Wirecard and the art of the Potemkin corporation
Wirecard was the rare German startup that seemed primed to become a global player. But it was all too good to be true, as Dan McCrum, financial sleuth at the FT, ultimately discovered. We talk to him about how he unmasked the scam, overcoming spies, mobsters and even the German financial regulator to get at the truth. And also about favourite scams and why fraud is so damned difficult to stamp out.
Presented by Jonathan Ford and Neil Collins.
With Dan McCrum.
Produced and edited by Nick Hilton for Podot.
Sponsored by Briefcase.News
Jonathan Ford 00:06
Hello and welcome to a long time in finance with Jonathan Ford and Neil Collins. In partnership with briefcase dot news, the service that brings intelligent curation and analysis to your media monitoring.
It’s an endlessly fascinating subject, fraud, and what makes us all fall for it. From the 19th century Scottish toff, Gregor MacGregor, who created an imaginary South American country, Poyais, and then sold its bonds to credulous investors – to Nick Leeson, the trader whose lucky 88888 account destroyed Bearings Bank. Now there’s a new case to marvel at. One which outsized most others in the sheer scale of its deception. Wirecard was a financial technology company from a country, Germany, which hadn’t produced many successful ones. Unfortunately, for its bosses, who were, as it turned out, making up most of the numbers, they were pursued by a former colleague of ours, Dan McCrum of the FT, who ultimately exposed them, despite all sorts of skullduggery and being investigated by the German financial watchdog as if he was the bad guy. Well, now he’s written a book about it, money men. And he’s here to talk about his own experiences here in Neil’s garden, where we are this afternoon, and also what makes a great financial fraud. So Dan, welcome.
Dan McCrum 01:36
Thank you for having me on.
Jonathan Ford 01:37
Not at all. It’s great to have you. So I thought we’d start by talking a bit about this particular fraud, how you first got into it, and what made you decide that it was worth pursuing?
Dan McCrum 01:38
So this little company, and we have to go back eight years now to the summer of 2014. Chatting to a hedge fund manager who liked me was interested in financial frauds. He says to me, would you be interested in some German gangsters? I say, yeah, of course. The best kind, I mean, who wouldn’t be interested in German gangsters? Yeah, I take a look. And it’s this funny little tech company, it’s worth about 4 billion euros, it markets itself as a European PayPal, just sort of FinTech and payments. Its numbers don’t make sense. You know, it looks just a bit too good to be true. The story of the investigation, which is really the story of the book in money men is, the more I dig, the stranger it becomes, and it sort of takes over my entire life. And the whole thing takes years to bring it to this sort of conclusion, at which point it’s become a big battle between, you know, the Financial Times, and its Editor Lionel Barber on one side, and this sort of geeky, awkward former management consultant who’s sort of wrapped himself in a black turtleneck like he’s some sort of Austrian cousin of Steve Jobs.
Neil Collins 02:42
This is the chief executive of Wirecard.
Dan McCrum 02:43
Yes, the chief executive Marcus Brown. And it sort of builds to this conclusion where we’re fighting off hackers, private detectives, Russian mercenaries…
Jonathan Ford 02:56
So it’s partly a story of their attempts to basically throw… literally throw you somewhere. If that failed…
Neil Collins 03:04
Throw you into the Thames, I would think.
Jonathan Ford 03:07
But one question I have is, I mean, obviously, with these things, often you’re keen to try and test your theories with the, you know, you see some numbers, which make no sense, the obvious thing to do is go and talk to the company and find out; can they explain them? Did they ever actually attempt to engage with you or did they simply reach for the Russian mafia? As the first, first step?
Dan McCrum 03:28
So I started out with these suspicions; they bought a bunch of companies all over Asia, and things about those transactions seemed strange. You know, when I looked at the paperwork on the ground, it just didn’t match what the company was telling its investors.
Neil Collins 03:41
So at what point did you approach them and say, can you help me here? Because I don’t really understand what’s going on.
