Wirecard: the frantic closing months of a fraudulent operation

The codename was “Undertaking Panther”. Markus Braun, the chief govt of German funds group Wirecard, had employed McKinsey & Co to assist put together his most audacious thought but, a plan to take over Deutsche Financial institution.

In a 40-page presentation final November, the consultants insisted the brand new entity, to be dubbed “Wirebank”, can be “pondering and performing like a fintech, on the scale of a world financial institution”. By 2025, it may generate €6bn in further revenue, McKinsey claimed.

Whereas Germany’s largest financial institution sat on €1.4tn in belongings, it was price a mere €14bn on the inventory market, roughly the identical as Wirecard. The McKinsey report promised that the mixed inventory market valuation would double to shut to €50bn.

A deal to accumulate Deutsche Financial institution would have been the crowning achievement for an organization which inside just a few years had turn into one of the crucial worthwhile within the nation, profitable the label of “Germany’s PayPal”. An upstart monetary know-how firm can be working Germany’s most illustrious financial institution.

A tie-up with Deutsche Financial institution had one other potential attraction: a deal supplied the prospect of a miraculous exit from the huge fraud Wirecard had been working. Round €1.9bn in money was lacking from its accounts and enormous elements of its Asian operations had been truly an elaborate sham. By mixing Wirecard’s enterprise into Deutsche’s huge steadiness sheet, it is perhaps attainable to in some way disguise the lacking money and clarify it away later in post-merger impairment expenses.

There was one catch. To even begin getting ready such a deal in earnest, the corporate wanted to get a clear invoice of well being from KPMG, which was conducting a particular audit of Wirecard’s books.

The approval from KPMG by no means got here.

Six months later the curtain fell on Wirecard. On June 25, the group collapsed into insolvency after it was uncovered as certainly one of Germany’s greatest postwar accounting frauds. Prosecutors in Munich suspect that €3.2bn in debt raised since 2015 has been “misplaced”. Round €1bn was handed out in unsecured loans to opaque enterprise companions in Asia.

Mr Braun, who denies allegations of fraud and embezzlement, and three different former prime managers are in custody. Jan Marsalek, Wirecard’s former second-in command, is on the run and the boss of a key Wirecard enterprise accomplice within the Philippines has been registered useless.

The Monetary Occasions talked to greater than a dozen individuals concerned and reviewed lots of of pages of inside paperwork to reconstruct the ultimate months earlier than Wirecard’s collapse. They reveal a determined effort stretching from Munich to Manila to cowl up the fraud and to hoodwink the corporate’s auditors that continued proper as much as the very finish.

“The brazenness of Marsalek [and others], who continually lied straight by way of their enamel, is simply thoughts blowing,” says one one that was working carefully with them in a senior place at Wirecard’s Aschheim headquarters close to Munich.

Audit arguments

The disaster within the firm started with an FT story revealed on October 15 2019 — the most recent in a string of investigations into the corporate’s accounts — that defined how Wirecard appeared to fraudulently inflate gross sales and earnings. Wirecard shares plunged however a relaxed Mr Braun brushed away the accusations. Three days later the corporate introduced a €200m share buyback.

Behind closed doorways at Wirecard, nevertheless, a heated debate broke out. Thomas Eichelmann, Deutsche Börse’s former finance director who had joined the board in June 2019, pushed for an unbiased audit into the allegations, in keeping with two individuals accustomed to the discussions. The proposal was supported by SoftBank, which had invested €900m into Wirecard just a few months earlier.

The corporate’s longstanding chairman Wulf Matthias was deeply sceptical. Simply days earlier than KPMG was employed, he advised the FT that the allegations had been “an annoyance” and argued a particular audit was pointless as Wirecard’s accountant EY was “evaluating the issues sufficiently”.

Mr Braun, whose 7 per cent stake in Wirecard was price greater than €1bn on the time, additionally opposed the audit thought. However a joint effort by SoftBank and the supervisory board swayed him. “We advised him that he wanted the audit to guard himself and his cash,” says an individual who was concerned within the discussions.

In November, 40 forensic accountants from KPMG began to dig by way of Wirecard’s books. They had been promised entry to any knowledge they wanted, and Wirecard had publicly dedicated to publish the end result.

Inside just a few days, KPMG realised that Wirecard’s core funds processing operations in Europe weren’t making any cash — a indisputable fact that Wirecard had by no means disclosed to buyers. The entire revenue was generated by the operations overseen by Mr Marsalek: Wirecard’s Asia enterprise, the place the processing of transactions was outsourced to third-party enterprise companions.

