PayPal moves HC against order holding it as payment system operator under PMLA

American online payment gateway PayPal on Wednesday moved the Delhi High Court against an order which ruled that it was a "payment system operator" under the Prevention of Money Laundering Act (PMLA) and has to thus comply with "reporting obligations" under it.

Senior counsel appearing for PayPal argued before a bench headed by Chief Justice Satish Chandra Sharma that the order passed by a single judge of the high court was “wrong”.

Senior advocate Mukul Rohatgi, appearing for the appellant, also said that the single judge's order cannot be sustained in view of a recent decision of the high court on the issue of payment system operator.

The bench, also comprising Justice Sanjeev Narula, listed the appeal for further hearing in September.

On July 24, the single judge had set aside a penalty of Rs 96 lakh imposed on PayPal by Financial Intelligence Unit (FIU) -- India for alleged non-compliance with the "reporting obligations" under the law against money laundering.

It had also ruled that PayPal was liable to be viewed as a "payment system operator" under the PMLA and has to thus comply with "reporting obligations" under it.

The single judge's order came on a petition by PayPal challenging the penalty imposed on it by the FIU.

The FIU on December 17, 2020, had directed the company to pay the fine within 45 days and also register itself as a reporting entity with the FIU on account of being a "payment system operator", appoint a principal officer and director for communication within a fortnight of the receipt of the order.

Under the law, a reporting entity has to report to authorities any foreign exchange financial transaction which occurs on its system.

Financial Intelligence Unit (FIU)– India is an organisation under the Department of Revenue, Government of India which collects financial intelligence about offences under the Prevention of Money Laundering Act, 2002.

The single judge had said that the PMLA was not merely a penal statute but also aimed towards discovery and prevention of fraudulent and suspicious transactions, and its salutary objectives must be borne in mind while seeking to unravel the intent and scope of its various provisions.

The FIU-India in its December 2020 order had accused PayPal of contravening the PMLA and "concealing" suspect financial transactions and abetting "disintegration" of India's financial system.

According to the order, the legal tussle had begun in March 2018 when the FIU asked PayPal to register as a reporting entity for keeping a "record" of all transactions, reporting suspicious transactions and cross-border wire transfers to the FIU, and for identifying beneficiaries of these funds.

According to the order issued under section 13 of the PMLA, PayPal had refused the FIU's directive and hence a show-cause notice was issued to it in September 2019.

PayPal had defended its action and cited the Reserve Bank of India guidelines to state that it only operates as an Online Payment Gateway Service Provider (OPGSP) or a payment intermediary in India and is "not covered within the definition of a payment system operator or financial institution and in turn, not covered under the definition of a reporting entity under the PMLA".

"Therefore, at this time, payment intermediaries, such as PayPal, are not required to register as such with the FIU-India," it had said in its reply to the agency.

The FIU, however, had rejected its claims and said PayPal was very much involved in handling funds in India, was a "financial institution" and hence qualifies to be a reporting entity under the PMLA.

The FIU order had also said while the company "defies" the process in India, its parent company in the US - PayPal Inc - reports suspicious transactions to the American FIU and also to similar agencies in Australia and the UK.