Hindenburg, which became a household name with the expose on Adani, is out with a new report. This time it is the mobile payment company based in the US, Block Inc. It has alleged that Block facilitated fraud against consumers and the government, avoided regulations, dressed up predatory loans and fees as a revolutionary technology, and misled investors with inflated metrics. Block Inc’s co-founder Jack Dorsey’s net worth plummeted within hours of the coming out of the report. He is reportedly sitting at a loss of about $526 million.
Block Inc, formerly known as Square Inc, is an American company offering a variety of payment and tech-related services. It was founded in 2009 by Jack Dorsey and Jim McKelvey. It’s basically a fintech company, with its payment app called Cash App being at the centre of the storm. Hindenburg has alleged that in the name of providing a smooth transaction experience with a little bit of ‘magic,’ the company actually evaded regulations. Its avoidance of necessary compliance is what gave it an edge over its competitors like Venmo, PayPal and Apple Pay. In addition to this, the company also misled investors with inflated user metrics. In fact, as per the report, former employees estimate the fake and fraudulent accounts to be to the tune of 40%-75%. Anybody could make an account on Cash App with just an email or phone number. Several Donald Trumps and Elon Musks were found to be on the app with active accounts.
Cash App is the main driver of Block Inc’s growth, with a reported user base of 51 million in 2022. By the end of 2020, its gross profit reached $1.2 billion, growing 170% from the previous year. Hindenburg Research has alleged that the company allowed fraudulent accounts to proliferate on Cash App, without any regard for KYC laws and Anti Money Laundering rules. This helped it to generate revenue through increased transactions along with inflated user metrics. There were multiple accounts linked to a single account and vast duplication of accounts on the app, raising cases of identity fraud and scams. When Covid-19 struck, Cash App offered to facilitate government relief payments, without the users needing a bank account. Within weeks of starting this process, several states raised alarms of suspected fraudulent payments ranging from unemployment benefits to stimulus payments, rental assistance, and child tax credits. As per a report by ID.me, the government lost about $400 billion in fraudulent transactions in unemployment insurance alone. The banks associated with Cash App were receiving 8 times more requests for unemployment assistance claims than its competitors.
All these transactions during the pandemic also gave a one-time hype to Block Inc’s stock, which rose by 639%. The co-founders swiftly made use of this opportunity to collectively sell over $1 billion of stock during the pandemic, making sure to secure their profits.
In no time, Cash App has become synonymous with fraud and scams, and a favourite among criminals looking to transfer drug money. Interestingly, Hindenburg research released a compilation video of several rappers acknowledging the ease of using Cash App in their songs.
Hindenburg Research alleges that Block Inc turned a blind eye to all these issues despite warnings from its employees and the government, while the lapses in compliance continued.
In response to the allegations, Block in a statement said that they will work with the “Securities and Exchange Commission and also explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about Cash App business.” Thankfully, no patriotism was invoked and nobody gave speeches with a US flag in the background.
As we move from traditional banking to mobile banking apps, this is a cautionary tale of what could go wrong. These apps do come with several security concerns. Recently, in Mumbai, cybercriminals robbed Rs 1 crore from 81 people using the UPI app. Last year, Paytm was in trouble for flouting data storage laws. The money routed through the apps is difficult to trace, unlike in traditional banks. Digital literacy is a must to know and understand fintech; and though it is growing, our everyday life is fraught with rising digital payment frauds! Hope the regulators are paying heed.
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