Business Maverick


Wirecard Scandal: Is their South African operation squeaky clean?

Wirecard's former chief executive Markus Braun. (Photo: EPA-EFE / Philipp Guelland)

By its very nature, accounting fraud is perpetrated across multiple geographies by companies that have convoluted structures that are difficult to understand, let alone audit. Could the South African operation have been sucked into the shenanigans?

Markus Braun, CEO of Germany’s once high-flying payment company Wirecard AG, has been arrested for a second time and his bail withdrawn as more details of the company’s alleged multi-year fraud emerge.

Wirecard, once a top 30 constituent on the DAX, Germany’s benchmark index of publicly-traded companies, applied for liquidation in June after auditors Ernst & Young refused to sign off the accounts. Prosecutors accused management of falsely inflating the company’s sales with fake income and Wirecard executives acknowledged that €2-billion of cash on its books did not exist.

While the legal process is underway, bankruptcy administrators have begun selling some of its businesses, as they try to stabilise its operations and raise money to pay off its heavy debt burden.

Among the assets for sale is Wirecard SA, a small entity within the greater scheme of things, but one with its own technology and own customers, which means it is nicely ring-fenced from the mothership.

Hannalie Marsh, regional MD of Wirecard sub-Saharan Africa, confirms the company is for sale, adding that there has been considerable interest from local, regional and global companies.

“We have our own technology, our own customers (the merchants), and our own links to the banks, which means we are quite separate from the global group. This independence puts us in a perfect position for a sale.” 

Customers include Herbalife, Beachcomber and car rental companies with whom Marsh and the team have been in regular contact. “They have been very supportive.”

While the parent company has spent the better part of the year dodging regulators, the local operation has been in a massive renovation and building phase since January. 

“If anything, Covid-19 has supported this as it boosted corporate interest in eCommerce,” says Marsh.  

Like its parent, Wirecard SA is a payment processor, helping websites collect credit card payments from customers. It also issues prepaid cards such as gift cards.

Unlike its parent, it does not have a licence to issue credit cards and handle money on behalf of merchants. 

This fact alone provides a measure of comfort for the SA Reserve Bank (SARB).

“With all that was happening with the parent company we started to look at the local operation, wondering what spillovers there might be,” says Tim Masela, head of the National Payment System department at the SARB. 

He says the fact that the local business provides backbone infrastructure in the payment space is comforting. 

“We would have been concerned if they were directly involved in holding or touching money. As an infrastructure provider, the worst that could happen is that their systems could go down, impacting transaction volumes.

“The company is managing its affairs and we are overseeing all of this,” he says.

But, does the apple fall far from the tree?

Should one be looking closer at Wirecard SA for evidence of the types of transactions that have brought the company to its knees?

“We have two major workstreams underway at present,” says Marsh. “One that is looking to the past; this is being driven by the liquidators and the authorities. The other is looking at the future and this is where my focus is right now. As much as I want the truth, my number one priority is to keep this entity and asset intact.”

Before one examines the acquisition of Amara in 2014 for €29-million, which laid the basis of Wirecard SA and MyGate in 2017 for €23-million, it’s worth understanding the mechanics of the fraud that Wirecard’s management has been accused of.

An anonymous group of analysts called mca-mathematik has done a significant amount of research into the Wirecard fraud, which can be found here. 

They point out that the €2-billion that is missing off Wirecard’s balance sheet isn’t actually missing. It was never there, to begin with.

Accounting fraud, large or small, is about delivering fake profits. But fake profits do not deliver cash flow. Which means that every year management needs to find a way to explain to investors the lack of cash generated by the fake profits. 

One method employed by fraudulent companies is to over-pay to buy assets from controlled entities and then funnel the overpayment back into the business to pay down aged receivables. 

The India deal was the most egregious of these, mca-mathematik says:

“Wirecard purchased an asset for >€300-million, 8x the price it had sold for just weeks earlier, despite recently admitting in the London courts that they were aware at the time that the prior transaction had taken place. We believe the majority of the profits given to the intermediary in the transaction were funnelled back into Wirecard as high-margin software sales and used to pay down receivables.”

