PayPal Obliged to Fulfill Reporting Duties Under PMLA as Payment System Operator

Paypal Payments Private Limited Vs Financial Intelligence Unit India & Anr (Delhi High Court)

Delhi High Court held that PayPal is liable to be viewed as “payment system operator” and obliged to comply with reporting entity obligation as placed under Prevention of Money Laundering Act, 2002 (PMLA).

Facts- PayPal Payments Private Limited, the petitioner impugns the order passed by the first respondent the Financial Intelligence Unit India holding it to be a “reporting entity” under the Prevention of Money Laundering Act 2002 and consequently proceeding to impose monetary penalties for it having failed to comply with the reporting obligations as placed under the Prevention of Money Laundering (Maintenance of Records) Rules 2005.

PayPal asserts that it is not a “payment system operator” as defined under the PMLA and consequently it would be erroneous for FIU-IND to hold it to be a Reporting Entity. This is asserted on the basis of it not being engaged in rendering services relating to clearing, payment or provision of settlement between a payer and a beneficiary. It essentially avers that it merely provides a technological interface enabling export related transactions that may be undertaken by an Indian exporter and an overseas buyer. It is its categorical case that in the chain of transaction which ensues between the Indian exporter and an overseas buyer, PayPal is at no stage engaged in the actual handling of funds. According to it, the transmission of funds occurs between the constituent Authorised Dealer Category-1 Schedule Commercial Banks which not only collect the amounts from the foreign purchaser directly and without any intervention of PayPal, the said funds are then transmitted to the AD Partner Bank‘s Export Collection Account. PayPal also relies upon the stand as struck by the Reserve Bank of India which in separate proceedings had averred on affidavit that it is not a payment system operator. The petitioner seeks to derive advantage from the stand so taken by RBI in those proceedings since the definition of a “Payment System” under the Payments and Settlements System Act 2007 is identical to the provision embodied in the PMLA.

Conclusion- Held that the instant writ petition is partly allowed. The Court holds that PayPal is liable to be viewed as a “payment system operator” and consequently obliged to comply with reporting entity obligations as placed under the PMLA. The imposition of penalty in terms of the impugned order dated 17 December 2020 is, however, quashed. The impugned order shall stand set aside to the aforesaid extent.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

A. PREFACE

1. PayPal Payments Private Limited¹, the petitioner impugns the order dated 17 December 2020 passed by the first respondent the Financial Intelligence Unit India² holding it to be a ―reporting entity” under the Prevention of Money Laundering Act 2002³ and consequently proceeding to impose monetary penalties for it having failed to comply with the reporting obligations as placed under the Prevention of Money Laundering (Maintenance of Records) Rules 2005⁴. PayPal asserts that it is not a ―payment system operator” as defined under the PMLA and consequently it would be erroneous for FIU-IND to hold it to be a Reporting Entity. This is asserted on the basis of it not being engaged in rendering services relating to clearing, payment or provision of settlement between a payer and a beneficiary. It essentially avers that it merely provides a technological interface enabling export related transactions that may be undertaken by an Indian exporter and an overseas buyer. It is its categorical case that in the chain of transaction which ensues between the Indian exporter and an overseas buyer, PayPal is at no stage engaged in the actual handling of funds. According to it, the transmission of funds occurs between the constituent Authorised Dealer Category-1 Schedule Commercial Banks⁵ which not only collect the amounts from the foreign purchaser directly and without any intervention of PayPal, the said funds are then transmitted to the AD Partner Bank‘s Export Collection Account. PayPal also relies upon the stand as struck by the Reserve Bank of India⁶ which in separate proceedings had averred on affidavit that it is not a payment system operator. The petitioner seeks to derive advantage from the stand so taken by RBI in those proceedings since the definition of a ―Payment System‖ under the Payments and Settlements System Act 2007⁷ is identical to the provision embodied in the PMLA.

