Afterpay Touch: AUSTRAC final report

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
26 November 2019, 4:50 PM
Sectors Covered:
Insurance and Diversified Financials

  • APT has released summary details of the independent auditor report into its AML/CTF compliance.
  • While APT failed to comply correctly with AML/CTF legislation in its infancy, the majority of the report recommendations have already been addressed with APT’s transaction monitoring now labelled “effective, efficient and intelligent.”
  • While an AUSTRAC fine remains a possibility, we continue to see the quantum of any potential fine as relatively immaterial versus APT’s market cap ($8bn).
  • Maintain ADD recommendation, PT increased (Morgans clients can login to view detailed reports and price targets). APT’s initial progress in the US/UK markets remains encouraging and we believe share price upside exists if management’s offshore strategy is successfully executed.

What happened

The key details from the independent auditor report into APT’s AML/CTF compliance are:

  1. APT failed to comply with the AML/CTF Act correctly from February 2015 until mid- 2018
  2. APT's non-compliance stemmed from incorrect initial legal advice, which saw APT focus its AML/CTF program on merchants originally rather than the end customer
  3. APT's AML/CTF program has evolved over time and the majority of audit report recommendations have already been addressed
  4. APT is a low risk business from an Anti-money laundering/Counter Terrorism Financing perspective, with no AML/CTF activity so far identified across the network
  5. AUSTRAC will consider the report and determine whether it will take any further action.

Our view

The clear positive of the final report is that key AML/CTF issues have already been addressed, with APT’s transaction monitoring framework now described as "effective, efficient and intelligent."

However, the company still did not comply with the Act correctly for ~3 years and will be relying on AUSTRAC leniency in this regard.

Any potential for regulator leniency/understanding would likely be due to:

  1. APT’s immature company status over the period of non-compliance
  2. The relatively low risk nature of its activities (with no AML/CTF activity having been identified so far)
  3. The significant changes/investment APT has subsequently made to improve its AML/CTF framework.

Whilst a pecuniary penalty remains a possibility, we continue to see Tabcorps A$45m fine in 2017 for “extensive, significant and systematic non-compliance of the Act” as the upper threshold if a penalty does eventuate.

We note even a fine of this size is relatively immaterial versus APT’s current market cap (~A$8bn).

Changes to forecasts

We make no changes to our APT forecasts. Our PT rises (Morgans clients can login to view detailed reports and price targets) reflecting some derisking of our valuation for removal of AUSTRAC investigation uncertainty, with Audit outcomes largely per our expectations.

Investment view

APT’s initial progress in the US/UK markets remains encouraging and we believe share price upside exists if management’s offshore strategy is successfully executed.

We maintain our ADD recommendation.

More information

Morgans clients can login to view our detailed report and increased share price target for Afterpay Touch Group (APT). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst owns shares.The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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