After Wirecard’s insolvency, there is great uncertainty among customers. To what extent your money is protected, what shareholders need to know and what threatens the supervisory authorities – an overview.
By Dominik Lauck, tagesschau.de
What happens to the Wirecard Bank?
Wirecard Bank, with which many private individuals are customers, is a subsidiary of Wirecard AG, which has filed for bankruptcy. The bank is to be protected from being dragged into the bankruptcy of the parent company. “Wirecard Bank AG is not part of Wirecard AG’s insolvency proceedings,” said the payment service provider. The financial regulator BaFin has appointed a special representative for the bank who monitors the cash flows. The Wirecard board no longer has anything to say there.
However, the bank is closely intertwined with the insolvent parent company – for example in sales. It may therefore be difficult to keep the bank out of bankruptcy.
Wirecard Bank has a full banking license and can offer all financial services. According to the 2018 annual report, savings deposits of EUR 1.4 billion were in Wirecard Bank at the end of 2018.
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What about customers of “boon” and “boon.PLANET”?
The “boon.PLANET” app is an offer from Wirecard Bank and works like a mobile direct bank. Customers have a physical and a virtual credit card (Debit Mastercard) and a checking account. Since the beginning of the year, Wirecard has been advertising giro balances with its banking app at an interest rate of 0.75 percent, while other institutions hardly pay any interest even with fixed deposits.
The deposits are protected by the statutory compensation fund, which covers up to EUR 100,000 per saver. In addition, the Wirecard Bank, which offers the app, is a member of the deposit guarantee fund of private banks. Including legal protection, this protects EUR 19.7 million per depositor.
With the boon card, which is issued by Wirecard Card Solutions Limited (WDCS), all transactions are no longer possible – this also applies to the use of Apple Pay via boon. “This situation came about because WDCS had to temporarily suspend its e-money, card issuing and acquiring businesses,” said boon. “The suspension will be ordered by the Financial Conduct Authority (FCA).”
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What about the Curve or Holvi credit cards?
The Multi-Mastercard Curve, which is also published by Wirecard Card Solutions Limited, cannot currently be used. This also affects all related transactions – for example if the card is linked to Apple Pay. Curve justifies this by saying that the British FCA has withdrawn WDCS approval to operate. Curve went on to explain that the cards would be ready for use again soon, but it could take a few days. Customers’ money and card details are safe and secure.
The situation is similar for customers of the Holvi Business Mastercard, which is also issued by WDSC. All credit cards are “temporarily blocked,” said Holvi. Payments and cash withdrawals are not possible. However, all other functions of the Holvi business account are still fully functional. “You can still send invoices and make and receive transfers. Transactions to Holvi accounts are not affected – that is, incoming and outgoing SEPA transfers are processed as normal.”
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What does bankruptcy mean for investors?
You have lost a lot of money. The stock fell from almost 200 euros to less than two euros in the meantime – a loss of around 99 percent. Investors can sue Wirecard or the auditors EY and try to recover at least part of their loss. The basis would be, for example, unlawful acts or violations of ad hoc obligations. Several law firms are already preparing corresponding class actions.
However, shareholders have to line up at the back. Banks that gave Wirecard loans and other creditors can file their claims in bankruptcy proceedings. Shareholders remain on their losses. After all, shareholders do not have to refill capital in the event of bankruptcy.
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What is Wirecard’s business model?
Wirecard is a payment service provider that processes cashless payments to cash registers and on the Internet. The company sits at the interface between the connected merchants on the one hand and banks and credit card companies on the other. Wirecard had transferred some of these businesses in the Middle East and Southeast Asia to third-party companies, which allegedly processed payments on behalf of the German company. Because it has now turned out that a large part of this third-party business was presumably fictitious. According to the current status, air bookings amount to 1.9 billion euros.
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How did Wirecard become insolvent?
The British newspaper Financial Times (FT) has uncovered the alleged manipulation by Wirecard in Asia. In October 2019, she reported suspicions that the third-party business there could have been invented. Because almost the entire alleged Wirecard profit came from the business with three partners: a company called Al Alam from Dubai, Pay Easy Solutions from Manila and Senjo in Singapore. These companies give the impression that they are bogus companies.
