Wirecard echoes in Austrian bank fraud raise awkward questions

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Austria has experienced plenty of scandalous bank failures in the past decade, not least at Hypo Alpe Adria, the house lender of the late Freedom Party leader Joerg Haider.

Yet the fraud that brought down tiny Commerzialbank Mattersburg im Burgenland AG raises questions for financial regulators and auditors that have uncomfortable echoes of the Wirecard AG debacle in neighboring Germany.

The lender in Mattersburg, a town of 7,466 an hour south of Vienna, was shut down last month after its boss Martin Pucher confessed wrongdoing to central bankers probing his institution’s accounts. Pucher admitted faking most of the bank’s roughly 800 million euros ($947 million) in assets in a deceit that started small but swelled over almost three decades and wasn’t detected by internal or external checks.

It’s a pattern that would be familiar to German prosecutors probing Wirecard, the DAX-listed electronic payments company that filed for insolvency in June after admitting that almost 2 billion euros in previously reported cash didn’t exist.

The damage Pucher unleashed goes beyond the local companies and neighboring municipalities that lost millions of euros in uninsured deposits, and beyond the Austrian banks that had to bail out small savers to the tune of 490 million euros. It has implications for Austrian corporate governance, auditing and supervision, as well as for the nation’s standing as a financial center.

The Wirecard case has prompted calls from German lawmakers for wide-reaching reforms to financial regulation and Finance Minister Olaf Scholz has promised swift action.

“It’s quite remarkable if in a country like Austria a bank goes bankrupt because of fraud,” said Transparency International’s Georg Krakow, a former prosecutor who brought one of biggest Austrian banking scandals of the 2000s to court. “That can cause a lot of damage, not just to the bank and its clients but potentially to the reputation of the country.”The Commerzialbank fraud was simple. Pucher and a complicit board member made up loans to fake clients and fabricated account statements showing funds the bank purportedly held at other lenders, according to people familiar with the probe, who asked not to be identified because investigations are ongoing.

Through his lawyer, Norbert Wess, Pucher said that he admits full responsibility for the false accounting, but insists that he didn’t line his own pockets.

“It’s impossible for Mr. Pucher to put into words how much he regrets the events,” Wess said in a statement.

The charade began in 1992 when Commerzialbank was still a member of the Raiffeisen cooperative banking system, Pucher told prosecutors, according to Wess. Commerzialbank left the system and ran independently from 1995, and Pucher told prosecutors the lender was effectively bankrupt as early as 2000.

Raiffeisen’s internal auditors had been skeptical about his business practices and feel vindicated now, a spokeswoman for the group said.

Soccer promotion

The only certain beneficiary of Pucher’s fraud was SV Mattersburg, the town’s soccer team, according to Wess. The club was in Austria’s fifth division when Pucher became its president in 1988. Thanks to ample funding from the bank, it reached the Bundesliga -- the top Austrian division — in 2002 but has meanwhile also filed for insolvency. About 8 percent to 12 percent of the missing funds went into the soccer team, according to Pucher.

The bulk of the cash, which could reach as much as 700 million euros, was used to cover the lender’s accumulated operational losses over 28 years, Pucher has said. The fake accounts and non-existent loans weren’t detected by the multiple checks enshrined in corporate and banking law.

Pucher and his alleged accomplice kept the paperwork for the fabricated accounts in their personal vaults and Pucher stacked the supervisory board with members who didn’t question him. Wilhelm Grafl, a local innkeeper and deputy chairman of the board, told Austrian public radio he and his fellow board members couldn’t be expected to detect a crime even auditors has missed.

“We’re the idiots now? Because we trusted the pros, who always gave a clean bill of health?,” he said.

‘Abuse of trust’

The bank’s auditor since 2006, Vienna-based firm TPA Group, approved its accounts every year. In a statement, TPA said it was itself a victim as “the auditors’ trust in the provided documents was apparently abused.”

The Austrian central bank said in a statement that it’s the auditors’ job to verify a lender’s assets and that it can’t duplicate their work but has to rely on it.

“Assessing the assets and liabilities is an invariable and crucial part of an auditor’s year-end audit,” the central bank said. It also noted that the fraud was discovered during its own on-site review and that scrutiny increased in past years because its doubts about Commerzialbank’s business model deepened.

Yet even without knowing about the falsifications, a look at Commerzialbank’s published accounts should have triggered suspicions, according to Oliver Lintner, a court expert whose analysis was commissioned by Hausmaninger Kletter, a law firm which plans to sue the government on behalf of creditors.

In 2008-2018, the bank reported an average net-interest margin of 2.5 percent, more than twice what comparable Austrian banks earned from lending in that period, the review showed.

At the same time, almost half its assets were reported to be low-yielding bank deposits. That implies that it would have earned 7.3 percent interest on its average customer loan, according to Lintner — in an era of zero rates.

“There can always be reasons for deviations from the average, of course — but you have to look closely and pay attention,” Krakow said.

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