PAYEAE: MATE KS FROM REGULATORY ENFORCEMENT ACTION 6. 10. aL. Payzafe Group PLC’s (“Paysafe”)! largect customer, who we believe to be bet265, may represent an estimated '~50%+ of Paysafe earnings and is operating a business that appears to facilitate and engage in illegal gambling, (page 3) Paysafe appears to be enabling both illegal gambling and Chinese capital control evasion through undisclosed related parties run by recent former executives. (page 11) We present evidence that Paysafe's Asian e-wallet operation, Quick Access, continued to run for “3.5 vears after Paysafe claimed to shut it down due to regulatory concerns. In our opinion, this looks like evidence of facilitating illegal gambling and Chinese capital control evasion. (page 12) Recent Chinese court cases may link a recent former Paysafe executive, alleged undisclosed related party Partner Delight, bet365, and by implication, Paysafe itself, together in an illegal gambling ring in China. (page 19) Now a different former Paysafe executive has created a new operation, Hamber Services, to apparently continue to operate the allegedly illegal Asian Gateway business from a new jurisdiction. (page 27) Aside from the one very large China focused customer, Paysafe appears to use the same approach with other customers operating illegal gambling enterprises in China and in other geographies where gambling may be considered illegal, such as India. (page 32) Paysafe appears to have employed a similar approach in the United States after a crackdown on illegal online gambling in that market. In 2007, Paysafe was embroiled in an illegal gambling and money laundering scandal in the US, the stock fell “93%, executives were sent to prison, and the company paid huge fines.(page 35) China is now engaged in a high profile crack down on illegal gambling, including making arrests of employees from mult ioc engoged in catering towarde Chinese gambling customers, (page 4) We believe that Paysafe may be violating laws in numerous jurisdictions, ineluding both China (Artiele 303 to the Criminal Law of the PRC) and the UK (The Proceeds of Crime Act). Paysafe is headquartered and listed in the UK and may face risk of criminal prosecution and sanctions by the FCA, while the Chinese business (an estimated 50%+ of earnings) may be at risk of being shut down by Chinese authorities. (page 43) Separately, the remainder of earnings in the Paysafe voucher card business is also at risk from new EU anti-money laundering regulations that are likely to come in force in 2017 and may effectively eliminate anonymous payments, which we believe to be the core value proposition of this voucher card business in our view. (page 46) We believe that many other red flags exist, Including potentially aggressive accounting that obfuscates the ‘true earnings power and free cash flow generation potential. (page 48) * Disclaimer: You should assume that as of the publication date of any presentation, report or letter, we (possibly along with or through our members, partners, afilates, employees, and/or consultants) have a short position in any stock (and/or are long puts/short call options of the stock) covered herein, including without limitation Paysafe Group Plc ("PAYS"), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report of letter, we intend to continue transacting in the securities covered therein, and we may be long. short, of neutral at any time hereafter regardless of our initial recommendation,PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Pe oes US. CHARGES TWO FOUNDERS OF PAYMENT SERVICES COMPANY WITH LAUNDERING BILLIONS OF DOT LARS OF INTERNET GAMRI ING PROCEEDS lontai “crinines erterprisa| In our view, given its 2007 scandal involving charges by DOL, Paysafe likely knows that its activity in China would be considered illegal. As US prosecutors reprimanded, “blatant violations” of the law are not mere risks to be ‘disclosed to prospective investors.” Our conclusion: We believe that there are material risks from potential regulatory enforcement action and numerous other red flags that make Paysafe uninvestable. PAYSAFE SHARES RISE ~1.400%+ SINCE 2011 DUE TO “ASIAN GATEWAY” REVENUE ans aia “ Paysafesrowsits, ‘China launches a = sores || Seweose Msnmare |[rcwrium, |) Secctoo”™ || nea 0 amin act | ereainwece. || semana || Ronn femestcatore | acdosnesin || 226uTMG272—. || pets aamcamg —] | Saree. Serre t Sonn “ WeEAPesetinne | | verges || vase = ‘aan 20 | Binreerenteo S Carer ritagt a tons ane 9 ‘Socengctsienin 4 m= tpg pet maser "2006.2008 Paysafeshut reenene eeanaeees —a 0 eaten wore {falls “93% peak to trough conaen ae meta . oor ZEERSESSESESEREERRERESRZTRRRRAIES ELL EES PESEESTEISSECESESCESESTESEETEESELEES Source: Spotlight Research Illustrative GraphicPAYEAE: MATENAL RK FROM REGULATORY ENFORCEMENT ACTION 1. Paysafe’s largest customer, who we believe to be bet365, may represent an estimated ~50%+ of Paysafe earnings and is operating a business that appears to facilitate and engage in illegal gambling. We believe that Paysafe’s largest customer is @ gambling website called bet365. Paysafe does not disclose that bet365 is their largest customer in company filings or on earnings calls, but multiple checks with analysts who follow the stock and other industry experts confirm that bet365 is most likely the unnamed large customer referenced in Paysafe filings. ‘Bet365 is a UK-based, Gibraltar-registered gambling company offering online sports betting, poker, casino games, and bingo as well as video streams of sporting events. Paysafe discloses that their largest customer represented 20% of 1H 2016 foo revenues, 23% of foo revenuss in FY2015, and 37% of fee revenues in £Y2014, Furthermore, Paysafe indicates in its filings that “the majority of this revenue comes from Asia.” [Major merchants The Group has one merchant who represented 239 of total fee revenue forthe year ended 31 December 2015 (2014: 36.7%) across al [enortable segments and geographies. The majoityof ths revenue comes rom Ada Source: Paysafe 2015 Annual Report We believe that bet365 may be running a gambling website catering to Chinese customers. This activity would fi sidered illegal Id potentiall ital contr ‘+ Alarge percentage of bet365's revenue is generated in China, where gambling is explicitly illegal according to Article 303 to the Criminal Law of the PRC. + Some of bet365's websites appear designed for Chinese players, and the casino games appear to be changed according to Chinese players’ preferences. ‘© The Guardian ran an expose on bet365's exposure to China in October 2014. Revealed: how bet365 profits from (Chinese punters who risk jail for gambling online Bookmaker Totates website addresses to keep ahead of authorities. say Jemployee Source: https://www.theguardian.com/society/2014/oct/03/bet365-prot cchina-online-gamblin ‘= Allegations from the Guardian include: © Chinese citizens have heen jailed for interacting with online hetting firms, including het365, (© Bet365 frequently changes its website addresses in China to side-step attempts by local regulators to close it down (© Bet365 created a large call center in Stoke staffed by Chinese-speaking workersPAYEAE: MATENAL RK FROM REGULATORY ENFORCEMENT ACTION © Bet365 constructed a complex payments system that allows it to take bets placed using RMB (much more on this later) (© Only half of the £2.3 billion the company won from gamblers in 2013 came from countries where bet365 possessed a license to operate ‘© One version of the bet365's Chinese language website says there are no payment options for China, but oddly the wehsite isin Chinese Relaw we see payment options for Allania (only Neteller or wire transfer) written in Chinese, but mysteriously no payment options for China. Note that Neteller is one of Paysate’s two key online payment e-wallet brands along with the more recently acquired ski eer ue a Source: https://help.bet365.com/zh-CHT/payments ‘© Another version of the website explains how to pay in Chinese: Source: bet365PAYEAE: MATE KS FROM REGULATORY ENFORCEMENT ACTION + We note that bet365’s UK publicly listed online gambling rivals (William lil, Ladbrokes, Paddy Power Betfair), which face stricter zerutiny due to their higher public profile have pulled out of the Chinese market and do not accept Chinese bets. We believe that this withdrawal has left a vacuum for bet365 to fill over the last several years. ‘© William Hill pulled out of China, Hong Kong, Macau, and Taiwan in 2013, ing “regulatory reacons.” Wiliam Hill pulls out of China with immediate ettect 21 August 2013 alm Hill wil stop taking bes trom China Yor regulatory reasons” the bookmaker informed ite afiatesthic wook The operator added tari ‘would alo no lenger be teking bets from online gamblers bazed in Macau, Hong Kong and Taiwan, The gaming operator zentaflltssthe following mezsage on Monday: We Fegretio norm you that witam Hl has taken a decision vo witiraw allof ts online beting and gaming services for all residents of China for able future. We the fore coral apologie for any incenvaniance this ngs Les hen Fu rel reasons beyond our “We wal be suspending all accounts of ll resident of Chine from midday Monday 19th August, 2013. After this date, bettors wall nor beable to use teir accounts to access our nine sportsbook or gaming rooms. Bettors wil be able to check thair accounts and withdraw any outstanding balance at ary time, unless we notify you otherwise in futur, by logging i, selecting My Account’ and then Withdraw to request a return oftheir outstanding ‘Source: http://www.igamingbusiness.com/news/william-hill-pulls-out-china-immediate-effect ‘+ Betfair announced that the company was pulling out of unregulated markets in 2012 including “come Asian countries.” UPDATE 2-New Betfair CEO retreats from unregulated markets ‘Source: http://www.reuters.com/article/betfair-results-IGUSL5E8ND1BF20121213 © While bet365 is private, we found financials for the company available on Companies House in the UK, which support the view that a Paysafe/bet365 partnership may have prospered as the publicly listed gambling plavers have pulled back from erev and black markets, © For simplicity, the below table does not even deduct brick and mortar retail revenues/EBIT from total company results. Brick and mortar retail represents a significant portion of William Hill and Ladbrokes business, and thus bet365’s dominance of the online betting market may be even more ‘exaggerated than the below table suggests.PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION eT + Thepointis cle come to dominate the indu: more than 70% in FY201: with the benefit of being less scrutinized a3 a private company, bet365 hes wing from reprezenting lezs than 2% of “Big 4” EBIT in 2007 to | | f ue TY ey SSE iaso apr sano. Gn? Wms WaT ULI Mae Mame Serge um mm tN mm Bm Te MO BO Te Ow Porte emus Sted Ses ios aus Game sane dene Since Seed) c257 SMa Sm mo 2 noe MON er ew ee JEW sesarinue Tay nas a Ha ok fettevree Hs, ee ot Sao Sa Gas bo ae as Citroen ae pee pee peep een ge evre me sar oe. tone. ie? aloe Moran SN A Bw Bw BON no ioe a leas Ta Am A Ao) Sa AE eter ie ise ion sor wet ime iin? Line: is or ‘to ‘mes ‘ue? med wy ano imo ts? mo oye Sm ae an ow se ae aw am am rawr Tas Waa Gee Gee oo oe Re Ne Ey econies 2) ee eee (1) Not that Betfair andPaddyPower merged on? 2 16. torial reals re for sandlone companies ‘Source: Companles House annua igs for bet. Pubic nanca ing for Ladbrkes, Wiliam il, Beta Grup, and PadyPower + Paysafe appears to have been a direct beneficiary