As a result, the auditing firm KPMG uncovered inconsistencies and determined in April that the existence of over a billion euros was not proven. Ultimately, the audit firm EY came to the assessment in the 2019 audit that it was criminal manipulation and gave the notice to the authorities.
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What responsibility does the BaFin financial supervisory authority have?
Like the auditors, BaFin apparently did not look closely at Wirecard, although there have been indications of trickery, opaque cash flows and possible falsifications of balance sheets for years. On the contrary: after FT research last year, financial supervision took action against the journalists. At that time, BaFin filed criminal charges against two FT reporters and several exchange traders. Reason: With the disclosure stories, they would have triggered a price slide at Wirecard in order to then be able to enrich themselves with the help of brokers by betting on falling prices.
In close coordination with the European securities regulator ESMA, BaFin also had a Europe-wide short sale ban. This had only happened in the financial crisis after the bankruptcy of the US bank Lehman Brothers in 2008. The BaFin approach looked “as if a protective wall was being built around Wirecard,” wrote the “Süddeutsche Zeitung”. Wirecard could easily portray itself as the victim of a conspiracy.
BaFin boss Felix Hufeld spoke of a “complete disaster” and was self-critical: “We have not been effective enough to prevent this from happening.” BaFin refers to its responsibilities and competencies. It only supervises Wirecard Bank, not the entire group. As a result, she “has no formal rights to audit the Group’s dubious Asian business,” as she says tagesschau.de explained.
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What consequences could there be for BaFin?
Federal Finance Minister Olaf Scholz wants to examine the BaFin structures. The current way of working has to be reconsidered. “In future, BaFin must be able to carry out special audits as quickly, quickly and efficiently as possible,” said Scholz.
The Finance Committee of the Bundestag wants to deal with the role of BaFin next Wednesday. BaFin boss Hufeld should also be available to answer questions. The Left Party has already called for personnel consequences.
The EU Commission also instructed the European financial regulator ESMA to clarify whether BaFin failed to control Wirecard. A preliminary investigation report should be available by July 15. If an infringement is found, BaFin could be instructed by Brussels to change its practices – a very embarrassing situation for a national supervisory authority.
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What about the accountants?
More and more investors are announcing lawsuits against the auditor Ernst & Young (EY), who has been checking Wirecard’s balance sheets for years. According to “Spiegel”, the Japanese technology investor Softbank, which is one of Wirecard’s investors, wants to take legal action against EY.
The reputation damage is immense. There are doubts that EY, as an auditor, is even suitable to check the balance sheets, said the Schutzgemeinschaft der Kapitalanleger (SdK). She would vote at future general meetings for the investors she represented against an appointment of EY as auditor. In Germany, EY was recently on the rise and won lucrative new mandates for the audit of accounts, such as the Deutsche Bank.
EY had checked Wirecard’s numbers for more than a decade. Only when they looked through the 2019 balance sheet did they notice that confirmations to accounts in the Philippines were fake.
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What’s next with Wirecard?
The Munich district court appointed Michael Jaffé as the provisional insolvency administrator. He now has to check whether the company is viable or whether Wirecard has to shut down due to lack of substance. This may take a while due to the very difficult situation. If the insolvency administrator considers the company to be viable, an option is to look for investors who will make the necessary money available for continued operation. The Wirecard employees in Germany receive bankruptcy money.
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Can Wirecard stay in the DAX?
The 30 largest public limited companies in Germany belong to the DAX. Deutsche Börse, which is responsible for the composition of the DAX, checks the composition of the index every few months. The next review is due in September. The stock exchange currently sees no reason to have the working group on share indices meet unscheduled.
Wirecard continues to meet all the requirements to belong to the DAX. After all, companies should not be prejudged – after all, Wirecard could still exist after bankruptcy. A quick exclusion from the DAX is only possible if “the bankruptcy is rejected for lack of funds” or if a company is “in the process of being wound up”.
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