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Wirecard is a wake-up call on regulatory weakness

This article by William R. Rhodes was first published in TheBanker |

There is no room for apathy where regulators are involved; we need an investigation into Wirecard, however embarrassing and painful it may be.

The lion’s share of the blame for the $2.1bn fraud and collapse of Wirecard rests with its board, ex-CEO, chief financial officer and senior leaders. The supervisory and executive boards failed to oversee the firm’s performance or ask the right critical questions. Why were they so lax?

German financial authorities, who have long touted the efficacy of their domestic board structures, need to take a long, hard look at lessons from the Wirecard debacle and change the expectations of how boards should function, deliberate and oversee senior executive performance. Unquestionably, banks also need to learn from this scandal.

Cutting out the rot

At this stage, it is too soon to say precisely who was acting illegally, who was complicit, who chose to look the other way or who was wilfully blind to malfeasance. But we can see the rot started at the very top.

The massive fraud was perpetrated over years. The scandal will continue to shake the German corporate world and must be the subject of careful dissection and analysis.

The corruption and the scandal fell between the cracks, with Germany’s states and regulators failing to effectively oversee Wirecard, either as a bank or non-bank firm. One might even say BaFin, the Federal Financial Supervisory Authority, was ‘captured’ by the firm. It was certainly too close to the company and yet claims it did not oversee the firm.

German officials criticised the critics of Wirecard. Short sellers’ accusations that funds, held in opaque subsidiaries in Dubai and the Philippines, were questionable turned out to be correct. The allegations should have been rigorously investigated, but they were not followed up effectively. Instead, corrective supervisory action was lacking.

German regulators went after external whistleblowers, investigating them for stock market manipulation. The short sellers’ warning of fraud were not heeded, nor were Wirecard’s criminal senior executives pursued.

Hedge fund apathy

Part of this problematic performance can be explained by German cultural and business antipathy to hedge funds and short sellers who make money betting on – and sometimes promoting the collapse of – firms, simply to benefit from the corporate carnage. Germany prides itself on long-term staid, solid businesses. Speculation for speculation’s sake is distrusted and disliked. But the dislike of short sellers does not mean regulators can allow themselves to be hoodwinked, or be gaslighted by a firm’s executives, rather than investigating allegations carefully.

Regulators should have been more sceptical of the weak explanations from Wirecard’s CEO. The late Paul Volcker, a central bankers’ banker, used to remind us of the maxim he held to on the many occasions he was approached by a senior banker with a warm smile and a hearty handshake. “I am your regulator – not your friend.” BaFin and other agencies failed this test.

This brings up the question of who held responsibility at the European Central Bank, the Single Supervisory Mechanism and European securities regulators. This real-time test of the European regulatory superstructure created after the 2008–2009 recession exposed areas of weakness.

Learning from mistakes

The scandal shows that poorly regulated banks and non-bank firms, at the margins and in any country, can avoid proper scrutiny and increase risks for customers, investors and markets. It shows that we cannot rest on our collective laurels, based on the misguided notion that the system is unambiguously safer today than in the past.

Instead, boards must be vigilant in their oversight of senior executives’ behaviour and conduct. Wirecard’s culture was rotten to the core – where was the board and what were they doing?

A full and careful investigation of the Wirecard scandal should include a review of the national and international regulatory mistakes and weaknesses of the many agencies involved. The investigation should also assess where regulatory agencies stumbled or failed, and fix any gaps that exist in which criminality can flourish. These investigations will be embarrassing and painful, but they are necessary.

National and international policy-makers must be willing to close gaps as and when they arise. More generally, we need to remember the lessons of the global financial crisis, and manage risks as they mutate, as the pandemic continues to wreak havoc on our economies, creating new risks.

Compliments of William R Rhodes, President and CEO of William R Rhodes Global Advisors – a member of the EACCNY, and a past chairman of Citibank.