The battle for iSignthis: General missing in action as fintech fights for its reputation

For four years, embattled fintech hotshot John Karantzis was the biggest defender of his once $1 billion ASX company iSignthis.

Through shareholder letters and fiery tweets, the maverick businessman led the company as it sought to repel allegations from the Australian Securities and Investments Commission (ASIC) and market operator the ASX that iSignthis had provided misleading information to the market.

In the minds of iSignthis’ defenders, the company was facing a war, and Karantzis was its major-general.

A lot was at stake. iSignthis had grown large enough to be considered part of the top 300 listed companies, with a suite of products tailored to take advantage of the growing world of online transactions. This included helping groups such as cryptocurrency platforms and gaming websites to process transactions and providing oversight of anti-money laundering controls that would help weed out nefarious transactions.

From left: iSignthis chairman Tim Hart, managing director John Karantzis and iSignthis director Scott Minehane.
From left: iSignthis chairman Tim Hart, managing director John Karantzis and iSignthis director Scott Minehane. Credit:Nine

But come ASIC’s civil trial in the Federal Court against the company and Karantzis this month, for alleged serious and ongoing breaches of their obligation to keep the market informed, Karantzis has, so far, been missing in action – despite the threat of banning orders hanging over his head. He has strenuously denied all allegations in an affidavit to the court, and currently lives in Cyprus, where he still runs a business that was spun out of iSignthis in 2022.

ASIC’s barrister, Michael Borsky, KC, was keen to point that out to the judge hearing the case, Justice Timothy McEvoy.

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“If Mr Karantzis ultimately turns out to give evidence, there’ll be many questions for him to answer under cross-examination,” Borsky said at the start of the trial. “If he does not, the inference will, of course, be available that his evidence could not have assisted his defence, or the companies and your honour will even more readily find that the alleged acts and omissions and alleged breaches of duties and contraventions occurred.”

Hitting the hurdle

ASIC’s opening salvo at Karantzis stood in contrast to the good times at the company. When iSignthis floated on the ASX in March 2015 it had much promise. The company had a strong board that was led by a high-profile and respected chairman in Tim Hart – the then president of the illustrious Australian Club. It also had relationships with big-name financial services groups such as National Australia Bank and Visa.

These larger financial institutions relied on iSignthis’ promise that its products could provide reliable and quick services that help verify customers’ identities that could ensure banks and credit card issuers were not inadvertently processing transactions linked to fraud, scams or other illegal activities such as money laundering. At the same time, iSignthis would provide products and services to online businesses handling large volumes of transactions.

Like many fintech start-ups, iSignthis’ revenue was low for its first few years. The group recorded about $1 million in revenue every six months as it sought to build up its client base.

Then in the first six months of 2018, its revenue suddenly exploded to a bit more than $5 million for the half year, as iSignthis entered into a flurry of contracts, some of which were allegedly backdated so that they fell within that six-month period.

The jump in revenue coincided with a key milestone for iSignthis’ founder, directors and advisers, who had been promised the handsome share bonus potentially worth together hundreds of millions of dollars if they had reached $5 million in revenue by the end of June 2018.

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But in iSignthis’ next six-month report – after the hurdle had been met to win the shares for its executives – its revenue suddenly fell back to $1 million again.

Already eyebrows were raised. ASIC alleges iSignthis was aware of the concern and deliberately misled its shareholders and analysts on a briefing call in August 2018 into believing that the bulk of this revenue – or 85 per cent of it – was recurring revenue rather than one-off payments and therefore reflected true, ongoing, organic growth for the company.

Just the start of iSignthis’ troubles

Soon staff from the ASX and ASIC began asking questions and by October 2019, iSignthis’ shares were suspended from trading, sparking a fight with the company that resulted in iSignthis lodging legal action against the ASX. By 2021, iSignthis would delist from the ASX, decamp to Europe and drop its case against the ASX.

The concerns about iSignthis’ presentation of its revenue was just the start of the company’s problems.

The court heard this month that the ASX and iSignthis’ commercial partner, Visa, would also allege during 2019 and 2020 that some of iSignthis’ new customers that had helped it record the unusually high revenue were associated with alleged scams, unlicensed trading and illegal gambling operations.

Michael Borsky, KC, when he was acting as counsel for Crown during the Victorian royal commission. In the iSignthis case he is acting for ASIC.
Michael Borsky, KC, when he was acting as counsel for Crown during the Victorian royal commission. In the iSignthis case he is acting for ASIC.
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Borsky also told the court that ASIC believes iSignthis broke the law when it failed to disclose in a timely fashion that Visa had terminated its relationship with iSignthis in April 2020, and when it did break the news, it did so in a misleading way on May 24 of that year and continued to do so for much of 2020.

The court heard that Visa first contacted iSignthis on March 6, 2020, to inform iSignthis it was suspending it from being allowed to process Visa transactions.

