Groupon 2011 Annual Report Download - page 31

the revenue generated from a new category grows more slowly or produces lower revenue than we expect, our results of operations could be adversely impacted.
Failure to deal effectively with fraudulent transactions and customer disputes would increase our loss rate and harm our business.
Groupons are issued in the form of redeemable coupons with unique identifiers. It is possible that consumers or other third parties will seek to create
counterfeit Groupons in order to fraudulently purchase discounted goods and services from our merchant partners. While we use advanced anti-
fraud
technologies, it is possible that technically knowledgeable criminals will attempt to circumvent our anti-
fraud systems using increasingly sophisticated methods.
In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse customers and/or merchant
partners for any funds stolen or revenue lost as a result of such breaches. Our merchant partners could also request reimbursement, or stop using Groupon, if they
are affected by buyer fraud or other types of fraud.
We may incur significant losses from fraud and counterfeit Groupons. We may incur losses from claims that the customer did not authorize the purchase,
from merchant partner fraud, from erroneous transmissions, and from customers who have closed bank accounts or have insufficient funds in them to satisfy
payments. In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive, they could potentially result in our
losing the right to accept credit cards for payment. If we were unable to accept credit cards for payment, we would suffer substantial reductions in revenue,
which would cause our business to suffer. While we have taken measures to detect and reduce the risk of fraud, these measures need to be continually improved
and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our
business will suffer.
We are subject to payments-related risks.
We accept payments using a variety of methods, including credit card, debit card and gift certificates. As we offer new payment options to customers, we
may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange
and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing
services, including the processing of credit cards and debit cards and it could disrupt our business if these companies become unwilling or unable to provide
these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers,
which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be
subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from customers or facilitate other types of online
payments, and our business and operating results could be adversely affected.
We are also subject to or voluntarily comply with a number of other laws and regulations relating to money laundering, international money transfers,
privacy and information security and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to civil
and criminal penalties or forced to cease our payments services business.
Federal laws and regulations, such as the Bank Secrecy Act and the USA PATRIOT Act and similar foreign laws, could be expanded to include Groupons.
Various federal laws, such as the Bank Secrecy Act and the USA PATRIOT Act and foreign laws and regulations, such as the European Directive on the
prevention of the use of the financial system for the purpose of money laundering and terrorist financing, impose certain anti-
money laundering requirements on
companies that are financial institutions or that provide financial products and services. For these purposes, financial institutions are broadly defined to include
money services businesses such as money transmitters, check cashers and sellers or issuers of stored value cards. Examples of anti-
money laundering
requirements imposed on financial institutions include subscriber identification and verification programs, record retention policies and procedures and
transaction reporting. We do not believe that we are a financial institution subject to these laws and regulations based, in part, upon the characteristics of
Groupons and our role with respect to the distribution of Groupons to subscribers. However, the Financial Crimes Enforcement Network, a division of the U.S.
Treasury Department tasked with implementing the requirements of the Bank Secrecy Act, recently proposed amendments to the scope and requirements for
parties involved in stored value or prepaid access cards, including a proposed expansion of financial institutions to include sellers or issuers of prepaid access
cards. In the event that this proposal is adopted as proposed, it is possible that a Groupon could be considered a financial product and that we could be a financial
institution. In the event that we become subject to the requirements of the Bank Secrecy Act or any other anti-
money laundering law or regulation imposing
obligations on us as a money services business, our regulatory compliance costs to meet these obligations would likely increase which could reduce our net
income.
State and foreign laws regulating money transmission could be expanded to include Groupons.
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