Bank Regulation

Source: German Regulators Failed To Take Action On Wirecard Red Flags

Numerous regulators had discussions over the years about tightening supervision on Wirecard or adding it to a list of potential subjects for more investigations, but all decided against it, Reuters reports.

That was all before the company’s current implosion over a scandal about a missing $2 billion on its books. The focus of the scandal is now also widening to include auditors who overlooked the company’s alleged financial malpractice for years. Wirecard, which enjoyed prestige as a payments firm for worldwide clients, allegedly owed much of its success to a network of scam transactions.

But before all that, in 2017, German financial regulator BaFin and central bank Bundesbank thought about identifying Wirecard for more supervision, but ultimately declined. BaFin said it had asked German regulator FREP in February 2019 to look into Wirecard’s activity, but the report had not come in yet.

Also in 2019, the European Central Bank (ECB) and others talked “for months” about putting Wirecard on a watchlist so as to give investigators more power to look into its practices.

Still, nothing happened, Reuters reported. The talks continued into 2020, even though Reuters reports that anonymous sources had spoken with ECB about “irregularities” with Wirecard.

It is unknown why these entities chose not to take action, although one source told Reuters that the decision would have raised some complex questions about whether to define Wirecard as a bank. Wirecard, which worked in processing electronic payments, was always a “gray area” in terms of bank supervision — while it owned a bank, it wasn’t just that. Putting it under the umbrella of financial firms would have put the whole company under bank regulation.

Jan Pieter Krahnen, a finance expert at the Goethe University in Frankfurt, said the affair was showing how Germany’s more lax attitude toward regulation was failing them.

“Capital market supervision is a low priority for Germany,” he said, according to Reuters.

BaFin is likely to face more criticism in the coming days, particularly for its reported habit of questioning those who criticized Wirecard rather than going after the company itself, Reuters reported. German opposition lawmaker Frank Schaeffler, who sits on BaFin’s supervisory board, said BaFin bears the brunt of the responsibility for the neglect.

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