Analyzing Wirecard case via temptation, opportunity, entitlement and boldness

On June 18, Markus Braun, CEO and the largest shareholder of the German firm, Wirecard, updated employees and investors on the status of the company’s annual audited financial statements in a recorded two-minute YouTube video. True to his new “visionary techie” image, he was wearing a black turtleneck sweater, inspired by Steve Jobs’ signature look. However, the resemblance this time was closer to disgraced Theranos founder Elizabeth Holmes.

Standing next to his speechless C-suite colleagues, Braun solemnly explained that the firm’s auditor, EY, couldn’t verify the existence of 9 billion euros in cash supposedly held by two banks in the Philippines.

“At present it cannot be ruled out,” Braun said in the video statement, “that Wirecard AG has become the aggrieved party in a case of fraud of considerable proportions.” (See Wirecard says it cannot rule out ‘fraud of considerable proportions’, Reuters, June 18.)

From porn site payment solutions to respectability

Valued at approximately 24 billion euros at its height in 2018, Wirecard was a poster child for Germany’s fintech sector. In 2018, the company replaced Commerzbank in 2018 on the DAX 30 index of leading German public companies. (See It was once Germany’s fintech star. Now, a missing $2 billion puts Wirecard’s future in doubt, by Ryan Browne, CNBC, June 19.)

Founded in 1999, Wirecard grew its business using proprietary technology to provide expansive online payment solutions. CNBC noted that, “The former tech darling’s business model involved managing cashless payments within a complex network of credit card companies, merchants and banks.” (See Why some investors are holding onto Wirecard shares even after insolvency, by Elliot Smith, CNBC, July 9.)

In 2002, Braun, a 31-year-old former KPMG IT consultant from Vienna, Austria, took control of Wirecard. He and his team raised more than 500 million euros from investors and then went on an acquisition spree across the globe to indulge his grandiose aspirations.

Wirecard snapped up little-known payment processors across Asia and established a regional headquarters in Singapore. The company offered credit card payment solutions to online pornography and gambling industries — areas that other traditional financial service providers tend to avoid. That year, Wirecard joined the Frankfurt stock market. In 2006, Wirecard purchased XCOM and moved into banking. Visa and Mastercard licensed the renamed Wirecard Bank so it could issue credit cards and manage merchants’ money.

In 2010, the company appointed Marsalek as COO, and the company’s official language was switched from German to English. (See Wirecard: the timeline, by Dan McCrum, Financial Times, June 25.)

Valued at approximately 24 billion euros at its height in 2018, Wirecard was a poster child for Germany’s fintech sector.

However, since Wirecard’s debut on the German stock market, fraud allegations have surrounded the company. In 2019, the Financial Times published a series of articles based on information that company insiders provided the newspaper on how Wirecard was using questionable accounting practices to increase revenues and profits.

Braun dismissed all the allegations as attempts by short sellers and colluding journalists to manipulate Wirecard’s stock price. The company even went so far as to get the German Federal Financial Supervisory Authority (BaFin) to halt the shorting of Wirecard stock. (See Germany bans Wirecard ‘shorting’ as prosecutors probe FT journalist, by Arno Schuetze, Reuters, Feb. 18, 2019.) Wirecard aggressively sued the Financial Times for its reporting, claiming that it made use of, and misrepresented, the company’s business secrets. (See Wirecard sues FT over investigative reports, Reuters, March 28, 2019.)

In October 2019, after the Financial Times launched a new salvo of allegations against the company, and with pressure from investors mounting, Wirecard hired KPMG to conduct a detailed forensic audit in the hope of clearing the company of any wrongdoing.

Braun assured skeptical investors and the media that the forensic auditors would have full access to all information and report back independently on the results without interference from the company.

After multiple project delays that pushed back the publishing of its report, Wirecard finally released the audit findings in April. KPMG could neither verify almost $1 billion in cash balances at various trust accounts in Asia nor a lion’s share of company profits from 2016 through 2018. The report also stated that auditors had encountered several obstacles while conducting forensic fieldwork. (See German payments firm Wirecard says missing €1.9bn may not exist, The Guardian, June 22.)

