Allegations of financial misconduct dogged German payment processing giant Wirecard AG since its inception; why did it take so long to uncover the fraud? Michael Toebe muses here about the perils of ego and unchecked greed.
Wirecard’s gross financial misconduct and resulting scandal and crisis has been dubbed the Enron of Germany by some analysts. No matter how many times this type of compliance and governance failure is repeated, leading to massive damage to stakeholders, ruin of reputation and careers, there always will be new actors eager to travel the same dangerous path.
Wirecard’s deception proved productive and profitable, and now-former CEO Markus Braun’s decision analysis, decision making and decision quality never improved. He was not alone though in failure as fired COO Jan Marsalek was his partner in crime (now reportedly hiding out in the Philippines).
Criminal thinking and actions seemed like the “right thing,” blinding leadership to ethics and risk management and thus Wirecard operated illegally, escaping capture until deep into the damage. It’s been reported that shares are down 95 percent.
Braun, knowing he was cornered, chose a fruitless attempt at blame shifting before his resignation and subsequent arrest. He has since been released on bail (which he managed to post, despite the $ 5.6 million price tag). Yet another poor look for Braun and other CEOs involved in wrongdoing.
Enron, WeWork and Theranos are three notorious examples with a similar lack of business character and ethics. Their leaders, like Braun, were weak in forward thinking and self control. Governance and compliance will rarely be priorities and commitments for such leaders. Hoping, wishing or expecting it to be different is a strategy destined to fail. As John Steinbeck wrote, “I learned very early not to wish for things. Wishing just brought earned disappointment.”
The Company You Keep
Braun is not much different from Enron’s fallen Kenneth Lay, Jeffrey Skilling and Andrew Fastow, or Theranos CEO Elizabeth Holmes or WeWork’s Adam Neumann. The original intention may not have been to deceive and exploit, yet once that mindset and behavior developed, little to nothing was done to slow it or apply corrective and protective measures for the well being of shareholders, employees, the market or the leaders themselves.
Founded in 1999, Wirecard AG, a tech firm that processes payments and sells analytics services, had Germany excited about its potential. Braun captained it since 2002 and in 18 years built Wirecard into a company that was looked upon favorably, providing a growing national and European pride.
Behind the curtain was a different reality, as Braun was accused of falsifying income to hook and deceive investors. The firm later admitted 1.9 billion euros ($2.1 billion) that was missing from its accounts “likely never existed,” according to media reports.
Wirecard had said the money was in a pair of Philippine banks, yet it is not surprising to learn the banks say they have no working relationship with Wirecard.
The company’s auditor, EY, formerly Ernst & Young, didn’t mince words about Braun’s leadership, saying Wirecard committed “an elaborate and sophisticated fraud…a deliberate aim of deception.”
Jan Pieter Krahnen, scientific director at the Leibniz Institute for Financial Research SAFE in Frankfurt, says uncovering and catching such skilled fraud can prove highly problematic.
“Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail. Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud,” Krahnen told New York Times reporters Liz Alderman and Christopher F. Schuetze.
Braun continued to deny wrongdoing and was permitted to get away with it, yet investigative reporters continued with curiosity, research and perseverance. They had picked up the figurative scent on the trail.
Germany’s financial regulator BaFin and president Felix Hufeld confessed, likely with exasperation, that it didn’t do its best work. “The situation is a complete disaster,” he said.
How did oversight fail?
Go back to Holmes. Like her, Braun had something about him that permitted the con to continue and grow. For one, his intelligence and expertise were respected, providing credibility and limiting scrutiny.
“Braun, known as a brilliant IT fanatic and strategist, was the brains behind the payments firm, propelling it from a payment processing system initially focused on internet casinos and erotic websites to one of the biggest success stories on the German high tech scene,” wrote Kate Connolly of The Guardian.
His personality didn’t win everyone over, yet his approach did result in sufficient belief, trust and followers.
“To the outside world he displayed a charisma that charmed analysts into believing he could predict the size of Wirecard’s business years into the future,” the Financial Times reported.
