All Elements Connected With A Payment Transaction Fall Within The Scope Of The 'Payment System' Under The PMLA - Delhi HC

The Delhi High Court has ruled that PayPal, the online payment platform, qualifies as a 'payment system operator' under the Prevention of Money Laundering Act (PMLA) and is therefore obligated to comply with the reporting entity requirements outlined in the PMLA.

This means that PayPal will be required to adhere to Section 12 of the PMLA, which mandates a 'reporting entity' to maintain records of all transactions and verify the identities of all its clients for ten years. The court clarified that the determination of whether an entity falls within the definition of a 'payment system' is not solely based on the handling of funds.

PayPal had argued that since it was not considered a 'payment system operator' or 'reporting entity' under the Payment and Settlement System Act, 2007 (PSS Act), it should not be subject to the PMLA. However, the court rejected this argument and stated that all elements connected with a payment transaction between parties fall within the scope of 'payment system' under PMLA.

The court was addressing a plea filed by PayPal challenging a penalty of ₹96 lakhs imposed by the Financial Intelligence Unit (FIU) for failing to register as a 'reporting entity'. The company contended that it operates as a payment intermediary and online payment gateway service provider, not providing clearing, payment, money transfer, or settlement services, and thus, should not be considered a "financial institution" under the PMLA.

The FIU accused PayPal of deliberately and willfully contravening the PMLA by not registering as a reporting entity and also highlighted that the company reports suspicious transactions to foreign financial intelligence units but failed to comply with the process in India.

Justice Varma, after considering the case, ruled that PayPal does qualify as a 'payment system operator'. However, the court found the FIU's penalty order unjustified since PayPal had been cooperating with the FIU and had genuinely believed its operations fell outside the scope of the PMLA.