Sunday, January 29, 2017

Ant Financial buying MoneyGram??......now I'm really getting irritated.....

The financial press has been abuzz with the recently announced "breaking news" and analysis of the proposed Alipay acquisition of MoneyGram.  Generally speaking, reporters have been euphoric about the deal, robotically repeating the press release talking points that Alipay and MoneyGram management have jointly provided.

As you might suspect, I have a markedly different take.  To me, the deal looks like the acquisition of one (allegedly) criminal, money laundering enterprise by an (alleged) Ponzi scheme.

As always, when reviewing any of these deals, the first place I go is the SEC repository to review the filings so I can get a feel for what might actually be going on.  (Remember: "Nobody tells a fib in a filing!")  Links to the deal and the most recent (2015) 10-K are posted below.  The 2016 10-K will be released on Valentines Day.....love is in the air!

Please take a few minutes and scan through these documents for background on what we're going to talk about today.

MoneyGram 10-K
Alipay/MoneyGram Merger

Finished?  Great! let's continue.

A Little History.....

As you now know by reading the 10-K, MoneyGram is a major player in the US$550 Billion global "money transfer" business.  Results have been oddly flat over the last few years. Annual revenues have been consistent at about $1.4 Billion since 2013 and they have been operating at break-even, showing little or no net income over the same period.  I say "oddly flat" because the percent of "unbanked or unbankable" folks in this country, the very sandbox that MoneyGram plays in, has been steadily increasing over the years, to roughly 40% of the US population in 2015.

Twenty years ago, if you wanted to get a bank account, you just showed up at a local branch, told the bank manager who you were, signed a form, ordered some checks and that was it.....you were "bankable".  Anybody who wanted a bank account had one.  But over the years, like much of what we do in this country, we've made things (some would argue justifiably) more difficult for our less prosperous residents. Today, if you try to open a bank account you have to provide multiple forms of identification, background checks are done, ChexSystems reports (to see how you've handled prior bank accounts and financial relationships) are requested and if the banker is unable to connect all of the dots re: your financial history.....NO BANK ACCOUNT FOR YOU!

So who are the unbankable?  When you visit a MoneyGram "store", generally, you see people who are just trying to get by.  Of course, there are lots of understandable reasons for good folks to lose banking privileges in America.  Job loss, medical bills, disability, etc. just to name a few.  There are also lots of "not so good" reasons (i.e. criminal activity, evasion of court ordered judgments, garnishments and seizures, citizenship issues, a potentially nefarious desire just to stay "off the grid", etc.)  In any case, all of the aforementioned comprise MoneyGram's target market.

Given the above, with the expansion of this market over the last decade, you'd think that MoneyGram's revenue and profits would be skyrocketing.  Interestingly, from what I can see, the only part of the business that's really taking off, as described on page 32 & 33 of the 10-K, is the foreign component of the Global Money Transfer segment of the business.

In 2015 the Global Money Transfer business comprised 88.9% of MoneyGram's total revenue ($1.262 Billion). While total revenue remained relatively constant, transfer volume within the US had decreased from 30% of total to just 13% in two years since 2013, despite the dramatic increase in eligible/potential "unbankable" domestic customers.  Combined US outbound (US to foreign) and foreign transfers (non-US to non-US) have increased from 70% to 83% of total transaction volume during the same period.  Per the 10-K (Pg. 33):

"The growth was primarily driven by the Middle East, Western Europe and Latin America regions.......the U.S. Outbound corridor was primarily driven by sends to Latin America and to Africa."    

I wasn't aware that these regions were experiencing an economic boom or a seismic acceleration of financial activity.  I must have missed it.

The Gory Details....

Hypothetically speaking of course, let's say I was an unbankable individual who wanted to get money into or out of the US for potential unsavory purposes. How might I do it?  I'd send a MoneyGram!

