG found nothing wrong, KPMG published a report in late April saying that Wirecard had not provided enough documentation to sufficiently address FT’s allegations. Shares tumbled again.

There are clear indications that this was an elaborate and sophisticated fraud involving multiple parties around the world.”

The other shoe dropped last week when Wirecard’s auditor, EY (Ernst & Young) refused to sign off on the company’s financials because it could not find the €1.9bn ($2.1bn) in question. “There are clear indications that this was an elaborate and sophisticated fraud involving multiple parties around the world,” EY said.

Domino effect

The scandal could have wide-ranging fallout. In addition to the missing money, possible frozen customer accounts, and the loss of almost all of the company’s value, Wirecard has outstanding loans of €1.3bn ($1.5bn) that might not end up getting paid back. There is a high likelihood that Wirecard will cease to exist.

EY is also under heavy criticism. Wirecard’s auditor since 2007, the company is on the receiving end of salvos from within the industry, as people want to know how it never noticed anything wrong until recently.

“Ernst & Young bear responsibility for this,” Mirabaud analyst Neil Campling told Bloomberg. “They were defrauded like everyone else but, as auditors, they should have looked through it. It is amazing that they signed off on the 2018 account.” Campling had set a price target of zero for Wirecard over a year ago.

It is frightening how long Wirecard AG was able to operate without being objected to by the auditors.”

Wolfgang Schirp, who filed a lawsuit against EY on behalf of investors before last week’s scandal revelation, said: “It is frightening how long Wirecard AG was able to operate without being objected to by the auditors.” Softbank is reportedly preparing to sue EY, as well.

On top of that, the European Commission has asked the European Securities and Markets Authority (ESMA) to investigate German financial regulator BaFin’s response to allegations against Wirecard leading up to the events of the past week. Depending on the findings, a “breach of union law” investigation into BaFin could be launched.

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