Wirecard’s missing money story unravels, the SFC is issuing penalties, the DEA made some serious mistakes and PEPs in Zimbabwe seem to be misbehaving.

We share our financial regulatory highlights from the week of 22 June 2020.

Wirecard’s Missing €1.9 Billion

€1.9 billion is a considerable sum of money. One that you’d be surprised to see appear out of thin air on accounting books of a legitimate and respected business. But despite Wirecard’s best efforts, it appears as though the fintech has either lost €1.9 billion or never had it in the first place.

The former CEO of Wirecard, Markus Braun was arrested on suspicion of inflating the company’s balance sheet after having resigned from the payments company on 19 June 2020.

Braun has been released on bail but could still face charges and considerable jail time for his alleged actions.

Initial reports suggested that the €1.9 billion had vanished upon entering the Philippines, but now it appears that the money may never have existed. The central bank in the Philippines says that the bank documents produced were fake and central bank governor, Benjamin Diokno, asserted that the perpetrators were attempting to cover their tracks by bringing the Philippines into the story, commenting: “The international financial scandal used the names of two of the country’s biggest banks – BDO and BPI – in an attempt to cover the perpetrators’ track.”

The scandal has extended past Wirecard and threatens to engulf Bafin, the German financial regulator, as well.

The head of Germany’s financial watchdog Bafin, Felix Hufeld, stated that the crisis is a “total disaster”, a fair assessment as around €11 billion has been removed from Wirecard’s market value since the news broke. Hufeld also accepted that Bafin and others had made mistakes.

This incident could have far-reaching consequences for the fintech sector in Germany, speaking to the issue on 23 June 2020 the German finance minister, Olaf Scholz, commented it was: “extremely worrying”. Scholz went on to say that Germany must quickly improve oversight of similar companies. Whether that’s fintechs or payment processors is unclear.

It seems that Wirecard has been dealt the final blow. One of the giants of the German fintech world, once worth €28 billion, has just announced insolvency  owing €3.5 billion to its creditors. It’s a sobering end to a tumultuous week in financial crime in Europe. As time passes and the accounts are unpicked it’ll be interesting to see exactly what happened at Wirecard and why the company failed. For now it’s a reminder that having clear internal processes and remaining compliant is not optional, but key to a company’s financial success.

This has had an impact on Wirecard clients with Wirecard having had its license frozen by the FCA and other regulators likely to follow suit. Some card providers are unable to process transactions, meaning that the week is ending with many customers of various financial institutions being unable to make payments. How long this will last is uncertain but the affected FIs need to move to new payment processors immediately.

Securities Failure with the SFC

Guotai Junan Securities, a Hong Kong firm, has been fined HK$52 million for multiple internal control failures and regulatory breaches over anti-money laundering by the Securities and Futures Commission (SFC).

The firm has also been penalized for its handling of third-party fund transfers and placing activities, as well as detection of wash trades and late reporting for suspicious activity.

Between March 2014 and March 2015, the SFC discovered that Guotai Junan failed to mitigate money laundering risks in over 15000 transactions reaching approximately HK$37.5 billion.

Guotai Junan also failed on numerous occasions to properly carry out ongoing monitoring procedures. The firm processed 5406 third party deposits between July 2015 and June 2016 where the identity of depositors, their relationship with the account holders and the reasons for the deposits were not always recorded.

There was also a lack of documentation regarding the relationship between depositors and third parties concerning two deposits coming to HK$38.2 million for a share subscription in December 2015. The deposits were from a third party who was unidentified until about September 2016.

Guotai Junan also failed in several areas regarding trade activity. Wash trades are illusory trades, made to create artificial activity in the marketplace through the simultaneous buying and selling of the same financial instruments by one trader.

The business missed 590 potential wash trades between January 2014 and July 2016 due to poor internal guidelines on the issue and technical failures of its transaction pattern monitoring system.

DEA Money Laundering Mistakes

Compliance isn’t just a challenge for private businesses, law enforcement can make mistakes too.

The US Drug Enforcement Administration (DEA) made several serious missteps when engaging in undercover money laundering and drug trafficking operations. That’s according to an audit conducted by the Department of Justice’s Office of the Inspector General in a report released earlier this month.

The inspector general’s report examined DEA operations that occurred between 2015 and 2017 — specifically Attorney General Exempted Operations (AGEOs). These are operations in which DEA agents facilitate money laundering to infiltrate and impede drug cartels’ activities.

Actively participating in money laundering schemes, however, means that there’s a heightened potential for fraud and abuse — a risk the DEA and DOJ failed to mitigate, according to the inspector general. Instead, internal controls and processes meant to guard against abuse were either not implemented or ignored, and statutory and regulatory reporting requirements were neglected, hindering oversight. The inspector general also indicated that the DEA, lacking proper documentation, failed to pursue targets involved in money laundering.

The report also calls into question whether AGEOs have been as successful as claimed. While the inspector general acknowledged that AGEOs have “led to significant arrests, prosecutions, money and drug seizures, and disruptions of [drug trafficking organizations],” the audit uncovered “inflated statistics and significant errors” in reporting those successes.

The Department of Justice’s report concludes with 19 recommendations that the DEA and DOJ should take to close compliance and reporting gaps and improve oversight capabilities. While the DEA said it has already made improvements, there’s still work to be done.

Zimbabwe’s COVID-19 Scandal

Obadiah Moyo, Zimbabwe’s health minister, was arrested on 20 June 2020 for his alleged role in green-lighting a multi-million-dollar deal to obtain exorbitantly priced COVID-19 test kits and other medical supplies.

Moyo has been accused of awarding a contract worth $60 million to a company called Drax International to procure drugs and other equipment at inflated prices (including $28 face masks) that would help fend off a COVID-19 outbreak. The company, which billed itself as a pharmaceutical manufacturing company based in Switzerland, was instead a consulting company with no relevant experience. Moyo allegedly knew this during the procurement process and still “exerted pressure” to see the deal through.

Further, the country’s health minister, who is out on bail, isn’t the only high-level official implicated in this scandal: Delish Nguwaya, Drax International’s Zimbabwean representative, and a few others from the state-owned National Pharmaceutical Company have been arrested for their alleged role in the scandal.

Questions have also emerged over what President Emmerson Mnangagwa knew and when, as pictures have surfaced showing the president and his family socializing with Delish Nguwaya, Drax International’s Zimbabwean representative. Nevertheless, no official connections or allegations against the president have been made.

Moyo is scheduled to appear in court on 31 July 2020 and, if convicted, could spend up to 15 years in prison.

While Moyo is not the first of President Mnangagwa’s administration to be charged with corruption — that honor goes to Prisca Mupfumira, Zimbabwe’s ex-tourism minister — it is a prime example of how the risk of corruption for PEPs is elevated during times of crisis.

Calls from health professionals in Zimbabwe for additional protective gear and medical supplies can appear to be met while at the same time giving cover for high-level officials to profit at the people’s expense.

While the case against Moyo is still in the preliminary stages, and he’s not yet been found guilty, the charges are a reminder that FIs must remain diligent about monitoring for PEPs even in these challenging times.


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