PayPal Liable To Be Viewed As ‘Payment System Operator’, Required To Comply With Reporting Entity Obligations Under PMLA: Delhi High Court

The Delhi High Court has held that payment platform PayPal is liable to be viewed as a “payment system operator” and consequently obliged to comply with reporting entity obligations as placed under the Prevention of Money Laundering Act, 2002.

Justice Yashwant Varma made the observation while quashing 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.

The FIUI had held PayPal to be a reporting entity under the PMLA. However, it was the case of the payment platform that it was not a "payment system operator” as defined under PMLA and that it would be erroneous for FIUI to hold it to be a reporting entity.

It was PayPal’s case that the FIUI had arbitrarily imposed the highest monetary penalty of Rs.1,00,000 for each of the three alleged offences for every month, stretching over a period of 32 months. According to PayPal, the quantification of penalty was clearly rendered unsustainable.

Granting relief to PayPal, the court said that it finds itself unable to sustain the imposition of penalty and thus, the same is liable to be quashed.

While partly allowing the plea, Justice Varma discharged the bank guarantee of Rs. 96 lakhs submitted by PayPal with the Registrar General in terms of a court order passed on January 12, 2021.

“….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 court said.

Justice Varma observed that all elements of the transaction comprised or connected with a payment being effected between two parties would appear to 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 the 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 AML measures,” the court said.

It added that mere fact that PayPal also interacts with AD (authorized dealers) Category Banks or other PAs (payment aggregators) in the transactions would not detract from the platform being recognised to be a system which enables payment and one which is concerned with money transfer operations.

Senior Advocates Kapil Sibal and Sajan Poovayya appeared for PayPal.

Advocates Zoheb Hossain, Vivek Gurnani and Farheen Penwale represented the Financial Intelligence Unit.

Senior Advocate Parag P. Tripathi with Advocates Ramesh Babu, Manisha Singh, Rohan Srivastava and Mishika Bajpai appeared for the RBI.

Title: PAYPAL PAYMENTS PRIVATE LIMITED v. FINANCIAL INTELLIGENCE UNIT INDIA & ANR.

Citation: 2023 LiveLaw (Del) 620

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