Hole in the fintech company’s books supports arguments that Wirecard used third parties to make itself look larger than it actually was.
Wirecard AG said that more than $2 billion missing from its balance sheet probably don’t exist, confirmation that its fast-growing online payments business was more of a mirage than a miracle.
The announcement leaves the company, once considered Germany’s pre-eminent fintech player, fighting for survival. It is now scrambling to retain credit lines with lenders and cut costs or sell business lines to stay afloat.
Wirecard said Monday that its management board now believes there is “a prevailing likelihood that the bank trust account balances in the amount of €1.9 billion ($2.1 billion) do not exist.”
The company said it is having “constructive discussions” with its lenders about debt due at the end of June. It hired restructuring specialist Houlihan Lokey Inc. on Friday.
Wirecard— an electronic payments business that provides software and systems that link retailers, consumers, and the financial system—has promoted relationships with the likes of IKEA, FedEx Corp., and German grocery chain Aldi.
IKEA and FedEx didn’t immediately respond to requests for comment. Aldi said it is in contact with Wirecard but otherwise declined to comment. Wirecard said Monday its payments systems continued to function as normal.
The gaping hole in the company’s books appears to support arguments made for years by Wirecard’s critics. Short-selling investors who bet against the company’s shares alleged that Wirecard used third parties to generate business to make the company look larger than it actually was. An outside special auditor report published in April was unable to confirm the bulk of those third-party transactions.
The likely fictitious $2 billion is equivalent to all the net income Wirecard has reported over more than a decade.
“Wirecard AG is currently not making any further statements,” a spokesman said.
Wirecard’s unraveling is the most prominent in the digital payments space, which exploded along with the rise of online shopping and gambling. The industry has created a stable of profitable businesses that mostly sit in the background of billions of transactions.
Big industry players include Square Inc., Dutch company Adyen and Worldpay, bought by Fidelity National Information Services for $35 billion last year.
Wirecard’s fall from grace would represent one of the biggest corporate scandals in Europe since the collapse of Portuguese lender Banco Espírito Santo amid allegations of fraud in 2014, which required a €4 billion government bailout.
“It’s a complete disaster we are looking at,” said Felix Hufeld, the president of BaFin, Germany’s financial regulator. “I completely accept the criticism that all of us, including BaFin, have to review a couple of strategies and measures, which we have taken or have not taken, once we sort out the immediate crisis.”
Wirecard Chief Executive Markus Braun resigned Friday after two Philippine banks thought to be holding the money said they knew nothing about the scandal
Wirecard shares resumed their free fall Monday, hitting their lowest level since 2012. The Munich-based company, worth more than $14 billion last week, is now worth less than $3 billion.
The problems with Wirecard’s books may stretch back years. The company withdrew its results for 2019 and the first quarter of 2020 and warned that its financial results for previous years could also be affected.
At the center of the scandal is a trio of third-party partner companies that have for years provided a large share of Wirecard’s reported revenue and the bulk of its profits. Wirecard said Monday that these parties may never have provided any business to the company.
Wirecard said it was continuing to examine these third parties and “whether, in which manner and to what extent such business has actually been conducted for the benefit of the company.”
The third-party companies provide clues to why Wirecard, a prominent international business whose lending arm was regulated by the German government, ended up claiming to hold more than $2 billion in escrow accounts in the Philippines controlled by a little-known local lawyer.
The Financial Times reported later in 2019 about Wirecard’s relationship with three so-called third-party acquirers. These firms were meant to collect credit-card details of people paying for goods or services online or via card reading machines in markets where Wirecard doesn’t have licenses. They then transmit the funds from each person’s account to the accounts of the sellers. A little bit of each transaction is kept as revenue.
Documents and spreadsheets seen by The Wall Street Journal showed that these three companies, based in Dubai, Singapore, and the Philippines, contributed more than half of Wirecard’s revenue and 95% of its earnings in some of these years. These companies were Al Alam in Dubai, a division of Senjo Group in Singapore, and PayEasy Solutions Inc. in the Philippines.
Executives with the three companies didn’t respond to requests for comment.
Last October, Wirecard bowed to pressure and brought in KPMG AG to conduct an independent audit.
The three third-party acquirer companies didn’t cooperate in KPMG’s investigation, according to a report the auditor published in April. KPMG said it was given little original documentation, contracts or data that could prove the revenue existed. KPMG tried to verify their existence by tracing money coming into bank accounts controlled by Wirecard subsidiaries.
KPMG hit a dead end because of the way Wirecard supposedly received the cash. Rather than paying Wirecard directly, the third-party businesses put cash into escrow accounts with a bank in Asia managed by a Singapore-based trustee
Money was held in escrow accounts supposedly to cover risks of large-scale refund requests, or chargebacks from customers, according to the KPMG report. Chargebacks or refunds occur with higher-risk payments business. These include travel bookings that are never fulfilled or when people who are gambling or buying pornography claim to have been defrauded, for example. Wirecard would have been responsible for paying such claims via third parties.
KPMG said it reviewed quarterly balance statements of the escrow accounts. But it said there were no details of payments into and out of them.
The picture was further confused when, late last year, the original trustee overseeing the cash stopped working with Wirecard. A second trustee took over. This was a small law firm in the Philippines, according to a person familiar with its identity. Calls, texts, and emails to the law firm requesting comment haven’t been returned.
The second trustee was recommended to Wirecard by the first. Wirecard’s management board signed off on the appointment. KPMG said minutes of that decision included no evidence that alternative trustees had been considered, or that the reliability of the second trustee had been checked.
The second trustee told Wirecard’s main auditor, Ernst & Young GmbH, that the funds had been moved to two new banks, BDO Unibank Inc. and Bank of the Philippine Islands. The backing material proving the $2 billion: electronic scans of bank confirmation letters sent to EY in March this year.
On Friday, those banks denied ever having held any money on behalf of Wirecard. The scans were fake.