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Wirecard: the scandal spreads to German politics

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In September 2019, Angela Merkel’s top economic adviser, Lars-Hendrik Röller, met a delegation from payments group Wirecard, which at the time was still seen as one of Germany’s most successful tech companies.

One of Mr Röller’s visitors in the chancellery in Berlin was Burkhard Ley, a strategic adviser to Wirecard and its former chief financial officer. A year later, Mr Ley is in police custody, accused of fraud, embezzlement and market manipulation. He denies any wrongdoing.

The get-together highlighted the extraordinary access the payments group enjoyed to Germany’s top decision makers until shortly before its collapse this summer — access which has shone an unforgiving light on the influence of lobbyists over German politics.

Wirecard has gone down as the most spectacular case of financial misconduct in postwar German history. But it is now fast becoming a political scandal too. Earlier this month the Bundestag decided to launch a full parliamentary inquiry into the affair, ensuring that it will continue to capture headlines well into 2021 — a year when Germans go to the polls to elect a new parliament — and potentially cast a shadow over Angela Merkel’s final months as chancellor.

One key area of interest for MPs is why the authorities seemed so slow to recognise the gravity of the situation at Wirecard. The Röller-Ley meeting took place months after whistleblowers had raised serious concerns about fraud at the payments processor that triggered a police probe in Singapore. Members of the German government — including Ms Merkel herself — continued to lobby for Wirecard, despite mounting doubts about its accounting practices.

The scandal has also exposed the weaknesses of Germany’s system of financial regulation, and in particular the toothlessness of its markets watchdog BaFin. Opposition MPs are still incredulous that instead of investigating the substance of the allegations against Wirecard, BaFin and criminal prosecutors in Munich went after the very journalists and short-sellers who had highlighted suspicious activities at the payment provider.

“With the knowledge we have today, this is an utterly hair-raising situation for us,” a senior German official told the Financial Times, conceding that “the level of [alleged] criminality at Wirecard by far exceeded the power of my imagination”. Government bodies as well as private-sector institutions such as auditors had, he said, all failed miserably.

For Germany’s opposition parties, it is the political failures which are particularly egregious. Many MPs single out Olaf Scholz, finance minister and Social Democrat candidate for chancellor in next year’s Bundestag elections, who oversees both BaFin and the Financial Intelligence Unit, Germany’s anti-money laundering agency. The FIU has come under fire for failing to pass on dozens of Wirecard-related suspicious activity reports to the German public prosecutor’s office.

The links between German finance minister Olaf Scholz, centre, and deputy finance minister Jörg Kukies and Wirecard are being scrutinised in the wake of the scandal © Tobias Schwarz/AFP/Getty

“No government agencies played any role in uncovering the crime — neither BaFin, nor the FIU, nor the public prosecutor,” says Florian Toncar, an MP for the pro business Free Democratic party. “The state made zero contribution to getting to the bottom of the Wirecard affair.”

The Bundestag’s committee of inquiry is not yet constituted, its remit still unclear. But it is already obvious what kind of questions might interest MPs.

Why, for example, did Ms Merkel lobby for Wirecard while on an official trip to China in September last year when her own finance minister was aware of continuing investigations into the company? Why did deputy finance minister Jörg Kukies visit Wirecard boss Markus Braun at his Munich headquarters last November, on the day of the chief executive’s 50th birthday?

Why did BaFin appear so reluctant to investigate a company that had been generating negative headlines for months? Why were BaFin employees able to trade Wirecard shares while the agency was investigating the payments group?

And why did BaFin respond to FT articles alleging accounting fraud by banning investors from betting against the company’s shares for two months, and later filing a criminal complaint against two FT journalists who had authored the reports?

Fabio De Masi, an MP from the hard-left party Die Linke, who was one of the few lawmakers to take an early interest in Wirecard, says the signal Bafin’s actions sent was “just terrible”. “It was a message to all critics of the company that they were spreading malicious rumours,” he says. “And it was a message to German journalists to be very, very careful before you write anything negative about Wirecard.”

The German police’s wanted poster, pictured last month, for Jan Marsalek, the fugitive former Wirecard COO © Clemens Bilan/EPA/Shutterstock

‘Fig leaf’ inquiry

Wirecard was once seen as a rare German tech success story. In 2018 it replaced Commerzbank in the prestigious Dax index and a year later dreamt of taking over Deutsche Bank. But that fantasy unravelled in June when it admitted that €1.9bn in cash was missing from its accounts. Within a week Wirecard had collapsed into insolvency, and €13bn in stock market value had been wiped out.

