When corporate accounting fraud comes to light, it feels like the sky is falling. Suddenly, accepted business practices are cast into doubt. Trustworthy people are revealed as rogues. Everybody in the enterprise is suspected as being complicit until proven otherwise. It becomes difficult to know what and whom to trust.

In the U.S., Enron remains the largest fraud ever. Executives Ken Lay, Jeff Skilling and Andy Fastow were convicted or plead guilty to financial crimes. Lay died of a heart attack before he could be sentenced. Skilling served 14 years and Fastow five. Also crushed by Enron’s collapse was Arthur Andersen, which audited Enron’s financial statements, and numerous private companies whose credit exposure to Enron exceeded their net worth.

Europe today is sorting out its own Enron-scale accounting scandal. The case has received scant attention in the U.S.

Wirecard was an electronic payments company founded in 1999 just before the dot.com market crash. Its early history was rocky. In 2002, investor Markus Braun bought the business and began processing payments for porn and internet gambling operators, business VISA and Mastercard refused to handle for Wirecard because it was illegal in some jurisdictions. Wirecard’s staff substituted transaction codes for legitimate types of merchants. The problem was solved, but the die was cast.

In December 2004, Wirecard carried out a reverse IPO, merging with a company whose shares were already owned by the public and listed on the German stock exchange equivalent of our Nasdaq. The public company took Wirecard’s name and Wirecard avoided the legally rigorous process of registering its own shares in an initial public offering.

A series of acquisitions followed—nearly all of them in foreign nations with lax or nonexistent financial regulatory regimes, including Singapore, UAE, China and the Philippines. Wirecard also established relationships with “partner” firms that were nominally independent. The international business units became the wheelhouse of the fraud. When Wirecard admitted in 2020 it could not “find” its own money, the “missing” funds totaled €2 billion.

Functionally, the fraud resembled a multiparty check kiting scheme, only the payments were electronic rather than by paper checks. Money was sent on a “round-trip” from Frankfurt to overseas Wirecard and partner firms who eventually routed it back to Frankfurt. Wirecard also claimed it had €1.9 billion of escrow fund balances at two Philippine banks when in fact it had none.

In April 2015, Britain’s Financial Times newspaper began publishing stories questioning Wirecard’s business practices. Wirecard responded ferociously. The company enlisted German political and regulatory officials to open investigations of, and bring criminal charges against, Dan McCrum, the lead FT reporter.[1] He, his wife and children, and other FT journalists were surveilled and threatened with violence by hoodlums allegedly in the employ of one of Wirecard’s law firms. Other Wirecard law firms in England and Germany sued the FT, seeking damages equal to the decline in market value of Wirecard’s stock as the scheme began to come undone.

In the end, as in Enron, the scheme unraveled because Wirecard employee whistleblowers fed the FT information about where to look for criminal activity. With the results of their work, FT reporters constructed a roadmap of the fraud. E&Y’s audit failure led to its being banned from auditing German public companies for two years. Wirecard CEO Braun’s trial is ongoing at present.

COO Jan Marsalek, the executive who directed the fraud, let his ties to Russian oligarchs and the GRU security service there be known to his associates as a means of intimidation. He is now a fugitive rumored to be living in Belarus. While the fraud was ongoing, he would mount counterintelligence operations using shady characters in an effort to compromise FT personnel. Too, he was said to possess the formula for Novichok, the poison the GRU used to kill Russians living in England whom the Putin regime viewed as political risks.

As always, the question is how could so many smart people be duped for so long? We have regularly written that financial frauds need to be understood as dramas where, as the British unprotected railroad crossing sign says, “One Train Hides Another.” Two completely opposite behavior patterns coexist—one that exudes success and moral rectitude while the other is a crime wave.

Accountants, lawyers, investment bankers and business consultants seek plausible explanations for transactions that seem a bit off. Inevitably, fraud perpetrators offer exactly that—plausible explanations. What the interrogators miss is that truth is the polar opposite of what is claimed, not just a little bit off. They are drawn into the drama and convince themselves all is above board.

As we have also written, technology is a perpetrator’s most valuable weapon in today’s world. It makes implausible schemes plausible. A modest example: Oakwood Deposit Bank in a town of 700 people in Northwest Ohio failed in 2002 after the CEO embezzled $40 million. He claimed the bank was successfully attracting deposits from customers far and wide via the internet. Without the internet claim, he would have needed to gather deposits from households in a three-state area to create the deposit base he said the bank had—a physical impossibility.[2] Technology’s extra value is as a force multiplier, making it possible to commit fraud on a scale that would otherwise be impossible and to build the fraud quickly.

Post-Wirecard, European legislators and regulators have adopted many of the Sarbanes-Oxley Act’s requirements. Although they are useful measures, they cannot and will not prevent financial fraud from taking place. Fraud is always a story of human failings. The Wirecard story includes many suckers and fools, most of them lawyers, accountants and investment bankers working for leading capital markets participants, including the German government. There are only a handful of heroes, particularly Wirecard employees who quit in disgust and then found it difficult to find employment elsewhere because Wirecard defamed them to prospective employers.

A late friend of ours, Gene Maloney, was an executive at Federated Investors and a devout Christian. Gene paid his own way every week to teach ethics to business students at Boston University because he believed doing so was important community service. Talking together one day in the year after Enron, I said to Gene, “Discipleship is costly, isn’t it.” He replied, “You bet it is; but it’s well worth the investment.”

[1] McCrum’s account of the scandal is Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth, published by Penguin Press in 2022.

[2] https://www.washingtonpost.com/archive/politics/2002/04/07/ohio-bank-goes-bust/122d7cb0-52f9-4814-9f61-6445d1f9b38d/