2. For the purposes of evaluating the challenge which stands raised, it would be apposite to notice the following essential facts. As per the disclosures made in the writ petition the officials of the petitioner are stated to have participated in a meeting with the Additional Director of the FIU-IND on 08 October 2017 where they had been invited to explain the scope and content of their business operations in India. The petitioner asserts that it had expressed its willingness to cooperate with the FIU-IND in that meeting and remains bound by that obligation even today. On 16 March 2018 FIU-IND issued a communication directing PayPal to register itself as a reporting entity under the PMLA. FIU-IND further asserted that the business model of PayPal clearly established that it would fall within the definition of a reporting entity as embodied in Section 2(1)(wa) of the PMLA. FIU-IND alleged that despite the detailed clarifications that had been submitted by PayPal it was convinced that it was liable to register itself in accordance with the statutory obligations placed by the PMLA. Acknowledging the receipt of that letter, PayPal in terms of its communication of 06 April 2018 sought further time to respond. Ultimately and on 17 April 2018, it addressed a communication to FIU-IND asserting that it could not be treated as a reporting entity and that it was in any case not operating a payment system. It would be apposite to extract the following parts from the aforesaid communication hereinbelow:-

“3. We would take this opportunity to bring to your kind notice that PayPal conducts the following businesses in India:

a. Operates and provides domestic payment gateway services with Partnership with Scheduled Commercial Banks with nodal and card acquiring bank arrangements.

b. Operates under RBI’s Online Payment Gateway Service (OPGSP) guidelines and processes export related receipts from exporters in arrangement with AD Category – I Schedule commercial Bank.

4.RBI does not consider or regulate PayPal and similar companies as an operator of a “payment system” under the Payment System Services Act (“PSS Act“) by virtue of PayPal providing payment intermediary services. Since the definition of “payment system” under the PMLA and the PSS Act is the same, therefore in our view, the same interpretation should also be applied in case of the definition of a “payment system” under the PMLA, and Pay Pal should not be considered to be a “payment system operator” for the purposes of the PMLA.

5. Further, from our inquiries on the FIU registration process, we are not able to ascertain how payment intermediaries such as PayPal can register. For example, on the ‘Reporting entity number‘ (registration number or any number used in correspondence with the regulator). Since PayPal is not a regulated entity, we do not have any registration number or authorization letter directly from RBI which we use in correspondence with regulator nor we have any direct formal engagement with them. All formal interactions with RBI are made through the nodal, AD and acquiring banks only.

6. Additionally, we have been advised by an external law firm that payment intermediary companies such as PayPal should not be considered as a “reporting entity” (as defined in Section 2(wa) of the PMLA) and is therefore not required to comply with the requirements, conditions that are applicable to a “reporting entity” under the PMLA and the rules made thereunder.

Request

7. Based on all of the above, we believe that PayPal is not covered under the definition of a “reporting entity” under the PMLA and therefore at this time cannot register as such with the India FIU.

Despite this, we remain very open and eager to have further discussions with the FIU India to identify an alternative and mutually agreeable solution that supports the FIU and PayPal in our joint goals of disrupting and preventing financial crime.

8. Given the above, we kindly request that you grant us time to meet you in-person for us to seek further guidance and discuss the best possible way forward.”

3. On 23 July 2019 FIU-IND issued a Show Cause Notice purporting to be under Section 13 of the PMLA addressed to PayPal and its six officers alleging non-compliance of Section 12 of the PMLA along with Rule 7 of the 2005 Rules. PayPal was in terms of the aforesaid notice called upon to show cause why suitable directions be not issued against them including the imposition of penalties. Responding to the aforesaid show cause notice, PayPal on 08 August 2019 asserted as under:-

” 3. We would like to highlight that PayPal is not licensed as a ‘payment system operator‘ under the Payment and Settlement Systems Act, 2007 (the “PSS Act”) and is not treated as a payment system operator by the Reserve Bank of India (the “RBI“).

4. As we had set out in our letter to the FIU-IND dated 17 April 2018 (since when there has been no change in the in the business activity being conducted by PayPal), PayPal conducts the following businesses in India:

a. Operates and provides domestic payment gateway services in partnership with Scheduled Commercial Banks with nodal and card acquiring bank arrangements in accordance with the “Directions for Opening and Operation of Accounts and Settlement of Payments for Electronic Payment Transactions involving Intermediaries” dated 24 November 2009 with reference number RBI/2009-10/231 DPSS.CO.PD.No.1102/02.14.08/2009-10 (“Payment Intermediary Circular“) issued by the RBI.

b. Operates under the regulatory framework set out in the circulars issued by the RBI applicable to Online Payment Gateway Service Providers (“OPGSP“) and processes export related receipts from exporters in arrangement with an AD Category – 1 Schedule Commercial Bank.

