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H8crilA

A very good thread summarizing what happened in this massive fraud:

https://mobile.twitter.com/DonutShorts/status/12736903626080...

Expect more revelations in the coming year or so:

> "Only when the tide goes out you find out who has been swimming naked" - Warren Buffet

> "The fraud cycle follows the business cycle" - Jim Chanos

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When the $WDI scandal is viewed in the context of many German banking frauds & the VW stock rigging by Porsche, investors can rightly ask whether German financial regulation is anything but a fig leaf.

The same could be said for many financial regulators all over the world -- clubby relationships with financiers, vulnerable to lobbying, "looking the other way" when there are signs of problems, letting the big fish off the hook while coming down hard on small players, etc.

In some countries it's much worse, with outright fraud involving the regulators themselves.

This also shows how inefficient government legislation is when the potential risk and impact punishment of being caught is low. These companies and all the people (not only few) should receive a substantial penalty. I think it is was not really sufficient in the VW case. We will see how it is going to be with WD.

The common thread in all of these are post-hoc discoveries of irregularities. In many cases, these are carried over many years and months without being detected. If one needs to address this issue, a near real-time approach would be needed. Otherwise, such operations will continue to take place.

Way too expensive to regulate in real time and the sample size for regulating is pretty low. What you need to do is make the punishment for bad behavior strong enough to minimize fraud. I would like to think most actors are good actors and we take the bad actors and make an example to the rest of the industry what to expect if caught. It will always be a cat and mouse game.

If the chance of getting caught is low, I'm not sure stronger penalties make that much difference. See the drug war for example.

General criminology finds that the certainty of punishment so long as it is non-neglible relative to the rewards is what matters more than the magnitude as most criminals don't think they will get caught unlike others.

It’s almost impossible to do that in real time. The problem is fraudulent activity can often be hidden behind a smokescreen of legitimate behavior, and stratigraphic investments can look overpriced. Apples acquisition of NeXt must have looked all kinds of shady at the time.

Like Madoff and his financial regulation friends in the US...

But the difference is that the US has harsh punishment and a system that learns from its mistakes. In Germany, bad actors are usually involved with the highest political circles and nothing ever happens. See the "cum ex" scandal, which cost the tax payers something like $36b and Germany just let it continue for years after taking notice.

The U.S. is one of the few countries that actually prosecutes financial fraud. Here in Canada we've quietly become the world's money laundering leader, or at least second only to Switzerland and there's essentially zero resources dedicated to any kind of enforcement.

North Dakota is now the worlds capital for hiding money.

North or South Dakota? Have heard a lot about South Dakota trusts, but nothing about North.

Judging by the variety of answers on this thread alone, I'm going to assume that if random internet commenters all know that a place is the most secure, secret place to do something illegal, it probably isn't really.

The first rule of tax shelters...

When you see Citi 'headquarted' in Sioux Falls you know something is up. ND, SD, NV, AZ, UT, FL, TX--one seldom gets a warm and fuzzy feeling of reassurance from these business addresses.

Banks it makes sense. SD doesn't have usury laws, and multi-state banks can charge interest based on their home state's laws.

As to what the other states get you, I'm not sure.

How is it better (or worse!) than Delaware? Reporting requirements for Delaware C Corps are pretty lax from what I have seen. I even recall reading somewhere that few Americans were ensnared by the Panama Papers scandal [1] because they could just register in Delaware.

p.s., Sorry any Delaware residents. You live in a very nice state.

[1] https://en.wikipedia.org/wiki/Panama_Papers

You mean the one that nails people driving on interstates with toll booths for driving about 20 miles in the state?

This state should be called the "land of trolls"

s/Canada/Vancouver; #or maybe Toronto

Not a lot of money laundering coming through NL or SK

"harsh punishment and a system that learns from its mistakes"

... what?

But that's when you make most money. Regulators are salaried individual, what's the incentive for them to do their job properly?

