This article is more than 1 year old

This article is more than 1 year old

Last week Australia’s financial watchdog, Austrac, ordered the popular buy-now pay-later company Afterpay to appoint an external auditor over concerns about the company’s compliance with anti-money laundering and terrorism-financing laws.

Stocks in the company have tumbled, and questions are being asked about the timing of the audit – announced only a day after the company raised more than $300m in a share offering on the Australian stock exchange.

The company has admitted it had been in talks with Austrac since August last year, but says it didn’t know about the order until after the share issue.

What is Afterpay?

Afterpay operates similarly to a lay-by system – consumers purchase a product and pay it off in four instalments, paid fortnightly. The difference is that, because Afterpay takes on the risk of default from the supplier, the purchaser receives the product upfront.

Credit vs debt? How Afterpay and other buy-now pay-later providers skirt consumer laws | Saurav Dutta and Lien Duong Read more

The company was founded in 2014 by Nick Molnar, a Sydney-based 29-year-old who previously founded an online jewellery retailer while at university. The company went public with a $125m listing in 2016, and reported underlying sales of $4.7bn in the 11 months to May 2019.

It now has 1.5 million active customers in the US and has conducted a soft launch in the UK under the name Clearpay.

Why is it in the news?

Last week, Afterpay raised $317.2m in fresh capital through a share issue, in part to help fund its international growth. At the same time, its three executive directors, Molnar, David Hancock and Anthony Eisen, cashed out to the tune of $103.5m. There is no suggestion of any possible link between the investigation by Austrac and the sale of those shares.

On 12 June, director Elana Rubin said the company was “pleased by the strong investor support shown in the capital raising for the Afterpay business and our global growth strategy as outlined in our previously announced mid-term plan”.

“The placement was oversubscribed, and we are also pleased to welcome several new high-quality institutions on to our register,” she said.

But just a day later, on 13 June, Afterpay revealed Austrac – Australia’s financial crime watchdog – had ordered the company to appoint an external auditor to probe possible breaches of anti-money laundering and counter-terrorism financing laws.

The announcement saw the company’s shares sink from $23 at its share issue to $20.27 at the close on Monday.

What is Austrac investigating?

In its notice to Afterpay, Austrac said it had “reasonable grounds” to suspect the company “has contravened and/or is contravening sections 32 and 81 of the AntiMoney Laundering and Counter-Terrorism Financing (AML/CTF) Act”.

Section 32 of the act requires reporting entities to first verify customers before providing a service, including a customer’s name and either their address or date of birth verified through “the use of reliable and independent electronic data from at least two separate data sources”.

Section 81 prohibits companies from providing a service to a customer without having an AML/CTF program in place.

Facebook Twitter Pinterest Afterpay was founded in 2014 by Nick Molnar. Photograph: Tabatha Fireman/BFC/Getty Images for BFC

In a statement, Austrac said it had ordered the appointment of an external auditor after “a period of ongoing engagement with Afterpay where Austrac has identified concerns with its compliance”.

The external auditor will examine the company’s:

• governance and oversight of decisions related to its AML/CTF framework

• the identification and verification of customers

• suspicious matter reporting obligations

• its AML/CTF program, including the development of its money laundering and terrorism financing risk assessment

Under the legislation, the company could face a maximum penalty of $21m, or $42m if they are found to have breached both sections.

The same issues were flagged last year, when the governance firm Ownership Matters issued a report detailing how the lack of verification could allow minors could use the payments to buy up to $300 worth of alcohol.

Following the report, Afterpay responded by introducing third-party verification of customer identification.

In a statement to the stock exchange, Afterpay said it had been “proactively engaged with Austrac on our AML/CTF compliance over a number of months, including recent engagement about our intention to conduct an independent review as part of our AML/CTF program”.

Austrac said it had ordered the appointment of an external auditor after 'a period of ongoing engagement with Afterpay'

“We recognise that buy-now pay-later is a new and maturing sector not only for our customers, but also for regulators, and we will continue to work closely with Austrac to develop a leading compliance regime specific to our business in a transparent and cooperative manner,” the company said.

Who knew what, and when?

The timing of the Austrac announcement so soon after Afterpay’s capital raising, coupled with the company’s admission that it had been in discussions with Austrac for “a number of months”, prompted the Australian stock exchange to query what the company knew and when.

In an earlier trading update on 5 June, Afterpay had said it was “currently in dialogue” with Austrac regarding issues the the financial crime watchdog had raised regarding AML/CTF compliance.

The company said at the time the outcome of the discussions was “yet to be determined” but that it had “not identified any money-laundering or terrorism-financing activity via our systems to date”.

Then, in its capital raising document issued on 11 June, the company said “one potential outcome” of those discussions was that Austrac could order the company to appoint an external auditor.

On 14 June, in response to written request for answers from the ASX, Afterpay revealed it first began “informal and constructive” discussions with Austrac from August last year.

Then, in April, the financial watchdog indicated to Afterpay that it was considering giving notice to appoint an external auditor “but requested further information or documents” before making a decision.

Afterpay faces audit after Austrac flags money-laundering concerns Read more

The company said it “sought feedback from Austrac on several occasions in May and June” this year following the share raising proposal.

“As recently as 4 June 2019 Austrac stated to [Afterpay] that it had not come to a decision internally,” the company said.

The company said it was not aware that the notice was going to be given when it gave its investor presentation on 11 June.

“The first confirmation that Austrac would issue the notice was during a telephone call late on 12 June 2019,” the company said. “[Afterpay] did not have advanced notice of the matters to be raised on that call. During the course of that call, we were informed that Austrac had decided to issue a notice.”

Concerns about Afterpay

Afterpay has marketed itself as a company for the millennial age, allowing consumers instant gratification on a purchase without introducing them into credit debt.

The company – which has a number of competitors both in Australia and overseas – doesn’t charge interest on payments but makes money by charging retailer and late payment fees.

That has long prompted concerns form consumer advocates who say the company’s no-interest model allows it to avoid consumer protections in the National Consumer Credit Protections Act.