The first thing I'd do is to go to MoneyGram.com and find a convenient location.  I'd figure out who I wanted to send my money to and let them know it's coming.  I'd take my fake ID and off I'd go.  Let's say, for example, I wanted to send $500 to a fellow unsavory friend in Kabul Afghanistan (or perhaps the unsavory friend wants to send money to me).  According to MoneyGram.com the transaction would cost me $11.00.  Presumably, MoneyGram would also take a cut on the currency conversion.


Luckily, for me and my hypothetical unsavory friends, there are fifty-six (56) convenient Kabul locations, where my unsavory, unbankable friends, with their fake forms of identification, can pick up the money.  MoneyGram "agents" are generally, banks, "Monitoring and Support Project" financial advisors (like Gulam Mustafa MSP or Sadat Hufyani MSP), small merchants, drug stores, bodegas, check-cashers, payday loan shops, etc.  I'm just guessing of course, that the employees and operators of the Kabul locations might not be all that well versed in identity fraud/verification and might even consider this process an alternative revenue stream, charging a small fee to look the other way rather than to closely examine the recipient's/sender's ID. Moreover, with the abundance of locations, my fellow unsavory friends could move from location to location, using trial and error until they find a location that will accept their fake identification documents.  MoneyGram is all about customer service!






















As luck would further have it, if I happen to have unsavory friends scattered all over the globe, MoneyGram actually operates in two-hundred-an-one (201) countries with more than 350,000 secure locations!  You can check out the countries listed on the drop down list on the website.....some of the more interesting vacation spots, besides Afghanistan, are Angola, the Congo, Belarus, Ukraine, Uganda, Russia, South Sudan and Sierra Leone.

Just to pick a few of the above, using the MoneyGram.com "location finder" we note that Luanda Angola has 70 pickup/send locations, Juba, South Sudan has 26 Locations, Freetown, Sierra Leone has 63 locations and Minsk, Belarus has 72 locations.....I'm no detective, but I think there's at least a good possibility that some of the money sent to/from these convenient locations isn't going to kids away at school, family members for financial help or other humanitarian purposes.

If you want to move a lot of money under the radar, the key is to spread it out into lots of small seemingly unrelated transactions. The Chinese, in their effort to get money off shore and get around their government's FOREX conversion restrictions, have coined the phrase "Ants moving house" which refers to the practice of having trusted friends, relatives or employees carry smaller amounts of money off shore for conversion and eventual re-consolidation into accounts owned by the original perpetrator of the scheme.  Legions of Chinese citizens getting on planes, boats and trains traveling on vacation with the hidden purpose of laundering the money of the Chinese elite.  It wouldn't be difficult to imagine that the MoneyGram model could simply become a slick way to automate the "Ants moving house model".  All of this potential transaction volume could really provide a boost to Alipay transaction revenue once they expand the list of convenient locations in China.

Moreover, there's a good chance, based on the rapid increase in MoneyGrams international transaction volume over the last few years, the model could already be working for drug dealers, gun runners and terrorists.  A $100,000 transaction stands out.....hundreds of $1,000 dollar transactions in multiple names to/from multiple locations fly right through.  If it works for terrorists and drug dealers it should also work pretty well for the Chinese elite trying to convert rapidly devaluing RMB into US dollars.

On pages 8 through 10 of the 10-K the company describes the onerous, complex regulations it is forced to comply with (OFAC, Bank Secrecy Act, Patriot Act, Dodd-Frank, etc.) and the risks associated with the complexity of its business.  It's the typical boilerplate "see ....we told you this could happen!" language intended to insulate the company from shareholder legal action.  There are lots of buzzwords in the disclosures, but as far as I can tell, the sophisticated compliance techniques used to prevent and catch illegal transactions consist of some computer software designed to analyze the "big-data" for repetitive, larger transactions and more importantly, handing the 350,000 authorized agents in 201 countries a probably unreadable manual describing the required anti-money laundering controls and compliance process. If I were to venture a guess, I'd think that one of the possible systemic, internal control weaknesses might be that the less-than-minimum-wage operators in Kabul, Luanda, etc. might be a bit more concerned about survival, food and just getting through their day than they might be about MoneyGram management's Dodd Frank compliance program.

