U.S. prosecutors are reportedly probing financial transactions at Block (SQ 0.39%), asking tough questions about potential compliance lapses at the company's Square and Cash App divisions. The reports caught investors off guard, sending Block shares down about 10% as of 1:45 p.m. ET.
The Feds are looking into Block's most important apps
Block products, including Square and Cash App, have been central to the fintech revolution, offering consumers and businesses new ways to transfer money and facilitate commerce. But they also mean the company is subject to U.S. anti-money-laundering and terrorism laws.
On Wednesday, NBC News reported that Block is subject to a probe into whether the company gathered sufficient information on customers to assess risks. Prosecutors are also looking into whether Square processed transactions involving countries subject to economic sanctions and whether Block handled cryptocurrency transactions involving terrorist groups.
The report states that former Block employees provided investigators with the U.S. Southern District of New York documents that the former employees say show compliance breaches. Some transactions involved sanctioned countries, including Cuba, Iran, Russia, and Venezuela.
According to the report, the employees claim that most transactions were not reported to the government as required. They also claim Block did not correct company practices when alerted to the breaches.
Is it safe to buy Block stock?
It is important to note that these are reported allegations, not actual charges. We don't yet know exactly what is happening or whether an investigation will actually lead to charges.
Should the government press forward with charges, there are a lot of potential outcomes, but most likely, Block would be subject to fines and greater regulatory oversight. The biggest risk here, then, is reputation.
Block built its original Square business and later Cash App based on trust. Both businesses are now under intense pressure from traditional banks and other fintechs, including PayPal Holdings. Investors are correct in taking these reports seriously and would be wise to hold off buying in until there is more clarity about what is going on.
