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(Bloomberg) -- In the space of just five years, a little-known company on the outskirts of London has grown into a payments-industry powerhouse, processing more than 1 billion euros ($1 billion) in transactions every month. Backed by licenses from regulators in the UK and Lithuania, Transactive Systems Ltd. touted itself as “one of the fastest-growing fintech companies in Europe,” with an ability to service clients from “compliance-intense industries” including cryptocurrencies, gambling and foreign-exchange trading, according to documents obtained by Bloomberg. The marketing pitch didn’t dwell on the firm’s back story. 

Multiple high-level employees who helped set up and run Transactive came from PacNet Services Ltd., a company that had to close down after being sanctioned by the United States for being the “payment processor of choice” for scam artists. Several are being targeted by authorities, including one facing federal fraud charges who remained a senior Transactive employee until just weeks ago. In June, a founding investor was sentenced to two years in jail for his part in an unrelated $1 billion healthcare fraud.

Some of Transactive’s clients have also drawn scrutiny. They include Nexo Inc., a crypto-lending company recently raided by authorities in Bulgaria and fined $45 million by US authorities, a payments firm that has been probed in the UK for possible connections to financial crime, and an Irish foreign-exchange company that had its accounts shuttered several years ago on suspicion of money laundering, according to filings.

Transactive has grown and grown. In Lithuania, where payments data is available, the company’s processing volumes expanded more than tenfold in 2020, and it initiated nearly 15 billion euros in transactions over a 12-month period ending in September.

This year, the company's rise has come to an abrupt halt. Officials from the Bank of Lithuania uncovered “serious infringements” of anti-money-laundering laws and “breaches and shortcomings” in controls at Transactive’s local subsidiary, according to a Jan. 20 statement. Because of the "scale and significance” of the problems, the business must stop taking on new customers and cease providing services to clients in the finance and cryptocurrency sectors pending a review, the central bank said.

A Bloomberg News investigation last year showed how scores of electronic money institutions, or EMIs, are now helping to move some £1.4 billion ($1.7 billion) every day in the UK — and some have ties to scandal and alleged financial wrongdoing. The story of Transactive, which remains approved by the UK’s Financial Conduct Authority, adds to questions about how regulators oversee Europe's proliferating payment firms. 

“There appears to be several allegations of rule-breaching that would suggest red flags” at Transactive, said Nicholas Ryder, a law professor at the University of Cardiff who focuses on financial crime. Taken together with some other troubled EMIs, it seems there are “several shortfalls” in the FCA’s approvals process and the regulator will be “under increased pressure following the actions of their counterparts in Lithuania to undertake a detailed review of the firms’ compliance with the relevant anti-money laundering and counter-terrorist financing provisions,’’ he said.

A Transactive spokesperson said in a statement that the company is “disappointed by Bank of Lithuania's decision and we are working to quickly resolve issues related to their findings." The firm “proactively parted ways” with the founding investor when the $1 billion healthcare fraud came to light, the spokesperson said, and “to imply that the presence of former PacNet employees within Transactive is indicative of nefarious activity within Transactive is grossly inaccurate.”A PacNet spokesperson said the company continues to deny wrongdoing. A spokesperson for the FCA declined to comment on Transactive.

PacNet

Transactive emerged after the demise of PacNet, a payments company founded in Vancouver in the 1990s. While PacNet said it worked with many legitimate customers, authorities have alleged that it processed payments for “mass mail” operators – scam artists who flooded elderly and other vulnerable consumers with bogus letters that told them to send money to win prizes that didn’t exist. By the 2010s, US prosecutors would later allege, PacNet was allegedly moving more than $100 million every year on average in checks and credit-card payments made by US consumers to its mass-mail clients. 

The business attracted the attention of authorities. US prosecutors in Washington sought to seize about $470,000 of PacNet’s cash in 2002, claiming the funds had arisen from illicit foreign-lottery mail schemes. The company denied the allegations but agreed to forfeit much of the money. And in 2007, an official for the North Dakota Attorney General’s office told lawmakers that many of the state’s consumers had paid out thousands of dollars to take part in bogus sweepstakes, with their payments being processed by PacNet. The company “clearly facilitated this fraud,” the official said. 

PacNet denied wrongdoing. But in 2016, as part of a sweeping probe of mass-mailing schemes, the US Treasury Department’s Office of Foreign Asset Control stepped in. Using a designation typically given to global drug cartels and paramilitary groups, OFAC cut off PacNet from the US financial system. Then-US Attorney General Loretta Lynch said that perpetrators of the scams had “cheated Americans out of hundreds of millions of dollars.”

PacNet continued to contest the allegations, but the sanctions crippled the business. In a Sept. 2017 deal with the US, the company agreed to wind down in return for having the OFAC designation lifted. A PacNet spokesperson told Bloomberg that the firm operated legally, that OFAC treated it unfairly, and that it had hundreds of other customers, many of which were “well-respected companies and organizations.”

