PayPal Moves Delhi HC Against Order Recognising It As Payment System Operator Under PMLA

On July 24, 2023, a single judge of the Delhi High Court ruled that PayPal is considered a "payment system operator" under the PMLA and must adhere to reporting obligations

PayPal on Wednesday moved Delhi High Court against an order which said that the US firm was a "payment system operator" under the Prevention of Money Laundering Act (PMLA) and that it has to comply with "reporting obligations" under the act. PayPal has been contesting that it only operates as an Online Payment Gateway Service Provider (OPGSP) or a payment intermediary in India

According to a PTI report, representing PayPal, Senior advocate Mukul Rohatgi told the HC that the ruling made by a single judge of the high court last month was deemed "incorrect." Rohatgi told the HC bench led by Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula that the verdict cannot hold ground in light of a recent court decision on payment system operators.

The bench has scheduled the hearing for the appeal to continue in September, the report said. 

The case dates back to 2018, when the Financial Intelligence Unit (FIU) asked PayPal to register as a reporting entity, requiring them to keep records of transactions and report suspicious transactions, cross-border wire transfers. 

As per law, a reporting entity is obligated to inform authorities about any foreign exchange financial transaction that takes place within its system. The Financial Intelligence Unit (FIU)– India is a body under the purview of the Government of India's Department of Revenue. It specialises in gathering financial intelligence related to violations under the Prevention of Money Laundering Act, 2002.

PayPal refuses to comply with the FIU's directive, prompting the issuance of a show-cause notice to the company. In December 17, 2020, FIU imposes a penalty of Rs 96 lakh on PayPal for non-compliance with reporting obligations under the PMLA. The FIU also instructs PayPal to register as a reporting entity, appoint a principal officer and director for communication, and pay the fine within 45 days. The FIU-India in its order had accused PayPal of contravening the PMLA and "concealing" suspect financial transactions and abetting "disintegration" of India's financial system, as per the report. 

On July 24, 2023, a single judge of the Delhi High Court sets aside the penalty imposed by the FIU on PayPal. However, the judge ruled that PayPal is considered a "payment system operator" under the PMLA and must adhere to reporting obligations. 

PayPal had justified its stance by referencing Reserve Bank of India (RBI) guidelines, asserting it operates as an Online Payment Gateway Service Provider (OPGSP) or intermediary in India. The company contended it does not fall under the definition of a payment system operator or financial institution, thus not needing to register with the FIU-India under the Prevention of Money Laundering Act (PMLA).

In response, the FIU dismissed PayPal's arguments, maintaining that the company is indeed engaged in managing funds in India, categorising it as a "financial institution" and thereby subject to reporting entity requirements under the PMLA.

Additionally, the FIU noted that while PayPal challenges the process in India, its parent company, PayPal Inc, abides by reporting norms for suspicious transactions with financial intelligence units in the United States, Australia, and the UK.