Wirecard Scandal: Germany Wants To Overhaul Financial Regulator, Another Executive Arrested

The German government is proposing to overvaul its financial regulatory agency in the wake of the scandal engulfing Wirecard, the digital payments firm that is believed to have inflated its sales and revenue figures for at least five years.

The Federal Financial Supervisory Authority – widely known by its abbreviation BaFin – admitted it overlooked suspicious accounts released by Wirecard.

"We need far-reaching reforms," German Finance Minister Olaf Scholz told the Frankfurter Allgemeine Sonntagszeitung newspaper, adding that lawmakers must "review and improve new protective mechanisms."

Wirecard filed for bankruptcy last month after some $2.1 billion were unaccounted for in its books. The company’s former chief executive, Markus Braun was arrested and released on bail but remains under investigation by federal prosecutors. Wirecard’s former chief operating officer Jan Marsalek is a fugitive.

Among other measures, Scholz said Germany should eliminate the two-stage examination procedure whereby BaFin only intervenes in companies after questions are raised by an initial audit typically done by a private monitoring agency. Scholz now wants BaFin to intervene directly.

Scholz also wants to grant BaFin -- which is supervised by the finance ministry -- "more control rights over financial reports, regardless of whether the company has a banking division or not."

"If we come to the conclusion that BaFin needs more money, more jobs and more competency, I will make every effort to ensure that this happens," the finance minister added.

Scholz also wants BaFin to be able to conduct checks on company books without prior notice.

Fabio De Masi, a member of the opposition Left party, welcomed the proposals but also requested a lower threshold of liability for auditors' failures.

Scholz further cautioned “we have so far only seen the tip of the iceberg [of this scandal]. There is probably more to come.”

Separately, Wirecard’s core businesses in Europe and North America had been incurring greater losses than previously understood, according to a study by accounting firm KPMG.

This latest revelation will likely make it even more difficult for Wirecard’s administrator Michael Jaffe to sell off Wirecard’s remaining business assets.

“Wirecard has very few physical assets, and the risk is that many of its clients will switch to rivals soon,” a source told Financial Times.

Jaffe said last week that “numerous” potential buyers – including Deutsche Bank -- expressed an interest in purchasing parts of Wirecard.

“We’re obviously a big participant in the payments business, it’s a big part of what we do, especially in the corporate bank,” said James von Moltke, Deutsche Bank’s chief financial officer.

Meanwhile, on Monday, German prosecutors said they have arrested the chief executive of Cardsystems Middle East FZ-LLC, a Dubai-based subsidiary of Wirecard.

The executive – whose name cannot be revealed under German law since he’s not a publicly known figure – flew from Dubai to turn himself in. The figure was arrested on suspicion of conspiracy to commit fraud, attempted fraud and aiding and abetting other crimes.

Prosecutors in Germany are also investigating Wirecard’s Chief Financial Officer Alexander von Knoop and Chief Product Officer Susanne Steidl.

As for the fugitive Marsalek, reports have emerged that he did not travel to the Philippines in late June as previously thought.

Philippines Justice Secretary Menardo Guevarra said that immigration records of Marsalek’s entry into the country were faked. However, Marsalek’s whereabouts and trajectory are completely unknown.

“We are an island country, and there are backdoors through which undocumented foreigners may slip through,” said Guevarra.