From Satyam to Wirecard : A sense of déjà vu!

“It was like riding a tiger, not knowing how to get off without being eaten” wrote B Ramalinga Raju, CEO Satyam Computers in his letter to the Board of Directors on January 7, 2009.

Flashback:

I was reading an article by Dan McCrum in the Financial Times last week, on the fraud in Wirecard AG (Wirecard). As I went through the modus operandi of the fraud, I was taken back eleven years ago to the Satyam Computers fraud, as it had unfolded, in January 2009.  I happened to have a ring-side view of what had transpired then, since at that time, I was managing the Fraud Prevention & Control unit of a large private sector bank. One of the deposit certificates that the CEO of Satyam, Mr. Ramalinga Raju had fraudulently created, happened to be under the name of that bank. I remember reading a copy of the confession letter he had written to the Board, with a sense of shock.

How the frauds unfolded:

Please find below, a brief summary of the Wirecard fraud that came to public view last week and the Satyam fraud that unfolded in early 2009.

The Wirecard Fraud

• Wirecard AG, set up in 1999 in Munich, Germany, was a VC funded small payment processor, which was processing online transactions done by credit cardholders on e-commerce sites.  Markus Braun, a former KPMG consultant and the main perpetrator of the fraud, joined Wirecard  as CEO in 2002. 
• Markus Braun, being a very ambitious man, wanted Wirecard to be a large payment processor. In 2005, instead of going in for an IPO, the requirements for which would have been tedious and stringent, Markus Braun got Wirecard a back door entry to the German stock market in Munich, by taking over a listed company which was basically a call centre.
• Wirecard entered the banking domain in 2006 with the purchase of XCOM Bank AG which had a universal banking licence and held material licences for the issuing and acceptance of credit cards. The Bank was renamed Wirecard Bank AG. VISA and MasterCard had approved this entity as a valid card issuing and merchant payment processing entity.
• Between 2005 and 2019, Wirecard raised funds through investments from shareholders and venture capitalists and with these funds bought small obscure companies across Asia, including a large €340 million deal for two lesser known travel payment companies in India, in 2015. It is indeed a wonder what the investment bankers saw as potential in those companies. It would seem these were more as fronts for behind the scene routing of funds. 
• Wirecard was a much admired fintech and bank in Europe. The image Markus had created of Wirecard was that of a sophisticated payment processor with the latest technology. Wirecard had a string of third party processors to whom the company claimed to have given millions of transactions worldwide to process. Wirecard also claimed that these third party processors paid commission to Wirecard for the same.  This was the main source of revenue for the company.
• Wirecard had even started processing crypto debit cards for TenX and Crypto.com. 
• Markus consistently produced healthy EBITDA margins of around 30- 35%. This, when most of his competitors in the business showed EBITDA margins which were substantially lower.
• Since 2015, the Financial Times had been tracking this company’s activities. Having found things amiss, they had started raising a lot of uncomfortable questions through various articles published from time to time.
• Markus’ response to these articles was belligerent. He hit back at FT, accusing them of colluding with the short sellers (bears) of the stock market to bring down the stock price of Wirecard. For more details on this, visit FT’s  website here. 
• It is understood that since the past five years or more, Wirecard has shown large revenues coming in from three third party payment processors based in Dubai, Philippines and Singapore.  This according to their CEO, was because of the world moving towards digital transactions and away from cash, especially in the Asian economies.
• The revenues received from these third parties were apparently kept in escrow accounts initially in OCBC Bank, Singapore and later on, in two banks in the Philippines, namely BDO and BPI.
• It is strange that neither the auditors nor the regulators and not even the financial analysts found it questionable that while Wirecard itself had a bank within its group i.e Wirecard Bank AG, it chose to keep the money  faraway in banks in the Philippines!
• Trust companies engaged by Wirecard for managing these escrow deposits, used to get statements from  junior level employees of these banks fraudulently confirming the existence of these deposits. These confirmations used to be shared with the auditors.
• Again, the question arises here is, how the auditors of such a reputed auditing firm, did not bother to check with the banks directly. This is a standard practice.
• In the last quarter of 2019, Wirecard appointed KPMG to do a special audit. This was mainly due to shareholder pressure arising from a whistle blower allegation about illegal routing of funds from Wirecard’s Singapore office and the repeated questioning by FT through its various articles in the media.
• KPMG submitted a report in April 2020 stating that over the period from 2016 to 2018, they were unable to verify the revenues and the escrow deposits that resulted from these revenues.  
• In the meanwhile, in order to complete their audit reporting of Wirecard for 2019, EY asked the two banks in the Philippines to confirm the deposits totaling €1.9 billion.
• The two banks denied any knowledge of Wirecard as a customer and the existence of such escrow deposits. On further investigation, they found one rogue employee each in their respective banks, who had issued the letters of confirmation.
• The very next day i.e on June 18, 2020, Wirecard announced that ‘cash amounting to € 1.9 billion was missing’ .
• On June 19, 2020 Markus Braun resigned as CEO of Wirecard.
• Wirecard’s stock price plummeted from €100 a few months ago to €1!
• Markus Braun has been arrested for fraudulent accounting practices with an intention to manipulate stock prices.
• On June 26, Wirecard filed for Insolvency. It has around €2 billion in debt and it remains to be seen how the creditors will recover their money.
• In the meanwhile, Wirecard Bank AG , which is a subsidiary of the holding company Wirecard AG, has put out a statement on their website that the Bank is not affected nor is involved in the insolvency proceedings.
• Also, there are several payment and business banking apps in the UK that use the prepaid card services of Wirecard Card Solutions Ltd., UK  a subsidiary of Wirecard AG.The depositors and users of the prepaid card solutions are currently worried about their money and their ability to do transactions, though the Financial Conduct Authority (FCA), UK has allowed limited operations resumption of ‘regulated activity’ from June 30, 2020.
• In the coming days, it would be interesting to see how the judicial system treats Markus Braun and his cohorts. Jeffrey Skilling, the CEO  of Enron Corporation got 24 years in the Enron fraud case. Of course, it is another matter that after serving 12 years in prison, Jeffrey Skilling was released in 2018.