At least seven of its former top managers are suspected of running a criminal racket that defrauded creditors of €3.2bn. Four people are in police custody and Jan Marsalek, Wirecard’s fugitive former second-in-command, is on Interpol’s most wanted list.

For Lisa Paus, MP and finance spokesperson for the opposition Greens, there is a pattern to this. “Wirecard is the latest in a whole series of financial scandals in Germany that BaFin failed to uncover,” she says. “You need a really tough watchdog with proper investigative skills to identify fraud, and that’s the opposite of what we have right now.”

She cited the “Cum-Ex” fraud scheme, the controversial share trades which exploited a design flaw in Germany’s tax code to rob the country’s exchequer of billions of euros in revenues. Then there are the various misconduct scandals at Deutsche Bank, which were unearthed by US and UK regulators, and the Volkswagen diesel affair, which was uncovered not by German authorities but by the US Environmental Protection Agency.

Some suspect that the German authorities were motivated by a desire to shield a national tech champion from external criticism. “You have the impression the regulators said — hey, we have this model German company, . . . it’s a victim of attacks by foreign hedge funds, and the FT is their tool,” says Mr Toncar. “And that was a grave miscalculation.”

Asked by the FT if it was true that the government and BaFin deliberately sought to protect the payments processor, Mr Scholz said there was “no evidence” of that.

He also brushed off the claim that the government could have done more to uncover wrongdoing at Wirecard — implicitly pointing the finger instead at EY, the accounting firm that gave the disgraced tech group unqualified audits for more than a decade.

Mr Scholz drew parallels between the Wirecard debacle and the Enron scandal in the US. There was not only a “gigantic accounting fraud”, but in both cases, “auditors who checked the company every year failed to identify this manipulation”.

That is why, he said, he was pushing for reform of the accounting industry. One finance ministry proposal would force large companies to switch auditors more frequently, and for accountancy firms to better separate their audit units from their consultancy businesses.

BaFin, too, has tried hard to fend off criticism that it failed to act. Felix Hufeld, its president, has argued that German capital markets laws left the agency no alternative but to act as it did. The authority, he told the German parliament, lacked a legal mandate to supervise Wirecard as a whole and instead oversaw only Wirecard Bank, a small subsidiary of the group.

Meanwhile, he argued, under German law BaFin did not itself have the right to launch a special audit of Wirecard’s accounts. All it could do was to turn to a body called the Financial Reporting Enforcement Panel, a private sector organisation which monitors the accounting practices of listed companies on behalf of the government, and ask it to investigate Wirecard. This is what happened in mid-February 2019.

BaFin then hunkered down for a long wait. Under Germany’s so-called “two-tier procedure”, the regulator cannot initiate its own investigation into a company until it has received the results of a Frep probe. Yet Frep, which has only 15 employees and an annual budget of just €6m, is ill-equipped to conduct the kind of forensic investigations required to uncover fraud.

Felix Hufeld, president of BaFin, argues that Germany’s capital markets laws left the watchdog agency no alternative but to act as it did © Hayoung Jeon/EPA/Shutterstock

When Wirecard went bust, the Frep probe was still continuing. Only after the company’s insolvency did Frep formally conclude that its financial statements were inadequate, according to a person with first-hand knowledge of the situation.

The slowness of Frep’s work had far-reaching consequences. Over the summer of 2019, Wirecard was able to raise €1.4bn in new debt from external investors. While the cash was partly needed to fund the company’s cash-burning operative business, prosecutors also suspect that hundreds of millions were siphoned out of the group.

In any case, critics dispute the assertion that BaFin’s only option was to request a probe by Frep: they argue that the Wirecard situation was so serious that BaFin should have considered more drastic action — and that it had the option to do so.

“BaFin did not take the allegations seriously,” says Rudolf Hübner, a capital markets lawyer at Quinn Emanuel Urquhart & Sullivan in Hamburg. “Commissioning Frep was just a fig leaf, as that body has neither the remit nor the resources for a forensic audit.” He argues that German law provides BaFin with several options to intervene decisively to uncover accounting fraud. “The problem wasn’t a lack of power,” says Mr Hübner.

Just days after Wirecard filed for insolvency, the government announced sweeping changes to the way accounting is policed in Germany. It terminated its contract with Frep and promised to give BaFin more investigative and forensic powers.