Think about if a regulator looks the other way, he is seen as incompetent - many times you'll not be punished for incompetence at work. But this benefits the corporate player and he can offer benefits to the regulator like private jet (for his family/friend use), maybe access to a resort where the regulator's family can stay during vacation or maybe an apartment in some posh locality where the regulator's kid can study abroad.

People are acting in their self interest.

You've salary and ethics Vs luxuries and loyality from the rich man who is unlikely to go bust.

Thing is you can choose to not coperate but that only increases the price and the rich man goes for your boss then you get in trouble as boss is cooperating with them and he may fire you.

I once dated a very rich and powerful lady in Asia and she could solve all problems with just 1 phone call - that was amazing, she new everyone everywhere it felt.

With respect, I do question whether an auditor overlooking financial irregularities is actually acting in their self-interest.

Do you know any regulators?

Yes I know a few guys in customs who are paid to look other way and they use CHA to benefit from such thing (so they aren't directly involved by indirectly involved through CHA) when caught they blame it on people working under them

That seems illegal. Who's looking the other way on that?

In most countries customs is a law enforcement agency (exercising the government’s policing power) not a regulatory agency (exercising the government’s policy-making power).

Late stage capitalism in a nutshell.

> A very good thread summarizing what happened in this massive fraud:

> https://mobile.twitter.com/DonutShorts/status/12736903626080...

Huh? I read the thread. It calls out a bunch of people who were involved; it doesn't discuss what happened at all.

Actually didn't catch much of a summary at all there. Just winners and losers?

same. not really a very good thread.

It's less a summary of "what happened" (which is already quite familiar to most of the shorts and FinTwit types who follow DonutShorts), and more of an accounting of who dropped the ball and who was on the right side of the Wirecard fraud.

Try this, it's the entire thread in one page: https://threadreaderapp.com/thread/1273690362608078848.html

Still doesn't help. It doesn't say at all what actually happened, expect for a vague mention of made-up cash.

The original link was already the entire thread on one page. The problem we're complaining about is that the thread very clearly isn't intended to say what happened. No effort is made in that direction; there is not even a hint that it was a goal. It's about as appropriate of a recommendation as an unrelated article in National Geographic.

Since years there have been allegation of fraud towards Wirecard. [1] I cannot understand how they even managed to make an IPO.

[1] https://translate.google.com/translate?sl=auto&tl=en&u=https...

They didn't just IPO, they were included in the DAX 30! In addition, Wirecard claimed to be vastly more profitable than their competitors, but they never actually explained how they made all their money. There was certainly enough smoke to warrant an investigation, but regulators were asleep at the wheel.

"No one knew how they did it. One theory was that they were active in more “risky” areas such as online gambling and porn sites but no one cared as long as reported profits and the stock price went up."

That's actually the explanation. 10 years ago I ran a small project and they were the only Payment Service Provider that agreed to work with us. At that time at least in Germany there were no Paypal and Stripe to directly process Credit Cards etc. for small websites. IIRC their fees - especially for refunds - were much higher than those of competitors. Refund rates are normally in the sub percentage but they would accept higher than usual refund rates without cancelling the account. It's easy to start a business in an area where there is a vacuum of competitors.

(FWIW I think cancelling the account with them to switch over to Paypal took almost 2 years...)

I have trouble to see the risk with processing payments for online porn. Sure, some institutions might have a "moral" issue, but otherwise? Gambling could be different, so.

PornHub has an enormous problem with sexual trafficking and child abuse, which means that financing PornHub exposes you to serious legal liability (and an unambiguous moral responsibility). So it's not just institutional prudishness - online porn is full of vicious criminals.

Wow so I guess Facebook needs to be classified as high risk as well? Please don't spread misinformation like that.

I guess there are a lot of chargebacks from people entering their details for "trials" as well as stolen cards being used.

> I have trouble to see the risk with processing payments for online porn.

