A US money transfer company that is setting up a Bermuda office has been accused of fraud, creating false accounts and failing to comply with financial regulations, according to media reports.

But the parent company, Block Inc, has disputed the claims and is threatening legal action against the group behind the allegations.

According to Reuters news agency reports, research company Hindenburg claimed it had unearthed evidence of illegal activity after a two-year probe into Block Inc and its subsidiary, Cash App.

The report added: “Block vowed to fight back, saying it would explore legal action against the short seller for its ‘factually inaccurate and misleading report’ that was ‘designed to deceive and confuse investors’.”

The Bermuda arm of Cash App – Cash App World – was granted a licence by the Bermuda Monetary Authority in February, a month before the claims came to light.

Cash App allows users to transfer money, buy stocks and trade bitcoin through a mobile application as an alternative to conventional banking.

The company claims to provide “frictionless” financial services using “magical” financial technology to empower those who do not have a physical bank account.

The company’s popularity surged during the Covid-19 pandemic, and it now claims to have more than 50 million monthly customers in the United States and Britain.

But according to Reuters, an investigation by Hindenburg has unearthed evidence that Cash App had “embraced noncompliance as a tactic to grow its user base“.

A March 23 Reuters report states: “Hindenburg Research on Thursday disclosed short positions in Block Inc (SQ. N) and alleged that the payments firm led by Twitter co-founder Jack Dorsey overstated its user numbers and understated its customer acquisition costs.

“The move is seen as a challenge to Dorsey, who cofounded Block in 2009 in his San Francisco apartment with the goal to shake up the credit card industry, and is the company's largest shareholder with a stake of around 8 per cent.

“The NYU dropout was just until two years ago splitting his time between the payments firm and Twitter, his other venture that went private in 2022 in a $44 billion buyout by Elon Musk that Dorsey supported.”

Reuters reprinted a note published on Hindenburg’s website, which read: “Our two-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping.”

According to Reuters, Hindenburg interviewed former Cash App employees who estimated that as much as 75 per cent of accounts they reviewed were fake, involved in fraud or were additional accounts tied to a single individual.

The story was picked up by US news network CNBC.

A story headlined “Block shares plunge 15 per cent after short seller Hindenburg says Jack Dorsey’s company facilitates fraud” states: “Shares of Jack Dorsey’s Block plunged nearly 15 per cent by Thursday’s close after short seller Hindenburg Research announced that the payment company was its latest short position, alleging that Block allowed criminal activity to operate with lax controls and ‘highly’ inflates Cash App’s transacting user base, a key metric of performance.

“Hindenburg described Block’s internal systems as a ‘Wild West’ approach to compliance.”

CNBC quoted Hindenburg’s report as saying: “In sum, we think Block has misled investors on key metrics, and embraced predatory offerings and compliance worst practices in order to fuel growth and profit from facilitation of fraud against consumers and the government.”

Cash App World placed an advertisement in The Royal Gazette this month seeking an experienced compliance officer or money-laundering reporting officer.

Questioned about the findings, a spokeswoman for the BMA said: “The Bermuda Monetary Authority is prohibited from commenting on licensed registrants or the information requested in accordance with Section 31 of the Bermuda Monetary Authority Act 1969.”

Last night David Burt, the Premier and Minister of Finance, said: “I have full confidence in the BMA’s processes to assess companies that apply for any financial services licence in Bermuda, whether that be insurance, banking, digital assets or investment funds.”

He added: “Over the last three decades, the BMA has proven that its licensing decisions should be respected and not questioned by hostile media/bloggers who do not wish to see the expansion and diversification of Bermuda’s financial services sector.

“I will not comment on reports that may be written overseas. But, I reiterate that I respect the BMA’s record of enforcing global AML/CTF compliance standards and support their independent decision-making when it comes to licensing financial services companies.”

A finance ministry spokeswoman added: “To be clear, the Minister of Finance neither issues nor withdraws licences for financial services companies; that is the sole purview of the BMA.

“The Minister of Finance trusts the BMA to do what the BMA has done for decades — assess the merits of any company that wishes to be licensed while ensuring that companies adhere to the terms of their licence.”