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Key player arrested as Wirecard scandal prompts EU to moot regulatory overhaul


A Singaporean businessman suspected of helping Wirecard embezzle billions by posing as the trustee for fake bank accounts has been arrested on fraud charges, as calls grow for regulatory changes in the wake of the scandal.

12th Aug 2020
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R Shanmugaratnam is suspected of aiding the collapsed German payment processor’s attempts to defraud auditors by claiming huge sums of cash were held in two Philippines accounts.

Wirecard crumbled into insolvency in June after admitting that €1.9bn (£1.71bn) of cash in so-called trustee accounts probably did “not exist”.

Shanmugaratnam was charged in July by police in the city-state for falsifying “wilfully and with intent to defraud” letters to Wirecard stating that his company, Citadelle Corporate Services, was holding hundreds of millions of euros in escrow accounts “when in fact [they] did not hold such balance”, according to charge sheets.

He is accused of forging three letters in March 2016 and one a year later, claiming Citadelle held €321m (£289m) in three separate escrow accounts. The Singaporean native faces 10 years in prison if convicted, and a fine for each of the four charges. His case will be heard on August 20 at Singapore’s state courts.

Wirecard told auditors EY that €1bn (£0.9bn) of cash resulting from arrangements with several partners from 2016 to 2018 was held in escrow accounts managed by Citadelle.

In June this year when EY asked Citadelle to reconfirm the existence of these funds, it was told that the Singapore firm did not provide escrow services to Wirecard after March 2017.

Death of a German businessman

Asian prosecutors are also probing the apparent death of a German businessman behind one of Wirecard’s biggest sources of stated profits. Philippine authorities were investigating Christopher Bauer, 44, in regard to Wirecard’s activities and collapse. Bauer’s death, suspected to be blood poisoning, was reported to a civil registry in Manila earlier in July.

He and his wife were the owners of PayEasy Solutions, a Manila-based payments processor with close ties to Wirecard, accounting for €291.4m (£262m) of the German payment group’s reported revenue of €2bn (£1.8bn) in 2018 and more than a fifth of its operating profit.

Bauer, who was a Wirecard employee 12 years ago, told KPMG, who conducted a special investigation into the suspected fraud, that his company specialised in processing payments for “high-risk clients” in online gaming, gambling and porn.

Banks feel the pain

High-flying Wirecard’s collapse was the first failure of a member of Germany’s prestigious Dax index. The German stock market is in the process of delisting Wirecard following its insolvency, which set off a chain of events that stretched far beyond the firm’s Munich headquarters, destabilising banks, creditors, wealth and pension funds, and customers all over the world who have been unable to access capital. The firm’s former CEO has been arrested twice, and his number two is currently a fugitive having fled the country.

Three of Wirecard’s biggest lenders have declared losses in their earnings reports, blaming the payment processor for the flat numbers.

The failure cost Germany’s Commerzbank AG and ING Group in the Netherlands €175m (£157m), more than half of their profit for the second quarter, while French bank Credit Agricole suffered a loss of about €110m (£99m).

The trio are among 15 financial institutions behind a €1.75bn (£1.57bn) lending facility to Wirecard that had just 10% remaining when the company collapsed.

Other large lenders stung include Dutch-based ABN Amro Bank NV and Landesbank Baden-Wuerttemberg in Stuttgart, Germany, exposed to the tune of €180m ($162m) each. London’s Barclays Plc, DZ Bank AG in Frankfurt and Lloyds Banking Group Plc of London also lent about €110m ($99m) each.

Several lawsuits have been filed against Wirecard, German regulator BaFin and auditors EY Germany, who are accused of failing to flag the missing billions. EY has repeatedly denied any wrongdoing, stating it had also been duped.

“There are clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception,” the firm said in a statement. “Professional standards recognise that even the most robust and extended audit procedures may not uncover a collusive fraud.”

US litigators are also now circling Wirecard. Schall Law Firm has announced the filing of a class action suit on behalf of shareholders, setting a date of 8 September applicants.

Regulatory overhaul

Wirecard’s demise is likely to quicken changes to financial regulation across Europe. The separation of audit and consultancy functions in large professional services firms is an ongoing matter, but there is also a feeling in regulatory circles that auditors have been too slow to move to better technology.

EU finance minister Valdis Dombrovskis told media that the Wirecard debacle had reinforced his belief that a failed attempt by Brussels to empower EU financial watchdogs had been a “missed opportunity”, and that another push was necessary

Previously, the EU has tried to give several Brussels agencies including the European Securities and Markets Authority (ESMA) more power and independence from member states, only to have the plans watered down heavily.

Dombrovskis said the case showed the need for stronger defences against fraud, and the bloc may revisit its attempts to strengthen the regulators as a result.

ESMA is opening an investigation into the German financial regulator BaFin, and a separate review of the role of FREP, a private-sector body responsible for monitoring company accounts in Germany. BaFin has been criticised for siding with Wirecard, as the star of German fintech, instead of conducting proper investigations into the company.

The EU is also considering stronger regulations for audit committees of companies' own boards of directors, Dombrovskis said

“If a Wirecard-esque scandal occurred in the UK, with a repeat of BaFin’s such extreme failings on the part of the FCA it might be that investors would try to rely on the bad faith route in order to make a claim against the FCA,” said Anna Battams, dispute lawyer at Collyer Bristow. “The class action against BaFin has put a spotlight on regulators’ immunity where there have been allegations of gross failings in regulatory duties. More broadly, the Wirecard saga has been a wake-up call for the German financial system and ESMA’s supervisory powers.”

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By tedbuck
13th Aug 2020 19:24

Here we are again - all these cases suggest that the FCA and its foreign counterparts are not up to the job. It also suggests that auditors are unlikely to pick up sophisticated frauds because they just are not close enough to their clients basic systems to be able to spot such things - unbelievably sometimes.
Is this perhaps because there is too much reliance on audit programmes and systems which themselves are difficult to evaluate.
Perhaps every audit team should have a free thinker untrammelled by a 'system' who could just look at stuff and say to himself/herself "why on earth have they done that - it doesn't make sense"
Let's be honest with ourselves - despite HMRC's belief that computers make everything right - we all know that GIGO still applies and that it is much easier to fudge a computer system because everyone accepts that they are right and don't query the figures. The computers change the emphasis of one's thinking to looking at transactions rather than at the sense of the original documents.
The whole approach to audits and accounts needs to be looked at with fresh minds who can put behind them the auditing background that has been failing so badly. With Wirecard you can quite see someone looking at the dodgy transactions and saying to themselves - "it must be OK as they've been doing it for so long and know it is there." Yup! But if 'they' are dishonest...............
Easy with hindsight but at the time with pressures to get the job done one can see how things get missed. You often don't see the obvious because, like the cleaner, it is invisible because you expect it to be there.

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