Huge number of chargebacks. A previous employer of mine had a subsidiary that handled premium rate SMS and phone call billing, a lot of which was adult services. You'd see a huge amount of contested charges, for reasons such as:

* Buyer's remorse (get drunk, wake up the next day, realise you spent $500 on porn)

* Unsupervised minor - your kid "borrows" your credit card for some online "research"

* Outright fraud - stolen cards, etc.

This varies quite a bit. I was the CTO of a very large porn site in the mid-2000s and our chargeback rate was tiny - a small fraction of a percent. That fact didn't help us avoid high-risk categorization, though.

The only time I've ever suffered from "stolen id", not even cards or accounts, was with an online porn company that sold the account in arrears to a collections agency. The agency even admitted they had nothing linking me to the transactions other than my name, but demanded I pay up. A stern letter fixed the problem from my end.

Yeah this is probably a big part of their business. I recently shopped around for a merchant account for a similar market and Wirecard reps were willing to work with me and would allow us to process big numbers.

Also last year Deutsche Bank gave the CEO a €150 million personal loan using his Wirecard stock as collateral.

This isn't a case of a few errors and lack of a little due diligence.

Just for the record, Deutsche Bank is a private company with the majority of stocks owned by non-German investors. It is not to be confused with the Bundesbank, which is something like the German FED.

it's a public company, its shares are tradeable on exchanges

"Private" and "public" companies don't have the same meaning in our side of the Pond. In France, "public" = "state-owned" and "private" = "not public".

Oh, wasn't aware of that. Not that I'm surprised that is Deutsche Bank. They have a long track record of shady dealings reaching back to, as far as I remember, the 90s.

"Bank of America", anyone? (Just talking how that name could also be misunderstood, I have no idea if they're scumbags or not).

> Also last year Deutsche Bank gave the CEO a €150 million personal loan using his Wirecard stock as collateral.

That kind of stuff is pretty common though, Elon Musk has about 15 billion dollars, 100x that amount (!), of his Tesla stocks posted as collateral for personal loans: https://www.theverge.com/2020/5/8/21252487/elon-musk-persona...

And Deutsche Bank is a big player in this kind of business, remember their involvement with Trump?

Honestly why do banks accept this collateral when underwriting a loan? Stocks are known to be volatile, aren't there more stable assets you should collateralize (e.g. inventory, real estate)?

Depends on advance rate. Loaning 20% of the value of the collateral seems pretty safe on average.

It's common, but the problems at Wirecard have been public for a long time and will be even more well known in the industry so you would imagine that due diligence would have questioned the potential value of his collateral against such a loan.

Regulators were definitely not asleep at the wheel. They were apparently actively defending them, for instance by attempting to sue the Financial Times for reporting on the irregularities.

Being asleep at the wheel would be an improvement. Last year, BaFin -- the german regulators -- investigated Financial Times for market manipulation (ie, reporting on Wirecard's suspicious accounting practices).

https://aboutus.ft.com/en-gb/announcements/ft-statement-on-w...

Agreed. Ignorance would be more ideal than corruption.

You can hide a lot of things in an international crime organisation.

IPO'd via reverse merger, according to MSN article linked to from other post https://news.ycombinator.com/item?id=23573350 :

"Wirecard's origins date back to 1999, when its Berlin-based predecessor InfoGenie was founded. Wirecard listed its shares on Frankfurt's stock exchange through a reverse merger with InfoGenie in 2005."

ft's reporting on this story has been great throughout. I would recommend anyone looking to get more background to read the solid investigative pieces Olaf Storbeck and Dan McCrum have done over the past few years1[1]. they deserve a lot of credit for pursuing this likely enron level accounting malfeasance story to the top.

[1] https://www.ft.com/content/d080c3fc-c561-11e8-8670-c5353379f...

