Wirecard bankruptcy: the Israel connection

Crowded Wirecard booth at Internet World Fair 2017

With Europe still suffering through a once in a century pandemic, Wirecard (a German payment processor) has collapsed after the CEO fraudulently represented the company as in better health than it really was.

Wirecard, which was founded back in 1999, was once widely viewed as a stable growth stock with good potential in the Frankfurt Stock Exchange. Just last month, however, the company showed the world just how far it has fallen. In an unprecedented display of corporate fraud, $2.1 billion dollars disappeared from Wirecard's books, the company was forced into bankruptcy, and CEO James H. Freis Jr. was placed under arrest.

In many ways, Wirecard's unfortunate demise represents more than a monumental fraud: it represents the final hammer blow on one of the largest criminal trends in recent years, one which centered right here in Israel. To anyone unfamiliar with the binary options trading in Israel, suffice to say it has been an enormous problem over the last decade. Even now, no one is really sure just how much money passed through these fraudulent clearing houses. Israeli citizen Lee Elbaz was found guilty by a court in Maryland for over $145 million in fraud in August of last year, and given that there were more than 100 other binary option firms at that time it is clear the scope of the issue was enormous.

Wirecard, it now appears, was one of the willing middlemen to these transactions.

In order for merchants to accept credit card payments, a bank is needed to underwrite the transactions. Most countries require the bank to check into the merchants, performing due diligence to ensure they are not engaging in any illegal behavior. According to an expose by the Financial Times, Wirecard ignored these regulations, receiving commissions from several Israeli binary options firms to underwrite illegal options sold to US consumers.

Further soiling the company's reputation, in a string of lawsuits against Israeli binary options firms Wirecard was named as one of the primary credit card processors. Though it remains unknown whether or not Wirecard intentionally broke the law, such a string of fraudulent behavior can't help but raise eyebrows.

To make things worse, in 2016 Israeli credit card company ICC-Cal was embroiled in a series of fraud indictments, with the CEO and his deputy sentenced to hefty fines. It was ultimately argued that the Israeli employees were not knowledgeable in overseeing the type of credit they were tasked with and were duped by several foreign nationals into processing illegal transaction. One of those foreign nationals would turn out to be Dietmar Knoechelmann, director of Wirecard's Ireland subsidiary, Wirecard Payment Solutions Holdings Limited.

Meanwhile, the ripples continue to effect consumers serviced by European and Israeli companies alike including Israeli financial services giant Payoneer, Curve, Pockit, U Account, and several more. While Payoneer seems to be positioned to avoid any service disruptions, other companies haven't been so lucky.

All-in-all, it appears that the larger economy is unlikely to be affected by the fall of this once beloved darling of the German marketplace, and with the specter of COVID-19's second wave hanging over the globe, bankruptcy seems petty by comparison. Still, Wirecard's demise remains a cautionary tale in corporate ethics and where throwing them out can lead a profitable company in the long term.