The Wirecard Scandal, Lesson for Africa’s Fintech and Regulators

By Emmanuel Okoegwale,

A  Television documentary titled  ‘Skandal! Bringing Down Wirecard’ caught my attention on Netflix during the weekend. Years back, I had met an executive of the firm when He attended, our annual payment conference in Lagos, Nigeria and was seeking partnership opportunities in Africa.

Much later, the news of their troubles sufficed but the circumstances surrounding it, was unclear till recent disclosures.

Wirecard which had a market capitalization of 24B euros at its peak in 2018, licked the dust in a significant way, judging from itself size and status in German, a country known for its very effective and efficient government machinery so what went wrong?

The story line looks like a well-established, formidable and innovative German payment processor  with operations in some other parts of the world, was built on a scheme, set up to pull the wool over the eyes of their own government, regulators, investors and the public.

For some years, the media and  the telescopic scrutiny of  brutal short sellers (investor who profits when the valuation of a company goes down in value)  latched on to  wirecard’s trail with some painstaking investigation to establish some wrong doings but it appeared that the German financial watchdogs built a ‘ringfence’ around their  iconic payment company, for years. With unrelenting attacks, Wirecard catapulted  in June 2020.

The management disclosed that €1.9 billion was “missing” in its book which was previously reported as held with two Philippines Banks but the banks denied it.  The shares of company tumbled down by over 72%. The damage from a short-seller’s barrel can be very brutal. JUMIA is still recovering from the damage from a lone wolf short seller’s attack on their NYSE IPO.

Though short sellers are unnecessary irritants to financial services regulators and how did the German financial markets watchdog BAFIN, allowed repeated reports from foreign jurisdiction with classified information, whistle blowers reports go untreated severally?

Some of the accusations

In financial services world, market operators can work with offshore partners and third-parties where there is license limitation, lack of operational base etc and earn a commission.

It’s not an illegal business activity in many jurisdictions  but for some reasons, these offshore commissions  were a major chuck of the revenue of wirecard and they are coming majorly from three partners, that looked alike in their business presentation, operations etc but in reality are extremely small business entities  which raised the question of the legality of the volumes of cash coming from those sources and the resultant ‘padding’ of their books.

Some far-reaching proposals had been tabled to address and prevent future occurrences such as mandatory auditor’s report to the finance ministry in reporting irregularities, change of market operator’s auditors every ten years, intervention of the of the financial regulator based on suspicion of irregularities etc.

A regulator’s job is to create market certainty and appropriate risk but in the case of wirecard, the German financial watchdogs dropped the ball. Due to missteps of a single market operator, it will take a while for Germany watchdogs to build back the confidence that people have in their financial services market, judging from the possibility of future revelations that may be presented in court during the trail of the arrested top executives.

There is a national systemic risk and contagion effect if national regulators don’t step-up their  role as gatekeepers for financial technology firms with local and offshore operations.

Emmanuel Okoegwale is a digital finance specialist based in Lagos – Nigeria Emmanuelok2007@gmail.com