Legal advice put Afterpay on Austrac radar, audit finds

Poor legal advice from top law firms led to Afterpay’s run-in with Austrac, an audit has found.

Afterpay came to Austrac’s attention due to recieving poor legal advice, an audit has reported. Picture: AAP

Afterpay was given dud legal advice on anti-money laundering compliance, according to the external auditor appointed to check if the buy now, pay later darling was in breach of current anti-money laundering and terrorism-financing (AML/CTF) laws.

The final auditor’s report, handed down to Austrac on Monday, stated Afterpay’s noncompliance with AML/CTF laws was the result of incorrect legal advice, which did not reflect the company’s business model.

Investors welcomed the news, sending the company’s shares soaring 7 per cent to close Monday’s session at $32.64.

“Afterpay’s compliance with its AML/CTF obligations was, from the outset and over time, based upon legal advice from top tier Australian law firms,” auditor Neil Jeans told Austrac.

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“The initial legal advice concluded that Afterpay’s business model resulted in the provision of the AML/CTF Designated Service – factoring receivables from merchants.”

“I am of the opinion this initial legal advice was incorrect,” he said.

“Having fully analysed Afterpay’s buy-now pay-later business, it is my opinion that Afterpay have never provided the factoring receivables designated service.”

The auditor’s report also confirmed that Afterpay was now fully compliant with the AML/CTF Act, adding that the business was less susceptible to be used for money laundering or terrorist financing.

“The nature of Afterpay’s buy-now pay-later business, the product it offers and how it delivers its services to consumers mitigates the risks reasonably faced by the business.”

“Despite the low risk nature of the business, Afterpay recognises that low risk does not equal no risk, and as a result, Afterpay continues to seek to effectively apply its AML/CTF systems and controls.”

“These systems and controls are now appropriate, focused and continue to be adequately resourced as customer numbers and loan volumes increase,” Mr Jeans said.

The report comes days after Austrac dropped a bombshell on financial heavyweight Westpac, accusing the bank of millions of breaches of AML/CTF laws and facilitating payments that were linked to child exploitation in Asia.

Raising concerns

Afterpay was forced to appoint an external auditor in June after the financial watchdog raised concerns about the company’s compliance with AML/CTF laws, sending its shares tumbling 14 per cent.

The company reaffirmed on Monday that there was no evidence of any money laundering or terrorism financing conducted over its platform.

The auditor’s report said that Afterpay’s AML/CTF program had evolved over time and appropriately shifted oversight from merchants to consumers.

“Based upon legal advice in 2016, Afterpay initially focused its AML/CTF controls upon merchants.”

“Afterpay’s current AML/CTF controls are more appropriately focused on consumers, given the Designated Service Afterpay provides.”

There was, however, a note of caution from the auditor, especially as adoption of services like Afterpay continues to rise.

“While the actual money laundering and terrorism financing risks inherently faced by Afterpay’s business are low, Afterpay’s increasing transaction volumes and business growth heighten the risk of misuse of Afterpay’s buy-now pay-later service.”

“As a result, the board should maintain a focus on AML/CTF compliance and ensure AML/CTF managers continue to be proactively supported and appropriately equipped to deal with these challenges.”

The auditor’s report will be considered by Austrac as it determines appropriate action. Afterpay could potentially cop a maximum penalty of up to $42 million having breached AML/CTF laws.

The material risk posed by the audit has been a concern for investors, however, Morgan Stanley analyst Edward Pham said Afterpay can ride out the turbulence.

“As such, we think there is a discount on the stock price and the removal of the Austrac overhang should see the stock react positively - even if a $42m penalty (maximum under the law) is incurred,” he told clients in a recent note.