I'm just sayin'......

So if we try to back into the US dollar value of this transaction volume, which interestingly isn't disclosed in the 10-K.  Using our ratio of $11/$500 (2.2%) of the transaction cost, we can make an inexact "guess" that the dollar value of Foreign Transactions processed by MoneyGram is about $47 Billion (($1.262B x 86%)/ 2.2%) Note: I say this is just a "guess" because the figures required to accurately calculate/estimate the exact amount of money transferred (% Revenue by Region/Country) are not disclosed. Moreover, you'd think they would simply disclose the annual "Gross Money Transfer Value" by country, since it would be an important operating metric, telling investors exactly where the business is growing and where it's profitable, but alas, it's not disclosed.  We know the figures are readily available since in response to a 2013 SEC inquiry regarding illegal transfers to Cuba they responded, generally, that the transactions were accidental and immaterial, amounting to only $4,503.

 "During the past three fiscal years, the Company conducted transactions totaling $4,503 with Cuba"

Of course, I'm not a sophisticated international money manager, but I'm not sure how anyone would accidentally send money to Cuba given the regulatory environment at the time.  Thank goodness MoneyGram tracks these things and is able to calculate exactly how many accidental mistakes they make upon a regulatory inquiry.

In any case, I think anyone reviewing the MoneyGram revenue figures would agree, the amount of money transferred by the company to/from outside the US is a huge number even though they fail to disclose it (at least that I can see) in any of their filings.


The SEC is onto them!

After their routine review of MoneyGram's 2012 10-K, the SEC fired off a "nasty-gram" dated 5/9/2013, as Mary Jo's SEC had been known to do.  MoneyGram counsel responded, as documented in the MoneyGram response letter dated 6/13/2013, the SEC noticed that MoneyGram had mentioned in their annual report that they were growing like gangbusters in Africa and the Middle East.  The SEC also noticed that one of their subsidiaries, MoneyGram Payment Systems, Inc. "continues to be identified on the OFAC (Office of Foreign Asset Control) website as an authorized remittance forwarder to Cuba. 

To paraphrase, the MoneyGram response letter generally states that "we're doing all kinds of things that look to you like they are illegal but we aren't doing anything wrong.... but if you somehow catch us and prove that we are doing something wrong, it's probably immaterial and insignificant.  If you find that it's not immaterial, and is indeed significant, we either didn't know it was going on or had adequate controls in place to stop it, but the controls didn't work."  Here's a quote from the Moneygram response.

"From a quantitative and qualitative perspective, the Company determined that the limited business conducted and the limited contacts made were not material and did not raise material investment risks for investors. Any operations or relationships that are consummated by the Company, either directly or indirectly, with any of these countries will be conducted in a manner consistent with the Company’s compliance program and applicable laws and legal requirements, and will be disclosed in the Company’s filings with the Commission as appropriate and required under the legal and regulatory requirements of the Commission." 

Isn't that AWESOME!

In the super-sleuth tradition of the SEC they continued to review the financial statements, for years, sending the obligatory, occasional, cover-my-ass, nasty-grams/exonerations on the same topics. letters dated, 4/17/2015, 7/8/2015, 10/27/2016, 11/30/2016 , taking no action other than to continue to urge MoneyGram management to provide accurate information, threatening penalties under the Securities Act of 1934.

As always, with Mary Jo's SEC, suspicion is one thing, having the fortitude to lawyer up and prove your suspicion is quite another.  It's also a lot of work.  Better to just let it go.....


The "Deal"....