We request that the contents of our letter dated 17 April 2018 to the FIU-IND may be read as part of the present reply.

5. We would like to clarify that PayPal is classified as a payment intermediary and not a ‘payment system operator‟ under the rules and regulations issued by the RBI in this respect. A payment system intermediary, such as PayPal, is required to comply with the Payment Intermediary Circular which provides for a separate regime regulating the functioning of the payment system intermediaries.

6. PayPal’s business in India of providing payment processing services and facilitation of processing and settlement of import and export related payments is governed under the framework prescribed by the RBI-“Processing and settlement of import and export related payments facilitated by Online Payment Gateway Service Providers“. While providing such services, PayPal operates as an OPGSP and is compliant with the applicable RBI regulatory framework.

7. It is submitted that the RBI does not consider or regulate PayPal as an operator of a “payment system” under the PSS Act by virtue of PayPal providing payment intermediary services.

Request

8. Based on what is stated above, we believe that payment intermediaries, such as PayPal, are 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-IND.

9. We wish to further submit that unless the PMLA and/or the applicable rules are amended in order to specifically include payment intermediaries, such as PayPal, within the definition of a ‘payment system operator‘, we sincerely request that FIU-IND not consider PayPal as a “reporting entity” required to register with the FIU-IND.

B. PA’s AND OPGSP’s- REGULATORY FRAMEWORK

4. As would be evident from the aforesaid extracts PayPal had reiterated the stand taken on earlier occasions by contending that it was not a payment system operator as defined under the PMLA and that payment intermediaries could not be said to be reporting entities under the enactment. It was PayPal‘s case further that till appropriate amendments are introduced in the PMLA as well as the 2005 Rules, it could not be forced to register as a reporting entity under the PMLA.

The said show cause notice was followed by, yet another notice issued by FIU-IND on 17 September 2019 reiterating that PayPal had failed to register as a reporting entity despite earlier communications issued and thus making it liable to face imposition of penalties by the FIU-IND. PayPal responded to the said show cause notice in terms of its letter of 11 October 2019. Apart from the various pleas which had been raised in its earlier communication, PayPal additionally averred that it was essentially an Online Payment Gateway Service Provider⁸ and which business is governed and regulated solely by the various circulars issued by the RBI from time to time. It would be pertinent to note that with the tremendous growth of e-commerce and financial transactions being affected on the internet, RBI had firstly issued directions in respect of electronic and online payments on 24 November 2009. Those directions had been issued in exercise of powers conferred upon it by Section 18 of the 2007 Act. Dealing further with the subject of processing and settlement of import and export related payments facilitated specifically by OPGSPs, RBI had issued a subsequent circular dated 24 September 2015. This was in addition to the guidelines which had been circulated by RBI for regulation of Payment Aggregators and Payment Gateways on 17 March 2020. In order to understand the concept of Payment Aggregators⁹ and OPGSPs it would be pertinent to firstly advert to the Intermediary Directions issued on 24 November 2009 ¹⁰and which defined intermediaries engaged in facilitating electronic and online payments. The said directions are reproduced hereinbelow: –

” Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries

1. Introduction

1.1 The use of Electronic/Online Payment modes for payments to merchants for goods and services like bill payments, online shopping etc. has been gaining popularity in the country. The increased facilitation by banks and prepaid payment instrument issuers of the use of electronic modes by customers for payments to merchants generally involves the use of intermediaries like aggregators and payment gateway service providers. Further, Electronic Commerce and Mobile Commerce (e-commerce and m-commerce) service providers have also been acting as intermediaries by providing platforms for facilitating such payments.

1.2 In most existing arrangements involving such intermediaries, the payments made by customers (for settlement of e-commerce/m-commerce/bill payment transactions), are credited to the accounts of these intermediaries, before the funds are transferred to the accounts of the merchants in final settlement of the obligations of the paying customers. Any delay in the transfer of the funds by the intermediaries to the merchants account will not only entail risks to the customers and the merchants but also impact the payment system.

