PMLA compliance: PayPal questions contrary stand of Central government on GPay in Delhi High Court

The Delhi High Court Wednesday sought Central government's stand on an appeal filed by PayPal challenging a single-judge's order holding that it is a 'payment system operator' within the framework of the Prevention of Money Laundering Act (PMLA) and, therefore, obliged to comply with the 'reporting entity' obligations under the Act..A division bench of Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula heard the matter and asked Central Government Standing Counsel (CGSC) Kirtiman Singh to obtain instructions on the matter. The bench said it will hear the matter next on September 5. .Senior Advocates Mukul Rohatgi and Sajan Poovayya appeared for PayPal and told the Court that the issue is covered by a division bench order in Google Pay's case. Notably, the Google Pay judgement was delivered by a bench headed by Chief Justice Sharma. Rohatgi stated that the Central government took contrary stands before the single-judge against PayPal and before the Chief Justice bench in Google Pay's case. "How are they opposing me in one courtroom and supporting me in another?" he asked. .In the Google Pay judgment, the division bench had held, on August 7, that Google Pay is not a payment system provider under the Payment and Settlement Systems Act (PSS Act). .However, in the order pronounced against PayPal on July 24, Justice Yashwant Varma held that PayPal will have to comply with Section 12 of the PMLA which makes it mandatory for a ‘reporting entity’ to maintain records of all transactions and verify and maintain the records of identities of all its clients for a period of ten years. The provision places a range of other obligations on a ‘reporting entity’.The single-judge had rejected PayPal’s argument that since it was not considered to be a ‘payment system operator’ or ‘reporting entity’ under the Payment and Settlement System Act, 2007 (PSS Act), it must ipso facto be held to fall outside the dragnet of the PMLA.“The Court deems it apposite to emphasise that bearing in mind the objectives underlying the promulgation of PMLA and the activity that it seeks to regulate and penalise, there appears to be no legal justification to interpret Section 2(1)(rb) to embrace only those entities which are directly engaged in the handling, retention or transfer of funds,” the judgment had said..PayPal had filed the plea before the single-judge challenging the penalty of ₹96 lakhs imposed on it by the Financial Intelligence Unit (FIU) for not registering itself as a ‘reporting entity’.It was PayPal’s case that the FIU had wrongly interpreted PMLA provisions against all settled principles of statutory interpretation.The company claimed that it functions as a payment intermediary and online payment gateway service provider to its customers, and does not provide clearing, payment, money transfer or settlement services.Consequently, it contended that it is not a "financial institution" under Section 2(1)(l) of the PMLA, and therefore, need not register itself as a reporting entity under Section 2(1) (wa) of the Act.The FIU said that Paypal had defeated and frustrated the tenets of public interest and the provisions of the PMLA by not complying with the law.It said that these contraventions were “deliberate and wilful” as the company did not register itself as a “reporting entity” as mandated under the PMLA.After considering the case, Justice Varma concluded that PayPal is a 'payment system operator.However, it ruled that the FIU’s order imposing penalty on PayPal was unjustified because the company was found to be cooperating with FIU and it had acted under a bona fide belief that its operations did not fall within the ambit of the PMLA.Hence, the single-judge partly allowed the petition and set aside the penalty though he ruled that Paypal is a 'payment system operator'. .PayPal is a payment system operator under PMLA; should comply with reporting entity obligations: Delhi High Court