US short-seller Hindenburg Research has released a new report accusing Block Inc’s Cash App platform of gross financial fraud and violating anti-money laundering laws. Hindenburg Research’s report on Block’s Cash App platform is the second sensational report in 2023 after its January 24th report jolted India’s Adani Group.
Block is a US-based $44bn-worth market cap company. It’s headed by its controversial CEO Jack Dorsey, who has been accused of fraudulent practices in the Hindenburg Research’s report. Dorsey was a co-founder of the popular social media platform Twitter and was also associated with the platform until its acquisition by Tesla owner Elon Musk.
Block Inc has portrayed the Cash App as one that empowers the “unbanked” and the “underbanked”. Block Inc claimed that the Cash App platform has over 51m active users transacting every month and it has a very low customer acquisition cost. However, Hindenburg Research’s report on Block’s Cash App platform alleged that these claims are based on inflated user metrics.
Citing former employees, who claimed that around 40% to 75% of accounts reviewed by them were either fake accounts or involved in fraudulent activities or were fake accounts tied to a single account, Hindenburg Research’s report on Block’s Cash App platform alleged that the latter has deliberately provided a platform that has enabled criminals to do money laundering.
The Hindenburg Research’s report on Block’s Cash App platform alleged that under the guise of empowering the “unbanked” and “underbanked”, the company embraced criminals as its biggest consumer base and allowed major financial frauds to go on unchecked. It has been alleged that whenever users were caught engaged in any scam, the platform didn’t ban their accounts but merely blacklisted them. A customer service representative reportedly shared the screenshots that showed how the blacklisted accounts were associated with hundreds of other active accounts suspected of fraud.
The report claimed that the platform never provides any insight into the real volume of active users. It alleged that the Cash App’s user metrics are filled with fake and duplicate accounts. The Hindenburg Research’s report on Block’s Cash App platform alleged that criminals have used it for more severe crimes than money laundering.
According to the Hindenburg Research’s report on Block’s Cash App platform, criminals have used the platform to exchange money for a contract killing. It also alleged that the app has been used extensively in US sex trafficking, including the sex trafficking of minors.
The short seller also alleged that apart from using CEO Dorsey’s name for a fake account, several users can easily signup using names like Donald Trump and Elon Musk, bypassing all compliances. Hindenburg Research even opened an account in the name of Trump and got a card mailed to them with that name.
The platform was also used for gross fraud when Dorsey announced that the app can be used to receive Covid-19 government relief payments. The states of Washington and Arizona sought $200m and $500m back from the payment processors due to alleged fraud committed using the platform, as per former employees.
While the stocks of Block Inc soared on the back of its fraud facilitation, Dorsey, along with co-founder James McKelvey dumped stocks worth $1bn. Other top executives, including its CFO Amrita Ahuja, also sold their stocks to profit from the high prices.
The Hindenburg Research’s report on Block’s Cash App platform alleged that it has bypassed a key banking regulation meant to protect merchants called “interchange fees”. The US Congress has made a regulation for large banks with assets over $10bn to pay “interchange fees” but despite having assets worth over $31bn, Block Inc avoided paying the fees by routing the money through smaller banks.
Block’s acquisition of the ‘buy now pay later’ service called Afterpay has been flopping. As the platform lends ignoring bank regulations for people without proper income verification, its delinquencies have been continuously increasing. Hindenburg Research quoted Fitch stating that the total delinquencies of Afterpay increased from 1.7% in June 2021 to 4.1% in March 2022.
“On a purely fundamental basis, even before factoring in the findings of our investigation, we see a downside of between 65% to 75% in Block shares. Block reported a 1% year-over-year revenue decline and a GAAP loss of $540.7 million in 2022. Analysts have future expectations of GAAP unprofitability and the company has warned it may not be profitable”, Hindenburg Research’s report on Block’s Cash App platform alleged.
Immediately after Hindenburg Research’s report on Block’s Cash App platform, Dorsey’s company’s shares fell by 20%. The accusations of fraud and inflated user metrics have caused severe turbulence in the market. The company has not commented on the accusations until the publication of this report.
