Wirecard Scandal explained: A modern-day Hera Pheri

Pandemic, Recession, cyclones, suicides, floods… What are we missing? Oh, wait. A financial scandal. Yep. A few days back, 2020 saw its biggest financial scandal so far (note for time traveller: we’re somewhere in early July 2020). The news has been infamously calling it as the Wirecard scandal; through this piece, we’ll try and understand what the scandal is all about. But, as we do with all our pieces, let’s first run-down through a swift history.

Swift history of Wirecard

Wirecard is a Germany based payment company that facilitates Digital payments across platforms for B2B and B2C businesses. It is similar to what Paytm is in India. Only that major chunk of its revenue comes from gambling and adult websites. The company was founded in 1999, is well-known across Europe and has expanded to various other countries in Asia (including Africa, Malaysia, etc.). But their revenue source did not change, they expanded in the same space.

Related: Take a look at the Paytm case study 

Since the inception back in 1999, the company grew a client base of near 3 lakh clients including KLM, Deutsche Telekom and FedEx. Given the number of clients, the market cap of the company grew to 24bn Euros and the company became one of the most valuable ones in Germany. However, relatively fewer people know about the company in India. But not anymore, right?

Anyway, so what happened?

On June 18th 2020, Ernst & Young, one of the well-known auditing firms, announced that they’re missing more than $2 bn in Wirecard account (their client). What’s worse? Wirecard announced they do not think this money even existed!

I mean seriously? said the CEO, and resigned.

The German stock market crashed after the announcement. The share price of Wirecard went from 104 Euros to 6 Euros. The market cap fell to 5bn Euros from the early 24bn Euros. Imagine the damage this caused to the investors!

Finally, company filed for insolvency the same weekend.

Well, all of that escalated quickly, didn’t it?

The Start

Scandals like these don’t just happen. There have been whistle-blowers in the past that have tried to bring this to light. And like all the others in the past, have been ignored.

Related: Take a look at the 2008 financial crisis case study

It started in January last year 2019 when Financial Times (England) published a report about the alleged use of forged and backdated contracts to inflate the revenues.

The inflation was presumably done in order to get the regulatory approvals for Wirecard to expand their business in Hong Kong. So, when you want to expand your operations in a country, you have to present them with your financials (paisa), if these figures meet the requirements, you get the approval to do business.

Given the company did not have strong financials, the company started manipulating figures in order to give a false impression of their figures. They used a practice called “round-tripping” where a set of confusing transactions is made across borders in order to give a false impression of something. You can also think of this as “Hera-Pheri” as most Indian’s would call it. The company transferred funds to their subsidiary companies (Wirecard Asia-pacific, Wirecard Singapore, etc.) and showcased that the funds were received from their customers.

Now, these companies transferred money back to Wirecard, to give an impression of all being fine here. Do you remember doing this with your friends when Google Pay was first launched? 😀

The second part of the story

Imagine you going to a regulatory body and telling them that most of the money we make comes from Porn and Gambling websites. Do you think they will approve? Duh. No. And so, they showcased money to come from good sources. These sources were those fake-partner companies they themselves setup (their own shell companies). The partner companies would do business with Porn and gambling websites and would send revenue to Wirecard, so Wirecard is not directly involved. The illustration is below

The Whistle-blowers

Later in October 2019, Financial Times (England) covered a story where it accused Wirecard’s Finance team conspiring to inflate sales and profits of the company. Wirecard repeatedly ignored and denied these charges and on some occasions, sued the newspaper. What’s more, BaFin, a financial regulator from Germany even filed complaints against some of the FT reporters for Market manipulation in 2019.

Wirecard requested an auditing firm KPMG to perform an independent investigation. Post investigation, KMPG too, stated that Wirecard was not providing all documents for the audit. Indicating something was wrong. But Wirecard covered this saying these were false claims. And the issue was covered for that time.

Looks like Germany was a little too protective?

Anyway, on 18th June 2020, it all came to light when E&Y announced the missing $2bn. The company first said that the money was safe in two banks of Philippines. However, later these banks denied the claims. And finally, the Wirecard scandal came to light. And so, the fall happened.

The Retaliation

So, what about the investors and loan givers (creditors) now? The company has a debt of more than 3.5 billion Euros. Well, they have lost hopes to receive anything back now. However, they have filed a case against E&Y given the company was Wirecard’s auditor for a while now and this could’ve been called out earlier. The most obvious scenario here seems to be an overlook, but the possibility of involvement in the scandal cannot be ruled out. It seems if the Whistle-blowers were paid a little more mind than they were, the damage could’ve been minimized.


The author of this piece is Yash Thakker, we hope this was simple enough to understand. Subscribe to the newsletter here for more of these content.

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