Wirecard Scandal: Lessons for Due Diligence
10 Sep 2020 10:45 am
- Risk & Compliance
- Reputation Management
- PEP Risk
- Anti Money Laundering
- Due Diligence
- Sanctions & Watchlists
- Nexis Diligence™
How the Wirecard scandal can become a lesson for due diligence management
Following a multiyear investigation conducted by the Financial Times, the German payment processor and financial services provider Wirecard acknowledged the possibility of a vast accounting fraud over alleged fabricated business activities in South-East Asia in late June. This latest case of alleged financial misconduct once more emphasizes the need for comprehensive due diligence management, in particular in the financial services industry.
Wirecard: From hero to zero after financial crimes come to light
As a result of ongoing investigations into alleged fraudulent activities,Wirecard, a company that only two years ago was identified as one of Europe’s most successful fintech entities, has recently announced that it will file for bankruptcy. Established in Munich in 1999, the company which specialized in payment processes quickly rose to fame with its constant growth, earning the confidence of investors and financial watchdogs such as BaFin, the German Federal Financial Supervisory Authority, who in 2019 underlined Wirecard’s importance for the German economy.
The current claims focus on fraudulent accounting that concealed the non-existence of €1.9 Billion in the official records of Wirecard. The Financial Times’ investigative journalists focused their research on Wirecard’s exaggerated accountancy over the past years, various lawsuits, and auditing giant EY’s April announcement that they had discovered questionable accounting practices.
Wirecard’s rapid ascent since the start of the new millennium has now turned into an even faster descent, with the company’s (former) top officials under multiple investigations by courts in Germany and beyond.
Lessons learned? The costs of due diligence failures
It can be expected that the Wirecard scandal will have a lasting impact on the financial services sector in Europe and elsewhere.In response to it, non-governmental watchdog institutions, such as Transparency International, have once more emphasized their demand for a reform of financial supervision legislation, as well as a comprehensive whistle-blower protection law.
The chain of errors that led to the implosion of Wirecard can be traced back to a systematic lack of comprehensive due diligence management. Various industry experts have since called out a number of apparent flaws around their past accounting governance. Wirecard’s business seemed too dependent on acquisitions for the company’s expansion to remain sustainable. Auditors appeared to have misinterpreted the risks stemming from Wirecard’s questionable business practices, which ultimately led to its sudden downfall.
As a direct result, Transparency International suggests that auditing companies face legally responsibility for potentially failing their duties of due diligence. This, together with their call for a fundamental reform of the financial supervisory authorities could be the start of potential industry-changing outcomes of this scandal.
How to identify corruption risk red flags
The present Wirecard case highlights the importance of comprehensive due diligence management for the financial services industry. For both investors and stakeholders,verifying the financial authenticity and viability of entities such as Wirecard should be a top risk management concern. However, given the fast-paced and global nature of the financial services industry, identifying potential red flags, such as unsustainably bloated accounts, can be hard.
Data-driven due diligence solutions can support entities in mitigating these red flags and reduce potential ESG and financial business risks. By offering a data-focused approach to due diligence companies can develop a 360-degree risk assessment. Whether organisations turn to an off-the-shelf due diligence platform or integrate risk-related data into in-house systems and analytics applications, they need a full range of sources, including general and adverse news, legal records, press releases and company reports, sanctions and PEPs. These sources can provide substantial insights into the financial services industry and support entities in their due diligence management.
Wirecard’s downfall has made it clear that investors and stakeholders have to perform a thorough background check on the financial health of a company, as well as a review of the personal and professional history of involved individuals, which seemed to have been absent in the present case. Access to comprehensive and global content paired with sophisticated AI-driven tools provides for the necessary clarity to confront potential financial risks and to safeguard your organisation’s reputation.
It remains to be seen how the financial services industry is going to recover from the shock that the Wirecard Scandal caused. Nevertheless, a progressive reform of financial supervisory bodies in combination with an enhanced due diligence process to mitigate similar cases in the future should be at least two of the lessons to take away from this.
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