“[BaFin] used the powers that it had at the time [when it commissioned a Frep probe] — but they weren’t enough,” Mr Scholz tells the FT. “That’s why we now want to give [it] the capabilities it needs to act with more bite.”

Former defence minister Karl-Theodor zu Guttenberg. His advisory firm Spitzberg Partners counted Wirecard as a client © Michael Dalder/Reuters

Chinese move

It is not only Mr Scholz and the finance ministry who have come under scrutiny over the Wirecard affair. Ms Merkel, too, is in the spotlight.

On September 3 last year she received a visit from a former colleague, Karl-Theodor zu Guttenberg, according to a timeline of contacts provided by the chancellery. He had once served as German defence minister, but was forced to resign in 2011 over a scandal about plagiarism in his doctoral thesis. He now works for an advisory firm, Spitzberg Partners: one of its clients was Wirecard.

Mr zu Guttenberg brought up Wirecard in his chat with the chancellor and shortly afterwards emailed her adviser Mr Röller to say Wirecard was planning to enter the Chinese market by acquiring a Chinese payments company, the Beijing-based AllScore Financial, and needed the approval of the regulator, the People’s Bank of China.

A couple of days later, Ms Merkel flew off on a state visit to China, and, while there, brought up Wirecard and the planned acquisition. After the trip, Mr Röller wrote to Mr zu Guttenberg promising “further political support”, according to the chancellery’s timeline. Wirecard announced the acquisition of AllScore, which came with a price tag of up to €109m, in early November 2019.

Ms Merkel has defended her lobbying for Wirecard. “It’s common practice, not only in Germany, to bring up the concerns of companies on foreign trips,” she said in August. Wirecard was, after all, a “Dax 30 company”, and at the time of the China trip she had “no knowledge” of irregularities at the payments provider.

But that argument does not wash with the opposition. “She essentially did her former cabinet colleague zu Guttenberg a favour by bringing up Wirecard during the China trip,” says Mr Toncar. “And she did it without checking what was happening at the company.”

Some are now calling for a sweeping reform of lobbying in Germany. “The question is: who has access to the chancellor?” says Ms Paus, the Green MP. “There doesn’t seem to be any sensible criteria. No one is checking who knocks on the door and who’s let in.”

Mr zu Guttenberg was not the only ex-government member lobbying for Wirecard. On September 11, Klaus-Dieter Fritsche, a former chancellery official who co-ordinated the work of the German intelligence services, introduced Mr Röller to Wirecard’s current and former CFOs — Alexander von Knoop and Burkhard Ley. According to the chancellery timeline, the meeting was a “getting-to-know-you session” and a chance for Wirecard to inform Mr Röller about its “business activities in the Far East”.

Others were more circumspect when it came to the payments company. Mr zu Guttenberg approached the German embassy in Beijing in late 2019, asking it to help Wirecard win Chinese regulatory approval for the AllScore acquisition.

But in November of that year a financial attaché at the embassy emailed the ambassador, Clemens von Goetze, warning him not to support Wirecard “at the present time”. He said it would be better to wait until the accusations of accounting fraud had been “cleared up unreservedly”, according to a copy of the email seen by the FT.

“[The attaché] clearly had a better sense of what was up at Wirecard than almost everyone who was dealing with the issue at BaFin,” says Mr Toncar.

Angela Merkel with Premier Li Keqiang on a state visit to Beijing last year. During the trip the chancellor brought up Wirecard’s planned acquisition of a Chinese payments company © Roman Pilipey/AFP/Getty

Beefing up BaFin

Since early September, an army of experts from Roland Berger, a management consultancy, has been sweeping through BaFin’s headquarters in Bonn.

Commissioned by the finance ministry in Berlin, they have been asked to figure out the lessons that Germany’s financial watchdog needs to learn from the Wirecard affair.

Critics say BaFin was asleep at the wheel, targeting short-sellers and journalists who raised concerns about Wirecard rather than investigating the substance of the allegations they made.

One thing that is already clear is that in any future reform, BaFin will be given the power to launch its own investigations into potential balance sheet manipulations by any listed company in Germany.

A member of the financial committee of the Bundestag in Berlin, Hans Michelbach, during a press briefing in July © Felipe Trueba/EPA/Shutterstock

However, according to people familiar with the discussions, it is increasingly unlikely that the country’s two-tier regulatory system, in which Frep, the private-sector institution, played a semi-official role, will be abolished completely. Frep is likely to negotiate new arrangements, though its role will be limited to conducting routine checks of corporate annual reports to ensure they are in line with legal requirements and accounting standards.

