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Germany to Revamp Financial Oversight After Wirecard Damage

Nicholas Comfort, Birgit Jennen and Brian Parkin
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Germany to Revamp Financial Oversight After Wirecard Damage

(Bloomberg) -- Germany will be quick to overhaul its regulation of financial companies to repair the damage caused by Wirecard AG’s collapse, Deputy Finance Minister Joerg Kukies said.

“What we must do is analyze, by turning over every stone, exactly where and how things went awry,” Kukies said at an event organized by the publisher of Die Zeit newspaper.

The accounting scandal that brought down Wirecard has laid bare significant cracks in Germany’s financial oversight, increasing pressure on Chancellor Angela Merkel’s government after one of the country’s biggest corporate failures.

Even with ample warning, German authorities failed to catch accounting issues at the digital-payments company. Slow decision-making, insufficient oversight and fragmented responsibilities created cracks that allowed Wirecard’s problems to go undetected by officials.

Germany is one of relatively few countries to split accounting enforcement between a private-sector watchdog and its markets regulator, while the investigation of money laundering at non-financial companies is handled by regional authorities. With the fallout risking the country’s reputation as a place to do business, the government is now pushing for reform.

The financial regulator, known as BaFin, has come under fire for being slow to respond to allegations and temporarily banning short selling of Wirecard stock last year, an unprecedented step that appeared to back Wirecard. But the inefficient delegation of supervision duties helps explain why it failed to dig up problems at the company.

“BaFin has no investigative powers -- that’s missing in Germany,” Kukies said. “It needs similar competences as prosecutors.” Kukies contrasted the regulator with the SEC, which does have those powers.

To consolidate financial enforcement, BaFin will be given the authority to start investigations into company accounts, the Financial Times reported on Sunday.

The government canceled its contract with the accounting watchdog, called FREP, a Justice Ministry spokesman said in an email. The contract will end at the end of 2021, and Germany is in the process of reviewing the extent of reforms needed to ensure “functioning and transparent capital markets,” he said.

No Feedback

BaFin received documents alleging irregularities at Wirecard in January 2019, yet it took more than a year to ask prosecutors to follow up on suspicions of market manipulation.

The regulator asked FREP in February 2019 to investigate, and since made multiple follow-up requests but hadn’t received a report on Wirecard’s accounting, said a BaFin spokeswoman.

FREP assigned just one person to probe Wirecard, according to Frankfurter Allgemeine Sonntagszeitung. The organization didn’t immediately respond to a request for comment.

In the meantime, KPMG’s special audit, published in April this year, couldn’t verify much of Wirecard’s historic revenue and profits.

Once lauded as one of Germany’s fintech stars, Wirecard filed for insolvency last week after saying that 1.9 billion euros ($2.1 billion) previously reported as cash on its balance sheet probably doesn’t exist.

Another key weakness in Germany’s regulatory regime has been that BaFin doesn’t directly supervise Wirecard. Despite the fact that its business was largely financial, the company was classified as a technology company rather than a bank or insurer, for which the watchdog is responsible.

The company’s failure will harm Germany’s reputation for years to come, Kukies said. “In the same way as we refer to Enron and WorldCom today -- in 10 years’ time we’ll be talking about Wirecard.”

Burned Name

BaFin President Felix Hufeld is scheduled to testify to parliament on Wednesday. He has acknowledged that his institution is among the bodies responsible for the scandal at Wirecard, yet Hufeld defended the short sale ban as being a legal duty following indications of manipulation in the trading of Wirecard shares.

Other institutions have been more focused on deflecting blame. Wirecard’s long-time auditors, Ernst & Young, last week accused their client of “an elaborate and sophisticated fraud.”

Markus Braun, who resigned as chief executive officer as the scandal unfolded, was arrested last Monday before being granted bail the following day. Last week, Wirecard fired Chief Operating Officer Jan Marsalek, a key strategist in the company and a close ally of Braun, without giving a reason.

With traditional lenders Deutsche Bank AG and Commerzbank AG struggling with their own problems, the scandal has raised questions over how to rescue Germany’s role in modern finance after Wirecard’s demise.

“It is very important to us that the business is saved and a German company can continue to run it,” said Andreas Laemmel, the lead lawmaker for economic affairs in Merkel’s Christian Democratic caucus, told Bloomberg. “But Wirecard’s name cannot persist, it’s burned.”

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