Case against Visa warning to financial services firms over negligence

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  • Financial services firms have come under scrutiny for the way that they are onboarding or signing up new customers considering the Visa scandal
  • Visa demonstrated a failure of KYC processes in signing up a client MindGeek. Both entities have been implicated in cases involving child sexual abuse
  • MindGeek operates popular adult entertainment websites that have come under fire in recent times for posting material depicting acts of child sexual abuse

In a shocking development on the 3rd of August 2022, financial services firm, Visa was fingered in a child pornography suit.

The Washington Post and the BBC reported that Visa, the credit card, and payments platform will remain a defendant in a lawsuit that alleges that the credit card company, Pornhub and other MindGeek-run websites conspired to circulate child sexual abuse material.

According to United States District Judge Cormac Carney, “Visa lent to MindGeek a much-needed tool — its payment network — with the alleged knowledge that there was a wealth of monetized child porn on MindGeek’s websites.” This decision makes it possible for the payments company and its executives to be culpable of and liable for wrongdoing should they be found guilty in the case.

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Visa, for its part, has lodged an application seeking to dismiss the charges. In its defence, the payments platform company said that the people who posted the victims’ underage images and those who distributed and earned money from the material caused the alleged harm and not Visa, the Washington Post reports.

The company went on to argue that it had nothing to do with the operations of the websites run by Mind Geek which include adult entertainment websites where child sexual abuse videos have been featured. Since the news of child sexual abuse broke and the landmark ruling delivered by the California court, Visa has been at pains to distance itself from the lawsuit of which it is now a defendant. The company made a statement to the Washington Post where it condemned sex trafficking, exploitation, and child sexual abuse materials as “repugnant” to its values and purpose as a company.

The statement reads: “This pretrial ruling is disappointing and mischaracterizes Visa’s role and its policies and practices… Visa will not tolerate the use of our network for illegal activity. We continue to believe that Visa is an improper defendant in this case.” The application filed with the California court to be dismissed from the lawsuit on the grounds that Visa was an improper defendant was dismissed by Judge Carney. It is now alleged that Visa helped users on the internet to make money from illegal images.

Judge Carney wrote: “If Visa was aware that there was a substantial amount of child porn on MindGeek’s sites, which the Court must accept as true at this stage of the proceedings, then it was aware that it was processing the monetization of child porn, moving money from advertisers to MindGeek for advertisements playing alongside child porn like Plaintiff’s videos.”

The Judge went on to say that: “When the Court couples MindGeek’s expansive content removal with allegations that former MindGeek employees have reported a general anxiety at the company that Visa might pull the plug, it does not strike the Court as fatally speculative to say that Visa — with knowledge of what was being monetized and authority to withhold the means of monetization — bears direct responsibility (along with MindGeek) for MindGeek’s monetization of child porn, and in turn the monetization of Plaintiff’s videos.” The implications of such a case are gravely profound and far-reaching for financial services companies in general and payments companies specifically. The case has set a very strong precedent that companies may not be able to easily distance themselves from accusations of misconduct by their clients.

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The matter unfolding in the California courts involving Visa in the case of child sexual abuse materials is the stuff of nightmares for any chief executive of a financial services firm be it a bank, asset management firm, pension fund, hedge fund, insurance company and related. There is an important lesson for banks and financial institutions from Africa and the world over from this debacle.

Financial institutions will now face increased litigation risk from the customer relationships they engage in even if they are not culpable or complicit in a crime or misdemeanour engaged by their client or clients. What this means is that financial institutions will go forward need to be more protective of their brands and reputation by being more selective in terms of who they do business with.

The case of Visa’s entanglement in a child sex abuse case with MindGeek demonstrates a very lax client onboarding process where KYC or Know Your Customer principles are concerned. Banks and other financial services executives need to develop a healthy paranoia where their respective brands are concerned. This is especially true where client relationships are concerned. Quality should from now on take greater precedence than quantity. The board of directors at Visa should hold the feet of their entire compliance function to the fire for negligence at best and hapless incompetence at worst. How was it a prudent decision by a reputable payments platform to onboard as a client a company that produces distasteful content that society widely frowns on? What is even worse is that the client has been found to be an enabler of the production of child sexual abuse.

There are fewer grand failures of KYC processes than this.

KYC or Know Your Customer principles refer to the process through which banks and financial institutions verify and credentials of a financial services user. This is important because financial services companies came to the realization years ago that there was a risk to their reputation of allowing all and sundry to access and make use of their services. The KYC is a pragmatic approach to managing the risk that may arise from onboarding undesirable and contentious clients.

It is used to prevent financial crimes like money laundering and terrorist financing. Whenever a prospective client wants to open a bank or securities trading account the laws of the country where they leave mandate the financial institution, they wish to do business with to request information and documents that verify the identity of the prospect, their income, and its source.

The KYC process is regulatory which implies that it is something not to be taken casually or trivially.

The Visa debacle demonstrates the important nature of this process which many financial institutions view as a mere box-ticking exercise. This process is more than that. The KYC process includes among its many benefits the following:

Helping financial institutions, especially those involved in lending to perform risk assessments by identifying the financial history or histories of prospects. A thorough and rigorous KYC process will limit incidents of fraud that occur from identity theft. A strong KYC framework in a financial institution will expose prospective clients that are money laundering, and reputational and litigation risks. In this instance had there been a rigorous KYC framework and a more vigilant compliance function at Visa the risk of onboarding a client with products and services that are widely viewed as antisocial would have been reduced if not mitigated entirely by declining the relationship.

Additionally, a rigorous KYC function in financial institutions has wider national benefits as it provides stability to the financial system and fosters confidence in the financial sector.

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A word of caution from this tale from Visa to African financial institutions which are known to be highly aggressive in the pursuit of growth and underwriting of new business. Quality over quantity is the new conundrum, especially in a world where financial institutions can and will most likely be held responsible for the misconduct of their customers and or clientele even if the financial institutions themselves are not prima-facie culpable in the misconduct of the clients. Visa has since removed its payment platform across the sites operated by MindGeek.

There can be no doubt as to the far-reaching impact of the reputational harm that has been done to the Visa brand and its standing with its other clients, its suppliers, investors, and the broader community.

The financial services industry will in the future start to look like what tobacco companies in the 1980s and 1990s looked like after they realized the growing trend of litigation against themselves by consumers of their products who had either contracted cancer or had lost a relative to cancer. Another example that comes to mind easily is the case of mining companies that released hazardous waste materials into the atmosphere or exposed their employees and communities to hazardous conditions. Companies in both sectors mining and tobacco ended up having to set up litigation reserves in their accounts and provide for these funds with cash flows generated by their operations. The purpose of these litigation reserves would be to settle any cases of litigation brought to them in the future.

This may seem far-fetched in the financial services sector however, prudent companies and executives are implementing this initiative, especially those that realize that they may have onboarded unsavoury clients and expect litigation in the future.

A better strategy or one that is less cost at least will be for financial services firms and fin-techs in Africa to develop a near neurotic obsession with their brands and reputation. This together with the appreciation that not all business is good business should stand these companies in good stead to weather any moral, scandalous, and litigious storms that may arise from having opened the doors to customers whose conduct is slimy to say the least.

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I am a financial services professional with a strong background in diverse areas of banking. My skill set includes among others International Banking, Trade Finance, Commercial Lending, Customer Service, Finance, Banking, Corporate Finance, and Investment Banking. Africa is my home and I am passionate about its development,

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