Dan McCrum 03:48
So I knock on the door again, this is September/October 2014. And they’re a bit strange, then I send them a bunch of questions. Can you explain these accounting things? And they sort of respond by saying, well, this is very suspicious. A hedge fund did ask us about these. Are you in league with short-sellers? Are you trying to drive the share price down for their benefit?
Neil Collins 04:09
There was no attempt to actually address any of the questions? This was just a sort of smokescreen?
Dan McCrum 04:14
Well, I mean, they did send us answers later. But that first reaction was just very unusual. And it’s like oh we’ve hit a nerve here. And again, the thing you see with frauds, I mean, we can talk about the numbers and stuff like that. But really, what you’re looking for is lies. There’s this great phrase, which American short sellers use, there’s never just one cockroach in the kitchen. And so, so I’m trying to like, catch the company in a lie, because then you can make a big deal about it. I have an interview and the great fun thing about being a journalist, I mean, as you both know, is you get to ask some very rude questions of people. You know, I asked this guy straight out, you hiding something, you know, is there accounting fraud happening here? And the weird thing was, he sort of gave an angry answer in the sense of his words. Like that’s bullshit, who’s telling you this sort of thing. But he used a few notable techniques of liars. You know, why would I do these things? You know, what about my reputation? It would make no sense for me to do them.
Neil Collins 5:12
Answering a different question.
Dan McCrum 5:13
Yeah, answering with a question and also invoking outside authority. You know, we have 17 analysts who think we’re worth buying, we have one of the world’s most reputable accounting firms, Ernst and Young, signing off on the accounts. Who are you to doubt us?
Jonathan Ford 05:25
But the point is that while this was all going on, from your first instinct to quite late on in the day, the company’s value it started, and you said at 4 billion had gone up to about 20 to 25. So there were lots and lots of people betting in the opposite direction. Did that make you wonder? You said, the guy says, well, we’ve got Ernst & Young on our side and a load of analysts and so forth. Did you ever think shit, well maybe I don’t understand it!
Dan McCrum 05:53
So you have these moments where you’re like, am I missing something? Yeah, the thing is, I never really got a good answer from the company. Right?
Jonathan Ford 06:00
That’s the key point; they couldn’t explain the missing bits in your mind.
Dan McCrum 06:04
And was sort of when I would zero on things, you know, the answer would keep changing. You’d say, okay, answer this question. They go, here’s x. You say, well, x doesn’t make sense. And they go, ah, sorry, actually, we mean, y. Okay, and so you sort of get that sense, like, yeah, you know, normal businesses can explain how their business works. It’s generally not that complicated.
Jonathan Ford 06:26
But what about EY I mean what the hell? I mean, somehow they allowed themselves to be spun along for years.
Dan McCrum 06:31
So Ernst and Young have done an absolutely terrible, negligent job for 10 years and are rightly being sued. And I think some of the guys involved are.
Neil Collins 6:44
That’s allegedly negligent.
Dan McCrum: 6:44
No, no, they were obviously negligent. I’m very happy to say that they were completely negligent. I don’t
Neil Collins 06:51
I don’t think they have much in their defence.
Jonathan Ford 06:52
We’ll be getting your disclaimer
Neil Collins 06:55
You’ll be hearing from schillings again,
Dan McCrum 06:57
The question is whether they are criminally negligent, you know, willfully negligent, or they were just incredibly stupid. And I do, as a rule, subscribe to the incompetence theory of humanity, rather than any darker sort of interpretation. What I think happens is, when you work on a big complex audit like that, you sort of become convinced that you really understand it. So every time you sign off on one little thing, you sort of become committed to it. Yeah. It’s now a question of reputation where you signed off on it before, why aren’t you doing it now? So that’s sort of the best that I’ve got? That they found themselves in a place where they sort of rationalised what was happening around them?
Jonathan Ford 07:36
They rationalised no one having the right piece of paper to hand and thought it’s just what happens with the startup, nobody really has the right piece of paper to hand.
