FIU slaps Rs 96 lakh penalty against PayPal for violating India's anti-money laundering processes

American online payment gateway giant PayPal has been imposed a Rs 96 lakh penalty by the FIU for alleged contravention of the anti-money laundering law and accused of "concealing" suspect financial transactions and abetting "disintegration" of India's financial system.

PayPal, which began India operations in November 2017, said it was fully committed to follow due processes and is "carefully reviewing the matter".

The company has also been charged with "defeating and frustrating" the tenets of public interest and the provisions of the Prevention of Money Laundering Act (PMLA), which aims to keep the country's financial system safe from economic crimes, terrorist financing and black money transactions.

Calling the contraventions as "deliberate and wilful", the Financial Intelligence Unit (FIU) in a scathing 27-page order issued on December 17 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.

"...I, in exercise of powers conferred upon me under section 13(2)(d) of the PMLA, 2002 impose a total fine of Rs 96 lakh only on PayPal Payments Private Limited which will be commensurate with the violations committed by it," the order issued by FIU Director Pankaj Kumar Mishra said.

It 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".

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

An appeal against the order can also be made before the Appellate Tribunal of the PMLA within 1.5 months.

A PayPal spokesperson told PTI 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," he said.

This is for the first time that the FIU, an agency under the Union finance ministry, has undertaken punitive action against an online payment system operating in the country like it has done against public, private and cooperative banks in the past for not following anti-money laundering procedures in keeping their financial channels clean.

As per the order accessed by PTI, the legal tussle between the FIU and PayPal began in March, 2018 when the latter asked the company 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 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 last year.

PayPal defended its action and cited 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 said in its reply to the agency.

PayPal also stated that it has "submitted" to the RBI its decision to cease domestic payment aggregator business in India before June next year.

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

"The business model offered by PayPal clearly indicated that it not only acts as an intermediary but actively undertakes money transfer operations...

"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 finalised," the order said.

It added, "By virtue of enabling payment system for its users by way of credit card, debit card, money transfer operations, PayPal is functioning as a payment system operator and is therefore deemed to be a reporting entity..."

The order 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.

Sharing of suspicious transaction reports by PayPal was "crucial" in enabling FIU to share such information with Indian law enforcement agencies and by refusing to register it was "not only concealing suspect financial transactions but is also abetting in the disintegration of India's financial system" and posing "enhanced risk to the financial system of India", the order said.

It noted that if PayPal's contention was accepted, the objective of the anti-money laundering law would be rendered "redundant" and other such entities "will find some reason to technically escape being categorised as one (reporting entity) and frustrate the very purpose and object of the PMLA".