"Buy now, pay later, launder when?"
Square (NYSE:SQ) recently bought the Australian fintech Afterpay (ASX- APT), which is a buy now, pay later business, much loved by millennials. Afterpay permits users to buy goods and pay for the same over an extended period of time, making four equal payments. The maximum purchase price of any goods is AUD 1,500 and the maximum debit balance is AUD 2,000. Payments are not accepted from pre-paid/store valued cards and as the business is an online fintech cash payments are also not accepted. Thus, payments are made from bank accounts or credits cards, both of which are traceable..
Afterpay has millions of customers and the biggest risk to the business model is fraud, consequently Afterpay has extensive, innovative and robust anti-fraud controls. Notwithstanding the fiscal limitations of Afterpay services, the business is regulated for anti-money laundering (AML). Pursuant to which, many of you immediately assert, of course it is, it is a regulated financial services business and as such, it could be used to launder money.
In the event I accept the protestations, the real question is … would a criminal use a business such as Afterpay to launder money? It will not be used for the process of placement, because money paid to Afterpay is already in the financial system. Of course it could be used for layering, but would a launderer really determine to use such a low-value service which requires goods to be purchased?.
Yes, people could use the proceeds of crime to buy goods, thereby realizing the benefits of both the predicated crime and/or the laundering of the same, but are we looking for this? David Lewis, Executive Secretary of the Financial Action Task Force (FATF) has rallied the global AML community to, “Stop money laundering, save lives”. I am fully committed to this cause, but how does AML in Afterpay contribute to this?
Of course, some will assert there is no real downside to Afterpay applying AML, but that is wrong on so many levels. Regardless of the rules-based AML regime applied in Australia, the global approach is risk-based, it has to be in order to save lives and be effective. Thus, what is the money laundering risk in the Afterpay business model? If it is so low, why present an additional low-value burden to the regulator? Whilst they are busy supervising such a low risk, low money laundering value business, they are unable to apply resources to higher levels of money laundering and save lives.
What about the shareholder expenditure upon AML for a business which is of limited or no value to a money launderer? Then there is the unnecessary customer burden, which can include costs for the certification of documents. Given that collectively we are failing to tackle money laundering, the numbers bear testimony to this, surely we need to focus upon areas where our efforts produce results of real and meaningful value.
Surely the risk is in the product is extremely low, for sure Afterpay know their customers, this is vital for fraud prevention. Moreover, given Australia has an all crime reporting regime, Afterpay files plenty of suspicious activity reports, the suspicion being a fraud.
"Sanctions, PEPs etc."
Sanctions are a tool of international diplomacy and are used to bring about change and/or enforce compliance. Historically they have been applied as an alternative to conflict. All of this means they are serious and often attached to efforts to stop countries from developing nuclear weapons or other weapons of mass destruction. In other instances, sanctions are applied to stop criminals and despots benefiting from their crimes.
The laws in Australia require regulated firms to screen customers for sanctions and for PEP status/risk. Furthermore, the law defines three types of PEP, being Australian domestic PEPs, but there may be some confusion or disagreement as to whether this extends to state PEPs, beyond the federal government. The other categories of defined PEP are foreign, being national politicians from other countries and international PEPs from multi-national bodies such as the United Nations, World Bank, the Olympic Committee and NATO.
Thus, Afterpay needs to screen a customer and transaction to ensure Boris Johnson’s children are not buying their designer clothing using Afterpay. Afterpay customers must use an Australian address and make payments from an Australian bank account or credit card. Does it matter? Yes, it does, because we are seeking to, “Stop money laundering, save lives”. Pursuant to which, how does this contribute to such a noble and necessary endeavour?
Bingo
No, I have not come up with the answer, rather I digress and raise the subject of the game of bingo. When I was younger, I recollect my mother going to play bingo with her friends. When I occasionally accompanied her I was confronted by a large room full of layer upon layer of cigarette smoke and a landscape of middle-aged women focused upon the numbers printed on the game tickets.
Back in those days, six books of tickets covered every one of the numbers 1-90. Now and then I saw an intense woman playing 12 tickets, which did require additional concentration and some extra funding, but bingo was not expensive.
Nowadays, my mum’s old bingo hall has a money laundering reporting officer (MLRO); an additional expense; more know your customer (KYC) requirements for players, but no smoke. How much money can anyone launder playing bingo? Does a money launderer look around and conclude bingo is the way to go?
Why, why, why? What are we trying to achieve when we determine it is necessary to regulate the game of bingo for AML? Is it lazy or incompetent legislators? Is it a lack of training, thinking and understanding? How many lives is this saving? Or tell me, have I got it wrong?
You can see where my thinking is with this…
Til next time…