The greatest Ponzi scheme in German history

Dear Reader,

This is the last newsletter before I take a summer break. Thank you for your support over the past few months. Your subscription will be paused for the next four weeks. I hope you have a pleasant summer!


Ponzi & Raub

When the financial services company Wirecard imploded last year, it came as a surprise to many people that fraud on such a scale could happen in Germany.

Isn’t this the country of sensible investment, where people would rather put their money in a savings account than into get-rich-quick schemes? Isn’t this the country where the regulated soziale Marktwirtschaft curbs the wildest excesses of capitalism?

The history of white collar crime here tells a different story.

The case of Volkswagen manipulating the emissions levels of its diesel engines is well known. That cheating could have been stopped back in 2010 if the Environment Ministry hadn’t struck road testing of emissions levels from a list of requirements written up by the Federal Environment Agency. Such a proposal was “a mine field”, an unnamed ministry official wrote in a draft copy leaked years later to Der Spiegel.

Less well known is the P&R scandal - the greatest Ponzi scheme in German post-war history, which came tumbling down in early 2018.

P&R was set up in Munich in 1975 by the businessman Heinz Roth. The idea was simple: instead of investing in stocks and shares, people put their money into P&R-bought containers, which were then leased out to shipping companies. For their investment they received rents and a guaranteed buy-back price.

The company was a darling of various banks and financial advisors, meaning that the southern city’s wealthy upper classes saw it as a safe thing.

But by the early years of this century P&R wasn’t making enough on leasing the containers, or on selling them on, to cover the high rents it had promised its investors.

In around the year 2007 it appears to have reached a point where it could no longer pay investors their earnings anymore. And that seems to be when the Ponzi scheme started. Money from new investors went into paying the existing clients rather than into buying new containers.

More investors meant more fixed rents to pay back out, meaning more investors needed to be found…

Eventually in 2018 the system imploded. The three subsidiaries that were responsible for closing deals in Germany went bust.

An insolvency administrator who came in to clear up the mess found that, of the 1.6 million containers the company claimed to own, just 618,000 actually existed. If one were to put the phantom containers end to end they would have stretched from Hamburg to New York…

Of the €3.5 billion that had been invested with P&R, a maximum of €1 billion is likely to ever be regained and paid back to those who entrusted their money to the company.

How could P&R get away with this relatively crude scam for so many years?

The similarities with Wirecard are hard to miss.

The accountancy firm that was supposed to check the company’s books gave it a clean bill of health every year. That stamp of approval meant that even experienced investors trusted the company enough to put their money into it.

The accountancy firm’s job was made more difficult by the fact that P&R split its operations between Germany and Switzerland. Three subsidiaries in Germany were responsible for acquiring new investment - that money was then transferred to Switzerland, where another subsidiary was responsible for dealing with the purchase and leasing of containers.

This made it easier for P&R to hide the fact that two thirds of its portfolio only existed on paper.

Accountancy firm Werner Wagner-Gruper was responsible for looking at its books in Germany. In 2015 it concluded that “in the course of our audits, no circumstances have come to light that would speak against the assumption that the company is a going concern.”

Werner Wagner-Gruper have defended themselves by saying that the company’s German books looked fine.

But Finanzwende, a citizen’s rights group that lobbies for more transparency in the finance world, says that the auditors should have noticed the “massive alarm bells” in the company accounts.

Payment’s were processed differently to the way in which they had been agreed with the client; the auditor in Switzerland flagged up irregularities and debts in the accounts there. Moreover, every container on the high seas has a unique ID number: it would have been a case of checking the ID numbers presented by P&R against publicly available lists.

The suspicion is that, just as with Wirecard, the accountancy firm chose to ignore the warning signs in order to hold on to a lucrative client.

And, just as with Wirecard, the story of P&R is also one of a failure of financial oversight.

P&R operated on what is called the grauer Kapitalmarkt, an area of finance which is legal but which is subject to little regulatory oversight.

For a long time the BaFin, Germany’s financial regulator, was only tasked with providing oversight of banks and other companies involved in financial services. A new Kleinanlegerschutzgesetz passed in 2015 extended the remit of BaFin with the aim of specifically protecting investors in the ‘grey economy’, where investors buy direct investments in concrete goods.

The agency now had the power to review the balance sheets of companies operating on the gruaer Kapitalmarkt, restrict sales of their products, or warn potential investors about measures it had taken against a suspicious company.

But the sum of the actual work that the BaFin did against P&R can be summarized as follows: they read the investment prospectuses that they gave to potential clients. They then authorized them due to that fact that the wording conformed to regulations.

BaFin “did nothing” to look into P&R, Finanzwende complained. “They didn’t even ask critical questions of the company, let alone impose a product ban, even though there were numerous indications of problems there.”

Things could be about to change.

A law that was passed by the Bundestag earlier this year should make it harder for a scam like that carried out by P&R to happen again in the future. The law gives external auditors greater access to bank transactions carried out by companies in the grauen Kapitalmarkt.

Will that be enough to stop the P&Rs and Wirecards of the future?

Several observers say that the real problem is a culture at BaFin of passing the blame on to politicians. Understaffed and under-resourced, the agency often lacks the know-how to take on sophisticated financial criminals. But even where it has the resources, it seems reluctant to act.

The next government will be tasked with the reforming the failed agency. But finance just isn’t that sexy… it certainly isn’t going to play such a prominent role in this election as a copy-and-paste job in a politician’s book.

Jörg Luyken