Factual Background 

In the case of PayPal Payments Private Limited v Financial Intelligence Unit India & Anr PayPal filed a complaint in opposition to the Financial Intelligence Unit’s 96 lakh fine for failing to register as a reporting business. The corporation claimed that the FIU misapplied established legislative interpretation guidelines for interpreting PMLA clauses. PayPal asserted that it does not offer clearing, payment, money transfer, or settlement services, but rather serves as an online payment gateway and payment intermediary. Due to the company’s failure to register as a reporting entity, the FIU determined that these violations were intentional and willful. PayPal sends questionable transactions to the American FIU, Australian FIU, and UK authorities, the FIU also said.

Issue 

whether PayPal would be considered a payment mechanism under the definition of PMLA 

Argument Advance 

According to PayPal, since it was not deemed to be a payment system operator or reporting company under the Payment and Settlement System Act of 2007, it must consequently be determined that it is not subject to the PMLA’s provisions.

Analysis of Court order 

Yashwant Varma, a single judge on the Delhi High Court, ruled that PayPal is a payment system operator under the Prevention of Money Laundering Act and must thus adhere to the reporting entity requirements of the PMLA. Further, he said that PayPal would have to abide by Section 12 of the PMLA, which requires reporting entities to keep records of all transactions and to confirm and keep records of all of their clients’ identities for ten years. A reporting entity is subject to a number of additional requirements under the clause.

The Court determined that all components of transactions involving payments between parties fit under the PMLA’s definition of payment system in Section 2(1)(rb). This description includes PayPal, thus there is no need to limit the applicability to businesses engaged in the handling or transfer of money, either directly or indirectly. The court emphasised that data collection and procedures, which are essential components of AML anti-money laundering measures, would be hampered by any interpretation. The Bench further stated that PayPal’s technology interacts with commercial banks and payment aggregators as well as permits money transfers between parties. The Court emphasised that there is no legitimate basis for interpreting Section 2(1)(rb) to apply solely to organisations that handle, retain, or transfer cash in a direct manner. The platform is still recognised as a payment system despite its affiliation with commercial banks and payment aggregators.

The Court came to the conclusion that PayPal operates a payment system and found the FIU’s punishment to be unreasonable. The court determined that PayPal cooperated with the FIU and that it did not consider its operations to be covered by the PMLA. The court granted the writ petition in part, finding that PayPal must be treated as a payment system operator and must adhere to reporting entity requirements under the PMLA. However, for the aforementioned reasons, the penalty imposition order of 17 December 2020 was overturned.

CASE NAME – PayPal Payments Private Limited v Financial Intelligence Unit India & Anr W.P.(C) 138/2021