One of the more baffling performances by a financial regulator in recent years has been the response by the German financial supervisory agency Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) to media reports about financial irregularities associated with the German fintech company Wirecard. Beginning in early 2019, a series of articles, principally by the Financial Times, identified multiple instances of potential wrongdoing within Wirecard. Those instances included forging and backdating of contracts to inflate revenues and attributing half of its worldwide revenue to three shell firms with virtually no evidence of genuine business activity that could generate such revenue.
When Wirecard’s share price plunged in response to media reports, BaFin’s response was not to open an inquiry into possible fraud or other violations of law at Wirecard. Instead, it imposed a temporary ban on short-selling of Wirecard stock, opened a market-manipulation investigation, and filed a complaint with the Munich public prosecutor, who opened a criminal market-manipulation investigation in which the lead Financial Times reporter was named as a suspect.
Not until the spring of 2020 did BaFin show active interest in Wirecard itself, filing a criminal complaint with the Munich prosecutor alleging market manipulation by Wirecard senior leadership. Shortly before Wirecard’s complete collapse in June 2020, BaFin President Felix Hufeld finally termed the Wirecard scandal “a complete disaster” and “a shame” for Germany, as a market that “should be governed by quality and reliability.”
On January 29, after six months in which the European Securities and Markets Authority, investors, and others took BaFin to task for its failures in supervising Wirecard, German Finance Minister Olaf Scholz announced that Hufeld was being replaced as head of BaFin. While Scholz reportedly thanked Hufeld for his years of service at BaFin, a Finance Ministry statement pointedly did not identify a successor for Hufeld, but stated that BaFin “needs a reorganization to fulfill its supervisory role more effectively.”
Both the Finance Ministry and the German Parliamentary committee tasked with investigating the Wirecard scandal will undoubtedly have much to say about how that reorganization should proceed. At a minimum, if it is to regain public confidence as a national financial regulator, BaFin will need to redefine its mission and purpose and persuade the government and the public that it is committed to vigorous regulation rather than corporate protectionism.
Dipping Through Geometries 