The Satyam Fraud:

• Satyam Computers was set up in 1987 by B Ramalinga Raju and his brother B Rama Raju.
• In 1991, it got listed on the Bombay Stock Exchange (BSE) and in 2001, on the New York Stock Exchange (NYSE).
• Satyam showed consistent growth and profits from 2001 to 2008 to become the fourth largest IT company in India.
• It had offices and employees across the world and boasted of large clients such as General Electric, Nestle, British Petroleum etc.
• The booming real estate market around the end of the 1990s and early 2000s, lured Ramalinga Raju to make heavy investments in land and real estate assets.
• To cater to the huge requirement of funds for the investments in real estate, Raju and the CFO of Satyam, Srinivas Vadlamani, inflated the sales and profit figures of Satyam, year on year, between 2001 and 2008. The revenue from these fake sales were fraudulently shown as deposits in various banks, including foreign currency deposits.
• Raju also added around 13000 non-existent employees to the existing employee strength of  40000. Every month, the salaries paid to these non-existent employees (estimated at Rs.200 crores a month) found its way back for use by Raju.
• The upward trend in business and profits attracted investors and the share price of Satyam kept rising. Satyam Computers became the blue-eyed boy of the IT world.
• The dynamism and charisma of Ramalinga Raju further lent an aura of success to the company.
• In 2008, the World Council for Corporate Governance even awarded the Golden Peacock Award for Excellence in Corporate Governance to Satyam!
• One on the one hand, Raju would show these inflated profits and the share price would rise in the market, on the other hand, Raju and family, would sell or mortgage their promoter’s share, so as not to raise any suspicion. The promoter’s shareholding, which was 24% in 2001 ended up being less than 4% by 2008.
• The funds so generated, would be invested in real estate. The investments were made through companies in the names of his family, friends and even some farm hands working on his farms, who were made Directors of some of these companies!
• Since the real estate market was booming,  Ramalinga Raju had planned to sell off the real estate properties at a huge profit and plough back the money into Satyam so that the gap between the real and fake profits would get narrowed.
• However, in 2008, real estate property prices tanked and his plan to close the gap between real and fake profits went awry.
• He then had the bright idea of making Satyam Computers acquire Maytas Infrastructure Ltd. and Maytas Properties, that were owned by his brother B Rama Raju. He reasoned that he could then show  the gap between real and fake profits as the loss incurred on account of the Maytas acquisitions. 
• While the Board of Directors, including the Independent Directors cleared the proposal in December 2008, the shareholders, especially the institutional investors of Satyam opposed the same. Eventually, he had to withdraw the merger proposal.
• On Jan 7, 2009, Ramalinga Raju wrote a letter confessing his deeds.
• Stock price of Satyam crashed, investors made a huge loss and the company was eventually taken over by Tech Mahindra.
• It may be noted that the CFO Srinivas Vadlamani sold off all his holdings a few weeks before Ramalinga Raju confessed his deeds in his letter to the Board.
• Investigating agencies put the total amount of fraud at Rs.7500 crores. In 2015, Ramalinga Raju was sentenced to 7 years of jail along with several of his family members, CFO and two auditors from PWC. He was released on bail after spending 32 months in jail.
• According to a media report that was published in 2019, Ramalinga Raju continues to live in his posh Jubilee Hill Residence with his family.

A tabular comparison of the frauds:

Points of  Comparison	Wirecard AG	Satyam Computers
Country of origin	Germany	India
Countries impacted	Worldwide – mainly Germany, UK, USA, Singapore, UAE	Worldwide – mainly India, UK, USA
Type of business	Card transaction processing online	IT services and software
Size of Fraud	€1.9 billion (estimated till date)	₹ 7500 crores (~ €1.1 billion at 2009 exchange rate)
Period of occurrence	2005-2019	2001- 2008
Main perpetrator	Mark Braun, CEO	B Ramalinga Raju, CEO
Others involved (main)	Jan Marsalek, COO	B Rama Raju, MD, Srinivas Vadlamani, CFO
Auditors	Ernst & Young  (EY)	Price Waterhouse Coopers (PWC)
Main modus operandi	Showing fake revenues coming in from third party processors and deposit of these revenues in escrow accounts in Singapore and later on, in the Philippines	Showing fake sales and service revenues and deposit of these monies as fixed deposits in India and in foreign currency. Showing non-existent employees on the payroll and diverting the salaries paid to them.
Leader’s personality	Charismatic, Aggressive, Entrepreneurial, Belligerent	Charismatic, Dynamic, Entrepreneurial
Regulator	BaFin, Germany FCA (Financial Conduct Authority), UK	Securities and Exchange Board of India (SEBI)

In Conclusion:

Markus Braun and Ramalinga Raju are ‘larger than life’ characters. With their entrepreneurial skills, they could build good, strong organisations.  But their ambition and greed took over and they ended up resorting to fraudulent accounting practices, to make money fast.  With their characteristic aggression and domineering nature, they could bull doze their executives and board members into acceptance. They managed to make their auditors lazy with the fat fees they paid them. With their charisma and convincing abilities, they could hoodwink the regulators and the media.  There could be many such leaders in organisations across the world.  We have had such people in the past as well.  Jeffrey Skilling of Enron was one such person. Would the compliance and regulatory framework machinery across the world learn from these cases and put in place necessary checks and balances or would we be seeing history repeating itself? Only Time can tell.

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