The Visa letter

Borsky, reading extracts of the letter he said was signed by five Visa executives, told the court the letter contained a list of allegations against iSignthis.

“First, unusual transaction activity … Visa’s financial intelligence and analytics program – FIA program – had identified an unexpectedly high volume of cross-border transactions at iSignthis merchants by United States cardholders. That’s in addition to the FIA program which identified a high number of transactions with merchant category codes, often found to be associated with miscoded and or illegal gambling. Second, there was suspicious merchant activity identified by Visa in relation to iSignthis. And thirdly, Visa had identified that there had been derogatory news regarding iSignthis … which had raised concerns about our iSignthis’ governance and client portfolio.”

Visa was a very important partner for iSignthis.
Visa was a very important partner for iSignthis.Credit:Jessica Shapiro

Borsky told the court Visa referenced a news report, by this masthead, that revealed German regulator BaFin had warned iSignthis’ top customer over unlicensed trading.

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Borsky went on to say that Visa alleged that iSignthis had not co-operated with an “attempted review” by Visa in 2019 following its concerns about its client quality, and had not responded to earlier notices from Visa about worrying transactions being processed by the know-your-customer specialists.

iSignthis responded to the letter offering to provide additional information, which it promptly did. But on April 17, 2020 Visa sent a termination letter that included more allegations, Borsky said.

“Visa explained that a robust and fit for purpose monitoring program would have resulted in investigation of suspicious activities identified by Visa in its review.”

This included, Borsky said: “High merchant payment volume volatility that fluctuated considerably month to month … Inexplicable consumer transaction patterns such as a single cardholder purchasing 52 travel packages, 43 games from a website that had only three games publicly available for free and 30 student travel packages all within one month, and suspicious web traffic patterns from iSignthis to gambling payment pages.”

‘Devastating news’

iSignthis chairman Hart, who gave evidence on behalf of the company during the trial, told the court the company honestly believed Visa was wrong in its decision and its letter included serious errors. He said the company found the allegation it had loose anti-money laundering controls misleading.

Hart agreed under cross-examination that Visa’s termination was “devastating news”, and that his first instinct was to draft a press release to tell shareholders after receiving the termination letter from Visa.

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“After the initial shock, and going by instinct and writing a draft [ASX release] – and again, it says draft all over it, I write lots of emails to myself and next day, thank goodness I didn’t send them to the person, and that was my instinct – when I calmed down, I thought analytically through it,” Hart said.

“I read the letter myself independently. I discussed that letter with Mr Karantzis and the errors were quite apparent and that was a significant component. And the second component was the legal advice.”

Hart also gave evidence that iSignthis believed it had the obligation to inform another regulator, the Central Bank of Cyprus, before it told its shareholders and that iSignthis intended to ask the central bank to use its power to overturn the Visa decision.

But ASIC alleges iSignthis never told the Central Bank of Cyprus of the termination and instead the bank confronted iSignthis about its troubles with Visa nearly a month later, on May 12, 2020, after reading press reports about it.

“I put to you that was completely false, there was no need to wait whatsoever to wait until the CBC was notified,” Borsky shot at Hart.

“I reject that,” Hart responded, adding: “Mr Karantzis [is] managing director, I’m the chairman. It’s quite appropriate for the chairman to ask the managing director to get the advice. He’s a credible person in our organisation, and I’ve subsequently had advice that he was correct.”

Rubbery figures?

Hart and another iSignthis director, Scott Minehane, and the group’s chief financial officer, Liz Warrell, were also adamant that the group’s revenue statements in its quarterly report (known as an appendix 4C) had not been misleading, with Hart and Minehane giving evidence that good analysts would have been using mathematical models that would have been able to detect that iSignthis’ revenue was largely one-off by comparing its cash-flow position to prior quarters.

“If you were [an analyst] developing models, you would have seen a significant increase in the cost part of your model, and therefore you would have seen that there was a lower margin,” Minehane told the court.

Borsky, however, attacked Minehane, alleging that this was the first time that he had ever made such a claim and did not include the evidence in his affidavit.

“Your answers in relation to the $2.656 million in the appendix 4C are strikingly similar to evidence Mr Hart gave on Friday. Are you aware of that, Mr Minehane?”

Minehane told the court he was unaware his answer was similar to that of his co-director.

It was a colourful joust between ASIC’s counsel and iSignthis’ witness, but it is still unclear how McEvoy will rule on the matter as the trial continues. Not only will the judge have to decide whether a long list of allegations made by ASIC are true, he will also have to decide whether it had any impact given the group’s shares were suspended during much of the alleged contraventions.

And for iSignthis – despite the valiant efforts of Hart, Minehane and Warrell to defend the company – it too will be unsure whether its defences were better off without their chief defender or with him.

But there is still a chance Karantzis could come to the group’s defence in the witness box. On Thursday afternoon, after a nine-day hiatus from social media posting, he tweeted to cheer on the company in its response to the allegations

The case continues.

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