Paypal is a payment system operator, has to comply with PMLA, says Delhi HC

A single judge bench of Justice Yashwant Varma in its order passed on July 24 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.

According to PMLA, a “payment system operator” is a person including an individual, a company, a firm, an agency or an association of individuals that operates a payment system. Such a person would include his overseas principal.

An overseas principal, in the case of an individual, would mean someone residing outside India, who owns, controls or manages, directly or indirectly, the activities or functions of the payment system in India.

In the case of a company, a firm, an association of persons, a body of individuals, an overseas principal would be understood as all these aforementioned entities either owning or controlling or managing, directly or indirectly, the activities or functions of payment system in India.

A “reporting entity” means a banking company, financial institution, intermediary or a person carrying on a designated business or profession. The HC held that the 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 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 said.

A payment system means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them.

The HC said 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) (definition of payment system) to embrace only those entities which are directly engaged in the handling, retention or transfer of funds,” the judgment said.

While partly allowing Paypal’s plea, Justice Varma discharged the bank guarantee of Rs 96 lakh submitted by PayPal with the Registrar General in terms of a 2021 court order.

“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 impugned order shall stand set aside to the aforesaid extent,” the HC said, adding that the imposition of the penalty “unjustified” as PayPal was “justifiably” proceeding under the bona fide belief that its operations did not fall within the ambit of the PMLA.