UPDATE 3-Australia orders external audit of credit provider Afterpay, shares tumble

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SYDNEY (Reuters) – Australia’s financial crime watchdog ordered an audit of buy-now-pay-later (BNPL) company Afterpay Touch Group to ensure it was following anti-money-laundering and counter-terrorism financing laws, hammering shares across the sector.

The government agency AUSTRAC said it ordered the company to hire an external auditor at its own expense and report back in 60 days, adding it hopes this will remind new financial service players to take their money-tracking obligations seriously.

The regulator did not give a reason for ordering the check.

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

AUSTRAC presented the audit as routine, but the move puts an element of doubt into an industry that has become a favorite of Australian stock analysts due to its rapid global expansion and the ability to benefit from the growth in online shopping.

BNPL players like Afterpay let shoppers buy products without paying upfront, and without the regulatory hurdle of applying for a credit card or loan. They typically make money by receiving fees from vendors.

Afterpay shares have soared to nearly 30 times their A$1 issue price just two years since listing – despite never posting a net profit – amid an ambitious plan to grow in the United States, fuelling a spike in shares of rival BNPL companies.

But the stock dropped 13% on Thursday after the AUSTRAC audit order, their biggest fall since October, in a flat broader Australian market.

Australian media had raised concerns about the BNPL model in 2018, with reports that shoppers had made purchases without needing to give their names.

About the AUSTRAC audit order, Afterpay said it had “proactively engaged” with the watchdog for months about its compliance with anti-money-laundering and counter-terrorism financing (AML/CTF) laws and had offered to hire an external auditor even before the agency formally requested it.

Afterpay said it had measures in place to comply with the law, including strict spending limits.

“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,” it said in a statement.

BNPL represented about a sixth of the A$23 billion Australians spent shopping online in 2018, analyst reports show.

The AUSTRAC audit, however, “puts a negative overhang on the business in Australia”, said Jason Teh, chief investment officer at Vertium Asset Management.

Shares of other BNPL providers slipped on the news, with newly listed Splitit Ltd down 6%, Zip Co Ltd down 5% and FlexiGroup Ltd down 3%.

Zip told Reuters it was not in any dialogue with AUSTRAC about AML/CTF compliance, and that it did credit and identification checks on every applicant.

Splitit and FlexiGroup were not available for comment.

Reporting by Byron Kaye and Wayne Cole; Editing by Stephen Coates and Himani Sarkar

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