Braun explained to investors that the 2019 financial results, including the EY audit attestation, would be delayed because of the pandemic. Behind the scenes, EY was frantically trying to get written confirmation from the trustee of the Philippines bank accounts for the $1.9 billion. However, EY became increasingly suspicious of the documents that Wirecard and the account trustee provided.

In a last-ditch effort to save its lucrative decade-long relationship with Wirecard, EY instructed the company to transfer money in four separate transactions from the Philippines to a German bank account. EY sent the instructions to the trustee in the Philippines, but weeks passed, and no money found its way into Wirecard’s accounts. [See Fälschungen, Fälschungen und noch mehr Fälschungen, (in German) by Von Christoph Giesen, Klaus Ott, Nicolas Richter, Jörg Schmitt und Jan Willmroth, Suddeutsche Zeitung, June 29.]

On June 5, police searched Wirecard’s offices based on a criminal filing from BaFin against Braun and several other members of the management team for potential market manipulation based on communication prior to the release of the KPMG report findings. (See Wirecard offices searched as prosecutors probe management board, Financial Times, and Wirecard: The Timeline, Financial Times, June 25.)

On June 16, two days before Wirecard was scheduled to release its 2019 results, Philippines banks BPI and BPO announced that documents EY presented as part of its audit procedures seemed “spurious” and they were unaware of banking relationships with Wirecard. (See Very clear Wirecard deposit certificate was ‘spurious’, BPI CEO says, Reuters, June 22.)

On June 19, Braun resigned — just a day after he released the video acknowledging the money was missing. Four days later, German police arrested him on suspicion of false accounting and market manipulation. He was released the following day on a $5 million bond. (See Wirecard’s Former CEO Markus Braun Is Arrested, by Patricia Kowsmann, Ruth Bender and Paul J. Davies, The Wall Street Journal, June 23.)

Meanwhile, Wirecard suspended Marsalek and then fired him when it realized he was responsible for the Asian trust accounts. Since mid-June, German authorities have sought to question Marsalek about his role, but as of publication he’s an international fugitive who seemingly has deep ties to various government intelligence services. (See From payments to armaments: the double life of Wirecard’s Jan Marsalek, by Sam Jones, Paul Murphy, and Helen Warrell, Financial Times, July 10.)

Analyzing Wirecard with additional attributes

According to a June 24 online article by The Economist, “Wirecard’s rise and fall is a case study in the carnage possible when a firm’s accounting goes awry but national regulators and big investors are so seduced by the company’s narrative that they cannot, or will not, see it.” (See Wirecard’s scandal shows the benefits of short-sellers, The Economist, June 24.)

During the two years I [Steve Morang] researched and wrote the original “Big Frauds” column, I realized that the traditional Fraud Triangle, as useful as it’s been, couldn’t practically address many of the frauds and fraudsters and provide the most useful insight for CFEs. The Triangle still stands as a launching point for trying to understand fraud. However, it might not always apply to the motivations and personality characteristics of modern fraudsters. (See The Fraud Triangle on trial, by John D. Gill, J.D., CFE, Fraud Magazine, September/October 2017.

Working as a team with my wife, Sanya, an expert on human nature and behavior, we created the Seduction of Fraud (SoF) Diamond to better understand the elements of fraud. We use SoF when, as adjunct professors, we teach our classes at Golden Gate University.

Let’s use Wirecard as a case study to help illustrate this methodology.

The Seduction of Fraud Diamond

The attributes of the SoF Diamond are temptation, opportunity, entitlement and boldness. Wirecard’s Braun is an excellent example of a modern fraudster whose words and actions are replete with entitlement and boldness. He and his fellow “chief seduction officers” were able to seduce investors, regulators and auditors for years. We can also study how their actions and personality traits mirror the infamous seducer and fraudster, Giacomo Casanova, and what that implies when we design internal controls or conduct fraud examinations.

The SoF Diamond applies a different perspective to human nature than the Fraud Triangle. The Fraud Triangle presumes that fraudsters have working consciences and good intentions under normal circumstances, but the SoF Diamond considers that everyone potentially can have bad intentions. For example, Abraham Lincoln said in his famous 1859 Cooper Union speech that “Human action can be modified to some extent, but human nature cannot be changed.”

