Wirecard: German regulators failed to heed red flags by short sellers
04 November 2020 Paris
Image: TTstudio/adobe.stock.com
German financial market regulators were 鈥渘egligent鈥� in acknowledging and reacting to accusations of Wirecard鈥檚 illegal activities by the media and short sellers in the years leading up to the , according to an investigation by the EU鈥檚 markets watchdog.
An inquiry was instigated by the European Commission following Wirecard鈥檚 collapse in June and spearheaded by the European Securities and Markets Authority (ESMA) to assess the roles of BaFin and the Financial Reporting Enforcement Panel鈥檚 (FREP) in allowing to take place in Germany and worldwide.
The results of the fast-tracked peer review into these events identify 鈥渁 number of deficiencies, inefficiencies and legal and procedural impediments鈥� related to BaFin鈥檚 oversight of the payment processing giant.
Highlights from the investigation include the revelation that some members of BaFin鈥檚 Market Abuse Regulation team traded in Wirecard shares and derivatives between 2018 and the first half of 2020.
The German regulator argues that this related to 鈥渙nly a very small proportion of staff with insider trading information鈥� and that it had mechanisms in place to ensure there were no conflicts of interest.
BaFin and FREP were also found to have failed to respond to years of repeated warnings by short sellers and the media that Wirecard was not as it seemed.
ESMA notes that as far back as 2005 Wirecard has been dogged by accusations of various types of money laundering, fraud and a lack of transparency in its business model.
In its review, the authority further concludes that FREP 鈥渄id not pick up signals鈥� from these reports as an impetus to examine Wirecard between 2016 and 2018, 鈥渄espite specific risks on Wirecard reporting which were left unaddressed鈥�.
ESMA adds that FREP should have been 鈥渕ore thorough in examining whistleblowers and media allegations鈥�.
Although in a different position compared to FREP in the German two-tier system, BaFin also did not request that FREP examine Wirecard reporting during that period.
When Wirecard was examined in mid-2018, the German market overseers failed to use the opportunity to investigate some of the concerns flagged by the media regarding inconsistencies in the firm鈥檚 financial reporting.
This was in part due to a breakdown in communication between the two bodies and a lack of clarity on where their respective remits began and ended.
Of the report, ESMA chair Steven Maijoor says: 鈥淭he Wirecard case has once again highlighted that high-quality financial reporting is essential for maintaining investor trust in capital markets, and the need to have consistent and effective enforcement of that reporting across the EU."
The review focused solely on the sphere of financial reporting and excluded an inquiry into the role BaFin and ESMA played in instigating a from February 2019 to protect Wirecard from what was described as a conspiracy between the media and hedge funds to bring down the firm shortly after it was admitted into Germany鈥檚 most prestigious index.
The ban has been for representing a misuse of the Short Selling Regulation which is meant to help stabilise markets during extreme volatility, not protect individual firms accused of wrongdoing.
In the past, the European Commission did not rule out further inquiries into what now appears to be two regulators barring market participants from expressing legitimate scepticism of a firm鈥檚 fundamentals.
Following the publication of today鈥檚 report, the commission says: 鈥淲e must recall that under EU legislation, the role of national competent authorities in overseeing the activities of market players and business companies is very clear.
鈥淚t is for the national competent authority to carry out the daily supervision of listed companies.
鈥淲e will carefully assess the implications of the Wirecard case for the regulation and supervision of EU capital markets, and act to improve the EU鈥檚 regulatory framework where necessary.鈥�
An inquiry was instigated by the European Commission following Wirecard鈥檚 collapse in June and spearheaded by the European Securities and Markets Authority (ESMA) to assess the roles of BaFin and the Financial Reporting Enforcement Panel鈥檚 (FREP) in allowing to take place in Germany and worldwide.
The results of the fast-tracked peer review into these events identify 鈥渁 number of deficiencies, inefficiencies and legal and procedural impediments鈥� related to BaFin鈥檚 oversight of the payment processing giant.
Highlights from the investigation include the revelation that some members of BaFin鈥檚 Market Abuse Regulation team traded in Wirecard shares and derivatives between 2018 and the first half of 2020.
The German regulator argues that this related to 鈥渙nly a very small proportion of staff with insider trading information鈥� and that it had mechanisms in place to ensure there were no conflicts of interest.
BaFin and FREP were also found to have failed to respond to years of repeated warnings by short sellers and the media that Wirecard was not as it seemed.
ESMA notes that as far back as 2005 Wirecard has been dogged by accusations of various types of money laundering, fraud and a lack of transparency in its business model.
In its review, the authority further concludes that FREP 鈥渄id not pick up signals鈥� from these reports as an impetus to examine Wirecard between 2016 and 2018, 鈥渄espite specific risks on Wirecard reporting which were left unaddressed鈥�.
ESMA adds that FREP should have been 鈥渕ore thorough in examining whistleblowers and media allegations鈥�.
Although in a different position compared to FREP in the German two-tier system, BaFin also did not request that FREP examine Wirecard reporting during that period.
When Wirecard was examined in mid-2018, the German market overseers failed to use the opportunity to investigate some of the concerns flagged by the media regarding inconsistencies in the firm鈥檚 financial reporting.
This was in part due to a breakdown in communication between the two bodies and a lack of clarity on where their respective remits began and ended.
Of the report, ESMA chair Steven Maijoor says: 鈥淭he Wirecard case has once again highlighted that high-quality financial reporting is essential for maintaining investor trust in capital markets, and the need to have consistent and effective enforcement of that reporting across the EU."
The review focused solely on the sphere of financial reporting and excluded an inquiry into the role BaFin and ESMA played in instigating a from February 2019 to protect Wirecard from what was described as a conspiracy between the media and hedge funds to bring down the firm shortly after it was admitted into Germany鈥檚 most prestigious index.
The ban has been for representing a misuse of the Short Selling Regulation which is meant to help stabilise markets during extreme volatility, not protect individual firms accused of wrongdoing.
In the past, the European Commission did not rule out further inquiries into what now appears to be two regulators barring market participants from expressing legitimate scepticism of a firm鈥檚 fundamentals.
Following the publication of today鈥檚 report, the commission says: 鈥淲e must recall that under EU legislation, the role of national competent authorities in overseeing the activities of market players and business companies is very clear.
鈥淚t is for the national competent authority to carry out the daily supervision of listed companies.
鈥淲e will carefully assess the implications of the Wirecard case for the regulation and supervision of EU capital markets, and act to improve the EU鈥檚 regulatory framework where necessary.鈥�
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