Neil Collins 07:44
It is a pretty arcane area, all this business about payments and who’s supporting what I mean, it’s not something which is easily grasped by somebody on the outside. Do you think you understand it pretty well now?
Dan McCrum 07:59
Moderately? But I think, you know, the big question is, how do you get away with a fraud, right? And the way they did it was by wrapping themselves in complexity. So fundamentally, their business was quite simple. Yeah, you have a website, you sell floppy hats. I am in no way being inspired by Neil’s fetching attire today.
Jonathan Ford 08:20
Strangely, I believe you.
Neil Collins 8:28
I need protection from the sun.
Dan McCrum 08:30
And so you have to take payment from your customers. And Wirecard was one of the companies which will help you take credit and debit cards. And there are loads of businesses which do that. But Wirecard dressed it up as it was doing all these clever things around it with software, and made its accounts very complicated because it also owned a bank. And so whenever it was questioned, it would do two things. It would say – you just don’t understand. It’s all very complicated. Let us help you. And then the other thing it did if that didn’t work, was it called any critic, basically a stock market manipulator. And kind of the surprising thing is, both of those strategies worked very effectively.
Jonathan Ford 09:10
Well, the second, the second one is very reminiscent of the slaps, where you basically take out your critic by trying to muzzle them legally or in their case rather brilliantly by getting the financial regulator to step in and investigate what the FT was up to, which of course, must have been extremely alarming for everyone that the paper.
Dan McCrum 09:32
What’s incredible about the Wirecard situation is how they use every single one of these tactics. And so, as it escalates, you know, they start off with angry lawyers letters. McCrone is an idiot. And by the way, he’s probably corrupt, the FT and investigating. Yeah. And that actually worked. There was a big Reuters investigation in 2015, which I talked about where Reuters discover what’s effectively, you know, a big money laundering operation run through concert County Durham. 1000s of companies. be set up. And the people who are supposed to be running them, they’ve been found in the pub and paid 50 quid to put their name to it. Like the whole thing stinks. Yeah, Reuters exposes the whole thing. But at the last moment, under legal pressure, take Wirecards name out of the story. So like, causes headlines on the BBC all day. It’s discussed in parliament, what are the problems with regulation? And nobody mentions Wirecard.
Neil Collins 10:30
That’s really bizzare.
Dan McCrum 10:31
And what this creates over time is this sense that you know, the investors look at it and say, well, there’s all this mud that’s been thrown at Wirecard. None of it stuck. So there’s can’t be anything to it. Right? You know, the regulator has, in Germany has investigated the critics of Wirecard, not the company.
Jonathan Ford 10:45
So they do all these things, which make absolute sense. If you’re running a fraud, you make everything unbelievably complicated, you sow in the minds of the investors, the fact that if there is a thing you can’t talk to them about, it’s really in their interest not to know it, because they’re operating cleverly on the grey frontiers of the financial universe or whatever it is. And yet, when it finally comes out, of course, it’s all incredibly simple. Basically, the final exposure is essentially that they’re claiming as often seldom happens at the end of one of these great stock market frauds. They’re pinned down to explain some cash, which they don’t actually have. This is all incredibly reminiscent of a scandal like 20 years ago with Parmalat where exactly the same thing happened. In their case, they looted the company for years, the family that owned the Italian cheese company, which did remarkably well, for the cheese business. Basically, they looted it for years bought football clubs and so forth. And in the end, it all came down to whether there really was about $4 billion sitting in some bank in the Cayman Islands. In the end, of course, it was shown not to exist, because when finally the accountants went and looked for it, they couldn’t find it, which is sort of what happened here.
Neil Collins 11:53
Jonathan Ford 11:54
Just think it’s amazing how the same scenario played out 20 years later, why didn’t someone go oh, maybe this is the Parmalat thing, when we need to go and ask more carefully if the money really exists.