of bet365's unfettered growth. Since 2010, Paysafe’s “major merchant Asia Gateway” (Ie, bet365 in our view) has skyrocketed, growing revenues 1,578% from 2010 to 1Hi6.PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION 20,202 23 aus as} C Tap ESOT ca Ta RET ROT ‘senangeror bie mE 8 ‘of Payment Processing Revenue an BK Bm SON ‘of Tota Revenue EN DK BI AIK Papa's Total Revenue (3) [asa @2 as mo mi m4 20 cue ou? ‘senonge ror Pave’ Damon roecing Rover (A) Paya “este earnings) mms mss 1 98 as 4935S ames bots Amune Wager (2 (2) GOR sak 1pm 24mM7 MORO ASIKT ANS IMRT ATLA MASS aOR ‘Kohonge Yor ON TK OOK EM SOK GIN IN SOK MOK EK Lay mops ayat “sgusteo" earings memeddogy Depaning int (2) Note that bet has operations in numerous jurisdictions nding legitimate markets ke the UX. Wa bln tht Payee rimalycndeot hat payment lume in ean mart ie China which cent wth Payee pul ace ht owe lune i. eat ab bap xo SF mde al ame! ANY =e (enteral rnin 8 dee nde dm lene i are Poe Tings BE ngs Sptigh Reso eae Source: Paysafe flings, bet365 Companies House filings © Bot365 is the 13” largest source of traffic to nateller.com, which wat Paysafe’s only key e-wallet platform prior to the acquisition of Skill in 2015. Bet365 appears to be a larger source of traffic to neteller.com than any other gambling website: ao om me ere eo ca eerree rare sew sexmstneoert tim 82 xe Aran tes aa 20 J etme cin vos mer ans Teac eee. 88S om am 8 an oom ome am 1ora than half af Paysafe’s overall earnings: © Asmentioned previously, Major Merchant Asian Gateway (“MMAG”), who we believe to be bet365, represents 20% of 1H 2016 fee revenue and represented 23% of 2015 fee revenue: Fy2014 FY2016 Hi 4G Tolal Fee Revenue 3643 0108 480.7, % from MMAG. 96.7% 23.0% 20.0% ‘Source: Paysafe financials, Spotight Research analysis in yellow ‘+ We think that margins at MMAG are significantly higher than overall margins, ‘+ Attheir 2015 Capital Markets Day, Paysafe disclosed that a “Gambling & Entertainment” customer (who we believe to be bet265) generated an estimated $1.937 billion in 2015 transaction volumes:PAYEAE: MATENAL RK FROM REGULATORY ENFORCEMENT ACTION Focused on profitable customer industries Top 10 Merchants Top 10 Industries ‘ encanta sm ee Source: Paysafe (Capital Markets Day slide #49) ‘© Using the above chart to infer total transaction volumes, we arrive at $13.9 billion ($4,711/0.34) © Actual 2015 Payment Processing division transaction volumes were $17.1 billion, but, pro forma for the Skrill acquisition, which is not included in the figures in the slide above © This implies that the take rate on PAYS's bet365 processing business is 7.3%, oF 3.7 higher than the take rate for their other processing customers on average. Furthermore, if Paysafe is earning a 7.3% take rate on nearly $2 billion in gambling volume then that should signal the hij revenue stream. (© Asa historical reference, as we will discuss in Section 7 of this report, in the instance of Redfall, a payment processor linked to former Paysafe executives, US prosecutors alleged in risk nature of 2012 that “Poker Companies relied on hi ited third nt processors who lied” about “the true nature of the financial transactions they were processing.” MMAG ‘Others Difference 2075 voume 1.9970) 2015 Revenue 2 Implied Take Rate 13% 2.0% “x ‘Source: Paysafe financials, Spotight Research analysis in yellow ‘© Payment Processing divisional COGS were $237MM in 2015, implying COGS/volume of 1.4%. rs ‘Volume 47,1000 cos 2365 cocsivolume aes RevenueNolume Gross Profitvolume Source: Paysafe financials, Spotlight Research analysis in yellow © Irprovessing Lusts for MMAG were equivalent lw the processing Lusts fur ullier Paysafe Lustumiers, ‘on average, then gross margins on the Paysafe business would be an incredible 81%. Even if we assume that MMAG processing costs are 3.0% (~2x above the group average), gross margins would still be 589% and more than 2x the level of non-bet365 customers. 3 httpsi//werw justice.gov/archive/usao/nys/pressreleases/February12/lang/langryaninformation.pdfPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Implied Take Rate 7.3% 2.0% 7.3% 2.0% cOGSiolume Gross Profitvolume Gross Profit % Gross Margin ‘Source: Paysafe financials, Spotight Research analysis in yellow ‘* Paysafe admits that the shift away from their lergest merchant is having a significant impact on {gross mergi © “Reported divisional gross margins were 36.9% in FY 2015 (2014: 40.9%), reflecting the ‘reducing proportion of revenue from our largest merchant and the increased impact of our 2014 US acquisitions.”* ‘© If we use the above statement and assume no impact on margins from US acquisitions (or that US /¢ non-bet365 business, which ie very contorvative tince Paysafe ays US acquisitions aro margin dilutive), this implios that MMAG, which ‘we believe to be bet365, gross margins are 58.6%, in-line with our estimate above acquicitione carry equivalent groce margine to Pays 2014 2015 Payment Processing Revenue 2147 375.1 Payment Processing Gross Profit 112.5 138.5 Groce Margin 10.0% 36.0% Revenue Mix: MMAG All Others ‘% Revenue Mix: MMAG 48.7% 37.4% All Others 51.3% 62.6% Source: Paysafe financials, Spotlight Research analysis in yellow hetps://www.paysafe.com/fileadmin/pdt/16 03 16 PAYS £¥2015 TINALpdtPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION + Based on these assumptions, we calculate thet bet365 likely represents at least ~50% of total ‘company carnings for 2016 (and likely represented ~69% of total company earnings in 2015) ni Fen Fam ERT tad a7 Ta 7 — Assn ft revernies nH 6 compari Ht 16 etmated roe hergin ow endo pretate margn range fr concerti rons Prot 47272905 2065166 Conmenous ee IOC twa, MAS a sort tat ‘gues rom M08 2108 21H ZT peratna Bxenses 1054 1653 1914NNSOB—_Diflerence between Gross Prot nd A. EBT eget ERT Zan m7 92 onan Come be FIRE teh fom BRIAG rgd Som 1055% 610% 42H LON ‘Pape rates Ta 681 eT OLS 96 Comam RAFrIOE, ‘ofwmen: Yom NS 138 "Yea "wr UIA MG Ag EB axa at DW ate |ngied % tom MEG - 1085% 6996500 SAH TaxRate 50% 84% 1% 11% UES 16taxrate n1O 16 Jal, Spotlight Research arvalysis it yellow We are aware that this math implies that prior to 2015, the bet365 relationship may have represented 100% or more of Paysafe earnings. We believe that this is precisely the case. Note that the MMAG revenue needed to grow to nearly $60 million in 2012 before Paysafe even broke even on its generous “adjusted” earnings metric. Paysafe was earnings negative from 2007-2011, pafe’s Asi sway Revenue'” Versus “Adjusted” Eat 250.0 200.0 = 150.0 100.0 soo } oo | 50.0 -100.0 -1s00 200.0 -250.0 ' Paysafe’s “major merchant Asian Gateway" revenue ($MM) (1) aysate “adjusted” earnings (2) (1) We believe "major merchant Asian Gateway" to be bet365, (2) Appt ‘Source: Paysafe financial filings Paycate's earings "adjustments" ta Paycafe earings heginning in 2012PAYEAE: MATENAL RK FROM REGULATORY ENFORCEMENT ACTION ‘+ Note that Paysofe’s “adjusted” carnings metric and poor free cash flow conversion will be discussed in detail in Scetion 11 of this report. ‘© In August 2015, Paysafe acquired Skrill for $1.2 billion, (© For 2016E, we estimate $93.4 million of EBITDA, $65.4 million of EBIT and $58.1 million of. ‘earnings for Skrill, which includes both the Skrille-wallet solution and paysafecard pre-paid voucher business. Paysafe’s Large Revenue Streams May be at Risk sm om ‘Skit cu os ou amo a ime ‘asian GatewaY" revenue appears to epresent majoritvof profits Neteller used in conlunction with 1-p2ycom in hina. Shr utilized by dafabet.com (China) and bet36s flea) New anti money launderingn Furope puts more than SOR of revenue from payrafecard business at taker disappeasing Source: Paysafe 2015 lnvestor Day Presentation, Spotlight Research analysis, ‘© Atthe time of acquisition, 56% of Skrill revenue was derived from the paysafecard pre-paid voucher in Section 10 of our report, we see more than 50% downside to paysafecard revenues in the event that the Fourth and Fifth Anti Money Laundering Directive are fully implemented in 2017 since anonymous payments will likely be banned. ‘+ As we will document in Section 6 of our report, we believe that Skrill’s eWallet revenues are also at risk, We have uncovered instances of Skrill e-wallet being utilized a payment form in other high risk countries whore gambling is likly considered illogal(o.g. India) and also as a paymant mochanism for other online gambling merchants in China (e.g. dafabet.com) where online gambling is explicitly illegal Paysafe appears to be enabling both illegal gambling and Chinese capital control evasion through undisclosed related parties run by recent former executives Bct365 and Paysafe appear to have significant operations targcting the illegal Chinese market, but both claim to not technically be operating in the country. ‘Neither bet365 nor Paysafe have a physical presence in China (no on-the-books employees, no servers, etc.) but claim to access the country through offshore servers and other infrastructure. + Paysafe claims to circumvent this restriction by using a white label payment gateway operated by a third party that facilitates the transfer of funde from China to offshore accounts and that gets around the laws that ban money laundering and illegal gambling, © Paysafe discloses that it relies on an “outsourced service provider” that they use in relation to their “largest merchant... in relation to its activities in China.” uwPAYEAE: MATENAL RK FROM REGULATORY ENFORCEMENT ACTION 3. Outsourcing risk e orton ti Framplor of mitgting tation nade change nto oti ‘The Group rie on the services of anouteauicedeanice aides ‘Bulding and maintaining 3 close rlationchip wth eo re ousourced service provider may be adversely Source: Paysafe 2015 Annual Report ‘We think that this third-party “outsourced service provider” that appears to enable illegal gambling and Chinese foreign exchange controls in China may actually be an undisclosed related party of Paysafe and therefore Paysafe may be (1) Involved in illegal gambling and foreign exchange control evasion in China and (2) this possible illegal gambling and forcign exchange control evasion may represent half or more of Paysafe ca 6s. 3. We present evidence that Paysafe’s Asian e-wallet operation, Quick Access, continued to run years after Paysafe claimed to shut it down due to regulatory concerns. In our opinion, this looks like evidence of facilitating illegal gambling and Chinese capital control evasion. ‘* Paysafe previously owned a Macau-based company called Quick Access International Company that acted as a third-party gateway service vendor © Quick Access was acquired in 2005 for $12.5MM_ (© Quick Access’s main product was a digital wallet called 1-Pay, or 1-pay.com, which appeared to allow Chinese gamblers to (1) gamble online with merchants such as bet365 and (2) transfer money offshore in large quantities, an activity which is likely in violation of Chinese capital control regulations. (© Commenting on its acquisition of Quick Access, Paysafe executive Gord Herman said, “Quick ‘Access will provide our merchants robust access to the Chinese payment network, a service currently unmatched by our competitors.” (© Paysafe’s 2005 and 2006 annual report describes the Quick Access 1-Pay platform as being specifically targeted towards the Chinese market. ‘ick Reza, & Macaviosed Gobt cad payment || expand thei fengs i this region processing company, was acquired in January 2008 fr 18 conseraton o $12.9 mon. Tas Sag of NETELLER's yment services to