The Delhi High Court has ruled that the online payment platform PayPal is a 'payment system operator' within the framework of the Prevention of Money Laundering Act (PMLA) and must comply with reporting entity obligations under the Act. The court's decision means that PayPal will be required to maintain records of all transactions, verify and maintain the identities of all its clients for ten years, and fulfill other obligations placed on reporting entities.
Brief Facts:
The High Court's decision came in response to a plea filed by PayPal challenging the penalty of ₹96 lakh imposed on it by the Financial Intelligence Unit (FIU) for not registering itself as a 'reporting entity' under the PMLA. PayPal contended that it functions as a payment intermediary and online payment gateway service provider, not providing clearing, payment, money transfer, or settlement services, and, therefore, it is not a "financial institution" under the PMLA and should be exempt from reporting entity obligations.
Contentions of the Parties:
The FIU accused PayPal of deliberately and willfully defeating the provisions of the PMLA by not registering as a 'reporting entity' while reporting suspicious transactions to other countries' FIUs. The court, however, ruled that the imposition of the penalty was unjustified since PayPal had cooperated with the FIU and genuinely believed its operations were not within the PMLA's ambit.
Observations by the Court:
Justice Yashwant Varma, in the single-judge bench, held that being a 'payment system operator' is not solely determined by the actual handling of funds, rejecting PayPal's argument that it should be exempt from PMLA requirements as it was not considered a 'payment system operator' or 'reporting entity' under the Payment and Settlement System Act, 2007 (PSS Act).
The court emphasized that all elements connected with payment transactions fall within the scope of the expression 'payment system' as defined in the PMLA, including PayPal's activities. The technology on which PayPal operates enables money transfers between parties, making it a payment system, and interacting with banks and payment aggregators does not detract from its role as a payment system operator.
While quashing the penalty, Justice Varma clarified that PayPal is indeed a 'payment system operator' and must comply with the reporting entity obligations as placed under the PMLA. According to the court, any system facilitating money transfers between two parties falls under the definition of a "payment system." The court found no reason to limit this definition solely to entities directly involved in handling or transferring funds. An interpretation contrary to this would hinder the implementation of essential measures and obstruct data collection and analysis, which are critical elements of anti-money laundering measures.
The decision of the Court:
The court partly allowed the instant writ petition. Based on the conclusions stated above, it held that PayPal should be considered a "payment system operator" and, therefore, must comply with the reporting entity obligations under the PMLA.
As a result of the court's ruling, PayPal will now be required to maintain records of its transactions, verify customer identities, and fulfill other obligations under the PMLA.
Case Name: PayPal Payments Private Limited v Financial Intelligence Unit India & Anr
Coram: Hon’ble Mr. Justice Yashwant Varma
Case No.: W.P.(C) 138/2021 & CM APPL. 421/2021 (Interim Relief), CM APPL. 37179/2022 (Direction)
Advocates of the Petitioners: Senior Advocates Kapil Sibal and Sajan Poovayya along with Advocates Shally Bhasin, Shreya Mukerjee, Prateek Gupta, Varshini Sudhinder and Palash Maheshwari.
Advocates of the Respondents: Advocates Zoheb Hossain, Vivek Gurnani and Farheen Penwale represented the FIU. Senior Advocate Parag P Tripathi with advocates Ramesh Babu, Manisha Singh, Rohan Srivastava and Mishika Bajpai appeared for the RBI.
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