Sentenial Fraud Incident

“EML Payments Limited (ASX: EML) advises that its Sentenial business has identified recent fraudulent activity relating to an identified set of fraudulent merchants within its direct debit processing business.

EML is taking steps to investigate and understand the circumstances surrounding the fraud, and has commenced steps to recover any losses. EML is confident that the maximum amount of any losses will not exceed €5.5m (AUD7.9m) but may be lower depending on the success of recovery actions.

The fraudulent activity primarily occurred in August 2022 and came to EML’s attention on Tuesday 23 August. A meeting of the Board was convened early this morning for the purposes of informing the market.

Consistent with our ASX Listing Rule obligations, EML will update that market via the ASX platform as we have material new information.”

Disc: Still holding a small holding which seems keep getting smaller! :)

ASX Announcement - Response to Media Speculation

This morning EML responded to media speculation regarding takeover interest by Bain Capital.

EML confirmed that earlier in the year it was in discussions with Bain Capital regarding a potential change of control proposal. Those discussions have now ceased.

The Board of EML will always consider proposals presented to the company and is fully committed to acting in the best interests of, and maximising value for, EML shareholders.

EML appointed Goldman Sachs as its financial adviser and Herbert Smith Freehills as its legal adviser.

Shine Lawyers Class Action

Just when the future was starting to look brighter for the Irish subsidiary, EML announces that it has “become aware of media reports and other publicity regarding a class action apparently commenced by the firm Shine Lawyers.

The proceedings are said to relate to whether EML failed to disclose information about correspondence received in May 2021 from the Central Bank of Ireland (CBI) in a timely manner.”

In its defence “EML considers that it has at all times complied with its disclosure obligations in that regard. EML has not been served with the proceeding at this time, denies any liability and will vigorously defend the proceedings.”

It hasn’t been a great year for EML and it’s shareholders!

Disc: Shares held IRL

Central Bank of Ireland Update

The market is pleased with the update this morning, up over 15% after the announcement:

EML PAYMENTS LIMITED (ASX: EML) (“EML”) refers to its ASX announcements of 19 May 2021 and 7 October 2021 and its ongoing dialogue with the Central Bank of Ireland (‘CBI’).

EML advises that, following provision of submissions to the CBI on 28 October 2021, EML’s Irish regulated subsidiary, PFS Card Services (Ireland) Limited (‘PCSIL’), has received further correspondence from the CBI (‘Correspondence’).

The Central Bank of Ireland has advised the following:

• The CBI will permit PCSIL to sign new customers and launch new programs whilst staying within the material growth restrictions. PCSIL is confident that it can meet these obligations.

• Broad based reductions in limit controls on programs will not be imposed. The CBI is satisfied to continue to engage with PCSIL with a view to agreeing appropriate limits under its Risk Management and Controls Framework.

• The CBI intends a material growth limitation over PCSIL’s total payment volumes will be imposed for 12 months or rescinded earlier following third party verification to confirm PCSIL’s remediation plan has been effectively implemented.

The CBI has invited PCSIL to provide it with submissions in relation to growth limits, which PCSIL intends to do by 30 November 2021.

As advised at the 2021 Annual General Meeting, PCSIL has been removing higher volume lower yielding programs to enable it to comply with a material growth restriction and is confident it can meet these obligations.

The remediation plan is on track. PCSIL is committed to meeting the timelines as established by the PCSIL Board and the EML Board.

The Correspondence does not concern EML’s Australian or North American operations, or the operations of PFS’ UK subsidiary (‘Prepaid Financial Services Limited’ which is incorporated in England and regulated by the FCA), or EML’s other Irish regulated subsidiary (‘EML Money DAC’), Sentenial Limited (regulated by the FCA) and Nuapay SAS, EML’s French regulated subsidiary.

EML is independently regulated in multiple regions and subject to regular audits by various parties including Central banks, payment schemes, external and internal auditors and other third parties. EML takes regulatory compliance, including AML/CTF, risk management and governance very seriously, and is committed to ensuring our global operations meet the highest standards of risk and regulatory compliance.

ASX Announcement
EML just announced that they have identified historical deficiencies relating to periods prior to EML’s acquisition with respect to the accelerated conversion into cash of funds in dormant and expired e- money accounts.