China. This represets one ot several inbatves that NETELLER expects to come sequstontactates th eos SELOEIETENEES wants myrod ore @Paycafe claims ta have chut dawn Quick Access in 2010 due to the “impact af changed regulatory environments in... certain Asian markets.” S http://www.iomtoday.co.im/news/business/neteller-profits-up-20-fold-1-1756258 2PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION ‘Source: Paysafe 2010 and 2011 Annual Reports ing Alphasense.com, we scanned Paysafe’s publicly disclosed documents and it appears that: (© The last time Paysafe mentioned “Asian eWallet” was the 2011 Annual Report (referenced above) when the company said it shut down the business in Qi 2010. (© Inthe 2011 Annual Report, Paysafe wrote down its intercompany Balance in Quick Access to ©, The zeroing of this balance appears to be the last reference to Quick Access in Paysafe © unl 23, INTERCOMPANY BALANCES Source: Paysafe 2011 Annual Report (© The last time Paysafe mentioned “1-Pay” in their disclosed materials appears to be April 6, 2010. PROCESSED | sowareauar— OAR I | ee Tromson | Bx 2533S REUTERS. Source: Paysafe annual report ‘= Inthe Annual Report, Paysafe says it will migrate from an e-wallet solution in Asia to an “outsourced ‘STP model.” But was the business truly outsourced? S350) 5 Ye ee 13PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION eed Source: Archived web image of 1-pay logo ‘+ While Payzafe claims to have shutdown Quick Access and 1 pay in 2010, web traffic to 1 pay.com did not stop until early 2015, suggesting that the website and service continued to operate for vyeare even though Paysafe claimed they chut down their Asian eWallet business in Q1 2010. © Internet traffic data from Similar Web shows that the 1-pay website and service were in operation well into 2015 with a heavy amount of internet traffic from China and Taiwan. coy @ rear ery ome ma maoren a Web (© The largest unpaid, indirect internet traffic source to 1-pay.com was Paysafe’s Neteller, and ‘many of the top traffic sources were gambling websites that should be illegal to access for Chinese citizens Tatas @ 0 swam @ emo _ sae oienersecon a on > mee so ome common ort Dein nd eye Broo snc se opee F vhseacon wot a Oteepcionae ae onto < Opicanans es < Owen sent in 12 Yates severe 2 MBvexsracnte rat ae 1 pinta 2 srt 1S Mirwmenacenecon tnd tino Source: Similar Web © Neteller.com was easily the largest source of referral traffic to 1-pay.comPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION ea carne ae Baoan ane at 4 exresancon vanes and noir» Buss Serene naw on F sosnooatcom ioc saa Omapaciecen centirg Ontecnnsem viuattn Mdeesrscomne nine on pana os ed — bese ‘Source: Similar Web * Wernext examined the internet archive of 1-pay.com, which confirmed the above internet traffic pattern, Based on our review of the internet archive, we believe that 1-pay.com was not shut down until the end of 2014. (© Furthermore, t-pay.com does not simply appear to be a method to transfer money into an illegal online gambling merchant account. Rather, it also appears to be a full blown money transfer Asian e-wallet tool capable of transferring large amounts of Chinese RMB into EUR, GBP, CAD, and USD. (i., the tool appears to allow for the evasion of Chinese capi regulations). Original Web Archive of 1-Pay.com dated August 26, 2012 (2.5 years after Paysafe claimed they shut down thelr Chinese e-wallet business In thelr Annual Report): Deen Peete feet) pee trig errr ig Oa AR A Rees a Source: https://web.archive.org/web/20120876010609/http://www.1-pay.com/services/accounts/ 15PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION 1 Pay.com Translated to Englizh from Chinese: Peoteatea) Peete peated Presta Express account verification fully verified accounts ceed cor cor oor co Peed Se a eae ere cert Reta een ree Ceeeeaie i cd pores Source: web.archive.org website for 1-pay.com © The 1-pay.com website says it all. With a “basic account,” customers can deposit up to ¥25,000, or $9,900 USD at the August 2012 ¥/$ exchange rate. Source: web.archivesory website for -pay.com ‘© Basic Accounts do not appear to be fully verified, which may violate customer verification ("Know Your Customer”, or “KYC"). Under the free account registration page, the 1 pay website saya that the company “reserves the right to request the user cubmit @ zeanned copy of the ID card fer reference purposes.”° This dost not sound like a strict requirement to us. + Furthermore, if “Bas limit is lower for “Basic” accounts versus “Fully Verified” accounts and (2) why 1-pay.com makes the distinction at all between “Fully Verified” and “Basic” accounts, which seems to imply that the latter is not “fully verified.” © With a “fully verified account,” Neteller 1-Pay members can transfer up to ¥500,000, or $78,000 USD per month © Chinese foreign exchange rules cap the annual maximum amount of yuan that Chinese nationals can convert ta other cuireancias at “$50,000 USD aach yaar and ractrict tham from transfarring yiian abroad directly without prior approval of the State Administration of Foreign Exchange.” © Therefore, it appears that “fully verified” accounts may enable users to violate the Chinese foreign exchange rules cap. Accounte were truly “fully verified,” we wonder why (1) the available trading * htps://web.archive.ora/web/20121025053500/https://waww.1-pay.com/resister/ (Translated into English from Chinese) 7 tp: /ferwer state gov/iinl/lsfoncept/201G/0l2/253091 htm 16PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Spotlight Re: ‘+ Interestingly, the only two country options provided on the 1 pay.com registration page are China ‘ond Taiwan, Source: ‘© Neteller 1-Pay appears to have continued to fully operate for three and a half years after Paysafe had said it was shutting down its Asian eWallet. It was not until August 2014 when the 1-pay.com website announced it would be gradually shutting down, with a full shut down date of November 3, 2014, Source: + “Smurfing,” oF breaking foreign currency transactions down ‘enormous problem in Chi nto sill sizes, has bevor Bloomberg highlights that “smurfing” is the same method that terrorists and drug smugglers move cash around to avoid official scrutiny.” ‘+ We will discuss specific laws and regulations in more detail in Section 9 of this report, but it is worth highlighting now if Paysafe failed to implement robust KYC processes on this Chinese e-money transfer service then it appears to be a violation of the UK Money Laundering Regulations of 2007.” Paysafe's own prospectus highlights that the company must apply KYC procedures due to the money laundering regulation. * hxaps://www.bloomberg,com/news/articles/2015-11-02/china-s-smurfs-beat-cash-controls-sending-real-estate- soaring * huep//ew legislation. gov.uh/uksi/2007/2157 regulation/10/made v7PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION The Paysafe Group must comply withimoney faundering regulation in the UK, the iste of Man, the US and elsewhere and any failure to do so could result in severe financial and Joga! penalties The Paysafe Group operates in an industry subject to money laundering regulations. These regulations prohibit, amongst other things, the Paysafe Group's involvement in transferring the proceeds of criminal activities. to_put wentative measures _in_place and to “know their customers” including conducting customer ideniification_and_verficalion_and_underating ongong montorng. In addiion, regulations require anpenies 1 hoop teesde ol Motliy and bal Tesi sta om the requirements of the relevant money laundering regulations. Al present, in the UK a senior member of staff naeds to be appointed and approved by the FCA to oversee appropriate policies and procedures. Source: httos://www.pavsafe.com/fileadmin/pdf/Prospectus 181215.pdf Paysafe’s prospectus further claims that Payzafe maintains an “outsourced zervice provider” to ‘enable it to provide cervice to its “Largest Merchant” (who we believe to be bet265) that did not have a “contractual relationship” with the “Largest Merchant.” in relation to Hs Asia Gateway service, the Paysate Group has engaged an outsourced service provider to enable it to provide the service to its merchants. The qutsourced service orovider does, pot have a _coniractual relationship with any of the Paysafe Group's merchanis including the Largest Marchant, The cutsourced service provider uses a network of maney changers in arder tn remit settlement funds to the Paysafe Group. Neither the Paysafe Group nor any of its merchants, including the Largest Merchant has a direct contractual relationship with these money changers. Source: https://www.paysafe,com/fileadmin/pdf/Prospectus 181215.pdf + Our review of Chinese discussion boards suggests thet the two companies may have had some sort Chine. customer documented receiving a targeted bet365 email with a 1- Pay.com promotional offer: Original Wanbet Post from 04/07/2010 Th Rat sora men TEE wBDETOeSAEEARHBL PAY ETS T AAEM PAYNE SLA, MONZA, BET SOSA MRRE® HRM AEMURBE TSS TIT, MMORMMEET SZ) Source: https://www.mywenbo.com/thread 2466511 htm! Highlight from Above Wanbet Post Translated to English DCTI65 believe it is belicved that 1 PAY! JBET36S an email today saying with 1-PAY Deposit Get 159% bonus , there is cooperation between them ‘© Chinese customers express difficulty registering payments potentially given the KYC authentication processes required with bank wire transfers. Another user recommends -pay.com or skril.com, According to this user, the skrill.com or 1-pay.com user verification make the bet365 verification process less restrictive.PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Original £168.com Post from 11/02/2014 [eT aSaTanT A Source: http://www.8168.com/thread-598-1-1.html Highlight from 8168.com Post Translated to English or China. @._ Recent Chinese court cases may link a recent former Paysafe executive, possible undisclosed related party Partner Delight. bet365. and by implication. Paysate itself. together in an illegal gambling ring in ick Access was shut down by Paysafe, how did the company continue to operate I-pay.com? Publicly available evidence appears to suggest that right after the shutdown of Quick Access, anew gateway service vendor was also set up in Macau likely by a former executive of Paysate. While not disclosed anywhere by Paysate, we believe that this company is called Partner Delight Company Limited (PDCL). ‘We believe that POCL may have been run by Joyce Wong, former Paysafe Director of Asian Operations, who formerly ran Quick Access for Paysafe. Ms. Wong was important enough to Paysafe to be pictured in the 2005 Annual Report. She 100k over direct management of the Company's Asian operations In 2007 upon the ident of Asian Pacific Op Source: Paysafe 2015 Annual Report 19PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION erelter Puc 3 April 2007 NETELLER Announcer Directorate Change Tuesday, 3 april 2007 ~The NETELLER Plc Group (‘WETELLER” or the “oroup") (LSE: NWR), the Leading global independent online money transfer business, today announced that, with effect from 2 April 2007, Dale Johnson retired from his position os on executive director of the Company end became © non-executive Girector. ine board wisnes to thank vale Tor nis signiticant contribution as both an executive director of the Conoany and most recently as President of the ‘= Expired job postings for Partner Delight provide a business description that sounds very similar to Quick Access’s prior business model