Wirecard was once a high-flying international Fintech, founded in 1999 and listed on the prestigious DAX index in 2018. The German company offered a range of services including transaction processing, risk management and the issuing and processing of payment cards.
In June 2020, the company’s auditor, Ernst & Young detected a €1.9 billion discrepancy in the accounts. CEO Markus Braun resigned and was arrested. On June 25, 2020, Wirecard filed for insolvency. A warrant was also issued for the arrest of former Chief Operating Officer, Jan Marsalek who is on the run. According to the Financial Times, Marsalek is a person of interest to three western intelligence agencies, which are intrigued by his association with Russia’s military intelligence agency and his secretive para-military projects in Libya and Syria.
The insolvency of Wirecard is inflicting major losses on its creditors and business partners. But due to the systemic nature of payments, it also has far-reaching implications beyond its immediate stakeholders.
The reputational damage for Wirecard’s auditors Ernst & Young is huge. The company is quoted in the Financial Times as saying there were “clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception”, adding that “even the most robust and extended audit procedures may not uncover a collusive fraud”.
But the scandal also places financial regulators under the limelight. Speaking at conference, the head of German regulator BaFin said “a whole range of private and public entities including my own have not been effective enough” at preventing this “complete disaster”. EU vice-president in charge of financial services Valdis Dombrovskis, told the Financial Times that he was asking the Union’s top markets supervisor to assess BaFin’s handling of Germany’s fallen fintech champion. He added the EU should be prepared to pursue a formal investigation into the German regulator for “breach of union law” if the preliminary probe by the European Securities and Markets Authority discovered shortcomings in BaFin’s upholding of EU rules on financial reporting. In the UK, where Wirecard has a subsidiary, the Financial Conduct Authority has issued new guidelines to payment service and e-money providers to protect customer’s funds 13 days after the collapse of the German group.
But those who suffered the most were the end users of Wirecard services. Following the insolvency of the parent company, its UK subsidiary WCS was ordered to suspend operations to avoid that money was transferred to Germany. This left millions of users of pre-paid cards, mobile money apps with their accounts frozen. This is irritating if you have alternative payment methods or several bank accounts.
It is far more distressful if you rely exclusively on these services. Several WCS customers including Pockit, Anna and Morse Club’s specialize in underbanked customers who struggle to open accounts with mainstream banks. Amongst the beneficiaries of the cards were victims of human trafficking and modern slavery who rely on funds from a government scheme that was an indirect Wirecard customer. “One victim had to rely on leftovers from a Red Cross food parcel for three days after the UK government was also caught up in the problems”, reports the Financial Times.
These victims were probably not even aware they were the end users of Wircard payments services.