That 2015 acquisition, which handed huge profits to a Mauritian intermediary, is at the centre of criticism from short sellers, who question whether it was part of a giant fraud to inflate Wirecard’s sales and profits.
The task of examining the deal is expected to fall to KPMG, appointed in October by Wirecard to conduct a special audit into controversies which have this year knocked billions of euros from the market value of the Dax-30 technology group that many see as the next SAP.
Wirecard is suspected of “round-tripping”, where sales and profits are faked by sending money to a third party, who then uses it to buy goods and services from the sender in a pretence of real commerce.
Singapore prosecutors said in March that eight Wirecard subsidiaries were under investigation in a criminal probe of suspected “forgeries, falsified documents, money laundering, and the round-tripping of funds to support false transactions that were believed to have taken place between 2014 and 2018”.
Two of those subsidiaries named were Indian: Hermes i Tickets, and GI Technology, sister companies purchased in a €340m takeover of the payments businesses of Great India Retail, announced in October 2015.
Mystery in Mauritius
Wirecard’s software and systems help businesses to take electronic payments, and the India deal was the largest of a string of takeovers that spread its operations across Asia.
Hermes and GI Technology had a network of more than 100,000 “Smart Shops”, kiosks where Indians pay utility bills, buy train tickets or make money transfers, built by the entrepreneurial Ramasamy brothers.
A third of the €340m acquisition price was set aside as a deferred payment, known as an “earn out”.
Yet the Ramasamys and their holding company, GI Retail, did not receive a penny of the earn out. Six weeks before the Wirecard deal was announced, they had sold 99.99 per cent of Hermes for just €37m.
The buyer was a Mauritius entity called Emerging Markets Investment Fund 1A — effectively a middleman — which bundled Hermes together with an unrelated Bangalore chain of currency exchange kiosks, then sold the package straight on to Wirecard for €326m.
What EMIF 1A paid for the Bangalore business, Star Global, is not known but was unlikely to have been a large amount. Star Global was in its second full year of operation, lossmaking, and later required a €1m capital injection. It employed just 60 of the 900 total staff that worked in the operations Wirecard took over, according to documents seen by the Financial Times.
Wirecard also invested €14m directly into Hermes’s sister company, GI Technology, taking the total outlay to €340m.
Asked to justify the sudden eight-fold rise in value, Wirecard told the FT that it “relied on advice provided to it by reputable legal and financial advisers”.
Despite the large pricetag, the businesses contributed only €12.1m to Wirecard’s net profits in 2017, which plunged to only €1.7m in 2018, according to the German group’s filings.
Wirecard also said it was “unaware of the share purchase particulars between GI Retail and EMIF 1A”. However, a due diligence report on Hermes prepared for Wirecard in November 2015 contained extensive details of the share transfers and price paid.
Litigation has prompted Wirecard to reveal further details.
In September it was sued in the English High Court by former minority investors in Hermes, who claimed a conspiracy duped them into selling their shares at the €37m valuation. Wirecard has denied the allegations, and said it was not a party to the transactions which preceded its purchase.
The defence filed by Wirecard stated the company was aware of Hermes since 2014, but the business was not initially considered for purchase because of its involvement in the travel industry.
“Travel services was a sector in which Wirecard was not and did not wish to become involved and therefore Hermes was at first not considered an appropriate acquisition,” the defence stated.
But then Hermes’ owners informed the company that an investment fund would buy it and carve out the travel operations, which “changed the viability of Hermes as a potential acquisition”.
Profits travel out and revenues return
That investment fund proved to be EMIF 1A. Who owns it and banked the outsized profits from the rapid purchase and sale of Hermes remains opaque. Its directors, who are employees of a fund administration company, did not respond to requests for comment. Wirecard said it “is not in a position to disclose the ultimate beneficial owner of EMIF 1A”.
Wirecard’s legal defence stated the travel business was transferred to Orbit Corporate & Leisure Travels, another Indian company purchased by EMIF 1A, which became a significant customer of Wirecard-owned Hermes.
Short sellers behind the website MCA Mathematik have questioned whether the apparent flow of money from Wirecard to EMIF 1A, into Orbit and then back to Wirecard constituted “round-tripping”. The German group has denied any round tripping or impropriety.
Singapore police intervene
The Singapore criminal probe was launched after the FT reported whistleblower claims that in early 2018 staff in Wirecard’s finance team planned to route €2m to Wirecard’s Indian business in a round-tripping scheme.
Police raided Wirecard’s Singapore offices, carting away files and electronics. Then in March prosecutors named Orbit as a suspect “transactional party” in the probe. Orbit did not respond to requests for comment.
Wirecard has said some staff may face criminal liability, but that the financial impact of any problems was minimal. It also said that an investigation this year by Rajah & Tann, a law firm, made no findings of round-tripping.
R&T’s view was informed by work of forensic accountants at a consulting firm. That firm relied on information provided by Wirecard, for instance spreadsheets that reflected Hermes bank statements instead of the originals, and it did not independently verify the material. Wirecard said the consultancy “had access to all information that it requested”.
R&T was unable to come to a conclusion whether so-called airline hosting services revenues from Orbit, and commercial debts associated with them, were genuine. In response to FT questions this week, Wirecard said Hermes was owed €4.1m by Orbit in relation to such services at the end of 2018, and that such revenues were fully audited.
It throws a spotlight on to the importance of KPMG’s review, and the terms of its remit. Wirecard has said that it expects to be exonerated, and “KPMG has the authority, in the conduct of its independent audit, to verify any information it deems relevant or necessary.”
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