Partner Delight International Limtied — Analyst Provides online payment eolution business to global customers including eoftware development and aftersales services, Source: htto://www.macauhr.com/iobad/20921 ‘Quick Access Intemational Company Limited online Peyment Solution” P°OVIGES online payment processing of debi, creat, a ‘and propaid earde and o commeree eoltione. Tho company also offers Intemet Service Providers (ISP) ‘services including SK dial up, broadband, facility ‘management, Web and database hosting, web_ design, system integration, e-business consultanc) anddomain name reaistration cess Intemational is based in Macau, China. As of (03/03/2005, Quick Access Intemational Company Limited is a subsidiary of NETeler Pe ‘© PCDL was establiched around the came time that Quick Access wat allegedly diseolved in 2010: English name Partner Delight Company Limited Company Number 1400519 [Date of eatabliahmentAvgust 9 2010 Source: htto://vww.hongkonedir.hk/partner-delight-companv-limited-bffebie/PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION PCDL’s email domain name (email pd.com) was registered in August 2010: Important Dates ‘Source: https://who.s/whols/emall-pd.com “Joye” linked Macau oe ner Delight Company limited Cees TANTO) "ahatdoun” “ssanealet Ibocnee” lle Chek areoce Epeycom) dete regulatory {then known as Netler PLC) seauires ck Parner Delight Comer eet te tty Sa, anorrnee Government Website icles AmvYinvintune is Scsacharohldar fire Aecaceitrmaionaca td” ee eee ene) ie ee eee) ‘Source: Paysafe, Hong Kong Companies Registry, Hong Kong Government Logistics Department, Wenshu Court = Publi show that le shareholder of Quick Accose Internati fin Vin Lung ie director of Wellex Management Limited, which itealf ic a director of Partner Delight Ce © Wellex Management is listed as a director of Partner Delight. 72 Directors wk =n 8 EA jane Waa exam ecto eae ow ‘intaee wera m ita ‘WELLE MANAOEMENT LDAITED) me ° oom 1201, Ali Kalin Dulin 138 Glaser Rand Wor Hose Rong Source: Hong Kong Campanias Registry for Partner Delight aPAYEAE: MATENAL RK FROM REGULATORY ENFORCEMENT ACTION © Amy Yin Vin Lung is a director of Wellex Management. xemeneRae uo wnch Oa Reta de Up 2.000 Compan nae a a ET [/tussae a re to atl : Baauncanet © 8 romstsotonestntd as xe CO) neue —==——— - Capacity Director Qo Aarne Decor on emetn nome _ - ann enn Via Yin Amy Kong Companies Registry for Wellex Management Limited (© Onthe Hong Kong Government Logistics Department website, we see that Amy Yin Yin Lung, participated in the wind up of a company called Charter Access Limited. In this disclosure, ‘we learned that Ms, Lung Is also the “sole shareholder” of Quick Access international Co. ud. rE T7 August 2012 LUNG Yin Yin Amy Representing Quick Access International Co, Ltd. Sole Shareholder Source: http://www.ald.gov hk/egazette/pdf/20121635/s620121635p2-1.pdf ‘Chinese authorities appear to be closing in on Ms. Wong and her alo Delight, in the country. This Chinese crackdown may explain why 1-pay.com finally closed down in late 2014, or ~2 5 years after Paycafe claimed they officially ended their Acian eWallot aperation, ‘© We found two recent public written judgements against Chinese nationals named Li Wei Ming, Zhou. Tingtin, Cheung Zhiman, and Tong Hui. These judgements were released on May 6, 2016 and can be found here: © http://wenshu,court,gov.cn/content/content?DociD=5a4da53e-cc79-44bb-be6s- 18621755990d58KeyWord=Jovce o_htto://wenshu.court.gov.cn) ntDoci=18e02969-41¢3-45a-al: Lzsdobab2s1&KeyWord=Jovce * These people were convicted of casino crimes. More specifically, they intended to provide online payment services to illegal online gambling companies and help them illegally transfer money through a network of fake companies (i.e. they committed illegal gambling-related offenses): © UWel ming was arrested on September 16, 2014 © Cheung Zhiman was arrested on March 5, 2015 ‘© These activities occurred between 2007 and 2015 (i.e. both during Paysafe’s disclosed control of ‘Quick Access and during their undisclosed, possible related party relationship with Partner Delight). 2PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION as ‘+ While meny nemes in the court cases are only partially disclosed or redacted, we believe thet these cases likely related to Joyce Wong, Partner Delight/Quick Access, bet365, and thus Payzafe. We believe this for the following © According to the judgements, the defendants helped “Macau XX Company” with payment services for online gamblers in mainland China, and “Joyce” was mentioned as taking charge of "Macau XX Company” in their business with “365”, “365 website,” or “Bet35.” We beliave “Macau XX Campany” is Partner Delight, and by implication, potentially Paysafe themselves. We believe “Joyce” is likely Joyce Wong. "We believe that “365,”, “365 website,” and “Bet35” al ikely refer to “bet365,” who we believe is Pavsafe’s largest customer. There are many disturbing details in within these case tiles, We have summarized some ot the most relevant below: © “In late 2008, Li Wei asked Cheung to contact Macau Xx Company. Then, Li Wei Ming and. Cheung Chi Man went to XX company to see Faith and Joyce, who and signed contracts for payment services. Two months later, the Public Security Bureau came to Investigate the sompany. Then, Faith told Cheung Chi Man that the XX gambling 2008 , SIRI HEP RIIXXA AY BiG, BEA KW. HOOKAH T IA , HARI — AB) AS 2] , RBA EMFAITH, JOYCE , HIT HMET XM, MTA AMBERMABAARE , ZGFAITHA URE Pt EXXR EMM: , 20007 , SRR LBA BMA YIM AMT SH. 2009F 0A , Haws (29 2S NS EAB AN Ja ZN A A 3 5 AL SE © “Defendant Mr. Cheung seid when he left AXX Company, he began to cooperate with Mr. Huang to provide payment processing services for XX gambling website. In November 2010, (Mr. Cheung brought Mr. Huang to Macau to see the boss Joyce and the operations person, Faith, At the beginning of 2011, Mr. Cheung and Mr. Huang started XX Company.” 5, MAARERRM : HRA XXO A , 201045 DAE , SRR 1K BUTXX2) Bl AOR 1 PS fo 2010 NAAT , TRAM XK eR NOYCEMMRESMFAITH. 20118) , MHARRRSK |RILXX42 © “Cheung Chi Man cooperated with Mr. Huang to provide payment service for Macau XX to settle gambling funds for the gambling website. In November 2010, Cheung Chi Man took 23PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Mr. Huang XX te Macau to see the bozs of XX Ltd., Joyce and Faith, whe were responsible for the operation.” HRAXXKAAR 20104 ARLE, SHERAU Oh WAIT XX4S Be) DOCH TS PUKE A. 2010 11H “A, AAP SIEILERIL 7 XX/A A] BAROVCE MAME AYFAITH, 2011974) , HANMER A re wb XX Be RELA Als © “On November 16, 2012, defendant Cheung Chi Man re-contacted xx Company and hired Tong Hui to purchase company documents and seals for its fake companies... ented servers ‘and took charge of technical work regarding the connection to third party payment platforms. Cheung Chi Man continued transferring gambling money for 365 gambling websites.” (= ) 20124F11A16R , RAAKRRARSXXE A] PRE , HEB LAS HSI XX ART RAS Al, FRYNTH XX SAAT BRAS), RANT XX BHR BRS a), FRU T ATOR SRS DL, SBE IFTEILIRXX SISA, BRRADAA BMP. BARS eT ARE BH HRTF A SRRL HE , BRA XOX TS TE REE HER. 2013F3AGN—A , RAEASRSMKRRRE ey ASP PO AS At AL SS Fes, TH AR AIRE BB SH BE SE RS PO es a Se © “By identifying the records and photos, Cheung Chi Man recognized Mr. Huang XX was the person who cooperated with him to manage Shanghal Xx IT Ltd. to transfer gambling money for Bet35.” 24PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION HARMROR AA ESEA ORE, GRRE AANRA, BRREWRA, BAP RA SEAR SS Ba AY BY FR DL Bey SEAR AS a] FF BB = SATS SE EPR , RRRARRACHRRKALSAR. Fl PE 55% , RRR S45%. HIB RA DAH , HEL MXXRAC AARP , Bt LeXxXa Ae Ree. 201241 AAR RSM SHES Lb. PRS, MAUR , RAKRRAU RRR SHR BF AXXA HA ABETIOM GE MRE BH A. (© “Mr. Huang. XX sent emails to Mr. long Xx that asked Mr. long XX to record the money ‘records under the instruction of staff of 365.” (6) RERRASROME , ARRBARRRER PRIGRIESA Rib FRY Ro ° “The email that Mr. Huang sent to Mr. Tong said that Mr. Huang required Mr. Tong to record the payment that the people of 365 required Mr. Huang to distribute.” (4) RERRGSROME , ASRERRRR BR DR iaRIESA MILA FRAY, (© “In June 2012, Cheung Chi Man signed the contract with 365 under the name of Shanghai XX IT Ltd. From 2012 to 2014, they registered about 20 merchants on Yi Ba0, Guofuba0, IPS.” 25,PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION LVEXX/)7).220125, 6A ORM RI IAIN PRM , LALA A SSX PAA ABSENT — Th ARAB , RTARBSHLAP AST MPAA , (RATER ARP SORE. BEA SEAR I6S IAS ARR SH, HR EDP SARE , RAIA PTE A ALERT DRE ROGSETE , ALLS Ae. 201257 At , ERI te SB BARA XXE FEY AISOO PAA BET 7 MATRA M2012 R204 , MNERAE A DEM S200 , RR, BR. AEA © Torecap, we believe that Partner Delight may be an undisclosed, related party of Paysafe for the following reasons: ©. Paysate claims to uses only one “outsourced service provider,” who we believe is Partner Delight, to service its “largest merchant,” who we believe is bet365. © Partner Delight has a very similar business description to Quick Access. We theorize that Partner Delight was the entity that continued to run 1-pay.com for years after Paysafe claimed to shut down its Asian eWallet operation. © Partner Delight appears to be led by Joyce Wong, former Director of Asian Operations of Paysafe. Court cases allege that a Macau-based business led by the “boss Joyce,’ which sounds like Partner Delight, aided a “365 website” (likely bet365) to commit illegal gambling ‘and money laundering offenses. © Joyce Wong ran Quick Access, which was e disclosed subsidiary of Paysafe that provided very si n (Macau) before the authorities in Chine cracked down on the illegal gambling that pozsibly involved Partner Delight and likely bet365 © Partner Delight appears to have been set up almost immediately after Quick Access wae “shut down" in 2010. © Partner Delight and Quick Access are linked together through Amy Yin Vin Lung, who became the sole sharchalder of Quick Access and a director of Partner Delight via Wellex Management. ‘© Most importantly, we believe that we have presented strong evidence that (1) Quick Accese’s 1- .com operated until late 2014 and (2) 1-pay.com in likely illegal money transferrin via e-wallet until late 2014 (like exchange control violations) © Pavsafe stonned disclosing Asian e-wallet. Quick Access. and 1-pav.com vears before the business was actually shut down. Perhaps the Chinese court cases implicating “Joyce” are the reason that 1-pay.com finally stopped its operations in November 2014? services in the same loc 26PAYEAE: MATE RK FROM REGULATORY ENFORCEMENT ACTION 5. Nowa different former Paysafe executive has eated @ new operation, Hamber Services, to apparently continue to operate the Asian Gateway business from a new jurisdiction ‘+ While it appears that the authorities may have forced the closure of Partner Delight and 1-pay.com, we believe that Paysafe has recently created a new company called Hamber Services to continue to allegedly service the illegal Chinese gambling market, and thus Paysafe’s “Major Merchant Asian Gateway” revenue has not yet been disrupted. © We do not believe that itis @ coincidence that this move is taking place nearly immediately after the Chinese authorities have arrested associates that appear to be close to Ms. Wong, 3d to transfer this business to a new company and a new ‘* Business descriptions of Hamber on online job portale cuggest that the company is a provider of “Online payment services facilitation” in China and Taiwan. Hamber Services is a new startup based in Sydney. We are a Business Process Outsourcing company that deals with Online payment services facilitation for international merchants and consumers based primarily in| ‘+ Job post listing that Hamber is servicing consumer based primarily in China and Taiwan is now dead: © https: .s00k.com.au/job/31637725?2pos=1 8ref=betaBtior=no tierS.type-standardus srqueryid-520fdbfe2d25fdalb@1babf42e31d05e.0475122&whereid-3000 ‘= However, a eached vertion of the posting is available via a Google search: This job is no longer advertised - SEEK Jobs hips aww seek com aujob/31637725 = Source: Google ‘© AHamber Services job posting that is currently live on Seek.com.au indicates that the company is searching for Mandarin speakers. Hamber's business description states that itis an online payment service facilitator for international merchants and consumers based primarily in South East Asia. Finance supervisor — Internal Control Peel unc ueCig Speaking) amber Services isa new startup based in Sydney We are 2 Business Process Outsourcing business dealing wth Online payment services facttator for international consumers based primarily in South East Asia ‘© Business descriptions of Hamber based on Linkedin profilas of various employees indicate that the company ic a providar of paymant gateway carviens 7PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Finance Director Hamber Services Dacember 015.