German payments processor and DAX market darling Wirecard AG has been revealed to have a € 1.9 billion hole in its balance sheet. Erstwhile superstar CEO Markus Braun found himself both out of a job and into police custody.
The company’s catastrophic implosion would have been no surprise to those alert to the depth of its problems as publicized over the last 18 months – not among them the credulous at German regulator BaFin, deeply interested DeutschBank, or a group of groupies among the executive team at SoftBank.
As for the missing cash? It appears never to have been there in the first place, suggesting that the inevitable up-coming forensic exercise may not be all that complex, to unpack an extended course of malfeasance.
Professors of literature teach that there are but a handful of great plot lines. So too, there are just a few basic financial fraud schemes, repeated with minor updating variations from one decade to the next. Among them, falsified operations and fictitious assets are persistent and recurring themes – tweaked in their sordid details by each new generation of white-collar criminals.
Two examples go back a half century – the first accounting scandals on which I cut my teeth as a rookie lawyer: the Salad Oil case, in the tank farm near Newark airport where Tino De Angelis used light-weight soybean oil to top off huge tanks filled with heavier water, fooling the auditors who climbed the ladders to open the lids but neglected to tap the valves at the bottom; and the Ponzi scheme at Equity Funding, where Stanley Goldblum’s minions falsified customer ledgers to create fictitious life-insurance policy holders who went undiscovered because not directly confirmed.
Back in those old days, fraudsters did real work to cover their tracks. Barry Minkow of ZZZBest tricked up dummy customer locations to pass as real work sites. Sam Antar at Crazy Eddie dissuaded the auditors from descending into the creepy basement vaults under his boutique-sized New York shops – never large enough to hold the bulky cartons of projection televisions shown on the fanciful inventories. Head counts of phantom cattle herds were inflated by multiple cycling of the same calves through corral gates, under the noses of naïve city-bred staffers, perched on fence rails and eager to escape the dust and noise.
The evolution over five decades means that such fabrications are of less need to the malefactors. Even the revelation in 2009 that one-third of the revenue of Indian software company Satyam Computer Services was bogus involved only non-existent customer contracts, although the inexplicable absence of physical evidence for 13,000 ghost employees – such as canteen turn-over and transport allowance cards and desks and telephones – remains a puzzlement.
In the case of Wirecard, the concentration of its business in a mere three shadowy “acquiring partners” and the ostensible location of its cash in two banks in the Philippines will figure. With their mission in hand, fraud examiners should not take long, peering at Wirecard’s business model through the guiding lens of hindsight, to reverse-engineer the plot line. Any treasure hunt is eased by having in hand a map with a large “X”.
William of Occam’s reductive principle applies no little to inform the design of a large-scale financial scam. In Wirecard, “the simpler, the better” is likely to have found a new application.
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