PayPal is a payment system operator under PMLA; should comply with reporting entity obligations: Delhi High Court

The Delhi High Court Monday held that online payment platform PayPal is a 'payment system operator' within the framework of Prevention of Money Laundering Act (PMLA) and, therefore, obliged to comply with the reporting entity obligations under the PMLA [PayPal Payments Private Limited v Financial Intelligency Unit India & Anr]..It means that PayPal will have to comply with Section 12 of the PMLA which makes it mandatory for a ‘reporting entity’ to maintain records of all transactions and verify and maintain the records of identities of all its clients for a period of ten years. The provision places a range of other obligations on a ‘reporting entity’..Single-judge Justice Yashwant Varma held that actual handling of funds cannot be decisive of whether an entity would fall within the ambit of the definition of 'payment system'.The Court rejected PayPal’s argument that since it was not considered to be a ‘payment system operator’ or ‘reporting entity’ under the Payment and Settlement System Act, 2007 (PSS Act), it must ipso facto be held to fall outside the dragnet of the PMLA.The Court said that all the elements of a transaction comprised or connected with a payment being effected between two parties would fall within the scope of the expression ‘payment system’ as defined under Section 2(1)(rb) of the PMLA (which defines ‘payment system') and PayPal falls under the definition.“The Court thus finds no justification to restrict the application of the expression “payment system” only to those entities which may be directly or undeviatingly engaged in the handling or transferring of funds. Any interpretation contrary to what has been noted above, would not only scuttle and impede the measures liable to be deployed but also obstruct and hamper data collection and analysis which constitute critical elements of AML [Anti-Money Laundering] measures,” the bench said..It added that the technology on which PayPal rests enables the transfer of money between parties at different ends and the mere fact that the platform also interacts with commercial banks or other payment aggregators would not detract it from being recognised as a system which enables payment and is concerned with money transfer operations.“The Court deems it apposite to emphasise that bearing in mind the objectives underlying the promulgation of PMLA and the activity that it seeks to regulate and penalise, there appears to be no legal justification to interpret Section 2(1)(rb) to embrace only those entities which are directly engaged in the handling, retention or transfer of funds,” the judgment said. .The Court was dealing with a plea filed by PayPal challenging the penalty of ₹96 lakh imposed on it by the Financial Intelligence Unit for not registering itself as a ‘reporting entity’. It was PayPal’s case that the FIU wrongly interpreted PMLA provisions against all settled principles of statutory interpretation.The company claimed that it functions as a payment intermediary and online payment gateway service provider to its customers, and does not provide clearing, payment, money transfer or settlement services.Consequently, it contended that it is not a "financial institution" under Section 2(1)(l) of the PMLA, and therefore, need not register itself as a reporting entity under Section 2(1) (wa) of the Act. .The FIU said that Paypal had defeated and frustrated the tenets of public interest and the provisions of the PMLA by not complying with the law.It said that these contraventions were “deliberate and wilful” as the company did not register itself as a “reporting entity” as mandated under the PMLA. FIU also flagged that while PayPal defied the process in India, it reports suspicious transactions to the American FIU and also to the agencies in Australia and the UK..After considering the case, Justice Varma concluded that PayPal is a 'payment system operator.However, it ruled that the FIU’s order imposing penalty on PayPal was unjustified because the company was found to be cooperating with FIU and it had acted under a bona fide belief that its operations did not fall within the ambit of the PMLA.“The instant writ petition is partly allowed. In terms of the conclusions recorded hereinabove, the Court holds that PayPal is liable to be viewed as a “payment system operator” and consequently obliged to comply with reporting entity obligations as placed under the PMLA. The imposition of penalty in terms of the impugned order dated 17 December 2020 is, however and for reasons aforenoted, quashed," the Court concluded..Senior Advocates Kapil Sibal and Sajan Poovayya along with advocates Shally Bhasin, Shreya Mukerjee, Prateek Gupta, Varshini Sudhinder and Palash Maheshwari appeared for PayPal.Advocates Zoheb Hossain, Vivek Gurnani and Farheen Penwale represented the FIU.Senior Advocate Parag P Tripathi with advocates Ramesh Babu, Manisha Singh, Rohan Srivastava and Mishika Bajpai appeared for the RBI..[Read Judgment]