Tuesday, April 16, 2024

Germany to strengthen its financial regulator following the Wirecard scandal

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Germany will create a special financial task force capable of carrying out forensic audits of companies suspected of fraud, as part of a broad reform of financial regulator BaFin triggered by the Wirecard scandal.

“I want a financial supervisory authority with teeth,” Olaf Scholz, finance minister, said as he announced the reforms on Tuesday. Stricter supervision is “good for German financial markets and for the protection of investors”.

Mr Scholz said BaFin’s planned overhaul would make it “more powerful, more rigorous and more efficient”.

The minister was speaking four days after expelling BaFin chief Felix Hufeld, who had become a lightning rod for criticism of the regulator and his failure to follow through on countless media and analyst reports on suspicion of fraud at Wirecard, the payment processor. Elisabeth Roegele, Mr Hufeld’s assistant, was also expelled.

Wirecard announced last June that 1.9 billion euros in liquidity were lacking in its accounts and, within a week, had collapsed into insolvency. Its former general manager Markus Braun is the subject of an investigation, suspected of having launched a criminal racketeering which defrauded creditors to the tune of 3.2 billion euros. He denies wrongdoing.

Criticism of BaFin has focused on its decision to target journalists and short sellers who exposed financial irregularities at Wirecard, and for overriding the Bundesbank’s objections to imposing a two-month ban on selling the shares of Wirecard.

The revelations that BaFin staff actively bought and sold shares of Wirecard as the company came under increasing scrutiny by authorities also caused dismay in Berlin. Last week, the regulator revealed that it had filed a criminal complaint against an employee for insider trading with Wirecard shares in June of last year.

Jörg Kukies, German Deputy Minister of Finance, said it was “indisputable that in the past mistakes had been made”.

“When there are concrete indications of accounting fraud, as was often the case with Wirecard, we want to create a situation where BaFin handles these denunciations, processes them and deals with them effectively”, he added.

BaFin’s reform is contained in a seven-point plan, based on the proposals of the consultancy firm Roland Berger, the centerpiece of which is a “targeted control body” to oversee complex companies. The Wirecard saga has revealed that oversight of these companies in Germany is too often split between separate bodies responsible for banking, financial markets and money laundering, and some companies fall through the cracks.

The plan also provides for the creation of a new BaFin working group capable of investigating companies suspected of financial irregularities. The regulator would also hire more of its own auditors to carry out these polls.

“When concrete information arrives, BaFin should always be able to conduct a forensic investigation [like the special audit carried out by KPMG into Wirecard], and be endowed with the sovereign powers to do so, ”said Mr. Kukies.

Mr Scholz said the reform would also ensure that BaFin takes whistleblower information more seriously and does more to protect the rights of investors and consumers. The position of its president will be strengthened and its IT capabilities improved.

The BaFin reform is based on a “action plan” unveiled by the Ministry of Finance last summer which promised a major overhaul of the regulations in the wake of Wirecard. One of the proposals it contains is that the Big Four accounting firms separate their audit and consulting services more clearly and that companies change auditors every 10 years.

But the finance ministry’s plan for BaFin has been criticized by lawmakers. Hans Michelbach, finance spokesman for the CSU, which is part of Angela Merkel’s coalition, called it “completely inadequate”. “A BaFin reform must above all guarantee [its] independence, ”he said. “Herr Scholz didn’t say anything about it.”

He referred to the report of the European Securities and Markets Authority on the Wirecard saga which criticized BaFin’s “deficient” management of the scandal. “Esma revealed serious loopholes in German financial regulations and. . . Mr Scholz’s reform plans barely meet them.

“Olaf Scholz is trying to sell himself as the great reformer and thus distract from his own failures in the Wirecard affair,” said Lisa Paus, finance spokeswoman for the opposition Greens.

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