Chinese technology giant Tencent may be hit by a potential record fine for alleged money-laundering violations by its WeChat Pay network, the Wall Street Journal reported Monday.

Financial regulators found WeChat Pay, which is widely used on the mainland for payments, had compliance lapses related to know your customer (KYC) and «know your business» regulations for verifying identities and sources of funds, the report said, citing people familiar with the matter.

WeChat Pay had allowed transfers for illicit transactions including gambling, the sources said, according to the report.

Larger Fines

The size of the fine for the violations, which were discovered during a routine inspection late last year, could be «hundreds of millions of yuan,» much larger than typical fines on nonbank payment companies with similar violations, the report said, citing the sources.

The news decked Tencent’s shares, which fell nearly 10 percent Monday and were down around 3.6 percent at 11:20 a.m. HKT in intraday Hong Kong trade Tuesday. That’s in addition to recent losses across the Chinese tech sector as mainland authorities have started imposing fresh regulation. Tencent’s Hong Kong shares are down nearly 30 percent year-to-date.

The mainland began implementing regulations, sometimes overdue, on new technology areas which had been allowed to engage in a «Wild East» strategy. Indeed, the public reason Alibaba’s financial arm Ant Group saw its Hong Kong and Shanghai IPO plans squashed at the eleventh hour in 2020 was due to concerns over regulating the company as a financial firm, rather than a technology one – the suspension came just after China drafted new rules for microlending online.

Selloff Overdone?

Some of the pressure on Chinese companies came from the Trump administration’s haphazard trade war against China, which included efforts to force the mainland’s companies to delist from U.S. markets. China’s response may have amounted to taking its own ball home from the game, leaving U.S. investment banks without IPO deals from the mainland.

Analysts at Daiwa said the correction in Tencent’s shares was likely overdone, saying the fine is likely to have minimal financial impact and is likely to be one-off.

In a note Monday, Daiwa estimated commission fees from merchants on WeChat Pay accounts for around 20 percent of Tencent’s total revenue.

«Although the company does not disclose the revenue mix within WeChat Pay, we believe that transactions related to gambling or other illicit activities are likely to account for a minimal proportion (low single digit, per our estimate) among all transactions as the majority of transactions are likely contributed by online-to-offline sales, QR codes and point of sales transactions,» Daiwa said.

But the Japanese investment bank noted the incident – which comes as Tencent’s track record shows a prudent risk management policy and strict regulatory compliance -- suggests regulators are stepping up scrutiny of the online payment sector, with more rules potentially in the works.