The European Securities and Markets Authority (ESMA) today published the results of its Fast Track Peer Review which looked into the events leading to the collapse of Wirecard AG and the supervisory response by BaFin (Bundesanstalt für Finanzdienstleistungaufsicht) and the Financial Reporting Enforcement Panel (FREP).

The Peer Review focuses on the application by BaFin and FREP of the Guidelines on Enforcement of Financial Information (GLEFI) and on impediments to the effectiveness of the German two-tier supervisory system for financial reporting in the specific context of the Wirecard case.

ESMA identified deficiencies in the application of the GLEFI in the Wirecard case in several areas.

Some concerned the independence of BaFin from issuers and government. For instance, there was a lack of information about its employees’ shareholdings. This raises doubts on the robustness of BaFin’s internal control system regarding conflicts of interest of its employees vis-à-vis issuers. Also, there is a risk of influence by the Ministry of Finance given the frequency and detail of reporting by BaFin, sometimes before actions were taken.

ESMA identified deficiencies in the market monitoring by both BaFin and FREP, specifically regarding non-selection (or non-timely selection) of Wirecard’s financial reports for examination based on risks in the period between 2016 and 2018.

Furthermore, FREP’s examination procedures of Wirecard financial reports did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against Wirecard. The analyses performed (level of professional scepticism, timeliness of examination procedures, assessment of disclosures) and their documentation were insufficient.

Regarding the respective roles of BaFin and FREP in the case of (indications of) fraud in financial reporting, ESMA claims that BaFin and FREP are not aligned in the perception of each other’s role and the limitations and possibilities that both have in the context of the two-tier system.

In addition, BaFin was not put in the position to thoroughly assess FREP’s examinations of Wirecard, which would have enabled BaFin to determine whether it should take over the examinations from FREP. The strong confidentiality regime, by which both institutions are bound, may have hindered the exchange of relevant information between them and with other relevant bodies, ESMA says.

The EU’s securities markets regulator has also identified instances of lack of coordination and inefficiency in exchange of information between relevant teams in BaFin.

The report was prepared in response to a request received from the European Commission on 25 June, inviting ESMA to conduct a fact-finding analysis of the events leading up to the collapse of Wirecard AG.