Panel on whether payment gateway reporting entity under PMLA is contrary to court order: PayPal to HC

American online payment gateway PayPal on Thursday told the Delhi High Court that the constitution of a committee to examine whether entities like it can be considered as a payment system operator and a reporting entity under PMLA was contrary to the court's orders.

Therefore, the report submitted by the committee was illegal, PayPal said to Justice Rekha Palli who was hearing the company's plea challenging a Rs 96 lakh penalty imposed on it by the Financial Intelligence Unit (FIU) India for alleged violation of the Prevention of Money Laundering Act (PMLA).

The FIU on December 17, 2020, had directed the company to pay the fine within 45 days and also register itself as a reporting entity with the FIU, and appoint a principal officer and director for communication within a fortnight of the receipt of the order.

Under the law, a reporting entity is one which has to report to authorities any foreign exchange financial transaction which occurs on its system.

The high court had on January 12 stayed the December 17, 2020, order of the FIU subject to PayPal maintaining records of all its transactions in a secure server and depositing a bank guarantee of Rs 96 lakh within two weeks in the high court.

PayPal, thereafter, deposited the bank guarantee in the high court.

On Thursday, Justice Palli said the interim order in favour of PayPal shall continue till the next date of hearing on July 28.

The court listed the matter on July 28 after PayPal said it wanted to go through the committee's report.

PayPal has contended that only a bank or an authorised dealer of foreign exchange will be a reporting entity and said that it is only a facilitator of financial transactions between registered banks and only charges a small amount as a "facilitator fee".

The FIU in its order had accused PayPal of contravening the PMLA and "concealing" suspect financial transactions and abetting "disintegration" of India's financial system.

Terming the contravention as "deliberate and wilful", FIU held the company guilty on three broad counts, the fundamental being its failure to register itself as a "reporting entity" with the federal agency as mandated under the PMLA.

As per the order, the legal tussle began in March, 2018 when the FIU asked PayPal to register as a reporting entity for keeping "record" of all transactions, reporting suspicious transactions and cross-border wire transfers to the FIU and for identifying the beneficiaries of these funds.

The FIU analyses and shares these reports with various intelligence and investigative agencies for further action.

As per the order issued under section 13 of the PMLA, PayPal refused the FIU's directive and hence a show cause notice was issued to it in September 2019.

PayPal defended its action and cited the Reserve Bank of India guidelines to state that it only operates as an Online Payment Gateway Service Provider (OPGSP) or a payment intermediary in India and is "not covered within the definition of a payment system operator or financial institution and in turn, not covered under the definition of a reporting entity under the PMLA".

"Therefore, at this time, payment intermediaries, such as PayPal, are not required to register as such with the FIU-India," it had said in its reply to the agency.

The FIU, however, had rejected its claims and said PayPal was very much involved in handling funds in India, and is a "financial institution", which hence qualifies to be a reporting entity under the PMLA.

The FIU order had also said while the company "defies" the process in India, its parent company in the US - PayPal Inc - reports suspicious transactions to the American FIU and also to similar agencies in Australia and the UK.