- Present (1 yea) | Syne, Aura Hamber Services is a financial services comoany that[provide ecommerce gateway services Fnabling the and consumer to send and receive payments th he eeommatce merchants Source ins ino inet connie oad af Cllant Services Hamber Seniose January 2018 ~ Present (11 mons) | Syaney, Ausvasa Harter Sevens proves li ats payer gatenay vervices enabiny Deer comma to ved ana recewe payments wth he eonmece Me ena '* This linkedin profile from a Hamber Team Leader says it all. The profile claims that Hamber is a global payment gateway service from UK to Merchants in Asia facilitating online payment services for international merchants and consumers based in China. Client Service Team Leader Hamber Services Pty Ltd. January 2016 - Present (11 months) | Sydney, Australia In charge of Client Service team as a Client Service Team Leader for Hamble Services - a global way service from UK to Merchants in Asia amber Seraes fa oustanding company based in Sydney. We ae a Business Process Outsourcing company that deals with ©) based primarily in China, Neary avery member of the team appears to ba a fuent Chinese speaker @] taro.292s English Mandarin Chinese Professional working profelency Native or bilingual proficiency Cantonese Professional working proficiency Source: Linkedin + Homber job postings require proficiency in Chinese: + Has strong leadership skill + Proficiency in MS Office especially EXCEL: + Effective oral and written communication skills in English and ChinesePAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION + Homber was zet up on October 28, 2015. any Nam HAMBER SERVICES PTY LTD Entity Type ‘Australian Private Company fasenpton of Ausalian pube company or cooperate pany Class Limited by Shares Tne vabity ot ne memoers i ime t me amount unpaic on met shares Sharenoaers ae not require to contibute an ther maniee (in be case ofa winging up ifthe shares hey ave taken pare uy pa Company Sub-class Proprietary Other REGISTERED Date of Registration 28 October 2015, Wednesday Source: https://mww.ausG4business.com/company/Hamber-Services-Pty-Ltd-t ‘* One of the key executives at Hamber Services is Eric Howard Sherritt, who is a longtime Paysafe executive and former member of the Board of Directors of at least one important subsidiary. According to ASIC, Eric Howard Sherritt became a director of Hamber Services on 10-28-15 Officeholders and Other Roles Current Officeholders and Other Roles Ty0 Nome aaroee ‘ShortOae Fn ata Eled Out More Rorument BecerGHAS DGAR BORE STOUR TREY SOLIDE —SC*C aa RL om 0 sine sruerom ne 88. porsicnits Drea TERCHOWARO SHERI fas =] rienced See ome Dee o ‘LISTON ONTARIO CANADA Source: htto://www.asic.eov.aul ‘+ However, Mr. Sherritt did not resign his directorship at Paysafe Financial Services Limited until 10-30-15, or two days after he became a director of Hamber Service 29PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Eric Howard SHERRITT Conon un Von Pak, Cer Wag, ambos, gn C24 Source: https://beta.companieshouse.gov.uk/company/04478861/officers ‘Our view is that Sherritt appears to have left Paysafe with the intent to set up Hamber Services. Until recently, Sherritt listed on his linkedin page that he was a Managing Director at Hamber Services per Uhe below screenshot. Managing Director amber Services ereribe 215} Preset @ mony \ Managing Ditecto ‘Optimal Payments (eugara) E000 Fetrary 2013 lovenber 2015 year 10:menth) | Soba Bugaia ‘Optimal Payments (Bulga) EOOD is subsiciry of Optimal Payments PLC. The Sofia Bulgaria contact centre augments the NETELLER consumer and merchadl support services prided in Calgary Canada Responsite forthe stat up cf the Bulgaria company and operations Executive Director Optimal Payments Ltd (October 2012 - November 2015 (3 years 2 months) | London. United Krgrdom Optimal Payments Lisi the FCA reputed subsidiary of Optinal Payments PLC and provides the [NETELLER account an onde cash account at consumers use Wo Securely Spend Dns of lars ‘online each year Member ofthe Optimal Payments Lid Board f Directors Vice President Operations - NETELLER ‘Optimal Payments May 2005 ~ November 2015 (10 years 7 months) | Caigay Cana Ave Vice Prasident Opaationt NETELLER Senior Leader ofthe Calgary ice Responsible fo NETELLER global operation including customer and merchart support Have a key rae \n all payments and MasterCard Nets Prepaid card epertions ‘Source: LinkedinPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION ‘+ More recent versions of his Linkedin pege show that he resigned from Paysefe in November 2015 but make no mention of Hamber. However, Google zearch archives continuc to make the Linkedin connection to Hamber: | Linkedin https Jw linkedin com/in/jeff-carey-50067827 Canada Director of Operations and Technical Services / PM AMCOM EXPRESS at Krates Defense and Security _ [Erie Sherritt Managing Director at Hamber Services ‘* Source: Google Search for “Eric Sherritt” AND “Hamber Services” ‘*_Hamber and Paysafe’s Australian subsidiary appear to be registered to the exact same address. Source: Acie.gov.au a1PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION 6. Aside from the one China focused customer, Paysafe appears to use the same approach with other customers operating illegal gambling enterprises in China and in other geographies where gambling may be considered illegal, such as India. We believe that we have identified other illegal gambling operations targeting the Chinese ‘market that appear to be customers of Paysafe. It appears that Paysafe may have materially understated its exposure to the illegal Chinese market as the company only discloses one “Asian” merchant custom (© While Paysafe claims that a minority of fee revenue comes from “Asia and the rest of the world”, we noticed that a large percentage of cash and cash equivalents, settlement assets, ‘and payables to members are denominated in Hong Kong Dollar As at 31 December 2 setioment assets Lou 10274 az 76.5 Casthaldasreseres Ln 0 Trade andotherreehrables 608 aur 1.431) Trade andother payables (23,525) 1199 7 (6,535) erenant cessing abies 2 23s [Prabtet merbors and merchants Nolee) Ts iss) Toe) oa Income tee payabe 159 728 wou) Dernatnefinanca ity ano) Long tem debt Tota mes 436,626) 3a) (20,853 Source: Paysafe 2015 Annual Report ‘+ Dafabet is a large gambling website that appears to illegally target Chinese gamers through its website dafa888.com (note: “8” is @lucky number in China). It clearly accepts payments Skrill, Neteller, and paysafecard. (© Dafabet was recently subject toa significant crackdown by Chinese authorities for illegal gambling (discussed more later). 32PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION ‘+ Most payment options that are available for use on Dafabet’s website are from Paysafe. eo) Landa aac eer amet) pee) Eira mretanassrverin ea a THB. \NO. KRW EUR GBP.NR. All Paysafe Owned & Operated Source: https://awww.vipdafa888.asia/en/online-casino-cashier Paysafe operates in other countries where gambling is illegal ‘* Gambling is illegal throughout most of India through The Public Gambling Act of 1867 ‘* While other large offshore online gambling websites do offer services to Indian customers, claiming that (1) no specific law exists regulating online gambling and (2) that games of skill, such as poker, are allowed. Given the lack of specific online gambling laws, we would consider India a high-risk “grey” rather than a fully “black” market. ‘© Popular Indian gambling website indiabet.com features a large bet365 advertisement on its ‘main landing page, calls bet36S a “preferred bookmaker,” and highlights that bet365 “will accept bets from Indian customers in every state in India.” 33PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION E BET365 [eat customers can setup an onane peta account rom an inaianaaaress. People seting up an account at bet365 can also choose to manage the account in Incion Rupees rather than in US Dotars or Brash Pounds Customers inca can depost money no thee BetISS account using thew debt ‘ata, reat caro, NETELLER. EnroPay ana Vive Transfer om mer bank account ‘Alf these deoosf methods ae tre. Wire transtrs take fom 3-10 days to process. you donot have 3 NETELLER aeccunt then you 2a gn up by cHehing ns WETELLES kk KKK 2D Did you know india Bet gives away bel365 vouchers every day? View our past draws or get some BEM dean tees now! $800 worth ven anay month Join india Bet To ENTER draws Source: https://www.indiabet.com/bookmakers ‘+ Indiabet.com also provides helpful instructions on how to use Neteller from India “keep your betting transactions separate from your bank account” and away “from nosy government employees” WHY USE NETELLER FROM INDIA? The benefits of using an electronic wallet such as NETELLER for online betting are threefold: + Nearty all online bookmakers offer NETELLER payment facilties to Indian residents. + NETELLER customers do not need to enter their credit card or bank deta at multiple online bookmakers, « JOsing NETELLER you can Keep your betting transactions separate from your bank account and any nosy Joank managers or government employees. ‘Transferring money from your Indian bank account to an electronic wallet such as NETELLER ic straightforward and takes me time. ‘+ Indiabet.com also provides details on how to use Skrill in India. “Skrill knows no borders” and is accepted at “virtually all online gaming operators.”PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Q: Why use Skrill? A: Simple, besides being one of the most trusted payment systems in the industry, benefits include’ + [Accepted at virtuatty all online gaming operators] + Instant pay-ins and pay-outs for FREE ‘+ Complete protection of your personal and financial data Highly compettive exchange rates. + Extremely reasonable commissions for withdrawal ‘= Several online poker rooms/casinos offer extra bonuses for Skrill users. + Guaranteed funds transfers security + simple and easy ways to raise your maximum transfer threshold. "SHIT Knows no borders. Send money and withdraw funds eficiently regardless of your location. Source: