Ben Taub of The New Yorker wrote an amazing article about the Wirecard case. Taub also provides insight into the origins and early history of the defunct German fintech unicorn, which sets it apart from many other German-language publications. He clarifies that payment services for gaming and pornography were the main drivers of Wirecard’s expansion. Dietmar Knoechelmann’s acquisition of Gateway Payment Solutions marked the beginning of the Wirecard scheme as we know it today.
The United States passed legislation outlawing online betting in October of 2006. The company of Wirecard faced an existential threat from this. The majority of significant payment processors ban US customers from gaming. But Wirecard took advantage of a legal gap that permitted “games of skill,” which in theory encompassed poker. Dietmar Knoechelmann and John Carbone sold Gateway Payment Solutions Holdings to the company in 2007. In that same year, Knoechelmann was appointed CEO of the Irish Wirecard Payment Solutions, and Wirecard announced a 62% increase in revenue.
Prior to Wirecard’s acquisition, Dietmar Knoechelmann was already well-known in the global gaming community. Online gaming enterprise Bingoworkz, based in Cyprus, was a sibling company of Gateway Payment Solutions.
In a 2015 J Capital Research study about Wirecard, Knoechelmann and his associate were referred to as “Fishy People.” Knoechelmann and former Wirecard board member Ruediger Trautmann left Wirecard at the end of 2009 to assume leadership of PowerCash21 and Inatec. These were part of the Wirecard shadow structure and functioned as satellite corporations.
Today’s Payabl was established in 2021 from Inatec and PowerCash21. It is a high-risk payment method in Cyprus that serves the gambling and pornographic industries, much like Wirecard did in the past. You can determine a lot about the early Wirecard designs by looking at Payabl.
The Case Study- Wirecard: The beginning
An Austrian businessman with experience in the porn section established a company in the 1990s to handle wire transfers for pornography on the internet. His company, designed for the dial-up era, is having trouble processing credit cards by the early 2000s. If he doesn’t make an acquisition with improved systems and credit card access, his business will fail.
He strikes a deal with another credit card processing company. The systems offered by this company do not live up to the hype. Their main programmer, an Austrian who was employed as a young hacker, was responsible for a major systems failure in 2000 when, for unclear reasons, he directed all of the business’s internet traffic to his own computer. The acquisition target rejects his approaches and never fully recovers.
By a lucky break-in, the target became bankrupt in 2002 due to an office burglary. Our trader purchases the business and unites it with his own. He appointed an Austrian consultant from KPMG to serve as CEO. He keeps the hacker, who will soon take over as COO, and the company name, “Wirecard.”
We cannot give the rest of the Wirecard narrative justice here; it is a well-known and captivating tale. Readers who enjoy a good story should pick up this book. Thanks to the Financial Times, you can view the entire timeline here.
According to the fabricated history, the corporation ventures into online gambling under the new CEO. Some wags might argue that this is a rich field for money laundering for anyone willing to get around national bans on internet gaming, as banks avoid paying gambling-related bills because of reputational risk.
A prime illustration of human gullibility is Wirecard.
Indeed, throughout the years, there were critics of the company. The corporation was frequently targeted by short sellers. From 2014 onward, the FT launched a protracted campaign against Wirecard, releasing ever-more-damaging material. But none of these assaults were effective.
Nothing persisted until June 2020, when the business eventually acknowledged that €1.9 billion was “missing” from two bank accounts in the Philippines.
Arguably, the most intricate and multi-layered fraud scheme in history was Wirecard. It was a shameless high-wire performance whose crimes were so intricately linked to organized crime, Russian billionaires, internet gambling, and the murky world of intelligence that we could never know the entire scope of their wrongdoings.
Wirecard Accounting Fraud
Only the Wirecard scam was different. It was an epic example of money laundering mixed with accounting fraud, meaning it inflated its earnings while secretly hiding revenue and embezzling cash.
Wirecard had all the right ingredients for accounting fraud:
- It used a network of offshore affiliates and escrow accounts to conduct millions of cross-border transactions. Due to this, it was difficult for auditors to confirm cash balances and impossible for an outside observer to track revenue;
- Its legal business had no margin, which made manipulating profits simple;
- It was nearly impossible to physically watch its business operations, making it challenging for an outside observer to estimate the amount of activity conducted within the company;
- Because its industry was thriving, it could record extraordinary growth without raising red flags;
- Because its accounts were a jumble of both banking and non-banking companies, many of the warning signs that forensic accounting often reveals were obscured;
- Considered a national champion, it was. German officials often looked into or even accused those who opposed the corporation of manipulating the market. It was difficult to oversee because it crossed regulatory borders as both a bank and a non-bank.
