Western Union: Finance in purgatory; The wonderful, awful business of international transfers

Western Union: Finance in purgatory; The wonderful, awful business of international transfers

Feb 15th 2014 | NEW YORK | From the print edition

ON FEBRUARY 11th Western Union’s executives glossed over a decline in earnings and revenues in an upbeat call. But a day earlier five law firms had cast light on some of its troubles when they petitioned a court to represent its shareholders in lawsuits related to dealings with financial regulators.

The litigation is the latest twist in a legal battle extending back more than a decade. At its core, it reflects conflicting public policy objectives relating to one of the world’s oldest businesses: the transfer of money from one place to another.

Western Union’s services are essential for people who do not have bank accounts or are working far from home. Its network is remarkable, encompassing more than 500,000 agencies in 200 countries. They complete 29 transactions a second and move $400 billion a year in remittances to developing countries. In the process, Western Union helps to bolster trade and disperse the world’s wealth. Yet these laudable activities conflict with another pressing goal: impeding money laundering. Rules to that end require financial institutions to know who their customers are and how they obtained their money. These requirements transform the virtues of Western Union’s model—the openness and breadth of its network and its willingness to process vast numbers of small transactions—into liabilities.

In response to accusations that it had moved cash for people involved in the cross-border smuggling of drugs, weapons and people, Western Union struck a far-reaching compliance agreement with Arizona’s attorney-general in 2010. It agreed to adopt 73 changes to its systems and procedures, to install an external monitor to keep tabs on its conduct and to fund the creation of a new enforcement entity, the Southwest Border Anti-Money Laundering Alliance.

Many of the recommendations were highly detailed. Western Union has, for example, set up a system to monitor transactions that takes into account factors such as the seasonality of marijuana harvests and illegal immigration. It is conducting background checks on agents and their families. Such efforts have turned out to be difficult and expensive. As this has become clear, Western Union’s shares have been jolted several times. Earlier this month Western Union said it would be subject to independent monitoring for an extra four years. It faces big fines and criminal prosecutions if it fails to meet the stipulations in the compliance agreement.

The allegations in the shareholder suits echo these concerns. They contend that the company has not been frank about its difficulty in complying with the settlement or the escalating costs involved in doing so. Courts have sealed the documents related to Western Union’s compliance efforts, making it harder for outsiders to assess its performance.

The monitor may complete a new report on Western Union’s progress in the next month, though distribution of that, too, could be curtailed. To some extent, this opacity helps Western Union, by sparing it negative publicity. But it also comes at a cost.

The law firms and their clients are not the only ones questioning the depth of Western Union’s compliance. Analysts repeatedly asked for more detail during the earnings call, to little avail. This matters not just to shareholders and law-enforcement agencies. Without more detail, it is impossible to tell whether Western Union has been unduly lax, or whether the regulators’ demands are inherently ruinous to any massive, low-margin money-transfer business.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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