Transactive was founded around the time that PacNet wound down. Seed funding came mainly from investors in Florida, and various former PacNet employees helped to run the operation day-to-day, taking up roles in compliance, marketing, technology and customer service.

“When people find themselves suddenly without a job, it is normal for them to seek employment in the same industry,” a PacNet spokesperson said. Many other former PacNet employees went on to work at many other companies, including Deloitte LLP, Wells Fargo & Co. and the Royal Bank of Canada, the spokesperson said. “To suggest that actions of PacNet’s former management team are reflective of all past PacNet employees is false.”

A Growing Industry

EMIs are companies that allow people and businesses to make digital payments without going through the much more heavily-regulated banking system. Led in the UK by major players such as Revolut Ltd., EMIs are "designed to inject much-needed competition and innovation into the financial services industry," according to Jane Jee, a lawyer who focuses on compliance in the sector.

Transactive applied for a UK payments license in 2017, at an auspicious moment for EMIs. Customers were carrying out out more and more transactions online. Cryptocurrency companies were also springing up and looking for regulated firms to process their payments. 

The FCA has doled out more than 200 EMI licenses in recent years. But if the UK — like other countries — hoped for a sector full of disrupting fintech unicorns, it got something else instead, according to Jon Wedge, a lawyer who works in the sector for Berg Kaprow Lewis LLP in London. EMIs often do business with companies that banks tend to avoid such as those from gambling and online gaming, and they are processing volumes of payments that are probably greater than what regulators expected, he said.

The regulator says it considers the “fitness and propriety” of an EMI’s managers, including whether they have been convicted or investigated for criminal activities, according to its 290-page handbook for the sector. Applicants are also supposed to be subject to particular scrutiny if its managers have been part of "any adverse finding or any settlement" in civil proceedings, especially when they relate to financial and payments businesses, fraud or money laundering.

After an EMI has received its UK license, it is free to seek out customers and move payments through the financial system. The FCA is supposed to keep tabs on its operations after that and has broad enforcement powers when it suspects possible wrongdoing, including conducting raids and suspending or revoking licenses.

A spokesperson for the FCA, while declining to comment on Transactive, said the regulator has recently clamped down on payment companies,  approving just 8% of applications in the past year.

"We are taking action to raise standards in the payments and e-money sector," the FCA spokesperson said.

The FCA approved Transactive's license application in 2018. That same year, Transactive received an electronic-money license from Lithuania as well. While London has long been a global hub for financial-technology firms, authorities in Vilnius have fashioned the Baltic city into a post-Brexit payments gateway to the European Union. A spokesperson for the Bank of Lithuania said that during its licensing process, “all the main aspects of the company are assessed.”

Early Investor

A few months after Transactive received its licenses, prosecutors announced that early investor Scott Roix – who owned half of the company – had pled guilty to participating in a $1 billion healthcare fraud. In addition, he and another firm he ran also admitted to selling millions of dollars of weight-loss pills, skin creams and testosterone supplements with “concocted claims of efficacy.” In June, he was sentenced to two years in prison. Zachary Green, one of his attorneys in the case, declined to comment. 

Roix’s business partner and fellow investor in Transactive, David Lukrich, also worked at HealthRight LLC, the firm that was charged as part of the same scheme, filings show. He wasn’t accused of wrongdoing.

The Roix conviction sparked concerns amongst some of Transactive’s partners. Clearbank Ltd., a UK bank, stopped working with the company as a result of the charges, according to people familiar with the situation, who requested anonymity because the details aren’t public. Executives feared that Roix’s investment might have come from the fraud, which compounded existing concerns about its risky business model, they said. Emma Hagan, chief risk and compliance officer at London-based Clearbank, declined to comment on Transactive. 

When Transactive learned Roix was under investigation, the company “took immediate action” and informed its regulators, the spokesperson said in a statement. “Transactive ended Mr. Roix’s investment in Transactive and returned his funds,” he added. “We can unequivocally say that the seed funds used to found Transactive were not from any proceeds or equity generated from Healthright, which was a completely separate business with no overlap with Transactive.” The spokesperson added that “Mr. Roix never had an operational or executive role with Transactive.”

Among the PacNet employees who had taken a job at Transactive were Miles Kelly, a senior anti-money laundering specialist, and Renee Frappier, who worked in marketing and communications. In 2019, US prosecutors in Nevada charged them with fraud and money laundering in relation their work at PacNet. In statements to Bloomberg, both denied any wrongdoing. Frappier said that she no longer worked for Transactive by the time she was charged. Kelly said in a December statement that he remained an active employee. In January, a Transactive spokesperson said that Kelly had recently left the company.

