Due diligence failure: The Wirecard scandal

7 min read
Jun 10, 2024 2:46:30 PM

Due diligence failure: The Wirecard scandal

In June 2020, the DAX-listed FinTech company Wirecard hit the headlines with a bang. The company had to announce that it was missing 1.9 billion euros. In the past, Wirecard was primarily known to yield-hungry investors who were hoping for a miraculous increase in money with the payment service provider. But then everything collapsed. Fraud, corruption and embellished balance sheets came to the fore and the beautiful facade collapsed. The share price plummeted by an incredible 98% in those days and countless investors lost a lot of money as a result. Naturally, the leading figures such as CEO Markus Braun and COO Jan Marsalek also came under public and legal scrutiny. The Wirecard case became one of Germany's biggest financial scandals, not least due to the complete failure of due diligence checks.


The Wirecard collapse was one of the most spectacular company collapses in Germany's economic history. What makes the case so extraordinary is the fact that not only renowned auditors such as Ernst & Young (EY) got into trouble as a result of the collapse, but also politicians who had directly or indirectly "adorned" themselves with the shooting star of the financial sector in previous years. Before we look at the failings of the financial market regulator and the failure of the auditors, let's take a brief look at the former high-flyer.

Who is Wirecard?

Founded in 1999 and based in Aschheim near Munich, the German FinTech Wirecard was the shining star of the German FinTech sector until shortly before its insolvency. As a payment processor and financial services provider, the company was an absolute exception. Both in Germany and in Europe, there were hardly any comparable players in this sector that could keep up with the major US payment service providers such as PayPal. Wirecard expanded to 26 locations worldwide with 5,800 employees. According to its own figures, the company processed payments for more than 280,000 companies. When Wirecard was valued at 27 billion US dollars in 2018, the FinTech company was worth more than Deutsche Bank. In September 2018, the Munich-based financial services provider was finally included in the DAX 30 index, replacing Commerzbank, which was now listed in the M-Dax. 

The beginnings of the Wirecard scandal

Wirecard's descent began at the end of January 2019. This was triggered by a report by Financial Times journalist Dan McCrum about a senior manager at the company in the Asia-Pacific region. He was accused of falsifying accounts and laundering money. This was based on an internal presentation from May 2018, which was passed on to the Financial Times by a concerned whistleblower.

The neglect of internal controls was to prove fatal for Wirecard. Despite concerns expressed by critical investors in previous years, the company repeatedly managed to dispel doubts. The leaked presentation provided detailed information on dubious transactions in the mid double-digit million range. These included, for example, invoices from companies such as Flexi Flex from Singapore, which had no business relationship with Wirecard. Likewise, round-trip transactions were used, a fraudulent accounting technique.

The list of questionable transactions in the Asia-Pacific region grew longer and longer. Wirecard pulled out all the stops to make the scope of its business activities appear larger. In doing so, the company referred to allegedly conducted due diligence checks and the audit certificate from Ernst & Young (EY) to nip concerns in the bud. The rapid sales and profit growth between 2015 and 2018 led to a quadrupling of the share price, which was cheered by investors. However, behind the nice sales figures was mostly just hot air.

The collapse of Wirecard

As a result of the article in the Financial Times, the share price fell by more than 13% in 2019. It was just the first warning shot. The big bang came on June 18, 2020, when an ad hoc announcement was distributed via the stock market ticker in the morning. It stated that the publication of the 2019 annual financial statements would be postponed due to indications of incorrect balance confirmations. On this day, Wirecard's share price plummeted by up to 70% as investors sold their shares in panic. 

EY refused to certify the 2019 balance sheet. This put bank loans of around EUR 2 billion at risk, which were now at risk of being terminated, and the ad hoc announcement referred to cash of EUR 1.9 billion, which it was not certain even existed. These were supposedly deposited in Asian trust accounts, which shortly afterwards turned out to be false information. On this one day, Wirecard's stock market value of 7.6 billion euros was destroyed.

When Wirecard announced in a further ad hoc announcement on June 22, 2020 that balances of over EUR 1.9 billion most likely did not exist, the share price collapsed further. On the same day, CEO Markus Braun resigned and was subsequently arrested. After three days, an arrest warrant was also issued for COO Jan Marsalek, who was dismissed without notice on the same day and went into hiding shortly afterwards. Wirecard finally filed for insolvency on June 25, 2020.