What does this have to do with South Africa?

As mentioned earlier, Wirecard made two notable acquisitions (plus a host of teeny bolt-ons) to form the base of Wirecard SA.

In 2014 Wirecard acquired Amara Tech, a company founded by tech entrepreneur Alan West, who remained on board until 2017. The intention was to use Amara as the platform for planned expansion into the sub-Saharan region. Amara was described as an “Independent MasterCard and VISA accredited third party processing business delivering payment solutions to the marketplace.” 

In 2017, Wirecard AG acquired MyGate from founder Dan Edmiston. It was at this point that eyebrows were raised at the price paid and the earnings quoted. According to Wirecard’s 2017 annual financial statements, MyGate contributed €5.9-million in revenue and €1.6-million in Ebitda for the nine months that the company was consolidated into the group.

“We have invested in a number of MyGate’s largest competitors, and are aware of the clients they serve.  We did look at the company 12 to 18 months before it was sold,” says Nicholas Smalle, a director with private equity firm Apis Partners. Apis is invested in pan-African payments firm Direct Pay Online (DPO) which is headquartered in Nairobi. 

“At that time MyGate was not generating revenue in-line with what was reported at the acquisition, although it’s possible that something could have changed in the interim. 

“We have been in the online payments space for a significant period of time and, in my opinion, there does not seem to be a way MyGate could have serviced the same market segments and generated the Ebitda that was reported at acquisition. Online processing is a commodity, requiring scale to operate due to very low margins.”  

An accountant who knows the business is equally sceptical about MyGate’s quoted numbers. 

“I’d say the rot happened in 2017 when MyGate’s numbers were consolidated into the group. You can bend things on consolidation, make adjustments and create assets that are not really there and use those to manipulate profit.

“I can tell you margins are very tight in this industry and the margin quoted in the 2017 financial statement does not make sense. That is a tell-tale sign that something is off.” 

Peter Harvey, the MD of the Direct Pay Online Group which owns MyGate competitor PayGate, was equally stunned by the price paid by Wirecard for MyGate but adds a note of caution. 

“We knew them well. They were worthy competitors, it was certainly a good price, but if there is a problem there I’d say it was a top-down problem [from Wirecard AG] and not a bottom-up problem.”

The complicated structure of Wirecard SA at the time meant that the local management team was effectively excluded from the financial transactions underway at the time.

It was only in 2019 that Marsh and John Smith were appointed to the board of Wirecard SA, replacing Peter Stenslunde and Carlos Häuser, Wirecard AG’s VP Payment & Risk and Shared Services.

Stenslunde and Dan Edmiston could not be reached for comment.

In their article Anatomy of a Fraud, mca-mathematik noted: 

“Our research has found that Wirecard’s acquisitions in South Africa, Malaysia, Singapore and most notably India, were purchased from entities partly or totally controlled by Henry O’Sullivan of Senjo Group, who himself has strong ties to Wirecard.”

If the acquisition of MyGate (and possibly Amara) was deliberately over-priced, how could the transactions have been structured?

For one, the value of the funds that came into South Africa for the purchase would be a small fraction of the stated sell price. This would mean that the balance of the purchase value would have been diverted offshore into a friendly jurisdiction like Mauritius.  

A side deal would have been struck between the seller and senior executives at Wirecard, including the board members of the local operation.

An arrangement would be made to share the proceeds of the over-payment via a trust in Mauritius that would later be drawn down, undetected.  

This means that Wirecard AG would see the full stated value being paid in different transactions. 

It’s the people, stupid

“We heard the reports and the allegations,” says Marsh, “but you don’t believe something this big could be possible. Instead, you focus on the things you can control – so we focused on taking care of our merchants, our business and each other. 

“This [Wirecard AG] was an amazing company. As a result of all of this fraud about 6,300 people will be affected – they did not ask for this.” BM/DM


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