Delhi HC seeks Centre’s stand in Paypal’s plea against order holding it as ‘payment system operator’ under PMLA

In its July 24 order, a single-judge had quashed the monetary penalty imposed by Financial Intelligence Unit India on PayPal in December 2020 for having failed to comply with the reporting obligations as placed under the Prevention of Money Laundering (Maintenance of Records) Rules 2005. While partly allowing Paypal’s plea, the single judge had discharged the bank guarantee of Rs 96 lakh submitted by PayPal with the HC’s Registrar General in terms of a 2021 court order.

Holding that Paypal is liable to be viewed as a “payment system operator”, the single judge had said that it is “consequently obliged to comply with reporting entity obligations as placed under the PMLA”.

The single judge had noted that all elements of the transaction connected with a payment being effected between two parties would appear to fall within the scope of the expression “payment system” under the PMLA, and the technology on which the platform of PayPal rests enables the transfer of money between parties at different ends.

In the previous hearing, Paypal had pointed to an August 7 order passed in Google Pay’s case by a Delhi HC division bench of Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad which said Google Pay is a “mere third party app provider” for which no authorisation from the Reserve Bank of India (RBI) is required under the provisions of the Payments and Settlement Systems (PSS) Act. This bench had dismissed two PILs seeking directions to Google Pay to cease its operations in the country over an alleged violation of regulatory and privacy norms. Paypal had argued that the order of the single judge won’t stand in view of the August 7 order.

Appearing for Paypal, senior advocate Sandeep Sethi today submitted that the definition of Payment system under the PMLA is “identical” as that in the PSS Act. The bench however orally said that definition may be identical in the two statutes but the intent of the PMLA has to be kept in mind. Sethi further submitted that Paypal is not a payment system operator but a payment gateway.

Appearing for the FIU, Additional Solicitor General S V Raju argued, “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”. The bench thereafter orally said that this is a worry and that is why the court is being cautious. Through its appeal, Paypal has sought quashing of the single judge’s order asserting that the order employs an “arbitrary and impractical interpretation” of Payment System under the PMLA to arrive at its conclusion.

The single judge had 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 also be held to fall outside the dragnet of the PMLA. “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 HC had said in the July order.