Delhi High Court: PayPal is a Payment System Operator under PMLA Must Comply with Obligations Under PMLA

Delhi High Court: PayPal is a Payment System Operator under PMLA Must Comply with Obligations Under PMLA

The Delhi High Court has set aside a penalty of Rs. 96 lakhs imposed on American online payment gateway PayPal by the Financial Intelligence Unit-India (FIU) for alleged non-compliance with the reporting obligations under the law against money laundering.

The single judge Justice Yashwant Varma was dealing with the petition challenging the impugned order passed by the first respondent the Financial Intelligence Unit India holding it to be a reporting entity under the Prevention of Money Laundering Act, 2002 and consequently proceeding to impose monetary penalties for it having failed to comply with the reporting obligations as placed under the Prevention of Money Laundering (Maintenance of Records) Rules 2005.

The Court observed that the online payment platform PayPal is a ‘payment system operator’ within the framework of Prevention of Money Laundering Act, 2002 (PMLA) and, therefore, obliged to comply with the reporting entity obligations under the PMLA. Therefore, PayPal is required to comply with Section 12 of the PMLA which makes it mandatory for a ‘reporting entity’ to maintain records of all transactions and verify and maintain the records of identities of all its clients for a period of ten years. The provision places a range of other obligations on a ‘reporting entity.’

In this case, the officials of the petitioner- PayPal had participated in a meeting with the Additional Director of the FIU where they had been invited to explain the scope and content of their business operations in India. The petitioner asserted that it had expressed its willingness to cooperate with the FIU in that meeting and remains bound by that obligation.

It was PayPal’s case that the FIU wrongly interpreted PMLA provisions against all settled principles of statutory interpretation.

The company claimed that it functions as a payment intermediary and online payment gateway service provider to its customers, and does not provide clearing, payment, money transfer or settlement services.

Consequently, it contended that it is not a "financial institution" under Section 2(1)(l) of the PMLA, and therefore, need not register itself as a reporting entity under Section 2(1) (wa) of the Act.

The FIU said that Paypal had defeated and frustrated the tenets of public interest and the provisions of the PMLA by not complying with the law.

It said that these contraventions were “deliberate and wilful” as the company did not register itself as a “reporting entity” as mandated under the PMLA.

FIU also flagged that while PayPal defied the process in India, it reports suspicious transactions to the American FIU and also to the agencies in Australia and the UK.

The High Court opined that the question of whether PayPal is liable to be treated as a payment system operator must fundamentally be answered on a construction of Section 2(1) (rb) and (rc) of the PMLA alone and not by its conduct in other jurisdictions where the gamut of services provided by it range far wider than those that are ordinarily extended by an OPGSP.

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 ipso facto be held to fall outside the dragnet of the PMLA.

The Court 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 (which defines ‘payment system') and PayPal falls under the definition.

“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,” observed the Court.

With regard to the monetary penalty, the Court found merit in the challenge raised by PayPal. On first principles, the Court noted that undisputedly the levy of penalty was imbued with a quasi-criminal characteristic.

It was this aspect which was highlighted by the Supreme Court in Hindustan Steel Ltd. vs. State of Orissa (1969) when it observed that the penalty would be justified provided it is established that a party had failed to comply with legal obligations deliberately, in defiance of the law or be guilty of contumacious or dishonest conduct. The Supreme Court had pertinently observed that penalty would not be leviable merely because it was lawful to do so.

Averting to the present case, the Court observed that the imposition of penalty was clearly unjustified in the facts of the case. As per records, PayPal had consistently taken the position that it could not be held to be a payment system operator under the PMLA.

The Court stated that the stand taken by the petitioner in this regard could not possibly be said to be wholly specious or in willful disobedience to abide by a legal obligation which was either apparent or free from doubt. It was held that PayPal could thus, be justifiably said to have been proceeding under the bona fide belief that its operations did not fall within the ambit of the PMLA.

The Court pointed out that even when the writ petition was entertained, the Court had in its order of 12 January 2021 taken note of the perceptible incompatibility between the stand taken by FIU and the RBI and which led to the constitution of a committee of experts. This too would seem to indicate that the issues raised by PayPal were not free from doubt and that its challenge was found to, prima facie, raise triable questions.

Therefore, the Court held that proceeding then to the issue of quantification, as per Section 13(2)(d) does not prescribe or stipulate the imposition of penalty for each month of default. The Court avowed that the provision does speak of non-compliance amounting to a continued infraction or one which may warrant the imposition of penalty on a monthly basis. It was imperative for FIU to have recorded reasons in justification of the levy of the maximum penalty provided under the statute, opined the judge.

The Court also found itself unable to sustain the impugned order insofar as it proceeds to observe that PayPal would be ‘deemed’ to be a payment system operator.

The Judge asserted, “A deeming fiction must stand specifically engrafted in a statutory provision. A legal fiction would be available to be invoked only in a situation where the Legislature engrafts such a measure or frames the provision in language which justifies the existence of such a fiction being recognized to operate.”

Hence, it was that the FIU’s order imposing penalty on PayPal was unjustified because the company was found to be cooperating with FIU and it had acted under a bona fide belief that its operations did not fall within the ambit of the PMLA.

In view of the above, the bench partly allowed the petition and held 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.

Senior Advocates Kapil Sibal and Sajan Poovayya along with Advocates Shally Bhasin, Shreya Mukerjee, Prateek Gupta, Varshini Sudhinder and Palash Maheshwari appeared for PayPal.

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.