Ten days after police raided Wirecard’s Singapore office in February 2019 over allegations of accounting fraud, Germany’s financial regulator made its own move.
BaFin banned investors from betting against Wirecard shares for two months, the first such restriction on an individual company in German stock market history. That was quickly followed by a criminal complaint against two Financial Times journalists who had reported the whistleblower allegations about the payments company.
Less than 18 months later, it is German regulators who are coming under fire for failing to investigate what increasingly appears one of the country’s worst ever accounting scandals. Wirecard shares have crashed more than 80 per cent in recent days as the company acknowledged the potential scale of a multiyear fraud.
“The Wirecard scandal did not come out of the blue,” said Florian Toncar, a member of parliament for the business-friendly FDP. “It’s a mystery to me why the finance minister and BaFin did not shed light on the matter much earlier.”
There is no single reason for the failings of Germany’s regulatory apparatus, according to academics and the handful of politicians who over the past year became alarmed at the gravity of the problems emerging at Munich-based Wirecard.
They instead point to a corporate culture historically wary of foreign speculators, a refusal to doubt what appeared a rare German tech champion and, more specifically, the inability of Germany’s regulatory system to deal with a payments company.
“My impression was for a long time that Wirecard was seen as this delicate homegrown plant that needed to be protected,” said Fabio De Masi, a Berlin lawmaker with the leftwing Die Linke party and one of the few politicians to take an interest in the Wirecard scandal early on.
“Anyone asking awkward questions about its business “was seen as trying to run down Germany and its finance sector”, he added.
That attitude changed this week, and even BaFin was moved to issue a mea culpa. Felix Hufeld, its president, told attendees of a conference on Monday that “a whole range of private and public entities including my own have not been effective enough” at preventing the “complete disaster” at Wirecard.
Felix Hufeld, BaFin president © Bloomberg
Gerhard Schick, a former Green MP and now head of Finance Watch Germany, a pro-consumer lobby group, said that part of BaFin’s inertia over Wirecard stemmed from an institutional inability to carve out its role in a fluid and complex environment.
“Wirecard is yet another example showing that BaFin is systematically failing to cope with complex situations where it does not have a clearly defined legal remit but needs to define its own role,” said Mr Schick, who describes the watchdog as “too formalistic and timid”.
A limited legal remit means that, unlike its counterparts in many countries, BaFin lacks the power of a criminal prosecutor and has limited authority to investigate potential accounting manipulations. Moreover, it has traditionally been dominated by lawyers who take a very narrow view on its role.
In practice that meant Wirecard was treated as a technology company rather than a financial services provider, putting the holding company outside BaFin’s direct oversight even as it regulated Wirecard Bank.
“It is unacceptable that a big payments service provider enters the Dax, and nobody at the upper echelon at BaFin is asking the question how it is supervised,” said Mr Schick.
It is a view echoed by Sascha Steffen, professor of finance at Frankfurt School of Finance & Management. “There seems to have been a ‘wasn‘t me’ attitude,” towards the question of who was responsible for regulating Wirecard, he said.
In a statement in May, Wirecard said that the Financial Reporting Enforcement Panel (FREP), Germany’s accounting watchdog, had scrutinised its accounting in the past without finding fault. FREP could not be reached for comment.
With the crisis now escalating, BaFin has sought to ringfence Wirecard Bank, the lender that the payments group has owned for more than a decade and one that acts chiefly as a way of collecting money from card issuers and distributing it to merchants.
The regulator has installed a special representative in the bank’s headquarters to monitor the bank management’s decisions and ensure it complies with regulations, according to people familiar with the matter.
It has also imposed a partial payments ban to prevent the lender, which had €1.9bn of assets at the end of last year, from transferring certain assets to Wirecard, the people said. Wirecard declined to comment.
Although Mr Hufeld acknowledged failings earlier this week, he remains unrepentant about the short selling ban BaFin imposed in early 2019. It was, he insists, designed to defend the integrity of the wider market and followed “compelling evidence” from Munich prosecutors of market manipulation.
“It is utter nonsense to trivialise [the short selling ban] to a battle ‘Frankfurt versus London’,’’ or see it as an attempt to protect “a youngish German company against foreign intruders”, he said this week.
But as the scandal unfolds in the coming weeks, concern over the damage inflicted on the reputation of Germany’s capital markets is likely to grow.
Peter Altmaier, the country’s economy minister, demanded a full investigation on Tuesday. “It’s really important to me that such a case never happens again — for the sake of confidence in the German banking system,” he said. Finance minister Olaf Scholz described the Wirecard case as “extremely worrying”, and said that “critical questions also arise about the supervision of the company”.
On July 1, Mr Hufeld will have the opportunity to explain his view when the he testifies before the Bundestag’s finance committee. The stakes for BaFin’s embattled boss and the reputation of corporate Germany are high.