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“Bad Apples” or Systemic Failure? What a European Private Sector Scandal Teaches Us About Corruption

By Rosemary Lark, Practice Fellow, CJL

Private sector anti-corruption observers often focus on how aggressive, or not, governments, financial regulators, and prosecutors go after corrupt activity. Less attention is paid, however, to the often narrow scope of actions these actors undertake once corruption is discovered.

Consider the recent scandal involving Wirecard AG, a German payment services provider, whose implosion has played out in dramatic fashion over the last year. Despite an exhaustive parliamentary inquiry into the long-running affair. which involved fraud, accounting irregularities, and corruption, German authorities now appear all too willing to ascribe blame to “a few bad apples.”

That’s convenient. By adopting such a limited focus, the German authorities neatly sidestep their own roles in perpetuating, sometimes even facilitating, Wirecard’s bad behavior. But by failing to address the larger schemes at play, these same authorities leave them intact.

The choice to focus on “bad apples” is by no means unique to German authorities. Many governments opt for this narrow approach to private sector corruption, based on the “principal-agent” theory. That is, the notion that a CEO, or “principal,” who acts as a steward of an organization can often be unaware of the corrupt behavior of her employees, or “agents.” Once made aware, however, so the thinking goes, the principal will immediately intervene to stop these activities.

Absent from this theory, unfortunately, is the possibility that the CEO may be in on the corruption, that the agents may be operating at the CEO’s behest, or that the corruption is not a limited or “one-off” incident by a couple of rogue agents but systemic.

This sort of willful blindness allows institutions to persist in wrongdoing and, ultimately, undermines shareholder confidence in the financial system’s integrity. Moreover, while lax enforcement may allow the rich and powerful to escape accountability, it also attracts malign forces and organized crime. These bad actors are attracted by the ability to operate in an opaque manner—and, if unchecked, over time they introduce more pernicious elements into both the financial system and society.

To those involved in anti-corruption work in fragile states or the intersection of conflict and corruption, this may sound all too familiar. As will the gap between Germany’s strong legal framework and how those laws are actually enforced, a gap that has little to do with ignorance of corruption issues.

But by applying systems analysis to a private-sector German financial scandal, we see that, like fragile states, Germany has developed a pattern of behaviors that reward corrupt behavior, pressure detractors, and erect roadblocks to thwart anti-corruption efforts that would challenge a system that provides rewards to so many.

Applying Systems Thinking

Whether applied to the Global South or North, systems thinking allows us to develop a more robust understanding of the dynamics of corruption. Through this method, we at CJL have, for instance, established a better conception of public corruption in fragile states. Systems thinking, though, can also be usefully applied to the private sector of highly developed economies.

In the case of Wirecard, almost from its 1999 inception, the company engaged in accounting irregularities to boost its revenue and increase its stock price. That rapid success, in turn, caught the imagination of German investors looking for a blue-chip European digital champion to match those of Silicon Valley. In creating a systems map to understand the interrelationship among all of the actors, formal and informal, who were involved in the Wirecard scandal, we can make a number of observations.

Source: Rosemary Lark

As Wirecard’s share price rose, its CEO attracted a larger circle of shareholders, creating more pressure on his team to accelerate stock market gains. This, in turn, created a reinforcing loop that led to an increasing and widening of the fraud.

At the same time, informal actors—small investor groups, hedge funds, journalists, and whistleblowers—the majority of whom, it should be noted, hailed from outside the German system, started to ring the alarm about Wirecard’s accounting. Their concerns ranged from allegations that Wirecard subsidiaries were not only falsifying accounts and fabricating invoices, but also hiding questionable transactions from their own auditors and regulators.

As concerns were raised, an early pattern set in. The formal German actors whose job it was to protect the financial system against fraud and corruption refused to investigate the accounting irregularities. Instead, they sought to protect Wirecard from scrutiny.

BaFin, the German financial regulator, actually devoted its energies to investigating Wirecard’s accusers. At one point, it urged Munich public prosecutors to charge the hedge funds that had made allegations, as well as even banned the short selling of Wirecard’s stock. At another point, BaFin accused two Financial Times journalists of colluding with short sellers and manipulating financial markets, referring them both to prosecutors.

Social scientists who research the group dynamics of corruption refer to this as a spiral of increasing pressures that can lead to an equally perpetuating increase in corruption. They compare it to an addiction, and point out that past success creates higher expectations, and meeting the expectations created by success achieved through corruption is likely to be difficult if not impossible without reverting to more corruption.


In Wirecard’s case, as this ever increasing dynamic accelerated, its amplifying force drowned out early but persistent efforts by the small group of informal actors to play a balancing role and protect the integrity of the German financial markets. (Here's a helpful break-down of systems-based corruption analysis.) The tipping point, however, was a special audit conducted by the accounting firm KPMG. Wirecard’s Board had retained KPMG in October 2019 to exonerate the company from fraud accusations. But after a six-month investigation, KPMG found that €1.9bn of cash on Wirecard’s balance sheet “did not exist.” Wirecard was a fraud. Afterwards, Wirecard suffered an 80% drop in its share price, the CEO resigned, the COO remains on the lam, and the company is in insolvency proceedings.


Without the aid of a systems thinking analysis, it would be tempting to suggest that the corrupt activities at Wirecard were just the result of a few bad apples. By any reasonable definition, its CEO and COO were bad apples. However, they were not rogue actors and nor were their actions isolated. Instead, they operated within a larger, more complex system that not only endorsed their corrupt activity but facilitated and amplified it.

When the first credible accusations of accounting irregularities against Wirecard publicly surfaced in 2008, the formal actors—the financial regulators, the audit oversight authority, the external auditors and public prosecutors—should have been the main drivers of an intervention to disrupt the company’s corrupt dynamics. This, at least, is the scenario that one would have expected from Germany. As a highly developed market economy, it has outsize resources to mobilize against corruption. It has signed on to the 4th EU Anti-Money Laundering Directive and, ostensibly, has a highly evolved structure for financial oversight and regulation.

With its lengthy parliamentary inquiry into the Wirecard scandal at an end, Germany is conducting a dialogue about the scope, nature and extent of reforms. Tellingly, most are either focused on the bad apples within the firm or the bad apples at E&Y, the external auditor.

However, as the systems analysis shows us, Germany needs instead to look at the dynamics of the larger scheme at play. To genuinely assess the root causes of this debacle, the country needs to analyze the complex interrelationships that drove and enabled the corrupt behavior in the first place. Otherwise, the systemic failures will increase the fragility and stability of the German financial system itself.


Rosemary Lark is a Practice Fellow at the Corruption, Justice and Legitimacy Program.

She is a Financial Crime Compliance Practitioner based in Washington, DC, where she investigates money laundering, corruption and bribery for private sector clients; monitors international banks under Consent Orders or Deferred Prosecution Agreements for BSA/AML/OFAC violations; and consults with banks on their financial crime compliance remediation efforts.

Rosemary is pursuing a one year, M.A. Degree in International Affairs for mid-career professionals at The Fletcher School of Law and Diplomacy at Tufts University. She is focused on governance and corruption.


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