The Wirecard scandal is a national embarrassment for Germany. For Olaf Scholz, finance minister, it is much more — a stain that could complicate his campaign for the top job in German politics.

The German payments company’s spectacular collapse has exposed deep flaws in Germany’s system of financial regulation. All the agencies that should have policed Wirecard appear to have failed. With a few exceptions, Mr Scholz’s ministry oversees them all.

“Ultimately the buck stops with the finance minister,” said Frank Schäffler, an MP for the opposition Free Democrats.

The Wirecard revelations come at a sensitive time for Mr Scholz. On Monday, his party, the Social Democrats, chose him as their candidate for chancellor in next year’s Bundestag election. The most popular SPD politician in Germany, he entertains high hopes of succeeding Angela Merkel as the leader of Europe’s largest economy.

But the Wirecard affair could hobble Mr Scholz’s political ambitions, at least if the opposition has any say in the matter. Many MPs — including some from the SPD’s partner in government, the CDU/CSU — want to see a full parliamentary inquiry. It is a prospect that fills the Scholz team with dread. 

“There are a lot of unanswered questions as far as we’re concerned,” said Lisa Paus, the opposition Greens’ finance spokeswoman. “There’s a suspicion that the authorities gave Wirecard a free pass.”

However, others reject the idea that the minister is in danger. “So far, there’s no evidence at all of misconduct on the part of Scholz himself, or of any personal entanglement,” said Uwe Jun, a political scientist at Trier University. “And if that remains the case, voters will forgive him. They know he can’t oversee everything.” 

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Wirecard collapsed in June under €3.5bn of debt in one of the largest accounting frauds in Germany’s postwar history. Its chief executive Markus Braun and three other former executives were arrested by Munich prosecutors last month and are in custody. Investigators believe they were involved in a multiyear fraud designed to inflate Wirecard’s revenue and so deceive investors. Mr Braun has denied any wrongdoing.

Ever since the payments company’s demise, questions have been raised about Mr Scholz’s role in the debacle, especially after it emerged that he had been informed as early as February 2019 that Wirecard was being investigated for alleged market manipulation. 

As finance minister, Mr Scholz oversees both the financial market watchdog BaFin and the Financial Intelligence Unit, Germany’s main agency for fighting money-laundering and terrorist financing. Both have been faulted for failing to supervise Wirecard adequately.

BaFin has been sharply criticised for responding to reports in the Financial Times last year about accounting irregularities at the payments processor by filing a criminal complaint against the FT journalists who wrote the reports. Meanwhile, it emerged last week that BaFin employees had been trading Wirecard shares in ever higher volumes as it edged towards collapse — and that the FIU had received about 1,000 reports of suspicious activity relating to Wirecard since 2017, mainly from banks — but had passed on just a handful of these to police and prosecutors.

“A potential vulnerability for Scholz is if there is more evidence of money-laundering [by Wirecard],” said Fabio De Masi, an MP for the leftwing Die Linke. “Then the question will be why didn’t the FIU intervene earlier? And the FIU answers to the finance ministry.”

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Mr Scholz has responded by placing the blame elsewhere, principally with EY, the accounting firm, which issued unqualified audits of Wirecard for a decade. 

“It’s unbelievable that auditors, the ones who check [company] accounts in the first instance in our system, didn’t discover such manipulation, despite high fees, an incredible number of employees and in full knowledge of the press reports,” he told Der Spiegel last week.

He has also defended BaFin to the hilt and dismissed suggestions that it could have intervened earlier in the scandal. The watchdog, he has said, lacked the powers under German law to conduct the kind of forensic audit that was ultimately carried out by KPMG at the behest of Wirecard’s board. In its highly critical report, published in April, KPMG said it was unable to resolve questions about the payments group’s accounting.

“Scholz . . . made it sound like BaFin’s hands were tied and it couldn’t have acted otherwise,” said Ms Paus. “That’s not accurate in our view. And that’s why we still have questions.”

Mr Scholz insists he has learnt the lessons of the Wirecard scandal and is determined to fix the system. Last month he presented a 16-point “action plan” to strengthen financial regulation in Germany, give BaFin sweeping new powers and forcing companies to change their auditors more frequently.

He has also promised full transparency, agreeing to work with MPs to get to the bottom of the authorities’ role in the Wirecard affair. Last month he was questioned by the Bundestag’s finance committee in a closed-door session for four hours.

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MPs have asked why Wolfgang Schmidt, a state secretary at the finance ministry and one of Mr Scholz’s closest aides, lobbied for Wirecard with Chinese officials in mid-June, months after the minister had been told the company was being investigated for suspected market abuse. (Officials said ministers routinely lobby for German companies wanting to expand internationally, even if they are under investigation.)

Felix Hufeld, head of BaFin, who stands accused of providing misleading statements to the Bundestag over the Wirecard investigation (BaFin has admitted that some of his answers were “imprecise”), is also under pressure.

Jens Zimmermann, a SPD MP and member of the Bundestag finance committee, said he saw “no way anyone can blame Scholz personally for the Wirecard affair”.

“But of course the opposition and the CDU/CSU will do everything they can to exploit the issue and use it to undermine him,” he said. “That’s what always happens in politics — you just keep repeating something until people start believing it.”

Via Financial Times