Wirecard: Inside and Outside the Tsunami

There’s no shortage of articles in the press this week and last about the start of the prosecution of Wirecard executives for fraud, but how is it possible that such a large-scale fraud took so long to emerge?

I first came across Wirecard in 2002. As has been detailed in Dan McCrum’s excellent book – they were an intriguing set of individuals. I had never in my life encountered anyone quite like Paul Bauer - the boss on that first encounter - unbuttoned shirt, extravagant hair with a palatial office looking like a scene from a lifestyle magazine, he acted more like a movie star than a CEO.

My colleagues and I were treated lavishly - allowed to borrow a BMW from the company fleet to zoom down the autobahn from their offices to our hotel and back again. We did get a sense of a bit of a divide in the company ranks. While the bosses were confident superstars, others we met were much more buttoned up and Teutonic and even a little nervous.

My company back then was looking for a way to process card transactions on behalf of our customers and Wirecard was already establishing a reputation as a company that could find ways to do things that others couldn’t or wouldn’t. The internet was young. Google was 4 years old. Facebook hadn’t been established. The infrastructure for online payments was not established, so it was great to find a practical company who took a pragmatic approach.

It wasn’t until my next engagement with Wirecard in 2005, that I would get to meet Dr Markus Braun and get to know Jan Marsalek - now quite literally the posterboy for Wirecard. While there was still plenty of confidence, it was reassuring to be dealing with Markus rather than Paul Bauer. Here was an ex-KPMG guy. He might have even been wearing a tie. He was someone we could do business with.

And - as many have said - Jan was remarkable - an utter workaholic. He told me once that he and his girlfriend went ice climbing on holiday as he didn’t like chilling out. He was the ultimate can-do guy. The project I was working on at the time kept shifting, often violently, but nothing was a concern to Jan. He would ruminate for maybe 20 seconds and say “No problem, Gabriel. Yes - we can make that work”.

What’s my point? As the Wirecard trial starts, I think everyone is curious about how the fraud went on for so long. It’s easy to think of everything that ever happened at Wirecard as being fraudulent and that wasn’t the case, certainly not back in 2005. The company was extremely ambitious - issuing credit cards, applying for banking licenses and looking to revolutionize financial services. At that point, Jan, Markus and the others still saw themselves as business pioneers.

However, most frauds start small and the roots of Wirecard’s later crimes were there all the way back to the start of the millennium.  In some ways the patterns were pretty consistent. The business image that Wirecard put out - as a reputable provider of banking services - and the reality - as a processor of questionable transactions - did not align. Wirecard relied on the questionable transactions to pay the salaries but that likely was unclear to many investors.

The real problems started in 2006/2007 – ironically with enforcement of the Wire Act and the new Unlawful Internet Gambling Enforcement Act in the US. Those involved in enabling internet gambling were getting arrested at US airports and ecosystem players like credit card companies started to close ranks. The Wirecard revenue that had been in a gray area suddenly became untenable or, at best, extremely difficult to maintain.

It seems that from that point onwards, the gloves were off, and the risks and deceits went from bad to worse. There’s a couple of interesting observations to make about human nature here.

Firstly, the financial hole inevitably got bigger and bigger and so the lies got bigger and more creative too. I’m sure those responsible must have been telling themselves that Wirecard’s stodgy legitimate businesses would eventually grow to fill the void before the quicksand sucked them under. Maybe that might even have happened if the later Deutsche Bank reverse takeover had happened.

Maybe more concerningly, those who wanted Wirecard to succeed were totally blinded to reality. You could argue that includes not just some very clever investment bankers, but also Angela Merkel and a host of experienced politicians. Germany desperately wanted a cool tech company and Wirecard looked the part. Markus Braun had stopped wearing ties a long time ago, now he switched and started wearing turtleneck t-shirts - just like Steve Jobs.

Even the German regulator, BaFIN, was caught in the spell. When the Financial Times started to report that there might be irregularities with the firm in 2015, BaFIN accused the FT themselves of involvement in short-selling and launched an investigation into the newspaper and the short-sellers.

The preference by outside observers to look for and accentuate positives about the company surely elongated the Wirecard scam for several years. We should be thankful for the work of a number of monitoring and reporting organizations – particularly the Financial Times and their reporter Dan McCrum – who pursued Wirecard from 2008 onwards.

What can we learn from the Wirecard experience apart from the fact that small lies grow into big lies and outside observers with a financial interest tend to turn a blind eye to even the most evident signs of nefarious activity?

Although it took a few years, the news media and others successfully identified and reported the company’s wrongdoing. In retrospect, I’m sure Wirecards’s bankers, suppliers and partners wish they had taken a comprehensive approach to screening the company and all their counterparties for risk. A successful Adverse Media screening solution provides powerful risk signals about accusations of fraud, bribery, corruption, and other risks early.

Increasingly, compliance professionals are turning to Adverse Media solutions - sometimes known as Negative News - in tandem with more traditional Sanctions, PEPs and watchlist checks - to fully manage counterparty risk and regulators - including those in Europe - are increasingly encouraging those organisations they regulate to use adverse media.