Supervisors and Wirecard: BaFin, FREP, ESMA and foreign regulators

analysisAccording to the Finance Ministry's report of 16 July 2020 to the Bundestag finance committee, Wirecard AG itself provided no banking or payment services and was not supervised by BaFin as a credit, payment or e-money institution, nor classified as a financial holding company; BaFin supervised only Wirecard Bank AG, and the UK Financial Conduct Authority supervised the British subsidiary Wirecard Card Solutions. ESMA records that on 1 February 2017 BaFin's banking supervision and the Bundesbank concluded that Wirecard was not a financial holding company under EU law, so that supervisors had no powers over the group as a whole, and that the ECB later agreed. Anti-money- laundering supervision of Wirecard AG was unresolved: the Lower Bavaria district government approached BaFin as the competent authority in February and May 2020, Wirecard regarded itself as a "financial undertaking" supervised by Bavaria, and in July 2020 the Bavarian interior minister said he did not regard the district government as competent. ^{1 2}

analysisBaFin investigated market participants betting on falls in Wirecard's share price: after the Zatarra report (from 21 March 2016, with a criminal complaint to the Munich prosecutor on 12 May 2016), after a report by the short-seller SIRF (18 February to 24 May 2018) and after Financial Times publications (from 1 February 2019, with a complaint on 10 April 2019). ESMA records that in February 2019 BaFin filed a complaint against market participants and two journalists on suspicion of market manipulation, and that month BaFin imposed a temporary ban on short selling of Wirecard shares with ESMA's positive opinion, which Wirecard's prospectus presented as a response to several short-selling attacks. In March 2019 Wirecard sued the Financial Times and its journalist in the Munich regional court over the use and misrepresentation of trade secrets; according to the company's prospectus, the Munich prosecutor was investigating the journalist Dan McCrum for market manipulation. The action was interrupted by Wirecard's insolvency in September 2020 and withdrawn on 28 October 2020. ^{1 2 3 4}

analysisOn 15 April 2019 BaFin fined Wirecard AG EUR 1.52 million for breaches of financial reporting obligations, partly for late publication of the 2018 half-year report and the related notice; Wirecard accepted the fine but contested its publication, which followed a decision of the Hessian administrative court in September 2019. ESMA found that BaFin sent the Finance Ministry at least 17 reports on Wirecard between 2016 and 2020 on its market-abuse examinations and transparency proceedings. State Secretary Dr. Jörg Kukies met Markus Braun on 5 November 2019 without minutes being taken; according to the ministry the topics included the suspicion of market manipulation and the KPMG special audit that had begun. ^{1 2}

analysisESMA records that in 15 years FREP fully examined Wirecard's accounts four times (2005, 2011 and 2014 by sample, 2018 on risk grounds) and found an error in the 2005 accounts. In 2008 it began examining the 2007 accounts after public allegations by the head of a German shareholders' association, suspended the examination because of an action to annul those accounts, which the Munich regional court rejected, and ended it in June 2012 for lack of public interest; the examination of the 2011 accounts found no errors. FREP selected the 2014 annual report by random sampling on 15 December 2014 and closed the examination without findings on 1 December 2016; ESMA rated it only partially compliant, citing serious shortcomings, unaddressed material risks, insufficient scepticism and a duration of 19.5 months against an average of eight. The 2015 accounts were not examined, and from 2015 to 2018 Wirecard was not selected on concrete risk grounds. ¹

analysisBaFin learned of the Zatarra report in February 2016 and in April asked FREP to include Wirecard in its risk group. On 29 September 2016 a whistleblower told FREP that the acquiring receivables and payables in the 2015 balance sheet were doubtful, which FREP's committee considered evidently unfounded; at a working meeting on 11 October 2016 EY confirmed it had looked into the Zatarra allegations and the related Financial Times reports, and FREP considered the matter resolved because the 2015 accounts carried a clean opinion, which ESMA criticised as reliance solely on the auditor. On 1 December 2016 Wirecard gave FREP a one-page interim report by an external party, without addressee or signature, and FREP closed its examination the same day. On 28 February 2017 FREP's committee decided that a magazine article about a "EUR 250 million puzzle" gave no sufficiently concrete indications of accounting breaches, although rolling security reserve receivables of EUR 250 million remained unexplained, and BaFin concluded on 15 March 2017 that a lack of clarity was not a breach, a view ESMA strongly disagreed with. ESMA's review also records that Wirecard published its 2015 accounts with an unqualified opinion on 6 April 2016, the day a Financial Times article again questioned its Indian acquisition. ¹