By January, Wirecard had a brand new chairman, with Mr Eichelmann succeeding the 75-year-old Mr Matthias, who had been accountable for the board for greater than a decade.

Mr Eichelmann was scathing about Wirecard’s haphazard inside buildings. “Even when I had been working a chippy I’d do it in a different way,” he advised a confidant.

Nonetheless, the brand new chairman didn’t consider that Wirecard was concerned in fraud, partly due to the group’s sturdy money era. In response to an individual accustomed to his views, he was satisfied that it was “extraordinarily laborious if not inconceivable to faux money flows”.

Fantasy accounts

With the KPMG investigation in full circulation, the Wirecard executives allegedly behind the fraud noticed Undertaking Panther and a take care of Deutsche, which was first reported by Bloomberg, as one attainable technique to fend off discovery, says an adviser to the funds group who was concerned within the discussions. However additionally they labored on a separate plan: an unlimited cover-up operation in Asia.

They needed to repair the weakest hyperlink — and shortly. For years, Wirecard had advised EY that enormous sums of firm money had been deposited in escrow accounts held by a trustee at Singapore’s second-largest financial institution, OCBC.

The accounts, it seems, had been fantasy. But EY, for years, had been content material with steadiness confirmations issued within the identify of the trustee, an organization named Citadelle whose director R Shanmugaratnam was charged this month over falsification of accounts in Singapore.

Sven-Olaf Leitz and Alexander Geschonneck, the 2 veteran KPMG companions working the particular audit, advised Mr Braun and different senior Wirecard executives that the paperwork on the escrow accounts weren’t adequate. They insisted on seeing unique paperwork, ideally straight obtained from OCBC.

It took nearly two months earlier than Mr Marsalek offered an obvious resolution. Wirecard’s second-in-command knowledgeable the auditors that the corporate had moved the financial institution accounts to a brand new trustee based mostly within the Philippines. Citadelle, stated Mr Marsalek, had abruptly terminated the enterprise relationship in late 2019 and was not responding to inquiries from Wirecard any extra.

In response to Mr Marsalek, Manila-based lawyer Mark Tolentino had stepped in as a alternative for Citadelle. Wirecard had subsequently transferred €1.9bn in money in early December from OCBC to escrow accounts in Mr Tolentino’s identify at two banks within the Philippines, BDO and BPI.

KPMG requested once more for the paperwork — and made a stunning discovery. By February — two months after the cash was supposedly paid into Mr Tolentino’s accounts — Wirecard nonetheless didn’t have a contractual relationship with the brand new trustee, nor had it performed background checks on him. Wirecard’s chief monetary officer, Alexander von Knoop, solely discovered concerning the transaction in late January.

But by mid-February, Wirecard’s outlook appeared to be bettering. It had received the help of two of Germany’s greatest asset managers, DWS and Union Funding, and its share worth was again to the extent it was at earlier than the FT report in October.

The preliminary full-year outcomes, revealed on February 14, vindicated the optimists. As soon as once more, Wirecard smashed analyst expectations and Mr Braun gave bullish steerage. When coronavirus escalated just a few weeks later, Wirecard was one of many few firms globally claiming that its full-year efficiency can be unaffected.

Manila conferences

Some senior executives had began to really feel uneasy. “I actually hope Jan [Marsalek] can be delivering,” Susanne Steidl, the chief product officer overseeing Wirecard’s enterprise exterior Asia, advised a confidant, including that the operations she was answerable for had been doing poorly.

But Mr Marsalek was in any other case tied up. He needed to in some way persuade KPMG and EY — the latter was auditing the 2019 outcomes — that Wirecard’s enterprise in Asia was real.

Mr Marsalek organized a sequence of conferences in Manila on March Four and 5, introducing senior KPMG and EY workers to the brand new trustee Mr Tolentino, in keeping with paperwork seen by the FT. He additionally accompanied KPMG and EY to branches of BDO and BPI the place workers handed over account statements. Mr Tolentino, who is known as in a number of audit paperwork by KPMG and EY, denies any wrongdoing and says he has been framed. “I’m not the trustee of Wirecard,” he advised the FT. “I by no means signed any doc with Wirecard. They dedicated id theft.”