Prosecutors alleged that they held senior roles at PacNet and had helped to process payments that were fraudulent and "designed to mislead victims into falsely believing they had won a prize." The prosecutors cited cases of elderly people suffering from dementia and other conditions who sent off thousands of dollars in checks that were processed by PacNet. 

The charges against Kelly and Frappier remain active and they have yet to lodge a response, according to filings and a spokesperson for the Department of Justice. A PacNet spokesperson said they intend to fight the charges and that the indictment is “factually flawed.” The allegations are focused on a small number of clients who “actively worked to deceive” the company, the spokesperson said.

Kelly and Frappier face more trouble in Vancouver, where the Office of Civil Forfeiture for British Columbia is trying to seize properties they own because they were allegedly bought with the proceeds of PacNet's "unlawful activity," according to legal filings. The agency is also pursuing cash and properties owned by Gordon Day, a former Transactive and PacNet consultant, and his wife Rosanne Day, a PacNet co-founder and shareholder, alleging that the assets were also bought with the proceeds of crime. They have all denied any wrongdoing.

Surging in Lithuania, Quiet in the UK

Payments processed through Transactive have surged in recent years. In 2019, its now-restricted Lithuanian subsidiary initiated only 95 million euros in payments, according to data from the country’s central bank. It started growing quickly in 2020, but in 2021, it took off, moving nearly 9.3 billion euros.It is the second most-active electronic-money institution in Lithuania, accounting for almost 14% of the 107 billion euros of payment transactions initiated during a 12-month period ending in September, the data show. The UK does not publish statistics about the size of individual payment firms.

Although it has held a UK license for almost five years, Transactive is hard to track. On its website and FCA profile, the company says it's based in Pinner, a suburb on the western outskirts of London. The exact address leads to an accounting firm in a converted barn on the corner of a quiet housing estate. A woman who answered the door said that Transactive uses the building as a "registered office" but isn't based there.

A spokesperson for Transactive said that the company has a "small, remote workforce in the London area." The firm moved out of its old offices during the pandemic, he added, and have "near-term plans" to find a new base.

Crypto Clients

Some of the payments fueling its growth have been for firms that do business in the cryptocurrency industry. One is Nexo Inc., a crypto-lending company. Bulgarian authorities raided its Sofia offices earlier this month and charged four people with money laundering and other offenses, allegations that the firm denies and says are “politically motivated." And last month, the US Securities and Exchange Commission fined Nexo $45 million for selling unregistered products to American investors.

Stella Zlatareva, a spokeswoman for Nexo, confirmed the relationship with Transactive, adding that the firm has “historically held a favorable stance towards crypto-native fintech businesses like ours throughout the years.” 

Another client is Migom Bank, a crypto-focused lender based in the Caribbean island nation of Dominica which Transactive promoted on its website as one of its customers until 2022. The firm has been represented in meetings by businessman Mikhail Syroejine.

Originally from Russia but based in the US since the 1990s, Syroejine pleaded guilty to money laundering charges in 1996, according to regulatory filings. He then cooperated with federal prosecutors and testified against a Russian organized crime group in New York in order to stay out of jail, the filings show. Using the name Michael Guss and shares held by his fashion model wife, he then took control of a brokerage in Austin, which went on to charge retail customers “fraudulently excessive” costs in the early 2000s, according to US regulators, who later expelled the firm from the finance industry. 

Thomas Schaetti, the CEO of Migom, told Bloomberg that Syroejine was a large shareholder in the firm and worked as an “advisor” on the relationship with Transactive. Migom “severed” its relationship with Transactive last year, however, and bought out most of Syroejine’s shares several months ago, Schaetti said. Syroejine declined to comment.

Several other Transactive customers have run into legal trouble. One is Viola Money, a UK payments company that the FCA forced into bankruptcy last December after one of its banks closed its accounts due to alleged “financial crime typologies,” according to public filings. Another is Blue Diamond Sports, which operates a foreign-exchange business on the southern side of the Irish border and had its accounts shuttered by Bank of Ireland in 2018 on suspicion of money laundering. The company denied any wrongdoing and sought an injunction in the Irish High Court but the action failed, filings show.The Transactive spokesperson said the company’s clients face “a rigorous onboarding process with continual monitoring” in adherence with the company’s anti-money laundering policies.

The Bank of Lithuania offered a different appraisal in its Jan. 20 statement. Its inspection found “breaches and shortcomings related to the identification of a client representative and beneficial owner, application of money laundering and terrorist financing risk management measures to high-risk clients, monitoring of business relationships and transactions as well as the implementation of international financial sanctions.”The decision means Transactive’s future in Lithuania is unclear for now. The firm’s mission, according to its website, is “Democratising Banking. Empowering You.”

Another message also greeted visitors in the aftermath of the Lithuanian restrictions. For “some customers, the provision of our services is temporarily suspended until further notice.’’