It's been reported that Ant Financial is "buying" MoneyGram.  This is simply not completely accurate.  The transaction consists of the creation of a newly formed, Delaware Holding Company (Matrix Acquisition Corp.) which will be the surviving corporation in a merger between same and MoneyGram International, Inc.  Matrix Acquisition Corp. will be a wholly owned sub of a newly formed, privately held , British Corp. (Alipay (UK) Limited).  Ownership of the Alipay (UK) Company was not disclosed.  The transaction will be "guaranteed" by a wholly owned, newly formed (2014) Hong Kong Corporation (Alipay (HK) Ltd.), again, the ownership and capitalization of same is undetermined. The deal will be funded/guaranteed by CitiBank (Hong Kong Branch) through Alipay (HK) Ltd, pursuant to the funding agreement as described in Sec. 4.9 of the Agreement and Plan of Merger (Pg. 31)    

There is no corporate history or disclosed governance or ownership of any of these newly formed Corporations.  I've found nothing on Bloomberg re: their activities or ownership.  Leiming Chen, a partner at the Hong Kong office of Simpson Thacher & Bartlett LLP, Alipay's advisor on the deal, was the authorized signor for Matrix, Alipay (UK) and Alipay (HK) on the filing.  There could be many reasons for this legal structure, but I'd suggest that none of them are intended increase transparency to US Regulators.

So what do we have?  We have an (alleged) money laundering business, being dumped into a "new" Delaware Corp. (Matrix), which will be owned by a brand new British Corp. (Alipay UK) which is owned by, God knows who?  Funded with debt financing (the "guarantee") provided by Alipay (HK) a new Hong Kong Corp. and Citibank (HK).  Ostensibly all owned or related to Ant Financial, of which, the only financial information publicly available in any filing I'm aware of, is a $60 Billion Market Cap estimate provided as a footnote in the BABA Earnings Call PowerPoint Presentation (Page 23), absurdly citing the "Media" as the source of this valuation.  (Authors Note: On its face you'd think that reporting an asset value in a financial statement based solely on a "Media" valuation would be a prima facie 10b-5 violation...but that's just me).

Guesses at Ant Financial gross assets (i.e. customer deposits, money market funds, WMP's, loans, etc.) have ranged anywhere from US$100 Billion to US$150 Billion or more.  There's no question that the amount of money the hard working people of China have entrusted with Jack and the gang is absolutely huge.  But again....nobody knows for sure how much it is and what it might be "invested" in.

It's important to understand exactly what this convoluted mess really is.  Alibaba (BABA) is a mish-mash of 300 or so related companies all dumped into a Cayman Shell Corp. to facilitate its listing on the NYSE.  Ant Financial is a "related", probably just as convoluted (maybe more so) mess of Fintech, Money Management and Investment Companies, (aka Ponzi Scheme) consistently offering above market rate "risk free" returns which consistently beat rates offered by SOE and Regional Banks.  Like any Ponzi Scheme, this can go on for a long time, until the hard working people of China decide that they no longer want to keep putting their hard earned money into Ant Financial Investment Products, or worse for Ant, they want their money back immediately.  This huge amount of money has continually been hijacked by Jack Ma and company to fund a series of boondoggle investments.  The purpose of these investments is (allegedly) two fold: 1.) Facilitate an accounting fraud, "buying" revenue and inflating asset values ; 2.) Convert overvalued RMB, "Monopoly Money" to hard assets valued in US dollars or Euros for the benefit of insiders.  The MoneyGram acquisition meets both of these dubious purposes.

Last Friday, the "Media" also reported on, what I'd suggest is the first trickle of what, over time, will be a steady flow of defaults of Ant Financial backed investment products, even though an Ant spokeswoman commented that this was a "one in billions incident".   As described in recent articles by Jim Areddy at the Wall Street Journal and Reuters, investments (loans) sold on one of Ant's websites (Zhao Cai Bao) were collateralize by the defaulted bonds of Chinese phone maker, Cosun Group. There are assertions of fraud and questions whether the bond underwriter, bank, or bond insurer will eventually be on the hook for the default. In any case, it's safe to say that these things rarely go smoothly.

My final thoughts are, that if the Alipay/MoneyGram merger is actually consummated, it will tell us a lot. It will tell us that CFIUS (Comittee on Foreign Investment in the United States) is about as effective at protecting US Interests as the SEC has been in detecting and preventing securities fraud over the years.  Yeeeeshhhhh......



