Delhi High Court in its recent ruling in the matter of Paypal Payments Private Limited v. Financial Intelligence Unit India & Anr. W.P (C) 138/2021 held that the payment platform PayPal is liable to be viewed as a “payment system operator” and therefore, is obliged to comply with the obligations of a “reporting entity” as placed under Section 12 of the Prevention of Money Laundering Act, 2002 (“PMLA”). PMLA and the rules thereunder require every reporting entity (banking company, financial institution, and intermediaries) to furnish certain reports such as Cash Transaction reports (CTRs), Suspicious Transaction Reports (STRs), Counterfeit Currency Reports (CCRs), Non-Profit Organization reports (NPRs). It is pertinent to note that PayPal had approached the Delhi High Court challenging the Rs. 96 Lakh penalty imposed on it by the Financial Intelligence Unit (FIU) for not registering itself as a ‘reporting entity’ and the Delhi High Court in its verdict had quashed the penalty imposed by FIU.

This law was introduced with effect from 15.02.2013 whereby PMLA has tried to link the corresponding law with the provisions of laws of foreign countries to introduce the concept of reporting entity to enlarge the definition of the offence of money-laundering to include therein the activities like concealment, acquisition, possession and use of proceeds of crime as criminal activities. Not only this, the Act also conferred power on the Director to call for records of transactions or any additional information that may be required for the purposes of the Prevention of money laundering and also to make inquiries for non-compliance of reporting obligations cast upon them.

The categorization of PayPal as a reporting entity by the Delhi High Court will ensure that all the big payment gateways and platforms are regulated, they share the Stipulated Suspicious Transaction Reports (STRs) and cross-border wire transfer reports with the Financial Intelligence Units (“FIUs”), thereby enabling FIUs disseminating these reports to various probe agencies such as the Enforcement Directorate or CBIs to investigate the offence of money laundering tax evasion and other serious financial frauds. The High Court passed the verdict by rejecting the argument by PayPal that since it was not considered to be a ‘payment system operator’ or ‘reporting entity’ under the Payment and Settlement System Act, 2007, it must Ipso facto be held to fall outside the dragnet of the PMLA. The Court held that

“Any system which enables the transfer of money between two ends would thus appear to fall within the ambit of the expression payment system. The Court thus finds no justification to restrict the application of the expression ‘payment system’ only to those entities that may be directly or undeviatingly engaged in the handling or transferring of funds.

The last review of India by FATF indicated that the country has made significant progress and with India being due for review later this year, recent legal and regulatory changes such as the recent Delhi High Court verdict implemented to further improve financial governance and combat money laundering can be seen in this light. With India being a fast-growing economy and one of the most attractive investment destinations, India has the highest volume of digital transactions in the world, and therefore, strict regulations on the prevention of financing terrorism, proliferation financing, and financial cyber-crimes are forecasted. A strong Anti-Money Laundering (AML)/ Combating the Financing of Terrorism (CFT) regime is important not only for India from a domestic policy standpoint but also for enhancing its international standing and therefore, complying with the FATF recommendations is the highest priority for India.

By - Prapti Allagh