> Losers con’t: E&Y – One word: cash. If your audit can’t confirm the cash in the bank, you need to find another business. Full stop. E&Y is the auditor of record in two other major suspected frauds

Not sure I get this. The news reports also seem to claim that E&Y rejected to sign the balance sheets. Or was that just after everything went haywire?

EY had been WDI's auditor for well over a decade. They only now refused to sign after KPMG wouldn't give the company a clean bill of health in April. Obviously, these shady practices didn't just start in the last few months, so there are clearly things that EY should have flagged much earlier, but failed to do so. And for that, they will be on the hook.

Thanks for clarifying. Confusing story if you’re just starting to get into it

Massive fraud? But an independent auditor just confirmed their financial position is 4x better than Tether. /s

Hey, massive does not mean the biggest out there :). I can't wait to see how the Tether story ends.

Tether's story ends only if the owners get too greedy and exit scam OR if a large minority of people holding tether decide to cash out -- which shouldn't happen since such whales benefit from tether and other cryptocurrencies money laundering operations.

Also, given that there are days when tether issued 3bln dollars to prop bitcoin, I'm sure the owners have made a lot of money by manipulating other legitimate cryptocurrencies prices.

> > "Only when the tide goes out you find out who has been swimming naked" - Warren Buffet

What does this mean?

The emperor’s clothes exist in a super-position of both existing and non-existing. When the tide goes out, this results in the wave function collapse of the super-positional state of the emperor’s clothes, thus demonstrating the observer effect on textile systems.

Just a joke. It means that you can’t tell who lost their shirt til all the bubbles are drained from the pool, and we’re left with ourselves, each other, and our new shared reality.

It means that it's easier to cheat when times are good. But when there's an economic downturn (tide goes out, in the metaphor), that's when concealed problems can't be hidden any longer.

Assuming naked swimmers wouldn't continue to swim as the tide goes out, you would find them laying on the sandy beach with their no-nos hanging out.

Unless the swimmers are to comfortable in the water to see the tide going out. In which case they are caught with their pants down, well without pants to begin with. The smart swimmers are drinking cocktails by then, courtesy of SoftBank more often than not.

That it's easy to hide or overlook financial problems in a good market. Once the market is tougher, those problems come to light.

Are there any honest, reputable operators in the financial industry?

Between Enron, S&L, Lehman, WorldCom, AIG, Wirecard, Madoff, VW, gold price fixing, 1MDB, and all the "lost" BTC stories - among so many others - it seems like a question that needs to be asked.

I mean not all of those companies you listed are in the financial industry. VW didn't even commit financial crimes, it was regulatory fraud. I don't know if the 1MDB is in the same league either, that's plain government corruption.

I feel like if you're going to ask that question then focus on dishonest financiers and not every business that has broken the law.

You forgot HSBC

+Countrywide, Indymac, and Bear Stearns

There are degrees of this issue; any business handling money is going to attract fraud, the question is how well the internal controls deal with it and whether management are in on it.

At one end is Lehman, which was incredibly over-leveraged and only slightly fraudulent ( https://www.accountancyage.com/2010/12/21/ey-sued-over-lehma... ), but set out to be a legit investment bank. AIG is in a roughly similar category. There was some fraud: https://www.sandiegouniontribune.com/sdut-gen-re-aig-trial-0... - but the collapse was due to leverage.

At the other end are Madoff and 1MDB, which were intentionally fraudulent from the beginning.

The "lost" BTC stories are just off in outer space; the bitcoin ecosystem doesn't acknowledge fraud or accounting control as a concept, because that goes against "code is law" and transaction irreversability.

> the bitcoin ecosystem doesn't acknowledge fraud or accounting control as a concept,

Neither do banks. Transferred means transferred. They had to be regulated into KYC. I don't recall the reason, wether it was fraud or terrorism.

> I don't recall the reason, wether it was fraud or terrorism.

