The chaos at Germany's financial regulators
On the Wirecard report released by Germany's Bundestag.
The Bundestag’s special committee which was set up to investigate the Wirecard fraud published its final report this week - or I should say final reports.
With the six parties unable to agree on their conclusions, we were given three separate versions - one backed by the CDU and SPD, one backed by the FDP, Greens and Linke, and yet another from the AfD.
The coalition partners have published a watered-down version that protects SPD Finance Minister Olaf Scholz, whose ministry oversees financial regulator BaFin, and CDU Economy Minister Peter Altmaier.
I’m presuming no one has actually read the AfD one. That said, the committee was actually led by an AfD MdB and it has been widely praised for its diligence in piecing all the evidence together in just nine months.
The version that seems most likely to be both competent and rigorous though, is the one produced by the Greens, FDP and Die Linke.
Their report is close to 700 pages long - I’m not going to pretend to have read more than a small section of it. Nor am I an expert on the Wirecard scandal, which involved financial shenanigans that are completely foreign to me.
But the the chapter I was interested in was specifically on the actions of the German regulators.
In reading it, I realized one key reason as to why Wirecard could get away with its deception for so long. Not only are these regulators unable to tell the difference between investigative journalism and market manipulation, they are blighted by a culture of buck passing and work avoidance.
Or, to put it bluntly: on the one side you have a global criminal enterprise employing the best lawyers and PR men money can buy. On the other side you have bureaucrats who refuse to use telephones.
The background: made up money
Wirecard was founded at the turn of the millennium as a middle man for online purchases.
Originally it specialised in processing payments on porn and gambling sites. But the company’s European operations were never profitable. So, to cover up this hole, it started buying digital payment companies in Asia and basically invented profits on their books to make it seem like these subsidiaries were raking in the cash. By 2020, when the fraud was eventually uncovered, they had €2 billion of imaginary assets on their books.
Short sellers - investors who bet against overvalued companies - had for years suspected that the company was laundering Mafia money and that its Asian businesses were frauds.
In early 2019, the Financial Times published accounts provided by a whistle-blower that showed that many of Wirecard’s southeast Asian operations were fictional.
But at the same time ‘big five’ accountancy firm EY kept giving Wirecard a clean bill of health in its annual audit. When the company made it onto the DAX in 2018 it was valued at €24 billion.
And Germany’s financial regulator suspected that Financial Times journalists were in cahoots with the short-sellers. In 2019, it took the decision to ban short selling on Wirecard shares in the wake of the FT’s investigation, an unprecedented move that gave small-time investors the impression that the company was clean.
Woken from their winter sleep
By February 2020 the waters around Wirecard’s Munich HQ were still calm on the surface. The company’s stock had rallied 28% since the start of the year on yet more strong earnings projections.
But investors were jittery. In the background KPMG was looking at the company’s books; Wirecard’s board commissioned the independent audit in order to convince investors that the Financial Times allegations were fake.
And in Germany, where financial regulators might have been expected to start asking questions, the hedgehogs working in the regulation offices were about to be woken from their winter sleep.
On February 20th an employee at EY got in touch with the money laundering authority of the Bavarian state government. He informed them that he was acting as a consultant for Wirecard and wanted to know whether the Bavarian authority was responsible for oversight of the company.
The problem: the Bavarian officials had no idea whether they were responsible for Wirecard or not. Financial entities are the responsibility of federal regulator BaFin, but Wirecard was separated into Wirecard Bank AG and the Munich-based parent company that conducted its various other businesses.
A Bavarian official replied that he would have to look into the issue.
Five days later, the Bavarian Beamter sent an email to BaFin seeking clarification on who exactly should be investigating potentially money laundering at the DAX company. The email was sent to the generic address firstname.lastname@example.org - the official apparently didn’t know who specifically to address his query to and doesn’t seem to have picked up a phone to ask.
“The use of a direct contact within the authority would have been more appropriate,” the Bundestag committee remarked dryly in its report.
The email went unanswered.
Two months later, on April 27th, KMPG published its findings. Wirecard bosses had systematically prevented them from seeing sensitive accountants and had avoided meetings with them. One newspaper described it as “a document of horror.”
On the same day, the plucky Bavarian official tried his luck again. His follow-up email - to the same BaFin address - was marked ‘high priority’.
Still there was no response.
Another two weeks passed. On May 7th, another email was sent from Bavaria to the federal authority. Again, no answer.
On May 27th, BaFin finally got in touch. The head of the department for money laundering called up his Bavarian colleague, apologized for the late reply, and informed him that he also could not say who was responsible. He advised him to try his luck at the Federal Finance Ministry.
By June 25th 2020 - the day on which Wirecard filed for insolvency after EY refused to sign off on its 2019 accounts - there was still no clarity on which authority should be looking into potential money laundering at the firm. And, of course, for this entire time no one had been looking into money laundering there.
Then suddenly on that same day, the Bavarian interior ministry announced that oversight of the company was a federal responsibility after all. The southern state’s interior minister Joachim Hermann would later tell the Bundestag investigation that his decision was made on the basis of a careful legal assessment.
“This coincidence of the Bavarian decision coming at the same time as the very public developments at Wirecard AG… …leaves the impression that this was a deliberate U-turn; with the aim of subsequently denying responsibility,” the Bundestag report noted.
Federalism’s blind spots
It is an old theme, one we have seen so many times before. Germany’s federal system is a mess of overlapping and competing bureaucracies. Responsibility avoidance or, to be kind, responsibility confusion is rife.
We saw it with the investigation into the Breitscheidplatz terror attack of 2016, where a known Islamist drove a truck into ta Berlin Christmas market after slipping repeatedly, and unwittingly, between the lines of the different state and federal police agencies that were supposed to be watching him.
And we’ve also seen it with inconsistent data sharing between health agencies during the pandemic.
As for financial oversight, the FDP/Green/Linke report was withering in its assessment of a “disastrous system” of unclear responsibility delineation.
But it was best put by the unfortunate Bavarian official who spent months half-heartedly trying to get an answer from BaFin.
During his testimony to the committee this January, he admitted that, even if his office had been responsible for Wirecard, it wouldn’t have made a difference. They aren’t specialized in financial firms and so would have bumped the company down their priority list, he said. It did make him wonder just how many other financial firms in Germany were operating without oversight.
By the way, no one in government has taken responsibility since the publication of the inquiry’s findings. No one has said sorry to investors who lost their savings. Olaf Scholz, a man who turns his nose up at investing in stocks, has kept quiet. Jens Zimmermann, the SPD man on the committee, claimed it had “refuted all the charges against him.”