https://iwww.indiebet.com/indian betting/437636/using moneybookers from 7. Paysafe appears to have employed a similar approach in the United States after a crackdown on illegal online gambling in that market. When Paysafe was embroiled in an illegal gambling and money laundering scandal in the US, the stock fell “937, executives were sent to prison, and the company ald huge fines. ‘© Ryan Lang served as Neteller’s Global Director of Sales from 2003 to 2007 © He was eventually arrested and pled guilty to violating the Unlawful internet Gambling Enforcement Act (UIGEA) (© Among other things, Lang was accused of “searching for other payment processing methods that the Poker Companies could utlize to obtain access to the United States financial system.” (©The below description of “highly-compensated third party payment processors” used to facilitate illegal gambling should sound pretty familiar (though the juri illegel activities has now moved from the US to China): ion for these 35,PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION (collectively, the “Poker Companies”), Because United states banks were largely unwilling to process payments for an illegal activity such as internet gambling, the three Poker Companies used fraudulent methods to avoid these restrictions and to receive billions of dollars trom United States residents who gambled through the Poker Companies. To accomplish this deceit, the Poker Companies relied on highly-compensated third party Payment. processors whn lied te United Statec banko about the nature of the financial transactions they were processing and covered up those lies through the creation of phony corporations and websites to disguise payments to the Poker Companies. in order to find payment processors, the Poker Companies relied on self-described “middlemen” who would match the Poker Companies with payment processors who could obtain access to the United States Banking system. ‘+The Department of Justice accused Lang of many offenses, including: ‘© Brokering relationships between payment processors and operators of illegal gambling ‘websites to facilitate the transfer of money to or from the US ‘0. Helping payment pracaccors ereata phony chal eampanias ta dicguica the poker transactions from banks and regulators © Some of the alleged crimes committed by Lang were said to have occurred while he was still serving ‘as Global Director of Sales for Neteller © Lang served as Global Director of Sales between 2003 and 2007PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Global Director of Sales Neteller 2003 - 2007 (4 years) | Calgary, Canada Areal UK Source: Linkedin © The accusations against Lang relating to “Money Laundering Conspiracy” (Count Three in the indictment) wera allegad ta hava accurred “fram at laast in or about 2003, up ta and including in or about May 2010.” Ti from at least in or about 2003, up to and Luding im or about way 202 1a District of New York and Rex U0, and unknown, willfully and knowingly did combine, conspire, oe Gefendant, and others know, 2 caer ning ptr, ey saad wceapany ead eda Tashan, ara ha appears to have continued these illegal activities. (© Redfall is described as a “payment services business” that specializes in electronic payment processing, e-wallets, and payment gateways, among other things. Co-Founder! Managing Partner Co-founder Mara redfall 2007 - 2010 (3 years) | Calgary. Canada Area oe We're Redfall, a payment services business with an expertise in software development. We create payment solutions that simplify and liberate Reedfall ie buit on a foundation of innovation, ereativty and forward thinking. Its a special group of talented individuals dedicated to providing simple solutions for a complicated world Specialties Online | Electronic Payment Processing, B2B | B2C | C2B Payment Systems & Solutions, Commercial Payment Applications, E-Wallet & Payment Gateways, Mobile Payment Applications Source: Linkedin © Redfall is explicitly named in the “Black Friday” UIGEA lawsuit 104, LST Financial and|Redfali} on or about July 19, 2010, United States Magistrate Judge Kevin Nathaniel Fox, Southern © Lang was joined at Redfall by other key recent employees of Neteller (© GM of Country Development and former Vice President of Sales Rodney Thompson joined Redfall in 2008 7PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION GM Country Development VP sales Netsver tedfa ll Source: Linkedin © Vice President of Sales Michael Oliver joined Redfall in 2009 ee [Director of Operations IRedfall Technologies Ine. years 1 month Operations Manager [BT Systems [Director of Sales INETeller redfall btasystems Source: Linkedin CADS10 million market capitalization and trades for 14 cents per share. Source: Bloomberg, Redfall eventually collapsed — the company merged with Vogogo (VGO CN). The stock now has a Interestingly, the former Chairman of Paysafe, Dale Johnson, now serves as Chairman of Vogogo. 38PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Chairman Vogogo (TSXV:VGO) wos May 2014~ Present (2 years 7 months) | Calgary, Canada Area Chairman Optimal Payments PLC 2004 November 2013 (0 yeare) Source: Linkedin ‘© Furthermore, recall that, previously, Dale Johnson previously served as President of Neteller’s Asian Operations until 2007, when Joyce Wong was promoted to head of the Asian business. When Paysate was embroiled in an illegal gambling and money laundering scandal in 2007 tell more than 90%, executives were sent to prison, and the company paid enormous tines. ‘* When Paysafe was still named Neteller, they were caught up in the “Black Friday” crackdown in the United States alongside Ryan Lang and Redfall. This caused the stack to fall dramatically and eventually lead to criminal charges against key Paysafe executives and the payment of a very large fine. (© The UIGEA was signed into law in October 2006 (©The FBl arrested Neteller co-founders Stephen Lawrence and John Lefebbre in January 2007, and they eventually pled guilty to conspiracy. 300. “internet camene services comoatles. Like Notalier. al ov te teanates movmy collected fran United states tag aac eee Source: https://www. justice gov/archive/usao/nys/pressteleases/January07/netellerarrests © Importantly, the FB! highlighted that the Paysafe (again, then named Neteller) founders should not take comfort In the previously disclosed risk factors from thelr publicly disclosed financial documents. We view the situation today with respect to the to the US situation in 2007: simply disclosing an illegal activity as a material risk factor does not make such activity any less illegal. As discussed in the section 9, Paysafe today discloses that the Proceeds of Crime act may have an adverse impact on their business. We agree. violation Chinese and the UK laws as simi 39PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION At the time that the defendants took Neteller public, the company acknowledged in its offering documents that United states: law prohibited persons from promoting certain forms of gambling, including internet gambling. and transmitting funds that are known to have been derived from criminal activity or are intended to| promote criminal activity. The company's directors, ineluding LAWRENCE and LEFEBVRE, also conceded that they were risking prosecution by the government of the United States under existing or future federal Laws. Mr. GARCTA atated, “Internet gambling has become a Jmutesbiiiion—doilar industry that derives » major poreion of ite Fevenues from United States citizens. STEPHEN ERIC LAWRENCE and JSOM DAVID LEFEBVRE knew when they took thelr company public that its activities, as well as those of the internet gambling companies AE assisted, were illegal in the United States. Blatant violations | ‘© Neteller promptly exited the US market after the arrests ‘* Neteller paid a fine of $136 million and admitted to criminal wrongdoing and a deferred prosecution agreement for “a conspiracy to promote Internet gambling businesses and to NETeller quits U.S. after illegal gambling arrests 1y Pee reson Reaes Tsay, Janay 18, 2007 &18AM LONDON (Reuters) British money transfer fim [NETeller Ple closed its US. Intemet gambling services on Thursday, w ‘operate an unlicensed money transmitting business.” 4. FORFEITURE PAYABLE (On 18 fy 2007, the Company ertered ito a Deferred Prosecution Agreement ("DPA") wih the United States Attomey's fice forthe oe Southam District of New York (USAO') Pura to the OPA the Company frfsted $16 miion tothe USAO a ‘certan profits recnved by the Group fom the actives descrbed 0 the Stterent of Admtied Facts atached tothe DPA Ths anourt Incuded the approximately $577 millon which the USAO prev sized The Company agreed (ffs frteure cbigation wih a payment of $4) millon to be pid cn or before |S October 2007, nd the remang balance tobe pad on Cr before 17 jury 2008 Ful ers ofthe DPA ae aalable on the Grouss website at woraretilerproupcom thar Rt would sty the remaining portion Source: Paysafe 2007 Annual Report © “At the hearing before U.S. District Judge P. Kevin Castel, Mr. Carroll said the company agreed, as part of a statement of facts under the deferred prosecution agreement, that it had violated U.S. law” Source: http://www.wsi.com/articles/S8118477363073970308 ‘+ Aiter the passage of the UIGEA, the exit from the US, arrests, and fines, the stock of Neteller (or Paysafe) fell more than 90%. More precisely, from April 2016 to December 2007, the stock fell 93%.PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Spotlight Research Source: Bloomberg, 8. China is now engaged in a high profile crack down on illegal gambling, including making arrests of employees fram multi-national entities engaged in catering towards Chinese gambling customers. oe authorities are et One ~ ch aging in @ massive crackdown against illegal online gar ‘major initiative is called Operation 109, which is said to have begun in 2015 © Since the launch of Operation 109, it appears that there has been a significant pick-up in arrest and shutdowns related to illegal online gambling ‘+ Chinese President Xi Jinping “declared war” on international gambling by Chinese citizens early in 2015. China's president just declared war on global gambling Feb. 6,201 Source: http://www. businessinsider.com/xi-declares-war-on-global-gambling-firms-2015-2 ‘© In August 2015, Chinese authorities announced that they had broken up a multinational gambling ring based in the Philippines that was targeting Chinese citizens. As referenced earlier, Paysafe’s payment solutions (Neteller, Skril, etc.) are supported on dafabet’s websites, Police Crack down on Overseas Gambling Site a 2018-0 1853:13 CRIENGLISH com Source: htto-//english.cri,cn/12394/2015/08/10/2743s891099.htm ‘+ InNovember 2015, Chinese police announced that they had made arrest associated with $79 billion in illegal bets placed on unauthorized gambling networks a1PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Chinese Police Raid $76 Billion Illegal 109 ine Gambling Ring in Operation Maniand China's poice anounced ths week they busted an international legal oamblina syndicate which tok USS78 bon ‘when t tare n 2014 The high pont er rests came June O15. when several thousand indus were arrested ox fer roe ‘the ocanaaton-or samo as aanbers Ministry of Public Safety Announces Raids The Scooe of Operation 109. or even the fact existed at al. was tet mee kn het of Pee Soy sen oa Source: nlinecasinos com /news/chinee police ai. 78 bilion Heal online gamble tne i operation 109L17 ‘* Also in November 2015, China cracked its biggest “underground bank” that had illegally moved $64 billion of money out af the country. China Cracks $64 Billion “Underground Bank’ Moving Money Abroad lovernber 19,2015 - 7.20 PM PST November 19,2015 — 0 PST fy Source: mt " ack 4 bilon-undereround bank ns ‘* In October 2016, Chinese authorities arrested 18 employees of Crown Resorts Ltd., an Australian Casino operator with a presence in China. © The arrests were for gambling related crimes and linked to Crown's illegal overseas direct marketing to so-called “whales” u Even though China only represented 12% of total revenue, Crown's stuck price plummeted as much as 20%, with $1.5 billion being wiped from the market value of the China. company in the days following the crackdown. a2PAYEAE: MATE KS FROM REGULATORY ENFORCEMENT ACTION James Packer squanders $700m in Crown China arrests fallout sin.92 Crown Resorts ‘sed ap = light, Payzafo's strong diroct Australian link to Hambor Services, which a¢ discussed earlier is fully staffed with Mandarin speakers focusing on gateway payment services for the Chinese market, should be of particular cancern for Paysafe investors. With the arrests of a number of possibly close associates of Joyce Wong and Partner Delight, ws ‘concerned that authorities may now focus their attention more closely on Paysafe, Partner Delight, Hambor Services and/or het265. We are further concerned that the additional scrutiny on Payzafe’s activiti Jn China may force them ta leave the market, which may cause earnings ta fall hy an 1d 50%. 