PayPal challenges court decision labeling it a payment system operator in money laundering law

On Wednesday, American online payment platform PayPal took legal action by approaching the Delhi High Court in response to a verdict that categorized it as a “payment system operator” under the Prevention of Money Laundering Act (PMLA). Consequently, PayPal is required to adhere to “reporting obligations” outlined in the law. The company’s senior counsel argued before Chief Justice Satish Chandra Sharma’s bench, stating that the previous ruling made by a high court judge was incorrect. Senior advocate Mukul Rohatgi, representing PayPal, emphasized that this verdict couldn’t stand in light of a recent high court decision concerning the classification of a payment system operator. The court, including Justice Sanjeev Narula, scheduled further hearings for September.

The dispute originated from an order issued on July 24, wherein a single judge overturned a Rs 96 lakh penalty imposed by the Financial Intelligence Unit (FIU) on PayPal for alleged non-compliance with reporting obligations related to money laundering laws. The judge’s ruling also affirmed PayPal’s classification as a “payment system operator” subject to such reporting duties. The single judge’s decision stemmed from PayPal’s petition challenging the FIU’s imposed penalty. The FIU, which gathers financial intelligence pertaining to money laundering offenses, accused PayPal of violating the PMLA, concealing suspicious transactions, and contributing to India’s financial system’s instability.

In December 2020, the FIU instructed PayPal to pay the fine and register as a reporting entity, appoint a principal officer, and director for communication. PayPal, however, contested this directive, referencing Reserve Bank of India guidelines that differentiate its role as an Online Payment Gateway Service Provider rather than a payment system operator. Despite PayPal’s stance, the FIU maintained its position, arguing that the company’s actions in India qualify it as a financial institution and therefore a reporting entity under the PMLA. This dispute underscores the legal complexity surrounding PayPal’s classification and its responsibilities under Indian money laundering laws.