You Don’t Say That Wirecard Was A Fraud, Do You? Really?

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Possibly the least surprising business news of the day:

The former chief executive of Wirecard has been accused of committing a multi-year fraud and has been arrested for a second time by prosecutors in Munich.

Markus Braun was among three former executives of the German payments group detained yesterday, with the Munich prosecutor’s office saying they were now suspected of an organised criminal enterprise to inflate revenues by using faked accounts.

The claim – it’s a claim so far – is that some to many of their customers didn’t in fact exist. Therefore they were fiddling the books to show income streams arriving, which they then handled, made a margin on and so reported income and profits.

The corollary of this is that somewhere in the system there had to be a cash balance. For balance sheets must balance and so if there’s been income and profits then the cash must be somewhere.

For a payments processor there’s an account – accounts – somewhere which are to handle chargebacks. The retailer isn’t trusted to be entirely open and honest about who is buying their goods. Or maybe to handle returns to be a little less cynical about it. So, some portion of all sales by a specific retailer are held in a trust account. The dodgier you think the retailer is the higher the portion of their sales are held for 10, 30, 90 whatever days. After all, the credit card company is – dependent upon the specific consumer credit laws in a place – responsible for refunds over fraud and non-delivery etc. So, some portion of revenues is going to be held somewhere to cover that risk.

So, if you’re going to be a dodgy payments processor that’s where you non-existing cash is going to be. In your chargeback accounts. Which is what, as it happened, turned out not to exist. Which is how that balance sheet now balances. As the chargeback accounts are empty we can now balance the true income and losses.

And now to move out from general opinion and speculation about what happened to the wilder shores. Wirecard started out as the processor for payments other people didn’t want to handle, porn and gambling largely. It claimed to have expanded well beyond this and perhaps it did.

There are claims that there were networks of porn sites all happily paying 15% or so – vast margins in this business – for Wirecard to process their payments. Also, the sort of porn sites that no rational person would ever bother paying for – plenty of more interesting places for free out there. So, why were people?

One theory is that this is how cannabis payments got laundered, or possibly more criminal money. My speculation – and it’s a wild one – is that this was a possible method of laundering stolen cards. Steal the online numbers, use them to sign up to some handful of these porn sites, pay off the processor, collect the revenues and thereby be able to gain money from having nicked the card numbers.

I have no knowledge of this, it’s pure speculation. But I hope someone’s looking at it. Because if I were running a dodgy processor as a massive fraud that’s exactly the sort of business I’d try to encourage. Given that I am not brighter than other people I sorta assume that someone alleged to have been running a dodgy payments processor would have thought of it too.

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