Germany’s top financial supervisor received detailed warnings about deceptive financial practices at Wirecard AG starting in 2008 but repeatedly declined to investigate the allegations, turning instead against the accusers.
Over more than a decade, investors, U.S. authorities, journalists and people close to the company warned of possible fraudulent accounting or money laundering, practices that are now at the heart of a criminal investigation into the disgraced fintech giant.
But as the red flags piled up, Germany’s equivalent of the U.S. Securities and Exchange Commission played down the allegations, kicked the ball to other agencies and delayed examining the company’s accounts, according to previously unpublished documents, people familiar with the situation, and the agency itself.
Documents show the Federal Financial Supervisory Authority, or BaFin, saw Wirecard’s former CEO, now under criminal investigation, as more trustworthy than his critics because he bought a large chunk of shares in the company at a key moment.
BaFin also decided against assuming direct oversight of Wirecard, which could have increased its ability to probe the company.
Germany has a patchy record in fighting corporate crime. Volkswagen AG ’s giant emissions-cheating scandal was uncovered by California. The U.S. has imposed more money-laundering fines on troubled German lender Deutsche Bank AG than Germany has.
BaFin’s decadelong blind spot for Wirecard now raises questions about the country’s ability to enforce securities rules that protect investors. Under mounting political fire, the German finance ministry, which oversees BaFin, has announced a review of the agency’s powers and methods. On Thursday, the president of Germany’s federal audit court told the news magazine Der Spiegel it would examine how BaFin and the ministry had dealt with Wirecard, including “why BaFin apparently did not take up the evidence.”
A spokeswoman for BaFin said that the regulator didn’t directly supervise Wirecard. Even at Wirecard’s banking subsidiary, which BaFin did oversee, it couldn’t investigate money laundering or suspected fraud as criminal offenses “as BaFin is an administrative authority and not a law enforcement agency,” she said.
BaFin President Felix Hufeld said last month that short sellers and others were right to raise questions about Wirecard, but he defended the regulator’s decision to investigate those suspected of trying to manipulate the market for their own gain.
An early chance to look into Wirecard came in 2008, when an association of small shareholders filed a suit with a Munich court targeting Wirecard’s accounting practices. It alleged Wirecard counted customer deposits as its own cash and that its margins were suspiciously high. This suggested Wirecard was more involved in gray areas such as online pornography and gambling than executives had disclosed, said Daniel Bauer, the current chief executive of the shareholder association.
BaFin’s role includes ensuring that listed companies abide by securities law, for instance by communicating truthfully with their shareholders. But BaFin didn’t look into the lawsuit’s allegations against Wirecard because there was no evidence the company had provided misleading information, the spokeswoman said.
Instead, BaFin opened a probe into the accusers. Wirecard had filed a complaint with the agency and the Munich prosecutor after the suit caused its stock to slump. Two former officials of the small shareholders’ association were charged, convicted of market manipulation and handed suspended prison sentences.
When BaFin did look into Wirecard, it was at the behest of U.S. authorities. In 2010, Wirecard’s banking unit popped up in an investigation by the U.S. Federal Bureau of Investigation into a German national suspected of operating an illegal money-transfer business for clandestine gambling sites in Florida. BaFin did look into the allegations but later said the bank had fixed all shortcomings.
In late 2015, German prosecutors raided Wirecard, again at the request of U.S. authorities looking into money laundering, according to the Munich prosecutor’s spokeswoman. BaFin’s spokeswoman said the search hadn’t yielded any relevant information.
Then, in February 2016, two short sellers published an anonymous dossier accusing Wirecard of participating in money laundering and fraud over years. On the day it appeared, Wirecard’s stock lost a quarter of its value.
Rather than investigating the allegations, BaFin targeted the accusers. Less than three months later, the agency sent a 45-page report to the Munich public prosecutor, accusing 37 short sellers trading in Wirecard stock of market manipulation according to the document seen by The Wall Street Journal.
Wirecard Chief Executive Markus Braun had recently purchased €18.5 million ($21.1 million) of Wirecard stock, which “suggests that Braun as CEO was convinced of the positive development of the company he helps to run,” BaFin wrote.
In contrast, the short sellers’ “use of various domestic and foreign banks, different financial instruments and markets suggests that they were aware their actions were wrong,” it added.
Some time earlier, BaFin had received an email from someone claiming to work for Wirecard and complaining of bullying, bribery of auditors and share-price manipulation at the company, according to BaFin’s report to Munich prosecutors.
Yet BaFin again decided not to investigate the company.
“We were and are not the competent authority to investigate the allegations,” BaFin’s spokeswoman said.
Not supervising Wirecard was BaFin’s decision: In 2017, the agency had briefly considered categorizing the provider of payment services as a financial services company, which would bring it under its direct supervision, but eventually decided against it.
While most supervisory agencies in the world, including in the U.S., wage turf wars to expand their remits, foreign officials say BaFin stands out in how narrowly it interprets its mandate.
In early 2019, the Financial Times published allegations that staff at one of Wirecard’s Singapore subsidiaries might have manipulated the company’s accounts to inflate the amount of business it was doing there.
Around that time, BaFin also received fresh information about Wirecard from an anonymous source, the agency told lawmakers in April 2019, without disclosing the content of the communication. BaFin declined to provide details.
True to form, BaFin opened its third investigation into possible market manipulation by short sellers of Wirecard stock. It banned investors from shorting the stock—the first time it had shielded a company this way—and handed its evidence to Munich prosecutors who launched a case against several traders and two journalists. That investigation is ongoing, said Anne Leiding, a spokeswoman for the Munich prosecutor.
Instead of investigating the claims against the company itself, BaFin asked a small private-sector body known as the Financial Reporting Enforcement Panel or DPR to audit Wirecard’s accounts, Mr. Hufeld told lawmakers at a July 1 closed-door meeting, according to participants.
A single auditor was assigned to the case. The panel has 14 auditors, but “even if we had 100 people, we wouldn’t have the legal means to intervene,” said Edgar Ernst, president of DPR. Its audit was never completed.
Mr. Hufeld told lawmakers that involving DPR was unavoidable because Wirecard wasn’t under BaFin’s direct purview.
German legal professors disagree, saying that BaFin could have investigated Wirecard’s books directly.
“BaFin can confiscate documents, they can demand communication data such as emails and telephone calls, they can subpoena and interrogate people and appoint external auditors to assist them,” said Lars Klöhn, professor of civil and business law at the Humboldt University in Berlin. “They have all the powers they need.”
The German Parliament’s legal services also found this month that BaFin could have launched its own accounting investigation, according to a report commissioned by opposition lawmaker Frank Schaeffler.
A BaFin spokeswoman on Thursday acknowledged that the agency would have been entitled to probe Wirecard’s accounts even without supervising it.
During his grilling by lawmakers this month, Mr. Hufeld called the Wirecard collapse a “disaster” but insisted Germany’s supervisory mechanisms were sound.
“The system functions well during normal times,” he said. “It just failed during a crisis.”