analysisIn 2019 FREP placed Wirecard in an abstract risk pool because of unusual transactions, above-average growth, sector risks and weak governance, signs that ESMA notes had been visible earlier. BaFin required FREP to examine the condensed half-year accounts at 30 June 2018 on 15 February 2019, and on 30 October 2019 FREP, in agreement with BaFin, extended its examination to the amount and existence of TPA revenue, the classification of escrow accounts as cash and a possible "Indian round-tripping", deciding to await KPMG's results. In early 2019 BaFin received the preliminary Rajah & Tann report from an anonymous whistleblower but, citing professional secrecy, did not pass it to FREP, which obtained it from Wirecard in mid-2019; BaFin's market-abuse and financial-reporting teams said they were unaware of the Financial Times articles of early 2019 on the partners. Wirecard did not release EY or KPMG from confidentiality towards FREP, and supplied the KPMG contract requested in mid-December 2019 only at the end of January 2020. On 10 December 2019 it published a statement on how it processed and accounted for payments via routing partners, which ESMA's review committee considered could have been more detailed and transparent. ^{1 2}

analysisOn 30 April 2020 BaFin required FREP to examine the 2018 consolidated accounts, expressly citing KPMG's report as concrete indications of material breaches concerning TPA revenue, the presentation of the escrow accounts and the reporting of TPA risks; it added the half-year accounts at 30 June 2019 on 24 June and the 2017 accounts on 25 June 2020. On 17 June 2020 FREP received from BaFin the auditor's report on possibly incorrect balance confirmations, and on 29 June Wirecard's management board told FREP that the reliability of earlier information, especially on "third-party transactions", was in doubt. FREP finalised on 6 July 2020 its findings that the 2018 half-year and annual reports were erroneous, concluding that significant assets, revenue and expenses had not been properly accounted for; Wirecard disagreed and refused to take part in the examinations of the 2017 accounts and the first half of 2019; FREP ended its examinations on 20 July and BaFin took them over on 24 July 2020. On 4 August 2020 BaFin for the first time published notice of such examinations in the Federal Gazette. ^{2 1}

analysisOn 2 June 2020 BaFin filed a criminal complaint against Wirecard with the Munich prosecutor for market manipulation through misleading ad hoc announcements on the interim results of KPMG's special investigation, on the basis of which the prosecutor searched Wirecard's premises on 5 June. On 18 June it filed a further complaint on suspicion of misrepresentation and market manipulation through false information in the 2016–2018 accounts, and on 20 June opened a market-abuse analysis of recent ad hoc announcements. On 3 June it had opened a market-abuse analysis of purchases of Wirecard shares by Braun through MB Beteiligungsgesellschaft, having reported to the Finance Ministry on his share transactions on 29 May; ESMA records that on 29 April BaFin had opened a market-manipulation examination of Wirecard's statements that KPMG had found nothing material. On 22 June 2020 BaFin required Wirecard Bank to report its liquidity daily, appointed a special representative to oversee all significant payments with group companies, placed the bank under special observation and asked foreign supervisors for assistance. ^{1 2}

analysisOn 25 June 2020 the European Commission asked ESMA to analyse the events leading to Wirecard's collapse and the German supervisors' response; ESMA launched a fast-track peer review of BaFin and FREP and approved its mandate on 25 August 2020. The review, covering 1 January 2015 to 25 August 2020 and published on 3 November 2020, found a heightened risk of Finance Ministry influence on BaFin because of the frequency and detail of its reporting, that BaFin had no information on staff shareholdings and that some staff in its market-abuse team had traded Wirecard shares, and that FREP did not select the 2015–2017 accounts for examination nor did BaFin request it. ¹

analysisESMA's report summarises the public allegations: FT Alphaville blog posts in 2015 raised the first doubts about the accounting for the partners; a whistleblower raised concerns with FREP in 2016 about acquiring receivables at subsidiaries in jurisdictions without a licence; in early 2016 Zatarra accused Wirecard of money laundering, mainly on information from 2006–2010, of facilitating circumvention of US online-gambling restrictions, of deceiving Visa and Mastercard on customer checks and of overpaying for acquisitions; and in June 2019 the Financial Times reported that a long-standing customer had settled US allegations of defrauding customers of more than USD 110 million. Wirecard systematically rejected these allegations at the time. Allegations were not new: the supervisory board's report for 2010 records that in April 2010 it discussed allegations against the group published, among other places, on the gomoPa website, and the necessary countermeasures, without describing them. ^{1 2}

analysisOn 26 June 2020 the UK Financial Conduct Authority required Wirecard's British e-money firm not to dispose of assets or funds or carry on regulated activities, citing events around the parent company, which it did not supervise; after it allowed e-money activity to resume on 29 June, restrictions on where customer funds could be held and on transfers of the firm's own assets remained. Wirecard reported that the lifting of the restrictions on 30 June reopened several hundred thousand accounts, and Estonia's e-Residency programme reported that the firm's Holvi and Payoneer Mastercard cards were frozen and later partly restored. The Monetary Authority of Singapore lists Wirecard Asia Holding Pte. Ltd. and Wirecard Singapore Pte. Ltd. among entities that previously held a temporary exemption from licensing under the Payment Services Act but no longer do. Ireland's audit supervisor IAASA concluded settlements with the auditors of Wirecard UK and Ireland's financial statements: severe reprimands and fines of EUR 19,500 for Tony Kelly and EUR 10,500 for Alison Gray. ^{1 2 3 4 5 6}