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Synopsis

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

The bench of Justice Yashwant Varma said, "PayPal is a 'payment system operator' within the framework of Prevention of Money Laundering Act (PMLA) and, therefore, obliged to comply with the reporting entity obligations 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 ordered.

“In view of the above, the Bank Guarantee as submitted by PayPal shall stand discharged. The Registrar General of the Court is requested to take further steps in light of the above”, it said.

The online payment gateway had challenged the order of December 17, 2020 passed by the FIU-India holding it to be a “reporting entity” under the PMLA Act and consequently, proceeded to impose monetary penalties for having failed to comply with the reporting obligations as placed under the Prevention of Money Laundering (Maintenance of Records) Rules 2005.

In its 174-page order, Justice Varma rejected the penalty imposed by FIU-India upon PayPal and said that it was "clearly unjustified" as PayPal was under the bona fide belief that its operations did not fall within the ambit of the PMLA.

PayPal stated that it is not a ‘payment system operator’ as defined under the PMLA and consequently, it would be erroneous for FIU-India to hold it to be a ‘reporting entity’. It was stated on the basis of it not being engaged in rendering services related to clearing, payment or provisions of settlement between a payer and a beneficiary.

Senior Advocates Kapil Sibal and Sajan Poovayya on behalf of PayPal contended that it merely provides a technological interface enabling export related transactions that may be undertaken by an Indian exporter and an overseas buyer.

“It is its categorical case that in the chain of transaction which ensues between the Indian exporter and an overseas buyer, PayPal is at no stage engaged in the actual handling of funds. According to it, the transmission of funds occurs between the constituent Authorised Dealer Category-1 Schedule Commercial Banks5 which not only collect the amounts from the foreign purchaser directly and without any intervention of PayPal, the said funds are then transmitted to the AD Partner Bank‘s Export Collection Account”, the court noted.

PayPal also relied upon the stand as struck by the Reserve Bank of India which in separate proceedings had averred on affidavit that it is not a payment system operator.

“The petitioner sought to derive advantage from the stand so taken by RBI in those proceedings since the definition of a ‘Payment System’ under the Payments and Settlements System Act 2007 is identical to the provision embodied in the PMLA”, the judge noted.

Advocate Zoheb Hossain on behalf of FIU-India, argued that the challenge as mounted by PayPal ignores well-settled principles of statutory interpretation. He submitted that it is by now well-settled that a statutory provision must be interpreted consistent with the purpose of the enactment. He pointed out that there exists a “stark and evident difference” between the PSS Act and PMLA.

Hossain contended that PSS is merely a ‘financial regulatory statute’, whereas PMLA constructs a framework which is intended to deal with special fiscal offences and illicit financial flows. He also submitted that the mere fact that PayPal is not recognized to be covered by the provisions of the PSS Act would not be determinative of the question of whether it is liable to be treated as a payment system operator under the PMLA.

“The instant writ petition is partly allowed. In terms of the conclusions recorded hereinabove, 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 court said.

Case Title: PayPal Payments Private Limited v. Financial Intelligence Unit India & Anr.