A day later, Mr Marsalek and the KPMG workers met Christopher Bauer, the boss of a key Manila-based enterprise accomplice for Wirecard, who was reported useless just a few months later. Mr Bauer ran PayEasy, which processed “high-risk transactions” for Wirecard — principally funds for pornography, playing and gaming. On paper, PayEasy in 2018 was producing greater than a fifth of Wirecard’s working revenue.

KPMG was nonetheless unconvinced. For months, requests for conferences with key workers of different Wirecard companions in Dubai and Singapore had been stonewalled. Granular transaction knowledge from the outsourcing companions was not accessible, and financial institution paperwork from the Philippines didn’t present that the money was held on behalf of Wirecard. In early March, KPMG advised Wirecard it was near pulling the plug on the particular audit, in keeping with an electronic mail seen by the FT, because it had run into an insurmountable “impediment to the investigation”. Determined to keep away from such a catastrophic end result, the supervisory board prolonged KPMG’s mandate.

An hour earlier than midnight on March 12 — with panic over coronavirus overwhelming the markets — a delay of the KPMG report till April 22 was publicly disclosed.

The primary draft of the KPMG report was hand-delivered by courier to the members of the supervisory board on the night of April 19, in individually watermarked paper copies. It was a relentless doc, spelling out intimately administration’s technique of delay and obstruction in addition to the numerous inconsistencies and open questions over the existence of Wirecard’s Asia enterprise.

KPMG’s Mr Leitz and Mr Geschonneck detailed shortcomings in Wirecard’s inside controls and compliance features and outlined extreme doubts concerning the firm’s accounting practices. “The primary draft was much more devastating than the model that was ultimately revealed,” says one individual accustomed to the varied variations of the draft.

Wirecard’s supervisory board briefly mentioned if Mr Braun, Mr Marsalek and Mr von Knoop must be sacked, however solely Anastassia Lauterbach, head of the chance and compliance committee, supported that concept, in keeping with two individuals accustomed to the inner discussions. Ultimately, the board requested the auditors for one more extension. The second delay was disclosed to the general public late on the night of April 22, the day when the report was alleged to be revealed. “No proof was discovered for the publicly raised allegations of steadiness sheet manipulation,” Wirecard stated.

That was a brazen distortion of the talks with KPMG. Some members of the supervisory board had been shocked — one even thought-about resigning with rapid impact.

Whereas KPMG was working frantically on the ultimate model of its report, EY stepped up its scrutiny of Wirecard’s Philippine financial institution accounts. Unable to journey because of the pandemic, it held a video convention with the 2 banks within the Philippines on April 24.

The auditors requested the financial institution workers to carry their IDs to the digital camera. Whereas the decision was ongoing, EY tried to confirm the identities, however couldn’t discover any of the individuals on social media. Some senior EY workers now suspect that actors might need been posing as financial institution workers through the video name, presumably in a mock-up financial institution department.

The ultimate model of the KPMG report was delivered to Wirecard on April 27. Probably the most explosive particulars had been hid in a confidential appendix that had 3 times as many pages because the revealed report. However even the abstract of the important thing outcomes, which was earmarked for publication, was devastating sufficient. It clearly described that KPMG neither verified the existence of the outsourced enterprise nor the money within the escrow accounts, and it described the dogged obstruction by Wirecard and its enterprise companions.

Wirecard’s unravelling

Oct 15 2019

FT publishes proof that Wirecard fraudulently inflates gross sales and earnings

oct 21

Wirecard mandates KPMG to hold out a particular audit into allegations reported by the FT

jan 10 2020

Wulf Matthias resigns as Wirecard chairman. Thomas Eichelmann appointed

mar 12

KPMG report delayed till April 22, publication of Wirecard’s 2019 full-year outcomes moved to April 30

apr 28

KPMG report revealed after one other delay, publication of full-year outcomes moved to June 4, then postponed once more to June 18

jun 18

Publication of full-year outcomes cancelled after EY informs Wirecard that paperwork confirming €1.9bn in money are “spurious”, based mostly on an electronic mail from BPI

JUN 19

Chief govt Markus Braun resigns, chief compliance officer James Freis — who started his job sooner than deliberate on Jun 18 — appointed new CEO

jun 22

Braun is arrested and launched on €5m bail in the future later

jun 25

Wirecard AG information for insolvency

Wirecard’s executives and board debated the entire evening about the best way to proceed. Mr Marsalek argued that the corporate ought to simply chorus from publishing the report, says somebody current on the conferences. However this concept was rejected even by Mr Braun. Wirecard determined to concentrate on the seemingly constructive information — that KPMG had discovered no proof of open fraud, and was not calling for a restatement of accounts.

