Pella’s responsible investing process incorporates Norms-Based requirements to identify and exclude companies that do not meet minimum standards of business practices and behaviour. Establishing minimum standards necessarily means there must be red lines that, when crossed, necessitate screening out or exiting a stock. Visa recently crossed one of Pella’s red lines.

On 29 July, newswires reported that a California district judge had denied Visa’s motion to be dropped from a lawsuit against MindGeek, the owner of PornHub and other similar websites. The judge ruled that “the court can comfortably infer that Visa intended to help MindGeek monetize child porn” by “knowingly provid[ing] the tool used to complete the crime”. However, the judge also ruled that “[the plaintiff] has no basis for claiming Visa directly participated in the sex trafficking ventures that harmed her” and ordered the plaintiff to provide “a more definite statement with respect to her common law civil conspiracy cause of action against Visa”.

The alleged incident at the centre of the lawsuit is disturbing, so we won’t be repeating the detailed allegations. Even so, our first thought upon seeing the news was that: while it would be best for Visa to have nothing at all to do with the porn industry, it seems very hard to believe that a company of its standing would have knowingly facilitated (or even turned a blind eye to) any illegal activity, let alone something as abhorrent as what has been alleged.

This ties in with our higher-level view that it would be unreasonable to hold a service business, particularly one that is virtually a utility, accountable for the illegal behaviour of one of its millions of clients… provided that the service business (1) acted in good faith, (2) had suitable rules/guidelines in place, and (3) had no knowledge of the specific behaviour in question. As an owner of Visa stock when the news emerged, we expected that those provisos would all have been satisfied.

Unfortunately, as we dug deeper into the matter, we became increasingly uncomfortable. To be clear, we are not claiming to have any special insight into the legal intricacies of the case, and we have no idea what the court will ultimately find in relation to the allegations. Nor have we seen anything to suggest that Visa had any specific knowledge of, or was complicit in, the alleged illegal behaviour by MindGeek.

Our growing concern was whether Visa had acted in utmost good faith once the allegations that form the basis of the lawsuit first came to light.

Here is a timeline of how things unfolded, based primarily on information published on the NCOSE (National Centre on Sexual Exploitation) website:

• 2014 through to 2020: Rough timeframe for the allegations contained in the lawsuit.
• February 2020: NCOSE publishes a series of articles drawing attention to the “recent news that sex-trafficked children and adults have been found on the [Pornhub] website”. Sample headline: “Is Visa Processing Payments for Sex Trafficking Porn Videos? It’s Likely.” NCOSE also adds Visa to its “Dirty Dozen list of mainstream contributors to sexual exploitation”.
• May 2020: According to a statement issued by NCOSE and the International Centre on Sexual Exploitation: “Child safety and anti-sexual exploitation advocates and organizations from Australia, Belgium, Bolivia, Canada, Denmark, England, India, Ireland, Liberia, Scotland, Sweden, Uganda, and the United States of America sent a joint letter this week to major credit card and payment processing companies requesting them to stop processing payments for the hardcore pornography industry… As international anti-exploitation leaders, we urgently call on these financial institutions to cease processing payments and thereby refuse to aid human rights violations.”
• 4 December 2020: The New York Times publishes a major expose titled “The Children of Pornhub: Why does Canada allow this company to profit off videos of exploitation and assault?”. In the wake of this expose, Visa and Mastercard issue statements saying that they will stop processing all credit card payments to Pornhub.
• 12 December 2020: NCOSE publishes an article titled “BREAKING: Credit Card Companies Still Funding Pornhub via MindGeek’s TrafficJunky”. The article reveals that Visa and Mastercard continued to process payments made to TrafficJunky, the advertising platform for Pornhub and MindGeek’s other websites. According to the article (and a follow up in March 2022), MindGeek generates the bulk of its revenue via TrafficJunky. The March 2022 article went on to say that “[TrafficJunky] itself is being exposed for abusive practices in how it deliberately targets ads towards illegal content”.
• June 2021: The plaintiff files the lawsuit against MindGeek and Visa.
• June 2022: MindGeek’s CEO and COO resign in the wake of a New Yorker exposé alleging that Pornhub hosted non-consensual videos, including those with children.
• 29 July 2022: The district judge denies Visa’s motion to be dropped from a lawsuit against MindGeek.
• 4 August 2022: Visa and Mastercard suspend TrafficJunky from their payment networks.

The most generous interpretation of the above timeline is that, within the massive Visa machine, there was a failure of communication and/or processes which allowed the relationship with TrafficJunky to continue even after the processing of payments to Pornhub was stopped.

A more cynical interpretation would be that Visa made the decision to shut the high-profile front door, while leaving the back door open.

Given the strength of Visa’s corporate credentials and ESG positioning, we would normally have assumed the former to be the much more likely explanation. However, the high-profile nature of the December 2020 decision to stop processing payments to Pornhub, followed by the NCOSE articles highlighting the TrafficJunky situation, makes it a lot harder to see this as a simple failure of internal communication. The speed at which Visa (and Mastercard) terminated their processing of TrafficJunky payments in the wake of the district judge’s ruling also concerns us.

Based on Visa’s apparent delayed and inconsistent responses to the MindGeek challenge, Pella determined that its behaviour crossed our Norms-Based red line, and we chose to exit our fund’s position in Visa. We will continue to monitor the situation and, when and if, Visa and Mastercard demonstrate they have developed effective systems to guarantee non-facilitation of the alleged breaches, they will return to being candidates for inclusion in Pella’s funds.