Saturday, August 15, 2020

Lessons learned from the Wirecard scandal: the importance of government regulations

Wirecard was a Germany-based payment processor and financial services provider. The company was mostly known for its electronic payment transaction services and issuance of physical cards.

The company dominated media headlines worldwide after it was embroiled in allegations of fraud as regulators couldn’t confirm the existence of two Philippine bank accounts with €1.9 billion in cash. What happened at the DAX-index listed darling of Germany’s stock market? Are other online payment services at risk of following Wirecard’s lead?

What Happened At Wirecard

Wirecard earned the reputation of being one of Germany’s 30 largest companies through years of deceit and misleading the public. For example, the company claimed in 2017 it serviced 33,000 large and medium-sized merchants and 170,000 small businesses by handling their online payment services.

This was a lie.

An internal file obtained by the Financial Times showed it had just 107,000 clients. Total volume and sales were in fact equal to half what the company reported to investors. Thousands of sales records now appear to be duplicates and the whole company came crashing down in 2020. Management itself even admitted the €1.9 billion bank accounts that regulators were looking for “probably does not exist.”

Wirecard’s Sketchy Links

Wirecard’s exposure to illegal gambling transactions and pornography subscriptions wasn’t exactly a secret to those who closely paid attention to the online money transfer space. For example, a former Wirecard executive Dietmar Knoechelmann entered into a guilty verdict for processing tens of millions of dollars of payments to illegal gambling sites between 2008 to 2010.

This should be red flag number one for anyone looking to take extra steps to avoid inadvertently dealing with companies engaged in fraud. If senior executives at a company admit to wrongdoing, it would be prudent to assume there is more to the story or they are taking the blame to protect more senior executives.

After all, when there is smoke, there is likely fire.

Rivals Look To Reassure Customers

WorldRemit was quick to issue a press release to reassure customers it has no financial relationship with Wirecard. WorldRemit played offense by reminding the public it is financially backed by some of the most recognized private equity companies in the world like TCV, Accel, and LeapFrog Investments.

It is more than reasonable to assume these private equity investors spent hundreds of hours looking over WorldRemit’s business inside and out to sniff out even the slightest indication of wrongdoing.

Other online payment companies that took the extra step to ease consumers is TransferWise. The company confirmed in a Tweet it did have a partnership with Wirecard for a “short time” starting in 2017 for its borderless debit card. But the relationship ended in September 2018 and the borderless debit card now passes directly through Mastercard.

Needless to say, Transferwise and others who do business directly through Mastercard have additional safeguards in place to reassure customers a Wirecard scenario won’t repeat itself.

Importance Of Government Approval

Consumers looking for safe and reliable money transfer companies should be sure to check if they are regulated by a government body. One of the generally accepted global entities includes the Australian Securities and Investments (ASIC). ASIC approved companies are trusted to keep their clients’ money safe in segregated client accounts.

Money exchange companies like Moneycorp are regulated by ASIC, along with other global regulators like the United Kingdom’s Financial Conduct Authority (FCA) and federally registered as a Money Services Business with the U.S. Financial Crimes Enforcement Network (FinCEN), the U.S. Department of Treasury, among others.

Registered money transfer companies that are regulated by multiple government agencies are deemed to be more trustworthy. For extra reassurance, consumers should look for favourable media mentions as major outlets are known to perform their own due diligence on companies they profile or mention.

In Moneycorp’s case, The Wall Street Journal sought out expert advice from its chief executive when it was reporting on the Brexit vote. Transferwise is often profiled by leading financial media outlets, such as CNBC.

While Wirecard went belly-up and saw its business crash, regulatory bodies dictated rules governing Wirecard’s clients. For example, the mobile banking app Pockit is authorized and regulated by the FCA, and its digital wallet was handled by Wirecard.

As noted by Pockit’s terms of service: “In the unlikely event that Wirecard Card Solutions Limited becomes insolvent, your e-money is protected and held at a regulated credit institution.”

The government’s rules for non-bank companies whose business relates to overseeing digital cash may have saved customers from losing their hard-earned cash. Granted, there were some difficulties along the way as Pockit was forced to temporarily suspend the use of all cards on its platform. But once business resumed, the majority of transactions were successful and the company was working hard to resolve minor outstanding issues that mostly impacted cash withdrawals of £200 or more.

Bottom Line: Trust But Verify

Government regulators have an interest in making sure the companies they oversee operate within the rule of the law. While mistakes do happen, it is often followed up with a population demanding changes are made to the system designed to safeguard their cash.

Can there be another Wirecard fiasco in the future? It is possible. But global regulators are likely to move quickly to figure out what went wrong and what changes need to be implemented.

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