On a name with journalists on April 28, Mr Braun known as the KPMG report a “huge step ahead”. Later that day, he advised analysts that “EY knowledgeable us this morning that they don’t have any drawback in any respect to log out the audit 2019.”

The truth is, EY was additionally more and more sceptical. It now demanded that Wirecard switch €440m in 4 batches from the Philippine financial institution accounts to Germany as proof the corporate was actually in a position to entry the cash.

Wirecard’s administration stated this may not be an issue. Mr Braun and Mr Marsalek assured on a number of events that the €440m from the Philippines was nearly to reach. Based mostly on the belief that this was true, EY continued to organize to provide Wirecard’s 2019 accounts a clear invoice of well being. On June 2, it shared an “all clear” draft audit opinion with Wirecard.

Ultimately, nevertheless, EY determined to go straight to the Philippine banks to certify the authenticity of the paperwork confirming the €1.9bn. The banks didn’t reply instantly and solely engaged after a senior EY worker spoke privately to their chief executives.

On June 16, EY Germany obtained an electronic mail straight from BPI that turned out to be the decisive second. “Please learn that the hooked up paperwork are spurious,” BPI’s authorized division wrote. “Due to this fact the financial institution can’t present any info relative thereto.”

EY knowledgeable Germany’s monetary watchdog BaFin of BPI’s letter at 5.28pm on June 16, in keeping with a doc seen by the FT. The same letter from BDO adopted in the future later.

At Wirecard’s headquarters, most individuals had been shocked. “When the primary letter [from the Philippine banks] arrived, everybody began to google the phrase ‘spurious’, after which was in utter disbelief,” remembers one individual with first-hand information. Two individuals, nevertheless, had been completely calm and relaxed: Mr Braun and Mr Marsalek.

“It’s all an enormous misunderstanding which can be resolved quickly,” the chief govt repeatedly stated.

On the morning of June 18, the €440m from the Philippines had nonetheless not arrived. “Every thing is feasible. We’re swaying between disaster and all high-quality,” Mr Marsalek texted to a confidant at 9.03am, in keeping with an trade seen by the FT. He added: “We’re ready for enter from a financial institution. If we obtain that, all the pieces can be high-quality. If not, EY will go completely loopy.”

James Freis, who was supposed to affix Wirecard on July 1 as its new chief compliance officer, was flat looking in downtown Munich on the morning of June 18, when he obtained a telephone name from Mr Eichelmann, who implored him to instantly be part of an emergency board assembly. “We’re in disaster mode,” Mr Freis was advised by the chairman.

Whereas the 2 girls on the supervisory board known as for the rapid dismissal of Mr Braun, their three male colleagues thought in any other case, say two individuals accustomed to the discussions. The board couldn’t even discover a majority to sack Mr Marsalek — as a consequence, he was briefly suspended for the subsequent 12 days.

Mr Marsalek retreated to Mr Braun’s workplace, the place each had a protracted dialogue behind closed doorways. “It regarded like a really intense dialog,” remembers one insider who entered Mr Braun’s workplace, solely to immediately retreat when he noticed what was occurring. Outwardly, Mr Marsalek was unfazed — workers noticed him strolling round Wirecard’s govt flooring, whistling.

Mr Braun and the remainder of the board then recorded a video message. The chief govt briefly launched Mr Freis, who needed to borrow a jacket for the looks. Mr Braun will be seen standing behind a desk, studying a brief message to buyers, through which he tried to painting Wirecard — and himself — as victims. “At current it can’t be dominated out that Wirecard AG has turn into the aggrieved celebration in a case of fraud of appreciable proportions,” he stated. No reference was made to the lacking €1.9bn.

When the video was launched on Wirecard’s web site previous midnight, Mr Freis was already poring over inside paperwork. Throughout the evening, he concluded there had been a fraud. On Friday morning, he requested a gathering to transient Mr Eichelmann.

The supervisory board met once more and concluded that the chief govt needed to go. Mr Braun pre-empted his sacking by saying his resignation — his dream of buying Deutsche Financial institution had changed into a nightmare. Two Wirecard workers escorted him out of the constructing. Lower than every week later, the corporate filed for insolvency.