- Because of its intricate procedures, it was challenging for an auditor to verify that the bank actually had cash on hand.
Predicting accounting fraud with AI
Frequently, we receive inquiries about the efficacy of our artificial intelligence (AI)-driven Manipulation Risk Analyzer (MRA) system in forecasting manipulation and failure risk beyond the testing sample.
It does for a number of technical reasons as well as one very useful reason: each fraud is different.
The same pattern that appears repeatedly is not used to train our computer. We rely on certain occurrences to repeat, it’s true, but they do so in a variety of intricate ways. This intricacy offers our system an extraordinarily rich learning base.
Our algorithm has been trained using 21,000 stocks and 200,000 stock-years of financial data, covering the period from 1994 to 2022. Almost everything that exists has been viewed by our system before, albeit in a different form.
Having said that, Wirecard has arguably the best chance of fooling any AI-powered fraud-detection program.
That’s because actual cash holdings were not confirmed by auditors in the last three years of operation, Wirecard was so well suited to conceal inflated revenues, and AI fraud detection algorithms are usually utilized by banks rather than taught to seek for fraud in banks.
If a bank is involved and cash holdings are not confirmed, then a company can manipulate accounts in a highly aggressive manner with little to no traceback.
Complicate that picture further with a maze of international escrow accounts, and some genuine high margin, but subsequently hidden and embezzled revenue from money laundering, and you have a near bullet-proof fraud machine, a veritable fortress, except perhaps for traces of working capital strain mixed with abnormal accruals or investment activity.
How Wirecard got away with it
These traces are rarely detrimental to the stock price because equity analysts are usually impressed by expansion plans and rarely look at working capital and accruals.
Because of Wirecard’s strong defences, the FT’s and short-sellers’ attempts over the years were never successful. The majority depended on closely monitoring Wirecard’s overseas affiliates, which are companies that are independent of the company.
These assaults proved that these affiliates’ actions did not match the figures that Wirecard had provided. They also disclosed that Wirecard seemed to be paying foreign affiliates too much.
However, the assaults were disjointed. They pointed out accounting irregularities at organizations located in remote areas where fraud is common. However, there was never any clear indication as to whether the disparities were the result of fraud at Wirecard, merely misbehavior, or the corporation itself. No fatal blow was delivered.
Not a single attack relied on forensic issues that were clearly identifiable from Wirecard’s publicly available data. Conversely, Wirecard’s disclosed figures were so complex that it was nearly hard to extract any real value from them.
This could be a problem because AI-powered fraud-detection software depends on reported figures.
Furthermore, it is uncommon for a business engaged in lawful commerce to conceal, embezzle, and inflate earnings simultaneously. This is where organised criminal fronts operate. AI software, in contrast to the FBI, cannot employ a horde of IRS experts to uncover tax evasion by a corporation like this. Only the released figures are stored in the software. It cannot make use of a convoluted tax code.
The way Wirecard changed over time—from a relatively straightforward payments company specialising in online gambling and pornography to a bank entwined with a sophisticated global corporation—is another confounding issue.
Over time, Wirecard’s money laundering practices evolved. Over time, the techniques for inflating earnings changed. Additionally, the embezzlement’s nature was altered. Because of this, Wirecard’s data were never easily comparable between years, which made it challenging to track down monkey business.
To be clear, we weren’t sure how an AI fraud detection system would handle Wirecard.
Wind-Up- Wirecard Aftermath
Criminal cases arose in Germany, Singapore, the Philippines, and other places as a result of the Wirecard crash.
The primary trial for former Wirecard CEO Markus Braun started in late 2022 and is being held in a high-security courtroom at Munich’s Stadelheim prison. Both Stephan von Erffa, the accounting supervisor, and Oliver Bellenhaus, the head of Wirecard’s Dubai business, are on trial as well. The former COO, Jan Marsalek, is missing and thought to be in Russia. Braun has already suffered two defeats in court.
The trial is anticipated to go until the very end of 2024 at the latest because it is proving to be extremely complex due to a lack of concrete proof. Markus Braun is accused of misrepresenting Wirecard’s accounts and of market manipulation by falsifying income from transactions with so-called third-party acquirers.
Since the prosecutions started, there have been numerous turns and turns. In the most recent development, on November 16, an Israeli private investigator was found guilty of participating in a US$4.8 million hacking plot that targeted journalists and Wirecard critics, and was sentenced to 80 months in prison.
