The EML Payments Ltd (ASX: EML) share price has dived upon correspondence from the Central Bank of Ireland (CBI).
Shares initially plunged 48% to $2.79 before bouncing around to land at $2.89.
What’s the news?
The CBI raised concerns around PFS Card Services Ireland Limited (PCSIL) regarding Anti-Money Laundering / Counter-Terrorism Financing (AML/CTF), risk and control frameworks, and governance.
In simpler terms, the CBI has reason to believe EML, specifically the PCSIL division may have breached local regulations.
PCSIL represents 27% of EML’s global revenue, including the Irish and European businesses.
The correspondence does not impact the EML’s Australian, United Kingdom, or North America operations. However, pending the conclusion of the CBI’s concerns, the relevant authorities in these jurisdictions may choose to undertake separate investigations.
The company will provide a submission to the CBI addressing the concerns outlined in the correspondence by the CBI by 27 May 2021.
Why did the EML share price react so negatively?
Given the minimal information around the regulatory concerns, it’s difficult for investors to quantify the impact on EML’s operations. Hence the volatile movements in the share price today.
Questions raised by the CBI may be isolated to a certain number of incidents, or have a broader impact on the EML business.
Independent of the outcome, expect more volatility in the share price for the foreseeable future, as more information comes to light and any repercussions are priced in.
PFS acquisition called into question
EML announced the acquisition of the PFS business in November 2019 for $423 million. Terms were then revised in the depths of COVID-19 to a final price of $252 million, saving EML $171 million.
At the time management cited Brexit and COVID-19 uncertainty for the revised price. Now it appears EML may have drawn the short straw.
This isn’t the first time the PFS business has caught the eye of regulators. Since 2019, the business has paid fines to both British and French authorities.
What’s next for the EML share price?
My apologies for the number of acronyms. Essentially EML is under investigation by the CBI.
Management didn’t provide much more colour, however, I believe more negative news may be on the horizon for EML shareholders.
In a worst-case scenario, the Irish and European businesses could be forced to shut. Moreover, scrutiny of the aforementioned Australian, UK and US businesses would likely increase by the relevant central banks. EML would likely incur significant legal and regulatory expenses to rectify the breaches of regulation.
Conversely, in a best-case scenario, the company may be fined or be exonerated of any wrongdoing.
Given the downside risk, I’ll be watching from the sidelines for now.
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