This cash would otherwise be retained in safeguarding accounts until six years post expiry of the accounts. The historical treatment is inconsistent with EML’s understanding of the correct application of the electronic money regulations.

Subject to audit, there is not expected to be an impact to EML’s profit and loss account as the issues related to the period prior to acquisition.

These deficiencies are historical in nature and pre-date the acquisition of Prepaid Financial Services Limited (‘PFS UK’) by EML on 31 March 2020. In line with our regulatory obligations, EML has proactively reported these historical issues to the Financial Conduct Authority (‘FCA’). PFS UK is an authorised eMoney Institution under UK law, its relevant regulator therefore being the FCA.

Our notification to the FCA was appreciated and we will be providing further details to the FCA next week in relation to the issues.

EML expects that the issue will require the injection of up to approximately £14.1 million (AUD 26.6 million) into safeguarded funds held by PFS UK. The injected funds may be released back to EML over an extended period, consistent with relevant regulatory requirements which allow conversion of dormant or expired eMoney. This is expected to be reflected in the FY22 to FY27 financial years.

Subject to audit, EML’s consolidated Group financial statements for the year ended 30 June 2021, will reflect the £14.1 million (AUD 26.6 million) as a liability through an adjustment to the acquisition balance sheet. As at 30 June 2021, EML’s unaudited cash balances exceed AUD 140 million. As noted above, there is not expected to be an impact to EML’s profit and loss account as the issues related to the period prior to acquisition.

EML considers that, as the issues relate wholly to the period prior to its acquisition, any and all financial consequences are the responsibility of the previous owners of the PFS group.

EML has the benefit of various warranties and indemnities under the Share Purchase Agreement entered into in March 2020 and we are assessing our position.

What could go wrong?

Under Section 45 of the Central Bank (Supervision and Enforcement) Act 2013, Click Here the consequences of not complying with subsection (2) below will result in one of the actions listed under subsection (3) below. None of these actions look good for the EML European business.

In the end I think the severity of the action will come down to whether EMLs PCSIL subsidiary blatantly ignored it's obligations under the Act. Something we may not know for some time to come. 

SECTION 45

(1) Where the Bank is satisfied that one or more of the circumstances specified in subsection (2) exist in relation to a regulated financial service provider, or a related undertaking of a regulated financial service provider, the Bank may, in the interests of the proper and effective regulation of financial service providers, give a direction in writing to the regulated financial service provider or related undertaking to take such of the actions specified in subsection (3) as are mentioned in the direction.

(2) The circumstances referred to in subsection (1) are as follows:

(a) that the regulated financial service provider, or related undertaking, has become or is likely to become unable to meet its obligations to its creditors or its customers;

(b) that the regulated financial service provider, or related undertaking, is not maintaining or is unlikely to be in a position to maintain adequate capital or other financial resources having regard to the volume and nature of its business;

(c) that the regulated financial service provider, or related undertaking, has failed to comply with, is failing to comply with or is likely to fail to comply with any condition or requirement imposed by, or by virtue of, financial services legislation;

(d) that the regulated financial service provider, or related undertaking, is conducting business in such a manner as to jeopardise or prejudice—

(i) monies, securities or other investment instruments or other property held by or controlled by it on behalf of customers, or

(ii) the rights and interests of customers;

(e) that there may be grounds for revoking or not renewing the regulated financial service provider’s authorisation.

(3) The actions referred to in subsection (1) are as follows:

(a) to suspend, for such period not exceeding 12 months as is specified in the direction, any one or more of the following:

(i) the provision of any financial service, or description of financial service, specified in the direction;

(ii) the making of payments to which subparagraph (i) does not relate or any such payments or description of such payments specified in the direction;

(iii) the acquisition or disposal of any assets or liabilities, or description of assets or liabilities, specified in the direction;

(iv) entering into transactions or agreements, or description of transactions or agreements, specified in the direction, or entering into them except in specified circumstances or to a specified extent;

(v) soliciting business from persons of a class specified in the direction;

(vi) carrying on business in a manner specified in the direction or otherwise than in a manner so specified.

Disc: hold shares