Failure of supervision and management

It was not only Wirecard's Supervisory Board that failed, but also Germany's banking supervisory authority BaFin. It adopted the view of Wirecard's management and saw the company as a victim of speculators trying to depress the share price. This explains why BaFin issued a ban on short selling for shares in the DAX company from February to April 2019. The move was justified with the argument that financial market stability and market confidence in Germany were under serious threat (partly due to critical reporting by the Financial Times).

It is obvious that there was too much closeness between BaFin employees and Wirecard. There was a lot of insider knowledge at BaFin. Many employees used this to trade Wirecard shares. They were therefore actively involved in matters that they were supposed to be supervising. Many also criticize BaFin for not being properly positioned to combat financial crime and therefore failing time and time again.

Political support and blindness 

Politicians were blinded by Wirecard's meteoric rise. Germany finally had a major FinTech company that could play in the global premier league. For many, it was inconceivable that a German DAX-listed company could be so brazen as to falsify account documents and simply invent billions in turnover. After all, German political celebrities also actively supported Wirecard. For example, former German Defense Minister Karl-Theodor zu Guttenberg in his role as a lobbyist when he asked Chancellor Angela Merkel to support the company in its market entry in China. One topic during her talks with the Chinese leadership was the opening of the Chinese financial market to German companies. It was no coincidence that Wirecard ended up on the list of recommendations.

Consequences of the Wirecard scandal

The Wirecard scandal was a wake-up call for politicians and authorities. Not all questions regarding responsibilities have yet been clarified, and the legal process remains protracted. While former CEO Markus Braun is in custody, there is still no trace of his former partner, former COO Jan Marsalek. An international search is being conducted for him, but so far without success. It is suspected that he may have fled to Belarus or Russia to avoid arrest.

Committee of Inquiry of the German Bundestag

At the request of three opposition parliamentary groups in the 19th German Bundestag, a committee of inquiry was set up in September 2020 and began its work in October 2020. By March 2021, a total of 67 people had been questioned. In addition to members of the Supervisory Board of Wirecard AG, the interviewees included members of auditing firms, supervisory institutions and federal authorities. FT journalist Dan McCrum, who started the ball rolling at the beginning of 2019, was also interviewed. The final report was presented on June 22, 2021.

Legislative initiatives in response 

As a consequence of the Wirecard case, the German government has introduced numerous measures to prevent cases such as Wirecard. These include an improved balance sheet control system to prevent balance sheet manipulation in future. To this end, an action plan was presented to initiate far-reaching legislative reforms. As a result, the Act to Strengthen Financial Market Integrity was passed by the German Bundestag in May 2021. The law contains a tightening of balance sheet controls, stricter rules for audits and a tightening of criminal accounting law. It also provides for a reform of corporate governance and gives the Central Office for Financial Transaction Investigations extended powers. The law also restricts private trading by BaFin employees in financial instruments in order to avoid potential conflicts of interest.

Lessons learned from the Wirecard scandal

Not only legislators, but also NGOs and analysts have drawn their conclusions from the Wirecard case. Transparency Deutschland calls for strict liability rules for auditors in the event of a breach of due diligence obligations. The NGO attributes the Wirecard scandal primarily to the systematic lack of comprehensive due diligence management and emphasizes its importance in the financial services sector. According to Transparency, further lessons that need to be learned from the Wirecard scandal include the introduction of extended due diligence procedures in addition to a reform of financial market supervision.

The last point is also taken up by Adrian Klee, a well-known analyst. In his blog post, he even calls for the establishment of a "compliance culture" to prevent cases like Wirecard from happening again. New banks and financial services companies should be able to follow established rules early and thoroughly. Company management must be aware of the risks and be obliged to comply with the rules. Last but not least, Klee recommends the introduction of a risk management system tailored to the company's specific risks.

Failures in due diligence

An undeniable fact is that the compliance rules for due diligence were largely neglected and the Wirecard Supervisory Board did not optimally monitor the operational business. In addition to deficiencies in auditing and the failure of the German financial market supervisory authority, the lack of due diligence was the main reason why the fraudulent business practices at Wirecard were not discovered earlier. Many former managers of the financial services provider now have to answer to the Munich Regional Court. For them, the inadequate risk management of their former employer is becoming a major burden because it makes it more difficult to prove their innocence. At the end of the day, many of the former executives have to take the rap for failing compliance due diligence within the company.


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