1.3 With a view to safeguard the interests of the customers and to ensure that the payments made by them are duly accounted for by the intermediaries receiving such payments and remitted to the accounts of the merchants who have supplied the goods and services without undue delay, it is considered necessary to frame these directions for the safe and orderly conduct of these transactions. Accordingly, following directions are being issued under Section 18 of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007).

2. Definitions

2.1 Intermediaries: Intermediaries would include all entities that collect monies received from customers for payment to merchants using any electronic/online payment mode, for goods and services availed by them and subsequently facilitate the transfer of these monies to the merchants in final settlement of the obligations of the paying customers.

Explanation: For the purpose of these directions, all intermediaries who facilitate delivery of goods/services immediately/simultaneously (e.g. Travel tickets/movie tickets etc) on the completion of payment by the customer shall not fall within the definition of the expression “intermediaries”. These transactions which are akin to a Delivery versus Payment (DvP) arrangement will continue to be facilitated as per the contracts between the merchants and the intermediaries as hitherto and banks shall satisfy themselves that such intermediaries do not fall within the definition of the “intermediaries” when they open accounts other than internal accounts.

2.2 Merchants: For the purpose of these directions, merchants shall include all Electronic commerce/Mobile commerce service providers and other persons (including but not limited to utility service providers) who accept payments for goods and service provided by them, through Electronic/Online Payment modes.

3. Maintaining of accounts for collection of payments

3.1 All accounts opened and maintained by banks for facilitating collection of payments by intermediaries from customers of merchants, shall be treated as internal accounts of the banks. While it is left to the banks to decide on the exact nomenclature of such accounts it shall be ensured that such accounts are not maintained or operated by the intermediaries.

3.2 Banks shall ensure that the process of converting all the existing accounts maintained and operated by intermediaries for the purpose covered in these directions shall be completed within three months of issuance of these directions.

3.3 For the sake of further clarity, the permitted credits/debits in these accounts are set out below:

i. Credits

a) Payments from various persons towards purchase of goods/services.

b) Transfers from other banks as per pre-determined agreement into the account, if this account is the nodal bank account for the intermediary.

c) Transfers representing refunds for failed/disputed transactions.

ii. Debits

a) Payments to various merchants/service providers.

b) Transfers to other banks as per pre-determined agreement into the account, if that account is the nodal bank account for the intermediary.

c) Transfers representing refunds for failed/disputed transactions.

d) Commissions to the intermediaries. These amounts shall be at predetermined rates/frequency.

Note: No payment other than the commissions at the pre­determined rates/frequency shall be payable to the intermediaries. Such transfers shall only be effected to a bank account intimated to the bank by the intermediary during the agreement.

3.4 Pending conversion of the existing accounts to internal accounts, banks shall ensure that only transactions as stated at paragraph 3.3 are permitted in these accounts. This process shall be implemented with immediate effect.

4. Settlement

4.1 The final settlements of funds to the merchants are presently guided by business practices followed by the intermediaries/merchants. In order to increase the efficiency of the payment process, it is necessary that banks transfer funds to the ultimate beneficiaries with minimum time delay. It is therefore mandated that banks shall implement the following settlement cycle for all final settlements to merchants. This settlement arrangement shall be implemented within three months of issuance of this circular:-

i. All payments to merchants which do not involve transfer of funds to nodal banks shall be effected within a maximum of T+2 settlement cycle (where T is defined as the day of intimation regarding the completion of transaction).

ii. All payments to merchants involving nodal banks shall be effected within a maximum of T+3 settlement cycle.

5. Treatment of balances by banks

5.1 As the funds held in the accounts as indicated in paragraph 3.1 would be in the nature of outside liability of the bank, the balances in these accounts shall be reckoned as such for the purpose of computation of Net Demand and Time Liabilities of the bank.

6. Concurrent Audit

6.1 Banks shall subject these accounts to concurrent audit and a certificate to the effect that these accounts are operated in accordance with these directions shall be submitted to Department of Payment and Settlement System, Reserve Bank of India, on a quarterly basis.

