ESMA published the results of its fast-track peer review, which assessed the events leading to the collapse of Wirecard AG and the supervisory response by BaFin and the Financial Reporting Enforcement Panel (FREP). The peer review identifies a number of deficiencies, inefficiencies, and legal and procedural impediments. These concern the independence of BaFin from issuers and government, market monitoring by both BaFin and FREP, examination procedures of FREP, and effectiveness of supervisory system in the area of financial reporting. The review also provides recommendations to address these shortcomings.
The peer review focuses on the application by BaFin and FREP of the Guidelines on Enforcement of Financial Information (GLEFI) and on impediments to the effectiveness of the German two-tier supervisory system for financial reporting in the context of the Wirecard case. ESMA identified deficiencies in the application of the GLEFI in the Wirecard case in the following areas:
- Independence of BaFin from issuers and government—BaFin lacks information about employees’ shareholdings. This raises doubts on the robustness of internal control system of BaFin regarding conflicts of interest of its employees vis-à-vis issuers. For BaFin, there is a heightened risk of influence by the Ministry of Finance given the frequency and detail of reporting by BaFin, sometimes before actions were taken. The Peer Review Committee recommends that BaFin should introduce a robust control framework to address the circumstances in which a conflict of interest could arise. The Peer Review Committee recommends that BaFin should introduce stricter limitations to the detail and frequency of reporting to the Ministry of Finance in the context of ongoing examinations.
- Market monitoring by both BaFin and FREP—Non-selection (or non-timely selection) of Wirecard’s financial reports for examination based on risks in the period between 2016 and 2018.
- FREP’s examination procedures of Wirecard financial reports—The scope of the examinations did not appropriately address areas material to the business of Wirecard, nor the media and whistleblowing allegations against Wirecard. The analyses performed (level of professional skepticism, timeliness of examination procedures, assessment of disclosures) and their documentation were insufficient. The Peer Review Committee recommends that, when establishing the risk factors to be considered to identify abstract risks, FREP should consider, more prominently, indicators of the potential impact of an infringement on financial markets.
- Effectiveness of the supervisory system in the area of financial reporting—Regarding the respective roles of BaFin and FREP in the case of (indications of) fraud in financial reporting, BaFin and FREP are not aligned in the perception of each other’s role and the limitations and possibilities that both have in the context of the two-tier system. BaFin was not put in the position to thoroughly assess FREP’s examinations of Wirecard, which would have enabled BaFin to determine whether it should take over the examinations from FREP. The strong confidentiality regime, by which both institutions are bound, may have hindered the exchange of relevant information between them and with other relevant bodies. Instances of lack of coordination and inefficiency in exchange of information between relevant teams in BaFin.
On June 22, 2020, Wirecard announced that EUR 1.9 billion were missing, which it claimed to hold in escrow accounts. In view of allegations of fraud, questions were raised about the roles of BaFin and FREP in taking timely action in this case. The report was prepared in response to a request received from EC on June 25, inviting ESMA to conduct a fact-finding analysis of the events leading up to the collapse of Wirecard AG. This is the first peer review conducted by ESMA under the revised ESMA Regulation and the new Peer Review Methodology, in the form of a Fast Track procedure and focusing on only one jurisdiction and one issuer.
Keywords: Europe, Germany, Banking, Securities, Peer Review, Wirecard, Financial Reporting, FREP, BaFin, EC, ESMA
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