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FT Report: The House of Wirecard starting to fall in

In a further update to the ongoing FT (and other party) investigations into Wirecard, it now seems that there is going to be serious fall out from the allegations made last week.


The House of Wirecard starting to fall in

The story surrounding a major accounting scandal begins at a time when Wirecard was seeking to convince regulators at the Hong Kong Monetary Authority to issue a licence so Wirecard could begin roll-out of prepaid bank cards in the Chinese territory.

According to the FT, the group was seeking to take over payment operations from Citigroup, covering 20,000 retailers in 11 countries stretching from India to New Zealand. Regulatory approvals in every territory were crucial, even if it meant inventing numbers to be used in the Hong Kong licence application.

Mr Kurniawan, who ran the Asia-Pacific accounting and finance operations, sketched out a practice known as “round tripping”: a lump of money would leave the bank Wirecard owns in Germany, show its face on the balance sheet of a dormant subsidiary in Hong Kong, depart to sit momentarily in the books of an external “customer”, then travel back to Wirecard in India, where it would look to local auditors like legitimate business revenue.

In isolation, Mr Kurniawan’s scheme might have appeared to be the act of a rogue employee in the provincial outpost of a little known financial group. But the account of what happened, in a preliminary report on the investigation by one of Asia’s most eminent legal firms, indicated it was part of a pattern of book-padding across Wirecard’s Asian operations over several years.

Documents seen by the Financial Times show two senior executives in the Munich head office had at least some awareness of the round-tripping scheme: Thorsten Holten and Stephan von Erffa, respectively the company’s head of treasury and head of accounting.

The revelations call into question the figures reported by one of Europe’s few technological success stories, a German FinTech group that has grown into a €20 billion global payments institution. Before the FT exposed the existence of the investigation last week, the group was more valuable than Deutsche Bank or Commerzbank, whose place it has taken in Germany’s main stock market index.

Wirecard is a favourite of retail investors, who saw its rapid expansion into Asia as a sign that it can challenge the world’s biggest banks for primacy in the $1.4 trillion market for payments.

In response to the news of the preliminary investigation, Wirecard initially said no material compliance findings had resulted. This week the company told the FT that while its investigation was ongoing, it had made no conclusive findings of criminal misconduct and it would be wrong to draw conclusions from the preliminary report.  It is not the first time the group’s accounting practices have been called into question.

Accusations of suspect accounting were levelled in 2008, 2015 and 2016. Each time Wirecard has alleged market manipulation, sparking investigations by the German market regulator, BaFin. This time questions about its Asian operations began internally, prompted by a whistleblower left stunned by Mr Kurniawan’s January meeting last year.

Notifying Wirecard’s senior legal counsel in the region on March 26, the whistleblower identified two senior finance executives, James Wardhana and Irene Chai, as accomplices in the book-cooking operation. A separate whistleblower also raised concerns in February, and on April 3 that person supplied the compliance team with a suspect contract they had received via Telegram, the encrypted messaging app.

Daniel Steinhoff, Wirecard’s head of compliance in Munich, flew in to Singapore for a briefing. On April 13 he ordered the email archives of these individuals “mirrored”, with copies seized.  Compliance staff, who evidently found the accounts of the whistleblowers credible, soon found enough in the documents to warrant a snap investigation, codenamed Project Tiger.

They called in Singapore-based Rajah & Tann, which sent in a team of former prosecutors.  On May 4 R&T submitted a preliminary report, running to 30 pages of bombshell allegations: evidence in the documents of “forgery and/or of falsification of accounts”, as well as reasons to suspect “cheating, criminal breach of trust, corruption and/or money laundering” in multiple jurisdictions.

The trio in Singapore, led by Mr Kurniawan, appears to have been fabricating invoices and agreements to create a paper trail which could be shown to auditors at EY, as if money was moving in and out of Wirecard for legitimate purposes.

The job of his finance team was to oversee the figures put together by the various Wirecard companies in the region, then supply the accounts to head office. But the book-keepers were also putting together contracts and signing off on technology projects.  Not only were there no emails from certain supposed customers and suppliers to Wirecard, the preliminary investigation found that Wirecard lawyers, salespeople and technology staff did not appear to be involved in the deals either.

For example, in March last year Mr Wardhana, sitting at his computer, sent himself a digital copy of the logo for Flexi Flex, a hydraulics and piping company with offices in Singapore and Malaysia. The image was on invoices he presented to colleagues for payments, according to documents seen by the FT.

These documents, including contracts for the supply and purchase of obscure software products signed by Mr Kurniawan, made it appear Flexi Flex was doing substantial business with Wirecard.  In an April 9 2018 email chain, Mr Wardhana drafted answers for queries from EY in Germany needed to close out that year’s audit. He described Flexi Flex as “a new client engaged in 2017” which generated €4 million of revenue for Wirecard Malaysia.

Wirecard has since confirmed it had no genuine business relationship with Flexi Flex. Mr Wardhana’s email also attributed €3 million of Hong Kong revenue to Right Momentum Consulting, another third party business partner. The Kuala Lumpur address for the company on documents seen by the FT could not be traced.

The R&T preliminary report said: “We may draw strong and irrefutable inferences from the documentary evidence there has been at the very least several accounting irregularities which take the shape of forged agreements. In the best-case scenario, the purpose behind these deliberate acts may be limited to the false creation of revenue, with no wrongful misappropriation of monies.”

Suspect transactions, while individually small in the context of Wirecard revenues, appear to have been designed to stop Wirecard entities missing profit targets, by filling holes after the end of a financial year with fake and backdated sales agreements according to the preliminary report and certain emails reviewed by the FT.

Wirecard told the FT on Wednesday that, subsequent to R&T’s preliminary report, a separate internal investigation with access to accounting systems determined that the allegations were unsubstantiated and no regulations were broken.


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