Dan McCrum 12:06
I mean, I remember Parmalat thing, I was working at Citi Group in London at the time. The bank had been caught up in and embarrassed in Parmalat in some way, I think with some very embarrassing names for special purpose vehicles and things, which in retrospect, you look at and go ‘yeah, I think they were giving us a clue there’. The kind of, the Wizard of Oz moment in the Wirecard story is when the heat on it is really rising. And everybody wants to know, right? Where’s all the cash because cash is king. And so the explanation is, we have 2 billion euros in bank accounts in the Philippines, which
Neil collins 12:42
The obvious place
Dan McCrum 12:43
The obvious place, yes, for a European financial institution. And this is the cunning thing that they’ve done is they said, we have this special structure where actually the bank accounts aren’t in our name. Because we’re involved in our payments processing business. It’s all very complicated. They’re in special accounts overseen by a lawyer.
Neil Collins 13:03
This is pretty desperate stuff isn’t at this point.
Jonathan Ford 13:07
That’s the question I have, which is, I mean, you’ve obviously spent probably more time than anyone else on the planet apart from Braun and their associates, thinking about what they were up to, so how does it play out, but they get away with it? Because in all these things, there’s always a moment where there’s no money, and everyone wants the money. Do you think they could have got away with it?
Dan McCrum 13:26
Well, I really do think they could have got away okay, because they got away with it for so long.
Jonathan Ford 13:31
But how do they get out? How do they sell the company or exit or just so they just run off with a pile of cash and hope no one follows.
Dan McCrum 13:38
They were seriously considering trying to buy Germany’s biggest bank, Deutsche Bank.
Neil Collins 13:43
Okay, mind you, a bank entirely immersed in all sorts of terrible problems.
Jonathan Ford 13:50
That sounds like the frying pan into the fire solution.
Dan McCrum 13:53
So, I mean, Deutsche Bank has such a terrible reputation. It’s raised billions it keeps wasting it. It’s you know, there’s so many scandals, so they could have gone in there. And you look at what’s happened in the last couple of years to the meme stocks, you know, Wirecard was the most shorted stock in Europe. So it could have had the same like Gamestop effect where haha, let’s screw the hedge funds, its share price would have gone to the moon, it could have bought Deutsche Bank and then in the gigantic mess, made everythin go away, hidden it all away, blamed it on someone else, you know, or at least dragged it out for another five years.
Neil Collins 14:30
I was gonna say it’s just buys time, doesn’t it? Because in the end, if there’s no money, there’s no money. I think they could have got away with it like that.
Jonathan Ford 14:40
But also you pretty high bar to say the way we’ll exit from our shonky little German payments system by the country’s largest bank, and then put it all through the washing machine.
Neil Collins 14:51
It was very cheap at the time
Jonathan Ford 14:51
It’s possible, I suppose.
Dan McCrum 14:53
But what are the other ways you can find a big tech company like Hewlett Packard to buy you? That’s one way.
Jonathan Ford 14:59
That would be straying into very dangerous territory
Neil Collins 15:04
Beyond the scope of this volume, I think.
Jonathan Ford 15:05
But what you’re describing is, once again makes you think, why does this stuff come round and round and round? And this there? You and I, to some extent of both, and Neil, have written stories why oh, why. The story is saying why on earth has anyone fallen for this sort of thing again? But did you form any conclusions about why do these scams… I mean, they have certain superficial differences, you know, there’s a payment system and internet and a lot of bollocks about the cashless economy. But at the end of the day, it’s the same as Parmalat milk powder and Cubase, sort of it’s basically just a load of made up numbers. Do you have any views on why a fraud is so persistent?
Dan McCrum 15:47
I mean, they come around a big one, every so often just to remind us that they’re out there, don’t they? You know, we don’t see them every day. And I think that’s part of the reason if you saw frauds every day, you’d be looking for them every day, because you would expect to get ripped off. But because we live in a high trust society, you just don’t, you know, it would be a waste of time to check everything.
Neil Collins 16:09
Yeah, I think that’s a very good point. And of course, the vast majority of them are pretty trivial in the scale of things. And the people who’ve lost the money or the institutions who’ve lost the money would just rather draw a line under it and move on. You know, they often measured in millions of pounds rather than billions.
