Today, 3 November 2020, the European Securities Markets Authority (ESMA) presented its long-awaited report on the role of the German financial supervisor BaFin and the German Financial Reporting Enforcement Panel (FREP) in the Wirecard accounting scandal. In Germany, BaFin and FREP are jointly responsible for the enforcement of financial reporting. ESMA publishes guidelines aimed at harmonising enforcement throughout Europe and regularly assesses their implementation in so-called peer reviews. However, the analytical framework of these peer reviews is narrow. The report published today, which was requested by the EU Commission on 25 June 2020, is the result of such a peer review with a special focus on the Wirecard case. It is therefore not a full and open examination of the actions of BaFin and the FREP in the Wirecard scandal, but merely a comparison with the existing requirements of the ESMA guidelines on enforcement. BaFin’s critical role as Wirecard’s market, banking and payment service supervisor, in particular the short-selling bans and charges against Financial Times journalists, are therefore not taken into account in the report.
The report reveals considerable deficits. The cooperation between BaFin and FREP is hampered by confidentiality rules, and the two authorities disagree on their respective roles with regard to balance sheet fraud. The FREP’s examinations lacked professional scepticism in some cases, and critical media reports have not been adequately considered for too long. BaFin lacks resources to critically monitor the work of the FREP. The report expresses doubts about the internal control systems of BaFin. Trading activities of own employees in critical financial securities are not monitored, and employees of the market abuse department in particular traded Wirecard shares in the relevant period. Furthermore, intensive reporting obligations to the Federal Ministry of Finance entail the risk of excessive political influence on the work of BaFin.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The Wirecard report by ESMA reveals that the German system of joint financial reporting enforcement by BaFin and the FREP cannot work. If confidentiality rules prevent the authorities from communicating effectively, and if they even disagree about their respective roles, fraud cannot be effectively contained. The fact that, according to the report, the FREP sometimes lacks professional scepticism, but BaFin has to rely on the FREP without exercising own scrutiny due to a lack of resources, shows how absurd this supervisory model is. This chaos of responsibilities must come to an end. Instead of outsourcing public supervisory powers to a private sector association, what is needed is lean and effective enforcement by a powerful BaFin.
The report also shows once again severe internal shortcomings at BaFin. BaFin’s enforcement unit was not aware of relevant media reports about Wirecard, although the market abuse department dealt with them at the same time. Here, the left hand does not know what the right hand is doing. Above all, the authority broadly fails to see the joint fight against financial crime as its top priority. This lack of bite also becomes apparent when BaFin justifies its lenient approach towards Wirecard by saying that there has also been a lot of positive media coverage on the firm. Finally, the report calls into question BaFin’s internal control systems. Employees of the market abuse unit were trading in Wirecard shares, unnoticed by management due to a lack of disclosure obligations.
The report makes a particularly remarkable accusation against the German finance minister Olaf Scholz. Due to the intensive reporting obligations of BaFin vis-à-vis the Federal Ministry of Finance, it is not ensured that the authority can fulfil its statutory duties free from political influence. Olaf Scholz may no longer ignore the obvious deficits of BaFin. The hesitant financial market administrator must finally become an independent and powerful financial supervisor. A new start for BaFin in terms of organisation and personnel is overdue. ESMA’s recommendations go far beyond Olaf Scholz’s plans for a reorganisation of BaFin.
It is important that financial reporting enforcement in Germany is strengthened. However, it must not be overlooked that the real problem is the often completely inadequate quality of auditing. Anyone who wants to treat not only symptoms but causes must therefore also remove the current false incentives for auditors. As long as they are appointed and dismissed by the auditee itself and earn additional money from accompanying consultancy contracts, they do not represent a reliable first line of defence. Olaf Scholz should learn the lessons from the Wirecard failure and lobby in the Council of Ministers for an amendment of the Statutory Audit Regulation to tackle the problem at its roots.“
ESMA’s Peer Review report on the role of BaFin and FREP in the Wirecard scandal:
For readers with a sense of humour, we recommend this recommendation from the report addressed to BaFin:
“The PCR recommends that FREP and BaFin review articles in international newspapers (including online newspapers) with widespread acceptance in the sphere of international finance in the area of financial and economic matters in order to add these elements when selecting issuers for examination or when performing examination.”