Germany Plans To Hand More Power To Regulator That Botched Wirecard Disaster


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As Valdis Dombrovskis complains to ESMA about the impressive lapse by Germany’s Bonn-based monetary regulator, BaFin, the German federal government is rushing to preserve one’s honor. Not just are Chancellor Angela Markel and Financing Minister Olaf Scholz fretted about analysis from Brussels, but a group of smart litigators leading a major class-action lawsuit versus the German government for stopping working to safeguard investors is likewise threatening to win an embarrassingly big settlement that could even more erode the German federal government’s finances as it struggles to justify its break with the “penny-wise four”.

So, what is Berlin’s strategy to try and improve oversight of public business in the wake of the biggest accounting scandal in postwar German history? Well, it appears like the plan is to hand more power to BaFin, the regulator that’s mostly responsible for dropping the ball in the very first place. When the FT released whistleblowers’ claims declaring accounting fraud at the company’s Asian business, BaFin responded by prohibiting short-selling in Wirecard shares, and introducing investigations into one of the FT press reporters investigating Wirecard.

Instead of inviting a serious rethink of its regulative structure, Berlin is attempting to shift the blame for these failures entirely on to a market group that had contracted with the German federal government, essentially permitting the major accounting firms auditing the biggest German business to regulate themselves.

The government will end its contract with the nation’s accounting guard dog, the Financial Reporting Enforcement Panel, as early as Monday, according to officials informed on the matter. The power to launch investigations into companies’ monetary reporting would then be handed to BaFin, Germany’s financial regulator, the authorities stated.

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FREP, a private-sector body with quasi-official power, keeps an eye on the financial reporting of listed business on behalf of the federal government. “What the Wirecard affair has actually revealed is that…self-regulation by the auditors does not work correctly,” Jörg Kukies, Germany’s deputy finance minister told the Financial Times. ” So we will undoubtedly have to question whether the bodies that currently regulate the market should continue to do so in their existing kind.”

It begs the question: If Germany is so anxious about the reputation of its financial services industry (which it certainly should seek suffering a collapse on par with Enron) why does it just think handing a lot more power to BaFin will solve the problem? Not only are the top authorities at the regulator still in control, they responded to the scandal with the boilerplate apologies and platitudes, but stated little about actual reform, aside presuming more power to strongly investigate companies after looking out to possible wrongdoing.

The Wirecard affair has proved extremely awkward for the German government, which fears it might damage the reputation of the nation’s financial services industry. Through her spokesperson, Chancellor Angela Merkel on Friday explained the case as “alarming”, while Olaf Scholz, financing minister, called it “a scandal which is practically unprecedented in the world of finance.”

” We need to see the Wirecard story as a signal to attend to these problems, which have existed for rather a long time now, and to discover extreme solutions,” Mr Kukies said.

Rather, Scholz has safeguarded BaFin, declaring its choice to prohibit short selling in Wirecard shares was justified, and despite offering a “scathing criticism” of his own actions (per BBG) BaFin President Felix Hufeld remains in charge, and has no plans to resign. He largely blamed the failures on the auditors, despite BaFin’s extremely genuine actions to act as de facto lapdogs for Markus Braun and Wirecard management.

Germany’s galaxy brain strategy to reform accounting oversight in the wake of the Wirecard fiasco: hand more power to BaFin. https://t.co/wMrGV63 v6G

— Robert Smith (@BondHack) June 28, 2020

Make Braun head of Bafin.

— Robert Smith (@BondHack) June 28, 2020

Well known short-seller Muddy Waters joked that the choice was tantamount to putting OJ Simpson in charge of Household Court.

That makes good sense. While Germany is hectic pursuing such reasonable reforms, why don’t they designate OJ Simpson to run their household court system?

— MuddyWatersResearch (@muddywatersre) June 28, 2020

For those who have not been following the scandal, here’s what occurred: Via a complicated shell video game including Wirecard’s parent entity in Germany its regional subsidiaries, the business had the ability to conceal the missing out on ~$ 2 billion (EUR1.9 billion, technically speaking) from its auditor, Ernst & Young, for three years, as we explained a couple of days back. Obviously, it’s not like EY looked very hard; undoubtedly, it never ever even troubled to examine the funds that Wirecard said were stowed away in a special account in Singapore.

Now, Wirecard CEO Markus Braun is out on bail, and the DAX 30 is one business short. However most significantly, the scandal revealed that payments is simply another location of the European monetary system that is improperly managed, and quickly made use of, not unlike its AML controls.

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