I recently read Money Men, Dan McCrum’s retelling of the Wirecard saga. As background, McCrum was a journalist for the Financial Times who was the main investigator to uncover the unbelievable fraudulent schemes underlying Wirecard, the former German payments unicorn. Wirecard engaged in a number of criminal activities, but at their base level, they could be summed up by completely making up financial statements and engaging in substantial money laundering. McCrum spent nearly ten dogged years uncovering the fraud before markets and legal authorities came around on the matter, and the book is worth reading in its entirety. If you want to read an abbreviated version, this New Yorker synopsis is quite good.
The immediate question I had as I started reading a book was how did such a fraud last for so long? Wirecard in the form we are most familiar with got started around 2005 and the fraud wasn’t fully uncovered until the spring of 2020.
The first culprit was simply willful ignorance. Wirecard was a German “national champion” and the country was very proud of the fact that they had a homegrown fintech champion. Whenever journalists or short sellers started raising concerns about the veracity of Wirecard’s financial statements, German legal authorities and regulators jumped to Wirecard’s defense and took offense at the idea that others were criticizing the pride of the German tech sector. It wasn’t until Wirecard actually failed a special audit from KPMG that the evidence became too substantial to deny, and even that was after Wirecard passed a number of audits from the German branch of Ernst & Young without any concerns raised.
Another takeaway from the story was the value of real due diligence. Having worked in investing and M&A roles, I’m familiar with extensive due diligence processes that go into minute detail around financial statements, business performance, and legal and compliance concerns. Strong investors and acquirers have a comprehensive diligence process in place for a reason. To Dan McCrum’s credit, he applied the same principles as an FT journalist and kept tracking down unanswered questions until he figured out what was really going on beneath the surface, as did a number of short sellers. The same can’t be said for various other financial authorities, accountants, members of the press, and venture capital investors who took Wirecard’s stories at face value without doing any real research on the company. Spending a few weeks examining Wirecard’s financial statements, in retrospect, would have been enough to give the indication that something was off.
There’s also a lot to be said for the basic importance of the rule of law. Paul Murphy, a Financial Times editor, mentions in the New Yorker story that “in finance, globally, you have a situation where the only effective police are the Americans.” There’s a reason investors like to buy American equities and well-run companies like to list in America; if American financial regulators sign off on your statements and activities, it means something. Famous economic historian Daron Acemoglu once noted that “Without regulations and predictable laws, markets won’t work.” The confidence in the companies you are investing in and doing business with is essential to generating economic activity of your own, and its a lesson that has been seen time and time again as economies have successfully grown, or have struggled to grow.
It is worth closing out by mentioning the bravery of the short-sellers and journalists who uncovered Wirecard’s fraud. At every turn, Wirecard tried to intimidate them into silence, almost always through criminal methods, though occasionally through using Europe’s more restrictive (as compared to the US) free speech and libel laws. The journalists and investors did a real public service by exposing the corruption and criminality behind the Wirecard expertise, and its a timely reminder that good journalism is worth supporting.