Braun was known as a powerful figure, with some people using the words “hero” and “rock star” to describe him. Because such praise can negatively affect the ego, judgment and behavior—especially of those already on the wrong track—improvements are seldom made. Braun, similar to Holmes, had Steve Jobs-envy, reportedly even taking to wearing black turtlenecks.
Red Flags as the Con Succeeded
“What really struck me about the leadership of Wirecard as a technology company, was that they didn’t really seem to be very interested in it,” one former executive told Financial Times reporters Dan McCrum and Olaf Storbeck.
This might be hindsight bias, yet doubts were being created. Something didn’t look right, sound right or smell right. Now, customers are also suffering, as headlines indicate.
Reputation issues run deep: Wirecard Collapse Freezes Millions Of Online Bank Accounts: Will Customers Ever Get Their Money Back?
Customers Left With No Money As Wirecard Fallout Continues
The absurdity of this scandal is only exceeded by its arrogance, unbridled greed, rejection of ethics, not valuing relationships or respecting law.
We’ve Read This Book Before
Calvin London, founder and principal consultant at The Compliance Concierge and a regular contributor at Corporate Compliance Insights, says he isn’t seeing anything new in the scandal.
“The Wirecard example reflects a story that we have seen repeated on too many occasions; a great business concept gets used and abused by a CEO that is misguided, corrupt, greedy and operates with a perception that they are above the law,” London said. “There is a total disregard for those who are following and believing the rhetoric that is always stated so eloquently to hide the true ruse underneath.”
London’s analysis is that the real shortcoming was uninspired, low-quality or unethical oversight.
“Compliance today is as much about monitoring what is going on as it is about preventing what could happen,” he said. “In the case of Wirecard, the monitoring was either significantly flawed or as corrupt as the machine behind it. One could argue that the crime was picked up, but only after a 90 percent drop in share price—read demise of the company—and thousands of innocent investors losing their money.”
Character rot cannot be ignored, he says, as that’s where scandal originates.
“It is also a tale of ethics gone bad as much as ineffective compliance controls, assuming they were in place in the first place,” London said. “It is often stated that the ‘fish rots from the head down,’ and recently Michael Volkov has used this statement to describe the lack of corporate culture at Blue Bell Ice Cream. Although the scenario is different, it is not that far from the truth that seems to be an all-too-familiar story.”
London’s assessment is a history lesson that boards of directors and organizations seemingly are ignorant to or blind to learning.
“Corrupt CEOs take control of a company and then go to work to make as much money as possible before they get caught, usually with total disregard as to what the company’s mission was. Once caught it is then a simple process of confessing ignorance or apologizing, and everyone forgets about it,” London said.
Improvement is not complex. It does require a new way of thinking and discipline. Without this commitment and perseverance, the future can be easily predicted, London says, due to that familiar human weakness.
“Until we start to hold CEOs and all those in positions of power responsible for their actions, the story will repeat itself over and over again. The potential ill-gotten gains are just too tempting for some people,” he said.
Compliance provides a powerful protective quality, yet it can’t function properly in a vacuum, London said. “Compliance is a process or system to achieve an end-point but ethics is a different matter. It is a behavior and this is where we go wrong. Employees in the company will drive the compliance process, but the CEO sets the tone, and if this is not ethically correct the company is already a failure.”
London is direct in what boards of directors of organizations still are not universally recognizing.
“Wirecard is another example of a corrupt CEO running unchecked and hiding behind the legislation and ineffective financial accounting and monitoring. Unless there is a significant personal cost when CEOs get caught doing the wrong thing, they are free to repeat wrongdoing and the example to other CEOs is ‘take the risk, what do you have to lose,’” he said.
With limited thinking, tolerance of poor character and ineffective compliance and governance, compromised risk management is going to take place. It often costs organizations, in addition to tremendous reputation damage with stakeholders, diminished public trust, a Scarlet Letter of shame, losses in stock price and market value and internal resentment and distrust.
Yet the questions remain, “Who’s still not learning?” and “Who’s next?”