PayPal is a Payments System Operator, rules Delhi High Court

In a landmark ruling, the Delhi High Court ruled that the California-based online payment platform, PayPal, is a “Payment System Operator” under the Prevention of Money Laundering Act (PMLA). The Delhi High Court said that the company is therefore bound to comply with the obligations of the reporting entity under the PMLA.

In his 174-page ruling, Judge Yashwant Verma overturned the Lakh 96,000 fine that the Financial Intelligence Unit (FIU) imposed on PayPal, stating that it was “unjustified” as the company was found to be cooperating with the FIU and had acted under a firm belief that its operations did not fall within the scope of the PMLA.

The Court noted that the penalty could not be continued because it was necessary for the FIU to record reasons to justify the imposition of the maximum penalty stipulated in the law.

With PayPal now considered a “reporting entity,” it would have to comply with Section 12 of the PMLA that makes it mandatory for such entities to keep records of all transactions and to verify and retain records of all customers for ten years.

Also read: Fashion, travel and education technology are major sectors in cross-border payments for PayPal India

It falls within the scope of the payment system

The Delhi High Court rejected PayPal’s argument that since it is not considered a “payment system operator” or a “reporting entity” under the Payment and Settlement System Act 2007, it should ipso facto He is being held to fall outside the Chinese People’s Liberation Army’s tow net.

Varma held that the actual processing of funds could not be decisive as to whether the entity would fall within the scope of the payment system definition.

The Delhi High Court has also said that all elements of a transaction comprising or relating to a payment made between two parties will fall within the scope of the expression ‘Payment System’ as defined in Section 2(1)(rb) of the PMLA.

Thus any system that enables the transfer of funds between two parties appears to fall within the purview of a payment system. Thus, the Court finds no justification for restricting the application of the expression “payment system” only to those entities that may be directly or reluctantly involved in dealing with or transferring funds.

The order said that any interpretation contrary to what has been referred to above, will not only corrupt and impede the procedures that can be published, but will also obstruct and impede the collection and analysis of data that are crucial elements in anti-money laundering procedures.

The court noted that the technology on which PayPal relies enables the transfer of funds between parties at different ends, and that the mere fact that the platform also interacts with commercial banks or other payment aggregators will not detract from its recognition as a system that enables payment and takes care of money transfers.

“The Court finds it appropriate to stress that, given the objectives behind the promulgation of the PMLA and the activity it seeks to regulate and punish, there appears to be no legal justification for interpreting Section 2(1)(rb) to include only those entities that are directly involved in the handling, holding, or transfer of funds,” the order reads.

PayPal has approached the Delhi High Court to contest the ₹96 lakh penalty imposed on it by the FIU for not registering itself as a ‘Reporting Entity’.

PayPal claimed 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.