The world wide web of deceit

The balance between regulation and innovation.

On the one hand, a country wants start-ups to start up in their country; on the other hand, when dealing with financial services, you have to ensure that it is done in a way that protects citizens and society. That’s a delicate balance, as I’ve blogged about a lot recently. Specifically, it means that you have to avoid risks to citizens and society. The issue is that, in doing so, you can damage the companies serving citizens and society. I’ve highlighted Monzo, Monese and Pockit in this context, but there is more to this.

Take Lithuania as an example.

What?

Lithuania?

Well, it turns out the Wirecard investigation by The Financial Times continues. If you’re not aware of the Wirecard collapse and The Financial Times involvement in that, you can find all the background here. The gist of it is that Wirecard created a fraudulent network of nested companies to give the impression it was doing well when it wasn’t.

As part of that process, they lost €100 million to a company in Lithuania. What was going on?

European policymakers are concerned about Lithuania after The Financial Times revealed that a regulated fintech based in the country is suspected of stealing more than €100m from Wirecard, only weeks before the German payments firm collapsed.

“Fintech needs agile supervision and regulation, and that is missing both at the central bank and not least the financial crime investigation service. They are not keeping up with these fast-moving, innovative businesses.” Stasys Jakeliunas, MEP for the Lithuanian Farmers and Greens Union.

Jens Zimmermann, a German MP for the Social Democrats in Berlin, said that competition between EU members to woo fintechs to their countries risked “creating a regulatory race to the bottom”.

Interesting commentary, and something you can never solve.

Having been around this financial world for long enough, every country has its own agenda and interest, and any company or citizen can always find a way to get through the issues.

In the case of FinTech start-ups, they can use the easier rules and regulations of small states like Lithuania to get through the regulatory oversight they would be subjected to if they were setting up in Germany. In the case of banned operations like gambling online in America, companies can get through the regulatory armour by setting up online gambling services in Malta. In the case of outlawed cryptocurrencies in China, Chinese folks can find ways around the issues by using overseas apps via a VPN. When governments raise taxes on the rich in one country, the rich just move their funds to another country. If a major multinational corporation wants to minimise tax globally, it does so by finding the best way to hold its treasury funds in the least taxed location.

There are always ways around the system and, today, more ways than ever.

I’m not recommending them btw, but if you know your way around the system, then you can defraud, avoid, evade, and do whatever underhanded things you want. It’s the reason why cybercrime works and the Dark Web exists.

If I steal from an American via a server in Russia to a bank account in Malaysia for a criminal in China – or vice versa – then it’s incredibly difficult to catch.

This is the nature of the Wirecard scandal. Wirecard was set up as a global network of companies hiding funds from each other.

“None of the various players — the ministries of finance and justice, BaFin, Deutsche Bundesbank, the Financial Reporting Enforcement Panel — realised how explosive the case was or made full use of their capabilities,” Germany’s Bundesrechnungshof, the country’s top auditing institution, reported.

They didn’t realise because it’s a spider’s web of deceit.

Whether it’s Wirecard or an organised criminal network, the ability to use nested structures to deceive today is better than ever.