Fortune - Ant Acquiring MoneyGram - $550 Billion Industry - Global Money Transfers Annually
http://fortune.com/2017/01/26/alibaba-moneygram/

SEC - Alipay/MoneyGram Merger Filing
https://www.sec.gov/Archives/edgar/data/1273931/000119312517019756/d338195dex21.htm

MoneyGram Response 11/23/16 Letter - Re: 6/5/13 SEC Letter "Relationships with countries re: State Sponsored Terrorism"
https://www.sec.gov/Archives/edgar/data/1273931/000119312516775887/filename1.htm

SEC 10/27/16 Letter To MoneyGram - Re: "State Sponsorship of Terror"
https://www.sec.gov/Archives/edgar/data/1273931/000000000016098723/filename1.pdf

SEC 6/5/2013 Letter to MoneyGram -  Re: "State Sponsoship of Terror"
https://www.sec.gov/Archives/edgar/data/1273931/000119312513248457/filename1.htm

SEC - most recent 10k - filed - pg 33
https://www.sec.gov/Archives/edgar/data/1273931/000127393116000064/mgi2015123110-k.htm

Ants Moving House
http://www.latimes.com/world/asia/la-fg-currency-global-china-20151201-story.html

Unbankable
http://www.reportlinker.com/p03631609-summary/Unbanked-and-Underbanked-Consumers-in-the-U-S-Edition.html

Unbankable & Mobile Payments
http://www.pewtrusts.org/~/media/assets/2016/06/fsp_what_do_consumers_without_bank_accounts_think_about_mobile_payments.pdf

SEC Nasty-Gram - 11/30/16
https://www.sec.gov/Archives/edgar/data/1273931/000000000016103098/filename1.pdf

SEC Nasty-Gram - 10/27/16
https://www.sec.gov/Archives/edgar/data/1273931/000000000016098723/filename1.pdf

SEC Nasty-Gram - 7/8/15
https://www.sec.gov/Archives/edgar/data/1273931/000000000015035822/filename1.pdf

Cosun Default
http://www.wsj.com/articles/a-default-in-china-spreads-anxiety-among-investors-1485513181

Cosun Default
http://www.reuters.com/article/us-china-bond-fraud-idUSKBN14F0FG


Checksystems
https://www.chexsystems.com/web/chexsystems/consumerdebit/page/home/!ut/p/z1/hY9PC4JAEMU_Swev7vgHk24LmVGWhkW2l1hlcwV1ZXcL-vYZ4kWS5jbzfu89BhGUIdLSV1VSXYmW1v1-I94d8BpbbgpRmMQbwMHh6KeXyIbQQ9d_APnKM4Oh95MBGRPi7dnuE4IodOy9FZ7cKTCpgOUIzJfsEClrkQ__4DZ3_BIRyR5MMmk-ZX_mWndqZYABilFZcPNNuRBmIRoDfpm4UBplUxZ1TQZV0lx9hRcfeDhj2A!!/dz/d5/L2dBISEvZ0FBIS9nQSEh/

MoneyGram - Kabul Locations - 56 Agents
https://hosted.where2getit.com/moneygram/printlocator_secure2.html?form=locator_search&name=&phone=&mon_hours=&tue_hours=&wed_hours=&thu_hours=&kiosk_id=&legacy_agent_number=&retailer_id=&money_order=&billpayment=&form_free=&paypal=&country=AF&addressline=Kabul+River+Kabul&sendcurrency=&receivecurrency=&like=0.45987065804083893




3 comments:

  1. http://www.bloombergquint.com/markets/2017/02/09/ant-financial-said-raising-under-3-billion-of-debt-for-deals

    ReplyDelete
  2. My favorite excerpt:

    “It is the market practice for a globalized company like Ant Financial to raise debt in USD,” the company said in an e-mailed statement, declining to comment on any potential amount.

    LOL...Globalized? They do zero business in the US. I guess if you count all of Caribbean off-shore, money-sucking, Ponzi shells, they are indeed "globalized". Chinese bankers won't touch this mess.

    ReplyDelete
  3. This is not going to end well.

    ReplyDelete