The Delhi High Court on Tuesday sought response of the Financial Intelligence Unit (FIU) India on American online payment gateway PayPal's plea challenging the Rs 96 lakh penalty imposed on it for alleged violation of anti-money laundering law.
The high court also stayed the FIU's December 17, 2020 order subject to PayPal maintaining records of all its transactions in a secure server and depositing within two weeks in the high court a bank guarantee of Rs 96 lakh.
Justice Prathiba M Singh issued notice to the FIU and sought its stand on PayPal's plea by February 26. The high court also directed the Managing Director of PayPal India to give an undertaking that in case the company does not succeed in the matter, it will furnish all the data as required to be provided by a reporting entity. The high court also made the Reserve Bank of India (RBI) a party in the matter as it was governing the functioning of PayPal.
It directed the RBI and the Ministry of Finance to constitute a committee of its representatives to take a policy decision at the highest level on whether a company like PayPal, which facilitates transactions, can be considered as a payment system operator and also as a reporting entity under the Prevention of Money Laundering Act (PMLA).
The high court said a "clear policy decision" has to be taken at the highest level as this is the first case of its kind and any decision taken now would affect any such similar business which might be set up in future.
"Their becoming a reporting entity is of major consequence," the judge said.
Under the law, a reporting entity is one which has to report to the authorities any foreign exchange financial transaction which occurs on its system.
PayPal, during the hearing, told the court that any bank or authorised dealer of foreign exchange will be a reporting entity.
The high court said the committee may meet in a week and the decision taken be placed before it by way of an affidavit before the next date of hearing.
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, appoint a principal officer and director for communication within a fortnight of the receipt of the order.
PayPal has claimed that it was only a facilitator of financial transactions between registered banks and only charges a small amount as a "facilitator fee".
The FIU told the high court that there is a provision for appeal against the December 17, 2020 order by approaching the appellate tribunal within one-and-a-half month.
It also contended that the plea ought to have been filed in the Bombay High Court which would be the appropriate forum.
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 contraventions as "deliberate and wilful", FIU in its December 17, 2020 order 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 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 2019.
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 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, is a "financial institution" and 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.