Interesting question to procrastinate with :) Apparently it was both, it started with measures to prevent money laundering by the mafia, with the Federal Deposit Insurance Act of 1950[0]. The current regulations are a result of 9/11 and came as part of the Patriot Act[1].

[0] = https://authenteq.com/the-evolution-of-kyc-part-2/

[1] = https://en.wikipedia.org/wiki/Know_your_customer#Laws_by_cou...

You can get it back with a court order (or less) most of the time for domestic transfers. IBAN transfers are more of a problem.

(In the UK a lot of bill payment stuff is done by direct debit, which has a better "guarantee" agreement on getting your money back)

Real people lost a lot of BTC on Mt Gox, so I'm not sure how the BTC stories are in outer space.

Apart from that, the second half of your first sentence is exactly the question - is fraud endemic to this industry, and actually central to its operation?

The popular perception is that the industry is somehow fundamentally honest with a few bad-actor exceptions.

Considering how regularly fraud happens, how damaging it is, and how rarely it's flagged by auditors and regulators, I think it would be useful to question that view.

Or to invert the polarity - how many significant potential frauds have been prevented by auditors and regulators, or by paperwork theatre like KYC?

Are there any? If so, how do the numbers compare with the number of frauds that blow up into real financial and reputational damage?

>Real people lost a lot of BTC on Mt Gox, so I'm not sure how the BTC stories are in outer space.

That was the fault of Mt. Gox, not bitcoin. Also the fault of uneducated users, don't leave your bitcoin sitting at an exchange.

^ This is what I meant by the bitcoin community defining fraud as "not fraud, also your fault"

You clearly don't understand how bitcoin works.

Saying Bitcoin is flawed because Mt. Gox got hacked, is like blaming the manufacturer of your car because it was stolen when you left it in parking garage with no attendant, and left the keys in the ignition with the window down.

There was no technological flaw with bitcoin itself, there was plenty of technical flaws with Mt. Gox web site.

Right, and Enron, E&Y style frauds were the fault of those companies, not fiat money.

But ask a BTC True Believer and they will talk about how inherently flawed money is with respect to this because of how people act, and yet BTC is not inherently flawed despite how people act.

Fraud like this isn't common, is it. I think there's a question of scale. There are tens of thousands of banks in the world, and hundreds of thousands of financial firms in general. Perhaps more. Money goes missing on this scale once in a blue moon compared to how much is processed.

Yes, but they are usually considered lame and boring.

And aren't in the news for that reason. So most of the news is about the exciting people doing exciting things, often with other people's money.

I searched for the name of (IIRC) the third biggest Swiss bank on HN now. No stories ever, one comment, and that comment was basically a list of banks. That bank exists, though, it just isn't named when people talk about scandals.

Then there's systematic fraud between those players. Two that come to mind are the Libor manipulation (in the $ trillions) around 2006 and the subprime lending fiasco in 08.

The rats will cooperate if it lets them steal more.

Given that there's tens of thousands of such companies, and you can list a handful of bad ones, I suspect the vast majority do reputable and honest business.

Seems more likely that those who run financial services are motivated primarily by money, and that all such institutions are corrupt to the core because they're always prepared to break regulations/laws/ethics of there is sufficient monetary gain. All the big name financial companies have recent irregularities AFAICT.

Well, there's two kinds of people - those that are happy with what they earn (saving under a mattress or (maybe) in a bank), and those that want to have more unearned profits and invest their savings / pensions in the stock markets (or other businesses).

You mainly hear about the latter kind, and finance is in particular an industry that's targeting them. When people want something (profit) out of nothing (little to no work carefully picking investments, instead just give your money to someone else), there's a lot of people willing to sell them "something" that's really "nothing".

The gold market is too large for anyone to fix the price. Not even central banks are capable of doing that. It's a paranoid fantasy concocted by incompetent traders looking to blame someone else for their losses.

Err https://www.reuters.com/article/us-barclays-regulations-gold...

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