Since last summer, the Wirecard scandal has shaken confidence in the German financial system and shed a harsh light on BaFin, the federal financial supervisory authority, whose controls have been, to say the least, flawed. Michael Roth, the Federal Minister for Europe, does not deny it and assured Wednesday before the European Parliament that Germany, assuming the rotating presidency of the EU, would push for European proposals, before the end of the year, to avoid this type of financial megascandal in the future. For information, members of the Merkel government – including Olaf Scholz, the Minister of Finance – had to explain themselves behind closed doors to the Bundestag Finance Committee at the end of July on his relations with the Bavarian firm Wirecard and his blindness. Olaf Scholz spoke of blackouts when asked specific questions.
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The story (summarized here in a document from the European Parliament) did not make much noise in France, but, in Germany, the Wirecard affair is a major earthquake which culminated in the flight of a certain Jan Marsalek, ex -Director of operations for this flagship of German fintech, whose links with the secret services are murky. The businessman, wanted by police, vanished as the company admitted that 1.9 billion euros believed to belong to Wirecard on accounts in the Philippines were “probably” fictitious. Marsalek was supposed to be responsible … This sum represents a quarter of the company’s balance sheet. The panic that followed these revelations led to the collapse of Wirecard, a fintech specializing in online payment services but which also had a banking subsidiary.
Debut in porn and online betting
The Munich-based company had climbed into DAX 30, the holy of holies of German capitalism, by falsifying its accounts and everyone saw nothing but fire, starting with the Ernst & Young auditors. The fraud probably lasted a long time despite signals issued as early as 2004 by the Federal Court of Auditors in Koblenz, which pointed to the inadequacy of BaFin controls on this “darling” of German capitalism. A 4 million euro anomaly was discovered at the time. There was no follow-up until new suspicions arose in 2015 and in January 2019 the Financial Times publishes the first in a series of articles on possible falsifications …
The fall of Wirecard – bankruptcy in the summer of 2020 – was as brutal as its meteoric rise from its founding, in 1999, to an online payment activity for pornographic content and online betting. Two circles where the underworld reigns… This should perhaps have put the chip in the ear of the various supervisory bodies, including BaFin. The problem is that the BaFin employees have bought Wirecard shares. Their discernment could have been distorted… So much so that a shadow is cast over the serious German after the dieselgate at Wolkswagen, the embezzlement at Deutsche Bank, without even going back to the dubious bankruptcy of the audiovisual magnate Leo Kirch by this same bank.
Caution by Commissioner Dombrovskis
How to avoid in the future that the controls which must regulate the financial sector do not jump one after the other? This is the question that was discussed on Wednesday in the European Parliament in the presence of Commissioner Dombrovskis, still responsible for financial services before moving on to Commerce. Since national controls have been lacking, should European supervision be strengthened?
Cautious Commissioner Dombrovskis believes that it is “too early to draw conclusions” and prefers first to analyze the failure of the controls. He is awaiting a report from ESMA (the European Securities and Markets Authority) being prepared before deciding on the remedies. “You have to look at everything from reporting requirements to monitoring,” he said. The Commission is following this case closely. Dombrovskis received the first conclusions of the ESMA preliminary investigation on July 15; he awaits further investigations at the end of October. “That being said, it would seem that the main cause of the collapse (of Wirecard, Editor’s note) is financial reporting fraud which has arguably lasted for years,” he said. We must now ask ourselves how to better protect European investors. […] It is important that the financial reports submitted by financial companies are complete. “
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The existing tools to avoid the fraud of European companies listed on the stock exchange have failed: the obligation of an internal audit as the obligation of an independent audit were, in this case, insufficient. National supervisors should oversee the work of the auditor. The EU also regulates the transparency of information provided to investors as part of the reporting process.
“The Wirecard affair is an affair of economic nationalism, analyzes Luis Garicano, the Spanish MEP Renew (Ciudadanos, centrist and liberal). Why ? Because when the Financial Times discovered the scandal, the reaction of the supervisory authorities was initially to launch an investigation into the journalist. And then to prevent the sale of shares (of the company, editor’s note) and then to turn a blind eye and defend those suspected of illicit activities. It is true that the directors were able to withdraw millions of euros from Wirecard before it went bankrupt … “The national supervisory authority does not have the incentives to investigate domestic companies. It does, but Wirecard is a national economic champion … “In short, does BaFin defend small carriers, the champions of the German economy or the financial center of Frankfurt? And who controls the controllers, namely the “Big Four” (KPMG, Ernst & Young, Deloitte and PwC)?
The “Big Four” of the audit called into question
“Without direct European control, the next scandal hangs in our face,” said German MEP Evelyn Regner (Social Democratic Group). So we absolutely have to review the control directive. It is absolutely necessary to put an end to the domination of the market by the “Big Four”. “Ms. Regner received the reinforcement of her compatriot Engin Eroglu (Renew group):” This accounting was certified by Ernst & Young who invoiced millions. They filled their pockets. We trusted Ernst & Young. And so people were like “I’m going to buy these stocks.” […] A system must be created which will make it possible to hold accountants accountable. No more checks, yes, but those who make the mistakes have to pay. “
Italian deputy Antonio Maria Rinaldi (from Salvini’s Lega) insisted on one aspect of the problem: payment by card. “The Wirecard scandal is shaking the confidence that we can have in payment cards, including prepaid cards. It is very important, however, for young people, for the most vulnerable whereas today we are pushing more and more to stop using cash. In Italy but also elsewhere, there are certain credit cards that depended on Wirecard and which, for days, did not work, and this, in the midst of the Covid emergency. So a lot of people couldn’t do their shopping. […] If you encourage people to stop using cash, then you have to avoid any conflict of interest. […] What are the links between these supervisory authorities and listed companies? “
The limited powers of the European gendarme
The Commission is being urged by many MEPs to come up with a proposal for stricter regulations, accompanied by effective sanctions. The powers of ESMA (the European policeman of the Stock Exchange) over national authorities are currently limited. ESMA can issue opinions and recommendations when national regulations appear to be defective, but little more. “The Commission intends to improve regulation and monitor progress to ensure greater convergence of supervision,” said Commissioner Dombrovskis, who does not risk encroaching on the national competences of Member States.
As MP Rinaldi pointed out, Wirecard is involved in the payment sector. Dombrovskis believes that there too will have to be an attempt, within the framework of the directive on direct payments, to prevent fraud, even if it means establishing “regulation and surveillance throughout the value chain, especially since services financial resources are increasingly technological ”. The ball is in the court of the Commission and Angela Merkel, the President of the Union until December 31.