Why is the Block share price diving 5% the day before results?

An investigation is casting a shadow over the payment giant's upcoming results.

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The Block Inc CDI (ASX: SQ2) share price is sinking like an anchor today ahead of its first quarter results.

While the S&P/ASX 200 Index (ASX: XJO) is rising, investors are giving the Block sell button a workout. At the time of writing, shares are down 5.3% to $106.29 apiece. Yet the share price reached a session low of $103.84 in the first hour of trade.

It just happens to be a day ahead of the fintech company's quarterly announcement.

Coincidence?

The fear of a rough result may be kickstarting the exit. However, we don't need to look too hard to see a more likely cause for concern.

Reports are circulating that Block — the owner of Cash App, Afterpay, and Square — is under investigation. The United States Department of Justice (DOJ) is rumoured to be closely examining the Fintech player amid allegations of inadequate compliance measures.

By law, financial services providers are required to conduct checks to prevent money laundering and facilitating terrorism. A former employee of the sprawling company alleges Block has fallen short on multiple occasions, dragging down the share price.

For example, documentation supplied by the whistleblower shows transactions involving countries exposed to sanctions by the United States. The transactions — some of which are made in cryptocurrency — are across the likes of Russia, Iran, and Cuba.

Notably, these financial dealings were allegedly being carried out as recently as last year.

What is more problematic is the purported knowledge of such activity across people at a leadership level in Block. A claim presented by the whistleblower's lawyer Edward Siedle, who said:

It's my understanding from the documents that compliance lapses were known to Block leadership and the board in recent years.

It's not the first time such claims have been levelled at the payments giant.

Forensic financial research firm Hinderburg Research launched a short report at Block in March last year. Hinderburg alleged the company's Cash App product avoids regulation and facilitates a range of criminal activity under the guise of 'frictionless financial technology'.

Knocking Block share price before big day

It's an ill-timed issue for Block. Tomorrow morning will see the financial conglomerate release its first-quarter results for FY2024 in its native US market.

Today's reports of an investigation by the DOJ undoubtedly put a dampener on the event. Almost certainly investors will be asking questions on the rumoured investigation tomorrow during the company's earnings call.

Speaking of which… consensus estimates are for 16.6% top-line growth year-on-year, reaching US$5.82 billion. Earnings before, interest, taxes, depreciation, and amortisation (EBITDA) is expected to be US$588 million, surging 59.6% from the prior corresponding period.

The Block share price is heading into the result with a gain of 18.8% over the past 12 months.

Motley Fool contributor Mitchell Lawler has positions in Block. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Block. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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