9. We believe that Paysafe may be violating laws in numerous jurisdictions, including both China (Article 303 to the Criminal Law of the PRC) and the UK (The Proceeds of Crime Act). Paysafe is headquartered end listed in the UK and may face risk of criminal prosecution and sanctions by the FCA, while the Chinese business (possibly ~50%+ of earnings) may be at risk of being shut down by Chinese authorities. We believe that Paysafe may be violating laws in the UK, where it s illegal to benefit from crimes conducted in other jurisdictions. ‘* UK Proceeds of Crime Act (2002) “POCA” makes it clear that handling ill-gotten gains is illegal. We think that Paysafe/Partner Delight/Hamber Service may be facilitating illegal gambling, foreign exchange control violations, and violations of the KYC requirements under the UK ‘Money Laundering Kegulations of 2UU/ in China and elsewhere, These potent quality under Poca. ° | violations may If the proceeds of crime/criminal property are used in the UK, Paysafe may be liable under the POCA in the UK: http://www legislation gov.uk/ukpga/2002/29/contents In our view, there are three primary offenses that Paysafe may be liable for: = Concealing, disguising, converting, or transferring the proceeds of crime (s. 327) Assisting or abetting such conduct (s. 328) a3PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION + Handling the procceds of crime (2. 329) © Purcuant to 6, 340 of POCA, the relevant proceeds must constitute a person's benefit from criminal conduct, either directly or indirectly. ‘© “Criminal conduct” is an activity that is an offense in the UK, or would be an offense in the UK if conducted there (© We believe that failing to provide robust KYC requirements for Neteller 1-pay.com Basic user money transfers in China may constitute money laundering violations in the UK, and thus Paysafe is at risk of violating the POCA ‘* Failure to report the dealing in the proceeds of crime is also a criminal offense ‘© Paysafe’s regulated entities in the UK, such as Paysafe Financial Services Ltd., are subject to reporting obligation to notify the National Crime Agency (NCA) if they know, suspect. or have reasonable grounds to suspect, that another person is dealing in the proceeds of crime and that information comes to them in the course of their business in the regulated sector. It is @ criminal offense to fail to disclose such information under POCA. ‘© The Financial Conduct Authority (FCA) could take enforcement action against Paysafe (©The FCA has the power to take enforcement action against regulated entities for having insufficient systems and controls to enable them to identify, assess, monitor, and manage money laundering risk, + Paysafe discloses that proceeds of crime laws (including POCA, we think) are an important risk factor for investors to consider (importantly, see the FBI's negative view of Paysafe’s disclosed regulatory “risk factors” from Section 7 of this report). a [im non of men corns 2 coal ct ane conseguir farang of cad Jrevay sv vey tom bacon tte Soe paste co’ hat Fe Se Jere! at mat oes 8 rl eneae 8 ey rao fey eae. ters ane) [Scorn at reactrs have ew we Se Br eoreene kya |v ner trae te Pye Gry rd tr pres thr tw Payne Gra os [renter ete posse a tn bac wea etenoey ance eon rote supcan ef cml aciay Te Decion omar mere os md [ssa wrote nee ese nabs Source: https://www.paysafe.com/fileadmin/pdf/Prospectus 181215.pdf We further believe that Paysafe may be violating laws In China, where it is illegal to gamble andPAYEAE: MATE RK FROM REGULATORY ENFORCEMENT ACTION + Anti gambling lows © Article 203 to the Criminal Law of the People’s Republic of China says that people engaging in gambling shall be sentenced to jail for up to three years and be fine = “Whoever, for the purpose of profit, gathers people to engage in gambling or makes gambling his profession shall be sentenced to fixed-term imprisonment of not more than three years, criminal detention or public surveillance and shall alsa he fined.” Source: http://www.lawtime,cn/faguizt/23.html © Article 2 of “Interpretation of Several Issues in the Specific Application Laws for Handling Online Gambling Criminal Cases” makes clear that facilitators of online gambling are subject to Article 303, * “Whoever, for the purposes of profit, sets up gambling sites on a computer network or acts as an agent for the gambling sites, and accepts bets, belongs to casino crime in the Article 308 of the criminal law.” Source: http://law.lawtime.cn/d354259359353.htm| ‘© Opinions on Several Issues in the Laws Applicable to Handling the Online Gambling Criminal Cases further clarifies that pr sites is also subject to Article 303. = “Clearly knowing that it is @ gambling site, and to provide the following services cor assistance, belongs to the joint crime of casino crimes, and shall be punished according to Article 303 of the criminal law.” Source: http://vowlaw lib.com/law/law_ view.aap?id=222939 + Anti money laundering laws © Amendment IX to the Criminal Law of the People’s Republic of China shall be sentenced to jail for up to ten years and be fined (Article 191) * “Whoever, while clearly knowing that the funds are proceeds illegally obtained from drug-related crimes, erimas committed by mafias, terrorism or smugglers, bribery and embezzlement crimes, crimes related to destruction of financial management order or gains derived from financial fraud, commits any of the following acts in order to cover up or conceal the source or nature of the funds shall, in addition to being confiscated of the said proceeds and gains, be sentenced to fixed-term imprisonment of not more than five years or criminal detention and shall also, or shall only, be tined not less than five percent but not ‘more than 20 percent of the amount of money laundered; ifthe circumstances are serious, he shall be sentenced to fixed-term Imprisonment of not less than five but not more than 10 years and shall also be fined not less than five percent but not more than 20 percent of the amount of money laundered: '* Providing fund accounts, ‘© Helping exchange property into cash or any financial negotiable instruments; ‘© Helping transfer capital through transferring accounts or any other form of settlement, ‘© Helping remit funds to any other country; or asPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION + Covering up or concealing by eny other means the neture or source of tthe illegally obtained proceeds and the gains derived therefrom. Where a unit commits any of the crimes mentioned in the preceding paragraph, it shall be fined, and the persons who are directly in charge and the other persons who are directly responsible for the crime shall be sentenced to fixed- term imprisonment of not more than five years or criminal detention.” Sourca’ http://wunw lawtime.cn/faguirt/23.html 110. Separately, the remainder of earnings in the Paysafe voucher card business Is also at risk from new EU anti-money laundering regulations that are likely to come in force in 2017 and may effectively eliminate anonymous payments, which we helieve to be the core value proposition of voucher card business in ‘is thie rezearch paper from the University of Hamburg cuggects, Paysafe voucher cards can be used as a payment mechanism in online gambling for money laundering purposes. According to the author, Paysafe voucher cards allow the conversion of cash (potentially from illegal sources) to enter the official banking system Figure 6; Example of sing online gambling w launder €10,000 of legal proceedings ropooe roosa00e 100006 soe | swire | 9s00€ | Paysafe- [P8POt) Casing Casino [Transfers] Bank Ac- a cords: ‘Account: ‘Account | > Gamb- count lng wins ! Fog: Not Tax ree 10,000€ (observable: sane! income! Cimtomers for financial ar % = inenigence Operator Ayes ‘SOUFCE: htei/mn ws snchambue deiesdnintnlechderaracahinsaing FeeOnine Gambine as» Game Chane to Meer Lauder OL. 1+ Turkey ie a particularly concerni market cinco prepaid and etored value carde have been implicated in torrorist financing schemes. If money ean be truly send and withdrawn efficiently “regardless of your location’ these payment solutions may be ending up in the wrong hands.PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION INFORMAL BANKING SCHEMES: [Beyond te formal banking system, ISIS can also send and receive funds through nearby foreign money emitters Finnish authorities reported to FATF that a commen method of getting funds to foreign fighters is to send it via "money remitters who have agents operating in border areas close to ISIS-held tertory. This is to finance them once they are in Syfiatiraq” Dutch authorities have noted similar activity and "regard it as highly likely that...intermediaries transport leash to areas near teritory occupied by ISIS. ISIS operatives have come up with other schemes as well. For example, Saudi authorities reported to FATF that individuals associated with the group had solicited donors via Twitter and told them to establish contact via Skype. The operatives then asked these donors to purchase international prepaid cards (e.g., mobile phone credit, stow credit) and Send them the ard numbers via Skype. The information would eventually reach a follower near ISIS-held tertory in Syria, who could then sel it and take the resulting cash to the group. Source: http: //uww.washingtoninstitute org/policy-analysis/view/the-islamic-statas-backdoor-bankit The crack down on anonymous payments appears ta he a paramount concern of Furopean regulators. ‘* On 7/29/16, Paysafe hosted a call with analysts to discuss the impact of the upcoming 4” and 5" Anti-Money Laundering Directives to be implemented as soon as 1/1/17. Analyst takeaways from the call as follows: (© AML4)s likely to impact tinancial thresholds tor e-money instruments (Neteller, Skril) with stricter “Know Your Customer” (KYC) requirements, ‘© AML will make KYC mandatory when prepald cards (like Paysafe Card) are used online. ‘¢ While