HC asks Centre to respond to PayPal’s appeal challenging order holding it as payment system operator under money laundering law

The Delhi High Court Tuesday sought the Centre’s response on an appeal filed by US online payment gateway PayPal challenging an order which said it was a payment system operator under the Prevention of Money Laundering Act (PMLA) and has to comply with reporting obligations under it.

A bench of Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula issued notice to the Ministry of Finance and asked it to file a detailed reply in the matter within four weeks.

The bench said it was an important issue under consideration and impleaded the Ministry of Finance as a party to the appeal while listing the matter for further hearing on October 18.

The division bench had on August 23 issued notice and sought the response of Financial Intelligence Unit (FIU) India on PayPal’s appeal.

In the appeal, PayPal has challenged the single judge’s July 24 judgment, asserting that the verdict employed an arbitrary and impractical interpretation of Payment System’ under the PMLA to arrive at its conclusion.

The single judge had partly allowed PayPal’s petition to the extent of quashing the fine imposed on it. However, the finding that PayPal is a reporting entity under the PMLA was upheld by the single judge.

On July 24, the single judge had set aside a penalty of Rs 96 lakh imposed on PayPal by 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.

On Tuesday, senior advocate Sandeep Sethi, representing PayPal, argued that company neither makes any payment nor receives it and that it was only a payment gateway.

Additional Solicitor General S V Raju, representing FIU India, said PayPal’s own officials have conceded that the platform can be used for terror financing.

“Suppose, someone from Lashkar-e-Taiba sitting in Pakistan sends money to a person in Delhi to get explosives, you will not have any way of knowing it,” he argued.

Responding to his contention, the bench said, this is the worry of the nation and that is why the court is being cautious.

The single judge’s order had come on a petition by PayPal challenging the penalty imposed on it by FIU.

The FIU had on December 17, 2020 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, and 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.

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 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 had in its December 2020 order 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, 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 following which a show-cause notice was issued to it in September 2019.

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PayPal had defended its action and cited the Reserve Bank of India guidelines to state 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 had, however, 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 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.

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