Wirecard fraud could trigger claims in Asia

June 30 2020 by Nick Ferguson

The Philippines appears to be the scene of the crime at the centre of Wirecard’s collapse.

The German payment provider admitted last week that US$2.1 billion supposedly sitting in escrow in two Philippines banks probably “does not exist”, leading it to file for insolvency on June 25.

Also missing in the Philippines, according to some reports, is chief operating officer Jan Marsalek, who went on the run before being sacked.

Former chief executive Markus Braun, who has resigned and is facing accounting fraud charges, claimed that he and Wirecard had been the victim of “fraud of considerable proportions.”

D&O
If Braun genuinely did not know about the apparent fraud at the company that he has been running since 2002, then Wirecard’s directors’ and officers’ insurance policy could come into force. The company says in its 2018 annual report that it paid €261,000 (US$293,000) in premiums for its D&O insurance.

“There are clear indications that this was an elaborate and sophisticated fraud involving multiple parties around the world in different institutions with a deliberate aim of deception.” EY

D&O typically continues to cover claims against former executives during insolvency, whether the actions are brought by administrators, liquidators, creditors or shareholders, though the company itself will be protected from lawsuits as part of the insolvency procedure.

However, any findings of “knowing and intentional” violations of the law are likely to be excluded under the company’s D&O cover, leaving disgruntled stakeholders to pick over any wealth that Braun has left, which is mostly in the form of now-worthless Wirecard shares.

The company’s external auditor, EY, is a more obvious target for lawsuits given its failure to detect problems that had been consistently flagged by short-sellers, whistleblowers and the financial press for more than five years.

In its defence, EY did refuse to sign off on Wirecard’s 2019 accounts and defended its failure to spot the issues sooner, arguing that they were not in plain sight.

“There are clear indications that this was an elaborate and sophisticated fraud involving multiple parties around the world in different institutions with a deliberate aim of deception,” EY said. “Even the most robust and extended audit procedures may not uncover a collusive fraud.”

Unsurprisingly, lawsuits are already underway.

Trade credit
Away from D&O, Wirecard’s failure could cause disruption to payments in Asia, where the company has been extremely acquisitive – chalking up multiple offices. A subsequent rise in late payments and unpaid invoices could trigger claims in the trade credit insurance market.

Wirecard says that its IT systems are still working, but businesses that rely on its technology to process payments have been scrambling to find alternative providers, all the more urgently after the UK financial regulator froze the company’s accounts — a move that took down several prominent online banks and card companies.

In 2018, an employee in the company’s Asian headquarters in Singapore blew the whistle on allegedly fraudulent transfers via India in a so-called “round-tripping” scheme.

It’s possible that a significant portion of the company’s reported business in Asia was fictional or at least over-inflated — and that has certainly been one of the long-standing allegations. When short-sellers went in search of Wirecard’s Asian business in 2015 they found scant evidence of the thriving operation described by the company.

There have been other even more significant red flags. In 2018, an employee in the company’s Asian headquarters in Singapore blew the whistle on allegedly fraudulent transfers via India in a so-called “round-tripping” scheme.

Local law firm Rajah & Tann was hired to conduct an independent investigation, which Wirecard insisted “did not produce any findings having a material impact on the company’s assets or on its earnings and financial position”, though a final report was never published.

Authorities in Singapore were already pursuing a criminal investigation as a result of those findings and have now vowed to widen their probe.

However, while the scale of Wirecard’s Asia business might have been exaggerated, there is no doubt that it had some legitimate operations. In 2017, for example, it agreed a deal with Citi to buy its credit card acceptance business in the region, which comprised a customer base of more than 20,000 merchants in 11 markets.

Most recently, it announced a deal in March to process payments for Grab’s e-wallet, which is accepted by more than 600,000 merchants and small businesses across South-East Asia, starting in Malaysia, the Philippines and Singapore. That deal had not yet become operational and has now been scrapped.

Outcome
It remains to be seen what will remain of Wirecard when the dust settles. Many commentators have said the case ought to lead to greater scrutiny of the fintech sector, but critics had long been asking the company’s regulators and auditors to provide even a bare minimum of scrutiny.

To blame the oversight failures on issues unique to the fintech sector would be to draw the wrong conclusions.

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