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Germany’s BaFin Has Run Out of Wirecard Excuses

(Bloomberg Opinion) — After every financial scandal, the natural question that gets asked is: Where were the regulators?

The answer, usually, is asleep at the wheel — or MIA altogether. When the U.S. Securities and Exchange Commission opened a formal probe into Enron in 2001, the energy-trading giant had already lost 83% of its market value and was weeks from declaring bankruptcy. More recently, a string of money-laundering scandals in Europe has shown watchdogs missed warning signs for years.

When it comes to the spectacular collapse of German fintech darling Wirecard AG, though, things are rather more embarrassing. 

We know exactly what BaFin, the banking regulator for Europe’s No. 1 economy, was doing in the months leading up to the shocking revelation this June that 1.9 billion euros ($2.2 billion) of cash on Wirecard’s books never existed. Not only was it dragging its feet in investigating a national electronic-payments champion, it was going after the very people trying to expose the company’s dodgy accounting practices. 

When evidence of sham practices was piling up in Financial Times reports based on whistleblower accounts and internal documents, BaFin filed a criminal complaint in April — against the newspaper’s reporters and several short sellers. A few months earlier, it slapped a short-selling ban on the stock, a sign of support for Wirecard that spared it maximum pressure from the financial markets. Years before that, when Zatarra Research published a negative paper questioning Wirecard’s risk controls in 2016, BaFin probed the messenger as well.

Institutional biases and cognitive blind spots are nothing new, of course. The SEC failed to uncover Bernie Madoff’s Ponzi scheme for decades, even after several warnings by a whistleblower, because he was such a prominent establishment figure. Wirecard’s success probably blinded BaFin in the same way as it did auditors, bullish shareholders and the German media.

But in trying to explain how BaFin wound up using its finite resources to go after Wirecard’s critics, comments in July and August by its boss, Felix Hufeld, have been revealing in all the wrong ways. Excuses and defensive buck-passing have been the order of the day. Hufeld has said that BaFin didn’t have the power to fully investigate Wirecard’s fraud, and that it did all it could to spur other supervisory bodies and prosecutors into action. He has even said that, despite having a banking license, Wirecard was actually classed as a technology company — a category error so monumental that it’s akin to calling beef bourgignon a vegetarian dish. 

Even more disturbing is the revelation that employees at BaFin were trading Wirecard stock in the months leading up to its insolvency. The level of trading may have been low overall, but, given BaFin’s role as supervisor, the optics are terrible.

With Hufeld resisting calls to step down, and plenty of questions still unanswered, no wonder German lawmakers have decided to launch a full parliamentary inquiry. This will doubtless have a broad sweep, and examine the extent to which Wirecard held the political and financial establishment in thrall. 

What’s really needed, though, is reform of Germany’s regulatory supervision system. While nobody expects a U.S. style prosecutorial regime to emerge overnight in Germany, there is hope that BaFin can clean up its act and learn from the scandal.

More reform, more accountability and a serious overhaul of BaFin’s culture are needed. Garen Markarian, a professor at the University of Lausanne, reckons that top management needs to be replaced and those who traded Wirecard stock opportunistically need to be punished. There should also be tougher oversight of auditors, an area currently unevenly shared by BaFin and a much smaller entity, AOB.

Europe’s interconnected financial markets require strong regulators. Wirecard may be an extreme and egregious case, but it has revealed lapses within German regulation and a lack of understanding of the risks payment processors and fintech firms can carry. That’s a problem given fintech’s increasingly systemic role — as seen by Adyen NV’s entry into the Euro Stoxx 50 index as Societe Generale SA departs. Worryingly 31% of fintech firms in Europe aren’t regulated under any regime. Improving BaFin should help deal with these challenges — or, at the very least, allow journalists and short sellers to get back to their own day job.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France. He worked previously at Reuters and Forbes.

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