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Electronic payment company Paysafe (PAYS) has come under attack today by a blogging company named Spotlight Research. The share price fell by as much as 38% during the day and finished 18% down at 305p. Spotlight admit they may be shorting the shares.
The 50+ page document they have published makes various allegations but the key ones are that Paysafe have been enabling illegal gambling and money laundering, particularly in China, India and other Far East countries. They allege a lot of the money has been funnelled through Bet365 who they say are probably Paysafe’s largest customer.
Now this writer just happens to know a fair bit about this market sector being a former director of a company that provided payment services to gaming companies. It is of course an area full of difficult and complex legal issues – for example the US introduction of the Safe Port Act a few years ago put many payment companies out of business overnight and resulted in a number of legal actions by US authorities against both companies and individuals (including Neteller, now part of Paysafe).
Paysafe, and other similar companies, provide electronic “wallets” where you can deposit funds and then spend them anonymously. There are some “normal” applications for such wallets (or prepaid credit cards) where for example you wish to limit the maximum that can be charged or have doubts about the trustworthiness of who you are paying. But a very common use is to conceal payments to internet gaming companies. Payment to gaming companies can be blocked by the fact that they will be coded as “7995” transactions based on who is being paid, and hence the bank/visa/mastercard payment clearers will block the transaction. How do you get around this if you are a resident of China and want to pay by credit card? Simply open an account with one of the “wallet” providers and payments into that will not be coded 7995 because they are not obviously gaming companies. Payments from the wallet can then be made to whoever you want (including of course to overseas accounts thus enabling money laundering, if necessary by payments from winnings on the gaming platforms to conceal them further).
Well we all know the Chinese like to gamble, so this could be big business and probably is (it’s one of the most profitable parts of the electronic payment sector). Spotlight Research allege that Paysafe (via Neteller and more recent acquisition Skrill) are facilitating such transactions even if they are not directly involved. This could well lay them open to legal action, and potentially they might lose a lot of business.
Now having read the document published by Spotlight, I do not think it is accurate in all respects as such reports often are not – for example their comments on KYC customer checks appear inaccurate and full of presumptions. In addition Paysafe have already published an announcement saying that: “Paysafe confirms that all material information in the report is either factually inaccurate or has been previously disclosed. The Group has a history of significant, transparent disclosure to the market, publishing two prospectuses in 2015 and being subject to substantial additional scrutiny through a full UKLA listing process as part of its move to the Main Market of the London Stock Exchange”.
There was undoubtedly a lot of scrutiny of the company therefore only a year ago. But it will take days, if not weeks to analyse all the allegations by Spotlight in detail. In the meantime they are no doubt making hay.
Certainly Paysafe has always been a company with some doubts about some aspects of its operations because the provision of payment services to gaming companies was known to be a part of its operations. What proportion it formed has not always been clear (the company may not know accurately itself because of the complex intermediary chains). That and the regulatory risks associated with this market area has resulted in relatively lowly valuations for an electronic payment sector business (it’s now on a prospective p/e of under 12).
But it is unfortunate that such allegations are published by shorters rather than the facts being reported to the regulatory authorities in the UK and China so that a more considered review of their veracity can be made first. I have commented negatively in the past on my view of bloggers who publish allegations in jurisdictions that protects them from legal action if they turn out to be wrong, or who do not check their facts with the company they are commenting on first. My views on the dubious nature of some of these campaigns have not changed. The financial incentives created by the fast spread of negative comment on the internet is something I think the Financial Conduct Authority should look at and try to regulate. Perhaps that is something to add to a submission on the FCA’s Future Mission that they are currently consulting upon.
Note: this writer does not hold Paysafe shares although I have done so in the past (sold last holding in August this year).
Roger Lawson
Post Date: December 13, 2016
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Short selling provides a financial incentive to more quickly drive questionable practice into the open. If the short seller is wrong, they will often feel the consequences financially. A much quicker process than bringing the matter to the attention of the generally discredited regulatory authorities, who often see matters like fraud (with various shades of grey) as out of their narrow jurisdiction.
Really – what a naive position to take – make no mistake this is was an outright ” trash and crash” exercise – it was a 4 hour ( 11 am to 3 pm) “flash crash” driven using a different technique – a smear blog – full of rubbish accusations with no foundation and outright sensational headlines – why else an Anonymous author posting on a website outside the UK ?
Be very clear this was a Christmas bonus exercise for a bunch of shorters – at the expense of private investors..once again.
Disgraceful behaviour and unless the FCA investigate then private investors are better investing in the US markets where the FBI would look at this – FCA take note you are failing to regulate the market.
Yes I agree it’s all exceedingly dubious and shareholders in Paysafe should ask the FCA to investigate. To my mind this kind of report on the internet is another example of “false news” that has been widely discussed in the media of late, i.e. stories posted on the internet with no basis in fact – it’s even been alleged this was one cause of Donald Trump’s election.
Roger Lawson