In a significant ruling, the Delhi High Court has held that the California-headquartered online payment platform, PayPal, is a ‘Payment System Operator’ within the framework of Prevention of Money Laundering Act (PMLA). The company is therefore obliged to comply with the reporting entity obligations under the PMLA, the Delhi High Court has said.

In his 174-page judgement, Justice Yashwant Verma however quashed a monetary penalty of ₹96 lakh imposed by the Financial Intelligence Unit (FIU) on PayPal, noting that it was “unjustified” as the company was found to be cooperating with FIU and it had acted under a bonafide belief that its operations did not fall within the ambit of the PMLA.

The Court noted that the penalty cannot be sustained as it was imperative for FIU-Ind to have recorded reasons in justification of the levy of the maximum penalty provided under the statute. 

With PayPal now held to be a ‘reporting entity’, it would have to comply with Section 12 of the PMLA which makes it mandatory for such entities to maintain records of all transactions, verify and maintain the records of all clients for a period of ten years. 

Also read: Fashion, travel & edtech are key verticals in cross-border payments for PayPal India 

‘Falls under the ambit of payment system’

The Delhi High 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, it must Ipso facto be held to fall outside the dragnet of the PMLA.

Varma held that an actual handling of funds cannot be decisive of whether an entity would fall within the ambit of the definition of payment system.

The Delhi High Court also 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.

“Any system which enables the transfer of money between two ends would thus appear to fall within the ambit of expression payment system. 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 Anti Money Laundering measures”, the order said.

The Court noted 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 order said.

PayPal had approached Delhi High Court challenging the ₹ 96 lakh penalty imposed on it by the FIU for not registering itself as a ‘reporting entity’.

PayPal had contended that it was not a “financial institution” under Section 2(1)(i) of the PMLA, and therefore, need not register itself as a reporting entity under Section 2(1)(wa) of the Act.

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