Fraud Complex

It’s no secret banks and other financial institutions have behaved irresponsibly with money in the past, but German fintech Wirecard really went off the rails last month.

 

🕰 Recap

  • Back in 2018, a $230 billion money-laundering scandal led to the resignation of Danske Bank’s CEO. 
  • And later that year, Deutsche Bank’s offices were raided by anti-money laundering police. 
  • Last month, payments processor Wirecard saw its stock drop 70% after revealing it’d misplaced $2 billion. 
  • But days later, Wirecard conceded the money might not actually exist – and the company’s former CEO was arrested. 

 

✍️ Connecting The Dots

One of the main concerns of financial regulators around the world – and the reason several companies have been hit with large fines – is that not enough is being done to prevent money laundering, fraud, or other criminal behavior. It wasn’t that long ago, after all, that Swiss regulators rapped Credit Suisse on the knuckles for having loose anti-money laundering and corruption controls, as well as for promoting – rather than sanctioning – an employee who’d committed fraud.

But as we’ve seen, controls and processes – whether lax or stringent – can’t necessarily stop wrongdoing. For years, investors who’d bet against Wirecard’s stock argued something didn’t add up in the company’s accounts. And time after time, Wirecard batted back the claims. Until, of course, independent auditors couldn’t verify the location of the $2.1 billion Wirecard claimed to have. So after it was revealed the cash was more fiction than fact, the company’s ex-CEO was promptly arrested. As for whether Wirecard’s case was one of “simple” fraud or something more untoward, that remains to be seen.

Still, turbulence creates opportunity. In this case, that opportunity’s a potential acquisition: there are over 100 investors reportedly interested in buying parts of Wirecard’s business. Some of them are likely specifically interested in Wirecard Bank, given the high costs and regulatory scrutiny it would otherwise take for them to get a new banking license almost anywhere in the world. That’s probably cold comfort to Wirecard’s existing investors, though: analysts reckon a sale would only bring in $500 million – just 10% of what the company’s creditors are owed.

 

🥡 Takeaways

1. Who watches the watchmen?

Company analysts often find it hard to call out a legit-looking earnings report even when something seems amiss – and even now, the majority recommend buying Wirecard shares. That might be because investment banks want to work with major companies, and favorable opinions can ultimately lead to more business. But while their assessments may not come under much scrutiny for now, the auditing firm EY – which signed off previous accounts – is likely to: it has potential conflicts of interest across different segments of the company. In fact, all the UK’s biggest accounting firms have been told to plan how they’ll split off their audit businesses by October. 

2. Where angels fear to tread.

You often hear about stocks being risky, but that doesn’t just mean the returns you might get: it includes the risks of the businesses themselves. Wirecard’s shareholders could conceivably be left with stock worth nothing (or, in a best case scenario, a lot less than they’d previously thought). Bondhonders, on the other hand, can stake a claim to the company’s assets to make sure they’re repaid.

 

🎯 Also On Our Radar

For the first time ever, investors will have bet a combined $20 billion against a company’s stock rising. Divisive electric vehicle maker Tesla is on the verge of receiving that dubious honor: its shares have risen 230% this year, leading its naysayers to shout louder than ever that they’re overvalued – while also crossing their fingers they’ll soon be proved right to avoid facing massive losses.

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