This blog was originally created by RDC and published on rdc.com.
It’s unlikely to have passed you by that there’s currently a bit of a scandal going on in relation to Wirecard. Red flags were raised as far back as 2008 concerning accounting irregularities and more recently it has been reported that Wirecard processed payments for a mafia-linked casino. In this blog, I will take a look at the Wirecard story and ways the company could have identified relevant money laundering risk.
The Rise of Wirecard
Wirecard was founded in 1999 to provide a payment platform for certain, shall we say ‘adult’, industries. Perhaps unsurprisingly, they grew rapidly and by 2005 they had moved to a plush new head office in Munich and secured a listing on the Frankfurt stock exchange with annual revenues of c. €49m.
In 2006, they completed the consolidation of Wirecard Bank AG and rebranded their corporate identity to a TecDAX listing. Wirecard Asia Pacific (APAC) was established in 2007, with the same year marking the start of their issuing business; their annual revenue exceeding €100m. The next five years saw further expansion in Europe coupled with significant growth in APAC and annual revenues rising to €395m in 2012.
By 2016 they had, by their own admission, become “one of the world´s leading technology companies for electronic payment transactions including retail payment processing for all sales channels, whether online, mobile or point-of-sale (POS)”. This was followed by entry into the North American market with the acquisition of Citi Prepaid Card Services (USA) and expansion in South America with the acquisition of payment service provider Moip (Brazil). Annual revenues surpassed €1bn for the first time.
Wirecard joined the blue-chip market index Deutscher Aktienindex (DAX) in 2018, at the expense of Commerzbank, officially placing it in the top 30 most valuable German companies that are listed on the Frankfurt Stock Exchange. Annual revenues at the end of 2018 were in excess of €2bn.
Leadership Under Markus Braun
Wirecard might sound like a good news story and, to some extent it is. However it is worth noting that, in 2002 after the group had almost gone bust at the end of the dot-com bubble, Markus Braun took the reigns as CEO and merged Wirecard with a local rival, Electronic Business Systems, meaning that their stellar growth was not exactly ‘organic’ or sustainable. Also, the way they were able to gain a place on the Frankfurt stock exchange was by taking over the listing of a defunct call centre group, InfoGenie AG, a route that avoided the unwelcome scrutiny of an initial public offering.
When Wirecard moved into banking with the purchase of XCOM Bank AG, which was renamed Wirecard Bank, it gained licenses from Visa and Mastercard, meaning it could not only issue credit cards but also handle money on behalf of merchants. This slightly peculiar hybrid of banking and non-banking operations made its accounts harder to compare with peers, which may have gone some way to persuading impressionable investors to rely solely on the company’s ‘adjusted’ version of their financial wellbeing.
Accounting Red Flags
As far back as 2008, questions were being asked about Wirecard’s alleged balance sheet ‘irregularities’ by the then head of a German shareholder association, however nothing significant transpired. In 2010, Wirecard hired a new Chief Operating Officer who promised global expansion, which was funded by €500m of capital raised from Wirecard shareholders. Things continue until 2015 when the Financial Times saw fit to publish the first item in their series entitled ‘House of Wirecard’ which referenced ‘inconsistencies’ in Wirecard’s group accounts.
In April 2020, things start to get interesting. An auditor for accountancy firm Ernst & Young found evidence of ‘questionable accounting practices’. You don’t say?! Wirecard, it would appear, had attempted to “deceive the auditor” resulting in the bank processor being unable to release the share results for 2019. In a statement, Wirecard announced that it was “working intensively together with the auditor towards a clarification of the situation”. Yes, I can imagine they were!
Fast forward to 22 June 2020 when it was revealed by Wirecard’s management board that quite a lot of money was missing, their statement read “…on the basis of further examination, there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist“. Oops!
This revelation saw Wirecard’s share value plummet by over 72% and in turn forced the resignation of CEO Markus Braun, to be replaced by James Freis who had only joined the company the evening before. Two banks in the Philippines, that were allegedly holding the money, issued statements saying they did not have the funds and never did and to top it all, credit ratings firm Moody’s removed Wirecard’s rating altogether having previously demoted it to B3 from Baa3 just three days earlier. On 25 June, Wirecard filed for bankruptcy citing “over-indebtedness”.
So, when the news broke that a criminal investigation had begun and Markus Braun was arrested the same day, it probably should not have come as much of a surprise to anyone. But let’s put an alleged billion euro accounting fraud to one side for a moment and look in more detail at another Wirecard revelation concerning red flags – this time regarding money laundering risks associated with one of its customers.
Wirecard Processes Payments for Mafia-Linked Casino
It would appear that Wirecard were also none too picky about who they chose to do business with. It transpired in 2017 that Wirecard had been processing payments for online Maltese casino CenturionBet, which was later revealed to have been used to launder money by the Calabrian ’Ndrangheta, a none too pleasant mafia type organisation. Granted this would have represented a very small percentage of Wirecard’s annual turnover, however it speaks to their business model and wider compliance function, or possibly lack thereof.
The trail of illicit activity can be traced back to 2009 when British company Paradise Bet were forced to relocate due to an impending investigation which threatened to freeze their assets. Their Italian arm was alleged to have had involvement with the Parisi clan, who were a Puglian mafia type organisation, and were using Paradise Bet’s online casino to launder money, with the permission of Francesco Martiradonna, head of the ’Ndrangheta’s Arena clan. As a consequence, Paradise Bet looked to follow the path of least resistance which saw the sale of brand Bet1128 and other assets to CenturionBet based in Malta; a jurisdiction which, at the time at least, was well known in criminal circles for having lax controls around gaming.
Now, I accept that this is somewhat of a deviation from Wirecard being effectively taken down by an auditor however it proves the point that you need to know who you, and often more importantly who your customers, are doing business with. Screening Paradise Bet or CenturionBet for adverse media would have returned vital information that Wirecard could have used to determine if they wanted to engage with these clients. It seems almost incomprehensible to me that not a single person in the Wirecard organisation was aware of what these gaming companies were up to, or if anyone was aware, they clearly didn’t care. Either way, it speaks of senior leadership being ‘asleep at the wheel’ or, even worse, complicit.