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Financial Intelligence Unit slaps ₹96 lakh fine on PayPal

The Finance Ministry’s Financial Intelligence Unit (FIU) has slapped at ₹96 lakh penalty against PayPal Payments Private Limited, the global payments giant’s Indian arm, in an order dated December 17, 2020.  The primary charge against PayPal is that it failed to register itself with the FIU for several years, which is a violation of  Prevention of Money Laundering Act, 2002 (PMLA).

This is the first time that the FIU has issued a penalty against a payments system provider and operator in the country for not following anti-money laundering norms. The order is based on an FIU direction which PayPal did not comply with and in response in September 2019 the FIU issued the company a show cause notice.

In its order, the FIU said that “there is ample evidence of the willful violation of the law and, therefore, PayPal cannot be let off with a penalty that should normally be imposed for minor violations.” It directed the company to pay the fine with 45 days and  register itself as a reporting entity with the FIU, as well as appoint a principal officer and director for communication within a fortnight of the receipt of the order.

In an emailed statement, a spokesperson for PayPal told MediaNama that it is fully committed to regulatory compliance. “We take our obligations seriously across 200 markets where our payments platform is present. We are carefully reviewing the matter and we cannot comment further at this point,” they said.

Payment intermediary or payment operator?

PayPal has contended that it is a payments intermediary, Online Payment Gateway Service Provider (OPGSP) and not a payment system operator, hence, it does not need to register as a reporting entity with the FIU. The apex financial intelligence body said this was not true. “The business model of PayPal is such that it undertakes payment and settlement between a customer and the merchant irrespective whether there is instant delivery of goods/services. In other words, in carrying out its domestic operations in partnership with banks, PayPal undertakes payment and settlement of a transaction irrespective of the client or business base,” the FIU said.

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The FIU says that not only does PayPal act as an intermediary, but it actively undertakes money transfer operations irrespective of the business activities excluded under Reserve Bank of India (RBI) regulations. “Further, PayPal undertakes to settle an online transaction by moving money from the customer’s account (issuing bank) to the merchant account, which ultimately transmits funds to the merchant’s bank account (acquiring bank) when the transaction is finalized,” it said. Therefore, PayPal is not just a payment intermediary but also operates payment system, the FIU said.

Since the PMLA does not distinguish between ‘payment systems’ and ‘payment services’, and has similar definitions for ‘payments systems’ and ‘payments operators’ as under RBI regulations, PayPal, “is a deemed payment system operator and therefore, a deemed reporting under the provisions of the Act,” the order said.

Since PayPal offers internet based payments services and cross border transactions (in arrangement with banks), it receives all transaction information which is crucial for the FIU to process, analyse and dissemination. “By not getting itself registered as a reporting entity with FIU-IND, PayPal is not only concealing suspect financial transactions but is also abetting in the disintegration of India’s financial system,” the FIU said.

The FIU order says that if PayPals’ contention was accepted other entities would cite these technicalities to not comply with the PMLA, and the objectives of the anti-money laundering law would be rendered “redundant”.

Shuttering parts of Indian business

While it was reported last week that PayPal would shutter parts of its Indian business from next year, in its submissions to the FIU in August 2020, the company said that it would not apply for a payments aggregator license from the RBI next year.  “PayPal also submitted to have informed the Reserve Bank of India about its cessation of domestic payment aggregator business in India,” the order says.

“As per PayPal, upon cessation of its domestic payment aggregator business in India, it will only undertake operations as online payment gateway service provider (OPGSP) in accordance with the Reserve Bank of India’s framework governing operations,” the order said.

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