AML is still in draft format, a review of the latest draft of the document as of 11/15/16 confirms that AML 5 will likely prohibit merchants from accepting payments made using anonymous prepald cards. = an express derogation, which makes it clear tat Member states may decide not to allow merchants to accept payments made using anonymous prepaid cards: and ‘+ According to Paysafe’s 2015 Analyst Day disclosure, 54% of Paysafe users list anonymity when paying as being of key importance, and 68% cite “safety when paying.” We think this survey (conducted by Paysafe itself of 5,800 customers) may understate the importance of anonymity, which to us certainly seems like the primary use case. If only 37% of users claim to not have a credit card, the argument that Paysafe card ara a viable paymant method for “undar-hanked” consumers seems specious. a7PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Use Case for Payzafe Card ra 37% 37% Easy | Anonymity | Nocredit Cost Control handling [when paying] card Source: Paysafe 2015 Analyst Nay Pracantation © Asanonymity is a, revenue from this business use case for Paysafe Cards, we believe that more than 50% may be at risk as soon as 2017, 11. We believe many other red flags exist, including potentially aggressive accounting that obfuscates the true earnings pawer and free cach flow generation potential ‘> CFO resigned in late 2014 and many members of the board (including the Chairman) have resigned since 2014. ‘© Chairman Dale Johnson resigned in November 2013 (and then joined Vogogo/Redfall) © Interim Chairman Jonathan Camerfard, who taak aver the Chairmanship fram Johnson e000 ‘* In our view, aggressive accounting is being employed to intlate reported earnings. Free cash flow conversion is poor and the financials do not appear to match across reporting periods. Capitalization of “internal development costs” inflates reported EBIT by ~13% and was a director since 2009, racigned in lly 7014 CFO Keith Butcher resigned in December 2014 (he also resigned from the Board) Director Stephen Shaper resigned in August 2015 Director John Bateson resigned in July 2014 Qutside of CEO Joel Leonof, only one other current Paysafe board member has served tor 3 years or more, ° FYig _ FYI5 ‘Adjusted FRITDA ROAR 155A ess: 8a 20.967 51,202 Adjusted FIT 65,076 101.201 i aaa aes 5,395 12,695, Source: Paysafe 2015 Annual Report, Spotlight Research analysis in yellowPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION + Paysafe copitelizes items that may be operating expenses. The company re clessified computer software out of PP&E and into intangible assets in 2015. The amortization period is only 1-2 years. Why is this not an operating expence? ante as pa ol PTY, aT ad SUPT Fas Daca lnscd o tangle Sans Bs Baer mated vachl We whichis asesed abe one Tape SORE ICE aa onda arisen arate Source: Paysafe 2015 Annual Report ‘+ Changed depreciation/amortization rates of various tangible and intangible assets to significantly reduce future depreciation and amortization expenses by an estimated “39% mu zs Estimated Anus Annual Depreciation ‘Report Report Method a Furniture and Equipment 20% 15% —_Declining-balance Computer Equipment 30% 20% —_Declining-balance Other Intangible Assets 3Syears — 3.AAyears(2)_ Straightline Capitalized Develooment Costs 30% 20% —Deelining-balance Computer Software 2years sayeus, Singin Leasehold improvements A0years —_Termoflease_ Straightline Estimated 2015 Weighted Depreciation Average Weight Depreciation Change Cost (%oftotal) Cha 25.0% 4689 16% Am 78 50K “42.9% 198,480 an Capitalized Development Casts, 38.3% 51,133 175% Computer Software 25.0% 19,890 68% Leasehold ir os 2 () Averse he Dye (2) Excludes intellectual Roper, See Note Gof 2015 Annual Report for more detailed components Source: Paysafe 2014 & 2015 Annual Reports, Spotlight Research analysis in yellow "section of cash flow statement and not ‘¢ Interest expense is imbedded in “Financing Activit included in the calculation of free cash flow rm erg et 1 a2 900) (Amo Source: Paysafe 2015 Annual Report ‘© Changed disclosure of cash and equivalents in the first half of 2015 that significantly reduced the disclosed amount of unencumbered cash. 49PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION In HI 2015, the reporting of cash and cash equivalents was, adjusted to include two new line items on the balance /sheet: settlement assets and cash held as reserves. The objective is to provide users of the accounts with a clearer view of the Group's cash position and the impact of payments working capital cash flows. Source: Paysefe 2015 Annual Report (© Settlement assets are gross transaction cash at third-party acquirers, banks and processors due to be paid to Paysafe in route to merchant clients or to fund digital wallets "Cath held as reserves represent cash Paysafe is required to deposit with counterparties (acquiring partners and card schemes), in order ta trancact with these institutions Old disclosure in 2014 annual report showed $142.3 million of “cash and cash equivalents.” rrr i] Source: Paysafe 2014 Annual Report New disclosure in 2015 annual report shows just $109.9 million of “cash and cash equivalents” for 2014 oc et nsm8 sarge mae fo 730 Property lot a easement ot woe Totton caret ats iin 200 a5 ‘Prep expenses and ter ase tom me Source: Paysafe 2015 Annual Report ‘¢ The stated cash balances still do not match up even when adjusted for settlement assets and restricted cashPAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION 2015 Annual Report Cash Disclosure 2014 Cash and Cash Equivalents 109,892 Settlement assets 29,889 Restricted Cash 876 Cash Held as Reserves TSR Total " as7.275 2014 Annual Report Cash Disclosure zoe Cash and Cash Equivalents 142,325 Restricted NETELLER Merchant Cash 2,233 Restricted NETELLER Member Cash 5544 Total " a1,a02 © Source: Paysafe 2014 & 2015 Annual Reports, Spotlight Research analysis in yellow ‘+ Cash flow conversion has been poor over the last few years. © Paysafe disclosures show that it has only been able to convert ~50% of adjusted EBIT into free cash flow over the past two fiscal years (FY2014, FY2015) Cash conversion war ee ee “mw Source: Payeafe FY2015 IR Presentation © According to the Hi 16 IR presentation, each flow convertion in Hi 16 is down 1,500 basis points year-over-year (© Paysafe explain this weakness is due to “payments working capital” © Paysafe receives money very quickly from payment networks, yet they do not have to pay merchants nearly as quickly. * As long as transaction volumes are growing, this should be a great tailwind rather than a headwind © Paysafe’s slides on “cash conversion” do not appear to match the flow reported free cash 51PAYEAE: MATE KS FROM REGULATORY ENFORCEMENT ACTION zou we FCF on “cash conversion” IRsides (1 230 803-955 2048 (1) slide 37 oF 2 20151K Deck (2) Rawal For FO - Purchaser of PEE. Purcharas of Intangibles - Interest Pl Source: Paysafe H1 2016 IR Slides, Spotlight Research analysis in yellow Indead, Paysafe’s actual conversion of FRIT to ECF appears ta be just “43% (instead of ‘the claimed 56%). Conversion of free cash flow into net income Is only 50% 2014 2015 1.2016 Cumulative ‘Adjusted EBIT 74313321292 336.7 a 6801087 1042781 Source: Paysafe IR Slides, Spotlight Research estimates ‘+ Paysafe continues to employ executives from companies accused of money laundering in its executive ranks © Firepay was a digital wallet operated by Paysafe (formerly known az Optimal Group Inc.) ‘The FBI accused FirePay of processing “more than $2 billion worth of illegal gambling ‘trancactione for United Sates cuctomers”” between 2004 and 2006, Optimal Group cooperated with the investigation, admitted illegality, and agreed to pay $19.2 million to settle the charges One of the founders of FirePay, Benjamin Dalfen, who served as CEO beginning in early 2006 and previous to that was COO, * remains an Executive Vice President at Paysafe. Executive Vice President, Sales Paysafe Croup November 2 Present (1 year 1 month) | Montreal, Canada Area Executive Vice President, Sales ‘Optimal Payments PLC February 2013 — October 2015 (2 years 9 months) | Montreal, Quebec Source: Linkedin Questionable deal with Quindell lenders allowed CEO to sell stock but report that he was buying stock © In March 2014, CEO Joel Leonoff pledged 1.5 million shares worth “£4 million to Equities First in exchange for a loan As part of this loan agreement, Leonoff then reported on April 1, 2024 that he had purchased 80,000 shares. © http://www. reuters.com/article/optimal gambling idUSN3042693320091030 * http://www. businesswire.com/news/home/20060306006060/en /Optimal-Group-Announces-Executive- Management 52PAYSAFE: MATERIAL RISKS FROM REGULATORY ENFORCEMENT ACTION Optimal Payments Confirms Director Share Dealing With Equities First LONDON (Alliance News) - Optimal Payments PLC Friday became the latest company to confirm a Auiance News | 14 November, 2014 | 3:3 noo An LONDON (atiance News) - Opumal Payments PLC Friday became the latest company to confirm a directors’ agreement with Equities First, as scrutiny of Unusual share transactions involving the US stock loan company increased. Source: http://www morningstar.co.uk/uk/news/AN 1415987772033379600/ootimal- mments-confirms-director-share-dealing- with equides‘frs. aspx 0 Equities First deployed a similar arrangement for the CEO of Quindell, while he was selling the stock before it eventually collapsed. Quindell shares sink as deal sparks fresh panic Source: http://www.independent.co.uk/news/business/news/quindell-shares-sink-as- ‘Our conclusion: We believe that there are material risks from potential regulatory enforcement action and numerous other red flags that make Paysafe uninvestable 53PAYEAE: MATE KS FROM REGULATORY ENFORCEMENT ACTION Dizelaimer This research presentation report expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation report. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpoce only and should not be taken az limitations of the maximum possible loze or gain. Any information contained in thie report may include forward looking ctatemente, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond our control This is not investment or accounting advice nor should it be construed a2 such. Use of our research is ot ‘your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered her As noted above, you should assume that as of the publication date of any presentation, report or letter, we (possibly along with or through our members, partners, affiliates, employees, and/or consultants) have a short position in any stock (and/or are long puts/short coll options of the stock) covered herein, including without limitation Paysafe Group Ple (“PAYS”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered ther neutral at any time hereafter regardless of our initial recommendation, in, and we may be long, short, or This is not an offer to sell or @ solicitation of an offer to buy any security, nor shall eny security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not public sources we believe to be accurate and reliable, and who are not insiders ar connected persons of the stock covered herein or wha may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to us. However, all information contained herein is presented “as is,” without warranty of any kind - whether express or implied. We make no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its Use. All rights reserved. leading, and all information hae been obtained from