Wise under investigation for Anti-Money Laundering non-compliance

An article from The Bureau of Investigative Journalism reveals that Wise has been under investigation by prosecutors in Belgium for non-compliance of half a billion euros of suspicious transactions.

This is a definitely a big headline, which caused the stock price to drop over 15% today, the worst day for the stock since the IPO in 2021.

Wise has already responded.

There are things we need to look at as owners of Wise:

1. The investigation itself

2. The likely outcomes

This is specially important given that we had about 30% of our investments in Wise. Now down to roughly 26% (I bought some shares today).

The investigation

Wise has appeared in hundreds of transactions related to frauds, corruption, and drug trafficking across 30 EU countries. This has prompted Belgium prosecutors to open an investigation, given that Wise uses its license in Belgium to have access throughout the EU market.

At first sight, this might sound like something alarming. And it should be. But we need to understand that Wise deals with 4.7 millions of transactions each day and has 19 million active customers.

There are going to be bad actors. It is unavoidable.

We will never live in a world without criminals.

That doesn't mean that Wise shouldn't do a proper job at stopping and reporting suspicious transactions. They should. And they have been doing it. But apparently, not enough.

That said, we need to put the EUR 500 million in perspective.

Total transaction volume on Wise was $243 billion last year. It means that only 0.2% of volume are under investigation. And also, we don't know over which period that EUR 500 million is. The investigation started last year and it is probably over multiple years, bringing the annual fraudulent volume even lower.

The same report mentioned something interesting.

5% of global GDP is laundered each year, or $2 trillion.

If we use Wise's estimate of the total cross-border volume worldwide of $43 trillion, we get the same 5% number. Of course, not all of the money laundered is cross-border so, the real number will be lower.

Even if we assume it is 2%. That would be mean that Wise's fraud rate is at least one order of magnitude lower

Again, I'm not saying that it shouldn't be lower. Wise should definitely do more to make the fraud rate go down.

It is for the good of society.

But we need to put things into perspective instead of just reacting to headlines.

It's not like Wise was committing fraud itself like a Wells Fargo did with the fake accounts a few years ago.

Bad actors are always going to be here and Wise has been doing what it can to counter them. But from time to time, they will fail and they will be paying fines. It happened in the past and it will happen again.

For example, in the 2024 annual report, Wise gave the example of self reporting a GBP 250 withdrawal after identifying that it was from an individual from a Russian owned company. This was an admission by Wise that their system wasn't perfect. But as soon as they detected it, they responded. They didn't try to hide anything and reported to the authorities at the risk of being fined themselves.

Other times that Wise put ahead AML over its business growth was when they temporarily paused onboarding new business users since they couldn't handle the compliance workload.

You will not see this if you don't go beyond the headlines.

In a way, this is another reason why Wise has such as strong moat. Any competitor will have to deal with all of this with less resources.

As Wise mentioned, in their response, one-third of workforce is just compliance.

This also shows why moving money across border is so hard and why Wise is trying to solve it. These compliance issues are handled by banks and it is a lengthy process. But even in the normal banking system, there are times when fraud happens.

With the Wise Platform, Wise will be able to share some of the AML workload with the banks who own the customers.

For the time being, this is an ongoing investigation since last year. We don't know if there's going to a formal probe into Wise or if they will face further issues.

The company did not comment further as according to them, it would be speculative.

But let's look at some likely outcomes.

The likely outcomes

The worst case scenario is that the AML measures of Wise are severely lacking. But I believe this is unlikely based on we talked about. If this is the case, Wise is likely going to be severely fined. Or worst, even have limitations on how many new users they can onboard monthly, like it happened to N26 a few years back.

There is also the possibility that the license of Wise is restricted. But I find this very unlikely.

The most likely scenario would be a fine.

Wise has paid fines in the past and they will pay again. This is the nature of the business.

But they don't have to disclose anything until there's a number on how much they are expected to pay.

However, if they were expecting to pay a huge amount, I don't think they would have upgraded their short and medium term margins.

They could have kept the margins estimates at 13-16% instead of raising it to 15-20%.

Wise knows better what kind of conversations they are having with the regulators and where the investigation is.

At the end of the day, if you're investing in any business, you need to trust the people running it.

It is especially important in financial services where a small number of people will have access to a huge sum of other people's money.

But in the years that I've been following Wise and investing in the business, I can only say that I trust the management. Of course, the only certainties are death and taxes. But this is a risk I'm willing to take.

I already bought more shares of Wise today. And I'll be buying more if the stock price falls further.

I talk about the potential consequences on my free newsletter: https://nas.com/ishfaaqpeerally/feed/eeut