PayPal challenges order to comply with India's money laundering law

PayPal challenges order to comply with India's money laundering law

PayPal, the American online payment gateway, has moved the Delhi High Court to contest a verdict designating it as a "payment system operator" under the Prevention of Money Laundering Act (PMLA).

Being designated as a payment service operator would require PayPal to adhere to the "reporting obligations" outlined in the Act.

Represented by senior counsel, PayPal presented its case before the Bench consisting of Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula. The argument put forth by PayPal's legal team stressed that the ruling issued by a single-judge panel of the High Court was incorrect.

PayPal was represented in this case by senior advocate Mukul Rohatgi. Rohtagi further contended that the verdict of the single judge could not be upheld, particularly in light of a recent ruling by the High Court regarding the matter of payment system operators.

The Bench has scheduled the appeal for further consideration in September.

The single judge had on July 24 invalidated a fine of ₹96 lakh that the Financial Intelligence Unit (FIU) had imposed on PayPal. The fine was levied due to alleged non-compliance with the "reporting obligations" stipulated by the anti-money laundering law.

While delivering a verdict on a petition submitted by PayPal, which contested the FIU penalty, the judge had also concluded that PayPal should be categorised as a "payment system operator" under the PMLA and, therefore, must adhere to the corresponding "reporting obligations" outlined by the law.

The FIU had instructed PayPal on December 17, 2020, to remit the fine within 45 days. Additionally, due to its designation as a "payment system operator," PayPal was asked to register itself as a reporting entity with the FIU. The directive also mandated the appointment of a principal officer and director for communication within a fortnight of receiving the order.

As per the existing Indian law, a reporting entity is obliged to notify authorities about any foreign exchange financial transaction that takes place within its system.

The FIU as an entity operates under the federal government’s Department of Revenue. Its role involves gathering financial intelligence related to violations under the Prevention of Money Laundering Act (PMLA), 2002.

The single judge had underscored that the PMLA held a purpose beyond being solely a punitive statute. It also served the purpose of uncovering and preventing deceitful and questionable transactions. The judge emphasised that one must consider the commendable goals of the PMLA while attempting to decipher the intentions and extent of its diverse provisions.

In its order issued in December 2020, the FIU alleged that PayPal had violated the provisions of the PMLA by not adhering to its regulations and had engaged in "concealing" potentially suspicious financial transactions. The FIU also claimed that PayPal's actions contributed to the undermining of the integrity of India's financial system.

The legal dispute originated in March 2018 when the FIU instructed PayPal to become a registered reporting entity. This requirement encompassed maintaining records of all transactions, reporting any transactions that seemed suspicious, reporting cross-border wire transfers to the FIU, and identifying the recipients of these funds.

PayPal declined to comply with the FIU order issued under section 13 of the PMLA. Consequently, a show-cause notice was served to PayPal in September 2019.

PayPal justified its defiant stance by referencing the guidelines from the Reserve Bank of India. It contended that it solely functions as an Online Payment Gateway Service Provider (OPGSP) or a payment intermediary within India. According to PayPal, it does not fall under the category of a payment system operator or a financial institution, which consequently places it outside the scope of being deemed a reporting entity under the PMLA.

In its response to the FIU, PayPal had asserted that payment intermediaries like itself were not obligated to register with FIU-India.

The FIU dismissed PayPal's assertions and contended that PayPal was engaged in managing funds within India. According to the FIU's standpoint, PayPal constituted a "financial institution," which consequently made it eligible for classification as a reporting entity under the provisions of the PMLA.

The FIU, in its order, pointed out that while the company resisted compliance measures in India, its parent company, PayPal Inc., operating in the United States, actively reported suspicious transactions to the American FIU as well as comparable agencies in Australia and the United Kingdom.