Jonathan Ford 16:27
Well, it’s a bit like those things. What are they called, those letters you get on the internet, who say things like I’m official in the Nigerian central bank and give me your bank account details – and I will share with you the fruits of my theft. And of course, periodically, people fall for that. And the police say, well, of course, no one ever comes to us because they’re too embarrassed once they’ve lost their 30 grand to admit that they’ve fallen for such a transparent, transparent and disastrous scam. So in that sense, you could see, but I agree with you. I think it is a lot to do with that. I think there is a sort of idea that there’s a value in a high trust society in not checking everything. Because, actually it stops things getting done. And if the price is that you periodically, sort of send your tansy, or Parmalat comes along, or Markus Braun of Wirecard comes and rips you off?
Well, that’s just the price, periodically.
Dan McCrum 17:21
Each fraud is inventive in its own way. Because what you do is you sort of you’re making something which looks as close as possible to a normal set of transactions or normal set of circumstances. And you design it for what people are looking for. So one of my favourite scams is the great salad oil con.
Neil Collins 17:40
The salad oil swindle.
Dan McCrum 17:42
Yes, that’s the one I think it was the 70s right? Where a guy is seeming least starts to try and corner, like the world supply for salad oil. Vegetable oil. Yeah. And he has these tanks in New Jersey, I think. And what they do is every so often, someone will come along and check them by sort of unscrewing the lid at the top and dipping a stick, a dipstick, to see how to see how deep the oil is. And so what he does is he fills the tanks with seawater, and then creates a sort of like a deep bucket around the entrance, which has got actual oil in it. So when they dip it in, it seems like it was a sort of oil.
Neil Collins 18:21
I thought it was a tube that yes, and immediately underneath the point where you test it, so you could test it and it would all be oil. Yeah. All the way down.
Jonathan Ford 18:27
Yes, exactly. And when you looked, the salad oil was floating on top of the seawater.
Neil Collins 18:31
It was a quite imaginative fraud, I think.
Jonathan Ford 18:35
But that had, that had one other little wrinkle, which was that the reason it was all financed by a bank called American Express, and American Express basically wanted to get into the corporate lending business. So when this clown came along with his tanks of salad oil, instead of doing any checks, they basically just wrote the check. And lost a lot of money. But do you have; I wanted finally to end on sort of two things. One is, favourite fraud today is that your favourite fraud?
Dan McCrum 19:03
That is definitely one of my favourite frauds. One of my old-school favourites is Count Lustig. I think it was in the 1920s in Paris, okay. And he’s one of your, you know, the old school fraudsters who faked letters from the government saying that he had a contract to sell the Eiffel Tower for scrap. And he persuaded…
Neil Collins 19:27
It’s wonderfully imaginative, I have to say
Dan McCrum 19:29
And he persuaded two different scrap metal merchants to pay him very large amounts of money in expectation that they would then get the contract from the French government to basically melt down the Eiffel Tower. It’s just that wonderful example of how greed blinds you to, you know, to like what is obviously nonsensical.
Jonathan Ford 19:54
Which also obviously runs through all your wildcard story. But what about tips for spotting fraud? What’s the tell for, for a sleuth like you where your nostrils dilate and you start to think this, there’s something fishy here.
Dan McCrum 20:07
You know, there are technical things like trade receivables, which is, you know, sales where the money hasn’t arrived, yet growing faster than actual sales. Because that tells you they’re booking something which maybe isn’t a real sale. So that’s like a technical one. But really, I look for two things. I look for good sources who do all the hard work of looking for all these and then tell me about them, that’s the job of a journalist; your hedge fund managers. I’m not I’m not trying to cast myself… The other one is just look for a lie. Right? You know, if the company is lying about one thing, they’re going to be lying about other things.
Neil Collins 20:49
That was a longtime finance with Jonathan Ford and Neil Collins. Editing and Production is by Nick Hilton. And our sponsorship partner is briefcase dot news. Join us again next week.