PayPal Challenges Indian Court’s Ruling on “Payment System Operator” Status

September 18, 2023

PayPal is challenging a Delhi High Court ruling that classified it as a “payment system operator” under the Prevention of Money Laundering Act (PMLA), subjecting it to “reporting entity obligations.” The court’s single judge bench had concluded that all elements of transactions on PayPal’s platform fall under the PMLA’s definition of a “payment system.” However, the judge quashed a monetary penalty imposed by the Financial Intelligence Unit-India (FIU-India) for non-compliance with reporting obligations.

What arguments did PayPal put forth in its defense against the classification under the PMLA?

PayPal argued that it only provides a technological interface for transactions and does not handle funds directly. It cited the Reserve Bank of India’s stance that it is not a reporting entity under the Payments and Settlement Systems (PSS) Act.

does the definition of “payment system operator” under the PMLA differ from the Payments and Settlement Systems (PSS) Act?

The PMLA has a broader scope in its definition of “payment system operator,” which includes entities that enable and involve the movement of funds between two parties, whereas the PSS Act is more specific to payment aggregators and intermediaries directly handling funds.

What are the reporting entity obligations under the PMLA?

Reporting entities under the PMLA are required to maintain records of transactions, keep them confidential, verify the identity of clients under the Aadhar Act, and maintain information on “enhanced due diligence” for a specified period.

How does PayPal’s business model work with respect to handling funds in transactions?

PayPal explained that it serves as a technological platform facilitating transactions between parties, but it does not directly handle funds. The movement of funds is managed by Authorised Dealer (AD) banks at different stages of the transaction.

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