Payment giant Wirecard collapses, owing creditors US$4 billion

Wirecard's former chief executive Markus Braun was arrested on Monday and released on bail a day later.
Wirecard's former chief executive Markus Braun was arrested on Monday and released on bail a day later.

BERLIN/MUNICH • Wirecard collapsed yesterday, owing creditors almost US$4 billion (S$5.5 billion) after disclosing a gaping hole in its books, in Germany's worst accounting scandal.

The payment company filed for insolvency at a Munich court, saying that with €1.3 billion (S$2 billion) of loans due at the end of the month, its survival as a going concern was "not assured".

Its implosion came a week after auditor EY refused to sign off its 2019 accounts, forcing out chief executive Markus Braun and leading Wirecard to admit that US$2.1 billion of its cash probably did not exist.

EY said yesterday that there are clear indications Wirecard was involved in a fraud with multiple parties around the world in different institutions.

Wirecard is the first member of Germany's prestigious DAX stock index to go bust, less than two years after it commanded a spot among the country's 30 biggest listed companies, with a market valuation of US$28 billion.

Its demise leaves creditors with scant hope of getting back the €3.5 billion they are owed, sources familiar with the matter said.

Of that amount, Wirecard has borrowed €1.75 billion from 15 banks - including Commerzbank, ABN Amro, LBBW and ING - and €500 million from bond investors.

"The money's gone," said one banker. "We may recoup a few euros in a couple of years, but will write off the loan now."

Wirecard shares, which were suspended ahead of the announcement, crashed 80 per cent when trading resumed. They have lost 98 per cent since EY questioned its accounts last Thursday.

EY faces a wave of litigation in a scandal that has been compared to Arthur Andersen's disastrous oversight of United States energy company Enron.

German law firm Schirp & Partner said that with Wirecard now effectively sidelined, it would file class actions against EY on behalf of both shareholders and bondholders.

 
 

"It is frightening how long Wirecard was able to operate without being objected to by the auditors," partner Wolfgang Schirp said.

ALLEGED FAKE TRANSACTIONS

Wirecard's new management had been in crisis talks with creditors, but pulled out yesterday morning "due to impending insolvency and over-indebtedness".

Its insolvency filing did not include its Wirecard Bank subsidiary, which holds an estimated €1.4 billion in deposits and is already under emergency management by BaFin, Germany's financial regulator.

A second source close to talks with creditors said that although the company had a healthy core, about two-thirds of sales had been faked in its accounts.

"There is no way that they could repay their total debt of €3.5 billion with that core", with all the legal challenges ahead of them, the source said on condition of anonymity.

The insolvency also raises questions on the future of Wirecard's licences.

The company has licences with Visa, Mastercard and JCB International, through which its banking arm issues credit cards.

If Wirecard is unable to find the missing cash, Visa and Mastercard may have cause to revoke the licences.

The ascent of Wirecard, which was founded in 1999 and is based in a Munich suburb, was dogged by allegations from whistle-blowers, reporters and speculators that its revenue and profits had been pumped up through fake transactions.

Mr Braun fended off the critics for years before finally calling in outside auditor KPMG late last year to run an independent investigation.

 
 

KPMG, which published its findings in April, was unable to verify €1 billion in cash balances, questioned Wirecard's acquisition accounting, and said it could not trace hundreds of millions in cash advances to merchants.

Mr Braun was arrested on Monday and released on bail of €5 million a day later.

Former chief operating officer Jan Marsalek is also under suspicion and is believed to be in the Philippines, according to justice officials there.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on June 26, 2020, with the headline 'Payment giant Wirecard collapses, owing creditors $5.5b'. Print Edition | Subscribe