The Wirecard scandal has all the makings of a Hollywood thriller. But what went wrong?
Learning 1: Question complex company structures
Wirecard was an electronic payments processor which launched in 1999 with promises to use the best and fastest technology. The start-up grew extremely fast and expanded worldwide. However, as Dan McCrum reports in a video about his Wirecard research on the Financial Times website, they also invented profits that never existed.
How was this possible? McCrum explains: “If you are planning a fraud, there are a couple of things that you can learn from what Wirecard did. So one of the first things is to wrap yourself in complexity”. Wirecard built up a confusing construct of partner and third party companies around itself and convinced auditors that Wirecard collected a decent commission for payments processed by these partners. However, the money wasn’t going into their own accounts, but into escrow accounts. At the beginning the fictitious profits were relatively small, but they gradually increased. At the end of 2019, after 20 years in business, these accounts were supposed to hold €1.29 billion, according to Wirecard. In fact, this money had never existed.
Learning 3: Whistleblowers need a safe environment
Wirecard had an anonymous reporting system, but the management board misused it to monitor its own employees. According to Dan McCrum, there have been whistleblowers who have reported abuse or suspicion to Wirecard. The company then started an “investigation”, but nothing happened after that. The whistleblowers then turned to the Financial Times.
A reporting system alone does not protect whistleblowers. As Dan McCrum highlighted: “It’s good if you have a whistleblower system, but if the CEO or the finance director uses it to attack the whistleblower or even to find out who the whistleblower is, then you have a problem.”
A meaningful compliance programme does not just establish structures. It must also ensure that these structures are not subject to abuse and that the reports are taken seriously.
Learning 6: When a company gets big enough people stop asking
With Wirecard, Markus Braun and Jan Marsalek weaved an opaque network of subcontractors and third-party providers behind which they could hide: “Of course, you don’t just start out and invent €1.9 billion out of nowhere. Wirecard’s fraud began with small sums of money,” said McCrum.
Over time, the fictitious profits grew larger. By the end of 2019, Wirecard was a DAX company with a market value of more than €20 billion – considerably more than Deutsche Bank. So who would really want to ask any more questions? Not the auditors from Ernst & Young. Nor the banks that granted Wirecard loans. The German authorities? Not a whisper. Besides, hardly any other German company had made investors as rich as Wirecard had in past years. Perhaps the main reason why no questions were asked.