The big change is that BaFin will have greater freedom to launch its own forensic audit of a company at any time without being required to wait for the outcome of any Frep investigation.

In addition, BaFin is considering the creation of a new internal unit better able to identify unsound banks and insurance companies. This would pay special attention to institutions that have particularly risky clients, have grown extremely fast over a short period of time or are part of a larger, complex group that faces allegations of accounting fraud.

A third focus of reform is possible changes to the way BaFin deals with information from whistleblowers. People familiar with the matter say that the authority needs to improve its capacity to analyse data and connect the dots between separate pieces of information provided by different whistleblowers.

The German finance ministry is already making progress on another key reform — restricting BaFin employees from trading in shares of companies they supervise. The revelation that many of them had been dealing in Wirecard shares in the months leading up its downfall has only added to the political scandal around the company.

Source: – Financial Times

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Politics Podcast: There Just Isn’t Good Evidence That ‘Shy’ Trump Voters Exist – FiveThirtyEight

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This is the final(!) preelection installment of Model Talk on the FiveThirtyEight Politics podcast. Galen Druke talks to editor-in-chief Nate Silver about the latest polling shifts in key battleground states and whether there is any reason to believe that “shy Trump voters” will deliver an upset win for the president on Election Day. (The evidence suggests there isn’t.)

You can listen to the episode by clicking the “play” button in the audio player above or by downloading it in iTunes, the ESPN App or your favorite podcast platform. If you are new to podcasts, learn how to listen.

The FiveThirtyEight Politics podcast is recorded Mondays and Thursdays. Help new listeners discover the show by leaving us a rating and review on iTunes. Have a comment, question or suggestion for “good polling vs. bad polling”? Get in touch by email, on Twitter or in the comments.

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78 seconds that will actually make you feel good about politics – CNN

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And because we are dealing with Donald Trump, all of that normal end-of-campaign stuff has been made much, much worse. Trump is at the say-anything-and-do-anything stage of the campaign — particularly as polling suggests he is a clear underdog in Tuesday’s election.
Amid all of the darkness and terrible-ness (not a word, but you get the point) I’m here to offer you a reminder that not everything is, in fact, totally awful. And that politics can sometimes be a noble pursuit taken on by people committed to public service.
Which brings me to an ad that Minnesota Democratic Gov. Tim Walz who posted on his Twitter feed on Thursday. It features Walz as well as his three most recent predecessors in the job, Mark Dayton, Jesse Ventura and Tim Pawlenty — urging Minnesotans to vote.
That’s four governors from three different parties(!) making a call for call for calm and civility in this wildest of moments.
The four governors assured Minnesotans that a delay in announcing a winner is a) expected and b) proof the system is working. (Contrast that with President Trump’s repeated insistence that the election “should END on November 3rd,” like he tweeted on Friday).
“Our state is proud to have one of the safest and most secure election systems in the country,” says former Republican Gov. Tim Pawlenty.
“You can have faith that your vote will be counted,” says former Democratic Gov. Mark Dayton.
“With so many of us voting by mail, it may take a little longer to verify a winner,” says Walz.
“And that’s OK. It’s by design,” says Pawlenty.
“A delay just means that our system is working and that we’re counting every single ballot,” says former Reform Party governor Jesse Ventura.
Imagine that. Political leaders — both current and former — acting like, well, leaders. Educating the public rather than trying to skew reality for their own political benefit. (Worth noting: All four governors are shown walking in with their masks on, and putting them back on ant the end of the video.)
That a message like this feels so stunning and so different serves as a reminder of just how far Trump — and his decidedly unpresidential approach to the presidency — has changed our expectations from our leaders over these past four years. It was once common ground for politicians of all stripes to urge citizens to a) vote and b) know that their vote was fairly counted. Trump has chosen, for political reasons, to make war on that most basic of democratic assumptions as well as virtually every other “norm” including the guidelines set to mitigate the spread of the coronavirus.
“25,000, people want to be there, and they say you can only have 250 people, so they thought I’d cancel,” Trump carped on Friday about a campaign rally in, you guess it, Minnesota. “But I’m not canceling.”
Politics doesn’t have to be utterly awful and soul-crushing. It can be unified and, dare I say it, uplifting. Watch the Minnesota governors’ ad. And remember how things once were — and could be again.

