Afterpay faces AUSTRAC audit into anti-money laundering compliance

The Australian Transaction Reports and Analysis Centre (AUSTRAC) has ordered an audit of fintech Afterpay's (ASX: APT) after identifying concerns over compliance with financial crime legislation.

The announcement prompted a 12.6 per cent drop in APT shares this morning down to $22.41.

The financial intelligence agency has appointed an external auditor to examine whether Afterpay's operations meet the standards of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF).

The audit will examine the buy-now pay-later (BNPL) company's governance and oversight of decisions in relation to AML/CTF, the identification and verification of customers and suspicious matter reporting obligations.

Due for submission to AUSTRAC within 60 days and with a final report due within 120 days, the audit will cover Afterpay's activities since 19 January 2015 and will also look into its money laundering and terrorism financing risk assessment.

AUSTRAC chief executive officer Nicole Rose emphasises businesses in the fast-growing BNPL sector must take the legislation seriously.

"The audit will help identify if Afterpay has developed and implemented the systems and controls it needs to ensure it complies with its obligations," Rose said.

"These laws are in place to protect businesses, the financial system and the Australian community from criminal threats."

The audit will be used to determine the extent of any compliance issues and whether further regulatory action concerning Afterpay is required.

"AUSTRAC will continue to work with Afterpay to assist the company to mature and strengthen its compliance processes, staff training and suspicious matter reporting," says Rose.

"But we will not hesitate to take action where an organisation is failing to appropriately protect itself and Australia's financial system from criminal activity."

In response, Afterpay noted its commitment to the high expectations of customers and retail partners, and highlighted proactive engagement with AUSTRAC on AML/CTF compliance over a number of months.

"Since establishing the company, this commitment has remained consistent and we have earned the trust of millions of customers that wish to use our service to budget for discrete, small value ($148 average), noncash transactions," the company said.

"We welcome the opportunity to continue to work closely and constructively with AUSTRAC and we will approach this formal process as an opportunity to ensure that our AML/CTF compliance is robust. We are committed to remaining focused on becoming better at what we do.

"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."

Afterpay claimed its business model had several features that helped to control its money laundering and terrorism financing risk including the implementation of strict spending limits of up to a maximum of $1,500 per transaction.

"Afterpay has undertaken various measures to strengthen Afterpay's AML/CTF framework including in focus areas identified in the Notice and we are continuing to invest in further AML/CTF compliance enhancements. We do not expect any impact to arise on the way customers and merchants currently experience the Afterpay service," the group said.

This is not the first time Afterpay has come under scrutiny as regulators and the BNPL sector come to grips with one another. Last year the Australian Securities and Investments Commission (ASIC) opened up an investigation into whether companies in the industry were preying on vulnerable people with low incomes.

At the time Afterpay offered its support for ASIC's push to extend its intervention powers into BNPL services.

"Afterpay appreciates that having clear oversight from ASIC will further increase public confidence in our product and ensure additional consumer protection is provided in the case that our product is used in an unintended manner," the company said.

"ASIC has reconfirmed that Afterpay is different to traditional credit products as Afterpay does 'not charge consumers for providing credit' and is therefore not regarded as credit under the National Credit Code."

In February, Afterpay escaped unscathed by a Senate Inquiry into BNPL services, which highlighted the need for an independent regulatory framework for these payment systems that are patently different to traditional credit products.

Business News Australia