The WIRECARD scam of the century left undetected by audit

The WIRECARD scam of the century left undetected by audit

Filip Novák | 09. 11. 2020

How come that one of the German technology superstars, a leader in electronic payment services and financial risk management, which was, in August 2018, worth 24.6 billion euros at the Frankfurt Stock Exchange [1], is now short of 1.9 billion euros and pending insolvency?

A bunch of crooks

Money is the root of all evil and Wirecard [2] learned it the hard way. Staring Edo Kurniawan, senior financial strategic manager responsible for Wirecard´s financial operations in Asia and the Pacific  Region. Wirecard sought a license from the Hong Kong Central Bank to expand to the Chinese market and Edo Kurniawan was instrumental for this plan. Wirecard developed the following scheme – a sum of money was transferred from a bank owned by Wirecard in Germany to show on the balance sheet of one of the Hong Kong subsidiaries. In the process, however, it made a short but important stop in the books of an external “customer’s” books to finally appear in Wirecard books in India, where it was presented to auditors as legitimate revenue. This practice involving calculated transfers of money amongst branches, which were presented as genuine business transactions, is commonly referred to as “round tripping”. Wirecard kept practicing this scam for several years with the top management of the Munich-based Wirecard headquarters fully aware of it.

Jan Marsalek – a former Austrian top manager of Czech origin, currently on the Interpol list as one of the most wanted people in the world – is the man behind Wirecard´s total collapse. Foreign media describe Marsalek as a man who lived several lives in which he engaged in diverse business and promoted his political interests. Marsalek is often mentioned, for example, in relation to Russia and GRU, the Russian military secret service. You may have read in the media that he planned to recruit 15,000 mercenaries to allegedly guard commercial projects in Libya; one can only speculate about their actual intended use. After the outbreak of the accounting scandal, Marsalek announced that he´d fly to Manila to defend Wirecard’s interests and to find out where the hell all the lost money had gone to. Philippine border guards were first said to confirm his arrival, but this story turned out to be fabricated. Handelsblatt, a German economic daily, reported that Marsalek had in fact fled Klagenfurt by a private plane – he first flew to Tallinn and then to Minsk, Belarus. He is said to be in hiding in Russia near Moscow under the protection of the Russian secret services, which most probably have taken little interest in the money, but are definitely information hungry.

It is hard to imagine this story without this particular man. Markus Braun is known as a man literally obsessed with success. When the value of Wirecard reached the staggering 24 billion euros shortly after its listing in the DAX 30, Markus Braun was said to declare, in his interview with Handelsbatt, that there was a potential for the market value to reach 100 billion euros in the coming years. On 14 July, the German supervisory authority (BaFin) filed a complaint with the prosecutor’s office pointing at insider trading [3] in Wirecard shares. Markus Braun is now in custody and the market value of Wirecard is around 2 billion.

Accounting audit

You must be now shaking your head in disbelief; how could auditors ever miss this ? Since 2008, Wirecard was using auditing services of Ernst & Young GmbH. In the auditor’s opinion, Wirecard’s financial statements, including those of 2018, provide, in all material respects, a true and fair picture of the company´s accounting in line with the law and the applicable financial reporting framework. For that reason, the statements were evaluated as “without reservations”, the best evaluation rating possible. Ernst & Young GmbH, however, refused to attach their signature to the financial statements for 2019 and Wirecard subsequently requested a review from KPMG. At the end of April, KPMG issued a review report stating that it could not verify cash balance of one billion euros in total and questioned Wirecard’s acquisition accounting. Did the auditor, which could and should have detected the irregularities earlier, make a mistake? For sure, this question cannot be answered now. By all means, we assume that it would  have helped to introduce stricter rules for the mandatory rotation of auditors. For recommended audit best practice, please stay tuned and continue reading our articles.

Who is to blame?

As there are no new findings now regarding the case, we can only speculate. The facts, however, indicate that it is not a systemic weakness in the EU legislative framework, but most probably an individual failure. The allegations so far have included, for example, unauthorized interpretation of funds in trust accounts as company’s cash, use of suspicious transactions to generate fictitious income, fictitious clients or insider trading – all the above may be interesting in the context of money laundering.

Moreover, the British Financial Times reported that Wirecard allegedly processed transactions for Centurion Bet, a Maltese online casino which laundered money for Italian mobsters ‘Ndrangheta [4]. Cooperation of these two officially regulated entities has raised many questions.

Many questions but very few answers – a good reason to continue following this agenda.

[1] Since September 2018, Wirecard was part of the prestigious DAX 30 index, which brings together the most successful German stock exchange listed companies (however, it was excluded from the index in August 2020 after it had declared insolvency in June of the same year).

[2] Wirecard provides services mainly in electronic payments, payment processing technology, credit card issuing, or financial risk management.

[3] Perpetrators of insider trading unlawfully use insider information for the benefit of themselves or others.

[4] For more information on one of the largest, most powerful, and widespread criminal organizations originally from Calabria, see: https://www.investigace.cz/ndrangheta-nejmocnejsi-mafie-sveta/


Filip Novák

Filip Novák specializes in capital markets, fintech, compliance and money laundering prevention. In the area of capital markets, it focuses on the legal and regulatory aspects of the provision of financial services and collective investment, the supply of securities and admission to trading on public markets. In the area of fintech, compliance and money laundering prevention, it focuses primarily on crowdfunding, wealthtech, financial institution compliance and AML threats associated with cryptoactive activities and the use of new technologies. He currently works at the CNB as an expert in the field of financial market regulation and international cooperation. Prior to joining the CNB, he held the position of Head of Compliance and Legal Department of a Licensed Securities Dealer and previously at the law firm HAVEL & PARTNERS.