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U.S. election: How COVID-19 misinformation is being weaponized in politics – Global News

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Social media platforms are being used to downplay the threat of the coronavirus and push back on COVID-19 restrictions in the leadup to the 2020 U.S. election.

In a global pandemic, inaccurate information not only misleads but could also be a matter of life and death if people start taking unproven drugs, ignoring public health advice or refusing a coronavirus vaccine when one becomes available.

Read more:
Health misinformation gets billions of views on Facebook amid coronavirus, report says

A very dangerous element of all of this misinformation is distrust in institutions, in media and in democracy,” said Luca Nicotra, a disinformation researcher with non-profit research and activism foundation Avaaz.

“And this has very clear effects, for instance on vaccination rates. We have already seen how Facebook and other social media have promoted the rise of the anti-vaccination movement all around the world.”

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A study by his organization found that content from the top 10 websites spreading health misinformation had almost four times as many views on Facebook than websites providing evidence-based information, like public health institutions such as the World Health Organization and the Centers for Disease Control and Prevention.

Read more:
Nearly half of Canadians can’t tell coronavirus fact from conspiracy theory, survey finds

Nicotra says this has a lot to do with Facebook’s business model.

“Facebook is not a neutral platform. So basically, every time a user logs in, its algorithm decides what you see from the thousands of posts of all the pages you like or the friends you have. It selects the one that it believes will keep you in the platform the most,” he said.

“And what Facebook knows, (CEO Mark) Zuckerberg himself has said that they know that its algorithm, if left unchecked, will promote in a user’s timeline, divisive, sensationalist content and disinformation.”

Read more:
Coronavirus conspiracies pushed by Russia, amplified by Chinese officials, experts say

Despite all evidence, strong rhetoric downplaying the risks associated with COVID-19 has been endorsed at the highest levels of the U.S government.

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According to a study by Cornell University, President Donald Trump has been the world’s biggest driver of COVID-19 misinformation during the pandemic.

A team from the Cornell Alliance for Science looked at 38 million articles published by English-language, traditional media worldwide between Jan. 1 and May 26 of this year.


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Coronavirus: COVID-19 and the fear fueling conspiracy theories


Coronavirus: COVID-19 and the fear fueling conspiracy theories

And misinformation is increasingly moving offline and spilling over into the streets in the form of protests or sometimes aggressive refusals to follow social distancing restrictions.

In April, thousands of people gathered at Michigan’s state capitol to protest executive orders issued by Gov. Gretchen Whitmer that shut down most of the state.

Trump openly encouraged such protests, tweeting, “LIBERATE MICHIGAN!”

A group of men known as the Wolverine Watchmen, said to have been motivated by Whitmer’s actions to limit the spread of COVID-19, have been arrested on conspiracy charges, accused of plotting to kidnap the Michigan governor.

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Read more:
FBI foils plot to kidnap Michigan Gov. Gretchen Whitmer

Trump has admitted to downplaying the pandemic, continuing to do so even after he was diagnosed with COVID-19 — fuelling the growing coronavirus-denial movement.

“His success in responding or reacting personally to COVID that is now being fed into those conspiracies as well, that it proves that it’s a hoax, that it’s not nearly as serious as we went on it was,” said Barbara Perry, the director of Ontario Tech University’s Centre on Hate, Bias and Extremism.

And with Facebook’s algorithm trying to keep people on its platform for as long as possible, it’s no surprise that what keeps people engaged are sensational posts often full of false information.

“So Facebook’s responsibility then comes from the inaction on not constraining the algorithm (from going into) these black holes,” Nicotra said. “That, really, in the best case, radicalizes people. In the worst case, during a global pandemic like the one we are in the middle of, really, it puts people’s lives in danger.”

Read more:
Is Facebook ready for the U.S. presidential election?

Facebook has not responded to Global News’ request for comment but it has made an effort to label posts with warning notices about coronavirus misinformation — including posts by politicians.

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But advocates say it’s not enough.

One idea set forth by Nicotra’s foundation is that when Facebook deems a post false or dangerous, it should not only add a warning on the initial post but also when someone shares it, sending them notifications that what they have shared is untrue.

There’s also a push to downgrade the algorithm, says Nicotra, so that when a post is verified false, its reach is automatically decreased.

And as we get closer and closer to the U.S. election and important COVID-19 regulations are debated, access to fact- and science-based information is more important now than ever.


emanuela.campanella@globalnews.ca

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