George Washington wrote “We have probably had too good an opinion of human nature in forming our confederation,” which led the U.S. Founding Fathers to implement the separation and balance of powers, which we believe is a direct result of the founders’ dim view of human nature. In other words, power can corrupt because human nature yields to temptation. Organizations must therefore pit one potentially corrupt group against another to check the power. We often refer to this as checks and balances when we think of governments, but the same can apply to corporate entities in the form of internal controls and governance systems.

In the case of Wirecard, and Braun in particular, we can make these observations using the SoF Diamond methodology.

Temptation: As a well-paid CEO and shareholder on the German DAX, it seems highly unlikely that Braun was coming under any real financial pressure. With a net worth estimated at more than 1 billion euros on paper, we can assume temptations confronted him more than pressures.

Entitlement: Self-aggrandizement is now the new normal. The world treats the rich and powerful like royalty and feeds their narcissistic traits. Braun appears to have the plethora of personality traits found in covert narcissists. He was seemingly introverted — perhaps even appeared humble — but his rage would flash when he was frustrated or others challenged him.

A magazine that conducted one of Braun’s rare interviews titled its resulting article, “Der Besessene,” which can be translated from German as either “the obsessed” or “the possessed.” (See Der Besessene, by Ursula Schwarzer, manager magazin, April 2, 2019.)

Opportunity: From the SoF perspective, we believe that the opportunity for fraud always will be present. It either exists or fraudsters will create it, which we’ll further explain in the next attribute.

Boldness: The SoF Diamond introduces this as a new attribute that ties all the elements together. Though prosecutors apparently haven’t yet spelled out their case against Wirecard, Braun and associates allegedly conducted a multibillion-dollar international fraud under the noses of dozens of regulatory watchdogs, auditors, investors and investigative journalists. If this is true, Braun was bold to even consider committing a fraud of this magnitude.

Our definition of bold is “the ability of the perpetrator to act in a manner that’s considerably more courageous and/or considerably more confident than an average person.” Although boldness as a personality trait isn’t bad per se, without integrity it can turn villainous.

Lessons from the past

The infamous Giacomo Casanova of Venice, Italy, 1725-1798, is considered one of the all-time masters of seduction. Within our methodology, seduction refers to a psychological process that plays a significant role in many modern frauds.

Casanova, who had numerous careers, was a master at reinventing himself as needed. We can see how his personality traits are an almost perfect overlap with modern fraudsters. Human nature remains fundamentally the same through the ages. We can begin to understand why our anti-fraud and compliance systems often fall short of their missions to prevent, deter and detect big frauds if we don’t frame our seducers/fraudsters in the correct context.

The most common personality traits we’ve identified between historical seducers and modern fraudsters include:

• Improvisational.
• Intelligent.
• Assertive.
• Business savvy.
• Deceptive.
• Flexible.
• Charming.
• Discerning.
• Adaptable.
• Fearless.
• Innovative.
• Bold.
• Persistent.
• Manipulative.
• Risk taking.
• Witty.
• Reinventive.
• Seductive.
• Untouchable.

A number of these personality traits seem to be positive attributes, at least when we view them individually. Almost any employee would want to report to an executive or manager who’s intelligent, charming, bold and witty. However, as the adage goes, “There is no free lunch, and it all depends.” What’s missing from the chart are traits such as integrity, loyalty and empathy. CFEs should view these missing traits as a huge waving red flag when evaluating an individual’s character.

Wirecard’s problems continue to mount. According to an article in Accounting Today, “Now that Wirecard has filed for court protection from creditors, the accountants who signed off on the fintech firm’s books for a decade are rejecting responsibility for their role in the debacle and preparing for the inevitable avalanche of lawsuits.” (See Wirecard auditors say ‘elaborate’ fraud led to missing billions, by Natalia Drozdiak, Steven Arons and Sarah Syed, Accounting Today, June 26.)

The case reminds us that understanding personality traits of historical seducers like Casanova and the similarities to modern fraudsters will help CFEs better understand human nature. We can then better detect potential behavioral red flags that could indicate potential disasters, such as Wirecard’s Markus Braun.

Sanya Morang (smorang@ggu.edu) and Steve Morang, CFE (imorang@ggu.edu) are adjunct professors at Golden Gate University and co-developers of The Seduction of Fraud. Steve Morang also leads the Fraud & Forensics Practice at Frank, Rimerman in San Francisco.