Germany to toughen financial regulation after Wirecard scandal
27 Jul 2020

The German finance ministry has unveiled a sweeping reform of financial regulation in the wake of the Wirecard scandal, as pressure mounts on the authorities over their failure to properly police the disgraced payments company.

BaFin, the financial regulator, is to be equipped with “sovereign powers” to intervene “directly and immediately” in public companies, according to the draft of an “action plan” distributed by the finance ministry.

Prosecutors suspect Wirecard’s accounting scam began as early as 2015 when Markus Braun and other suspects allegedly agreed to inflate Wirecard’s revenue.

“BaFin should have the right to carry out special audits of all capital market-oriented companies, including the right to access information from third parties, the ability to carry out forensic investigations and the right to inform the public about its auditing of balance sheets earlier than is currently the case,” the ministry said.

The plan will also strengthen APAS, the body that oversees auditing firms in Germany, and give it the power to impose tougher sanctions on rule-breakers. Companies would be obliged to replace their auditor every 10 years.

The ministry will, in addition, seek to turn the EU’s financial oversight body into a “European Securities and Exchange Commission” modelled on the SEC in the US, which has more extensive powers to demand information from listed companies.

Wirecard was forced to file for insolvency last month after admitting that €1.9 billion ($3.9 billion) of its cash probably did “not exist”. The scandal, one of Europe’s biggest accounting frauds, shook confidence in corporate Germany and triggered a criminal inquiry into the company’s former executives.

Former Wirecard chief executive Markus Braun was accused by prosecutors in Munich last week of committing a multi-year fraud and was rearrested. The prosecutors suspect Wirecard’s accounting scam began as early as 2015 when Mr Braun and other suspects allegedly agreed to inflate Wirecard’s revenue in an attempt to deceive investors.

Angela Merkel lobbied on Wirecard’s behalf even though senior aides were aware of possible irregularities.

The scandal prompted the EU to launch an investigation into BaFin, which has been heavily criticised for failing to follow up on countless media and analyst reports about suspected fraud at the company.

The Wirecard affair is also beginning to make waves in German politics, after it emerged that the Chancellor Angela Merkel lobbied on its behalf in talks with Chinese officials last September, even though her senior aides were aware of investigations into possible irregularities at the company.

This week, German MPs will interrupt their northern summer recess to grill Finance Minister Olaf Scholz and Economy Minister Peter Altmaier, who are appearing at a hastily arranged session of the Bundestag’s finance committee to discuss the regulatory failings over Wirecard.

The plan put forward by Mr Scholz’s ministry significantly beefs up the powers of BaFin and abolishes the previous two-tiered system in which the onus for monitoring the financial reporting of listed German companies lay with a private-sector body known as the Financial Reporting Enforcement Panel, or FREP.

Auditing industry not working

Under German law, BaFin can ask FREP to open an inquiry into a company’s financial reporting and must wait for the result before it can start its own investigation. The government cancelled its contract with FREP late last month, acknowledging that what was essentially a system of self-regulation by the auditing industry wasn’t working.

By Guy Chazan and Olaf Storbeck, The Australian Financial Review, 26 July 2020

Read more at The Australian Financial Review

RiskScreen: Eliminating Financial Crime with Smart Technology

Advance your CPD minutes for this content, by signing up and using the CPD Wallet