7. Instruction applicable to other payment system operators

7.1 All persons authorized to operate payment system for issuance of prepaid payment instruments and card schemes shall facilitate compliance with these directions.‖

5. In terms of the circular of 24 September 2015, RBI permitted AD Category- I Banks to offer facilities similar to those as provided by OPGSPs by entering into standing arrangements with the latter. It becomes pertinent to note that the aforenoted circular was preceded by the circular dated 16 November 2010 which had permitted similar arrangements with respect to exports. The aforenoted two circulars thus enabled AD Category I Banks to enter into standing arrangements with OPGSPs both with respect to exports as well as imports. The relevant parts of the aforesaid circulars are extracted hereinbelow:-

Circular of 24 September 2015 

“4. Export transactions

As already notified vide our A. P. (DIR Series) Circular No.109 dated June 11, 2013 and A.P. (DIR Series) Circular No. 17 dated November 16, 2010 referred to earlier:

(i) the facility shall only be available for export of goods and services (as permitted in the prevalent Foreign Trade Policy) of value not exceeding USD 10,000 (US Dollar ten thousand) per transaction.

(ii) AD Category-I banks providing such facilities shall open a NOSTRO collection account for receipt of the export related payments facilitated through such arrangements. Where the exporters availing of this facility are required to open notional accounts with the OPGSP, it shall be ensured that no funds are allowed to be retained in such accounts and all receipts should be automatically swept and pooled into the NOSTRO collection account opened by the AD Category-I bank.

(iii) The balances held in the NOSTRO collection account shall be repatriated to the Export Collection account in India and then credited to the respective exporter’s account with a bank in India immediately on receipt of the confirmation from the importer and, in no case, later than seven days from the date of credit to the NOSTRO collection account.

(iv) The permitted debits to the OPGSP Export Collection account maintained in India will be:

a) payment to the respective Indian exporters‘ accounts;

b) payment of commission at rates/frequencies as defined under the contract to the current account of the OPGSP; and

c) charge back to the overseas importer where the Indian exporter has failed in discharging his obligations under the sale contract.

(v) The only credit permitted in the same OPGSP Export Collection account will be repatriation from the NOSTRO collection accounts electronically.

5. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

6. The directions contained in this circular have been issued under Section 10 (4) and Section 11 (1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.”

Circular of 16 November 2010

“2. Accordingly, it has been decided to allow the Authorised Dealer Category- l (AD Category-l) banks to offer the facility of repatriation of export related remittances by entering into standing arrangements with OPGSPs, subject to the following conditions:

(i) The AD Category-I banks offering this facility shall carry out the due diligence of the OPGSP.

(ii) This facility shall only be available for export of goods and services of value not exceeding USD 500 (US Dollar five hundred).

(iii) AD Category-I banks providing such facilities shall open a NOSTRO collection account for receipt of the export related payments facilitated through such arrangements. Where the exporters availing of this facility are required to open notional accounts with the OPGSP, it shall be ensured that no funds are allowed to be retained in such accounts and all receipts should be automatically swept and pooled into the NOSTRO collection account opened by the AD Category-I bank.

(iv) A separate NOSTRO collection account may be maintained for each OPGSP or the bank should be able to delineate the transactions in the NOSTRO account of each OPGSP.

(v) The following debits will only be permitted to the NOSTRO collection account opened under this arrangement:

a) Repatriation of funds representing export proceeds to India for credit to the exporters‘ account;

(b) Payment of fee/commission to the OPGSP as per the predetermined rates / frequency/ arrangement; and

(c) Charge back to the importer where the exporter has failed in discharging his obligations under the sale contract.

(vi) The balances held in the NOSTRO collection account shall be repatriated and credited to the respective exporter’s account with a bank in India immediately on receipt of the confirmation from the importer and, in no case, later than seven days from the date of credit to the NOSTRO collection account.

(vii) AD Category -I banks shall satisfy themselves as to the bonafides of the transactions and ensure that the purpose codes reported to the Reserve Bank in the online payment gateways are appropriate.

(viii) AD Category -I banks shall submit all the relevant information relating to any transaction under this arrangement to the Reserve Bank, as and when advised to do so.

(ix) Each NOSTRO collection account should be subject to reconciliation and audit on a quarterly basis.

(x) Resolution of all payment related complaints of exporters in India shall remain the responsibility of the OPGSP concerned.

(ix) OPGSPs who are already providing such services as per the specific holding-on approvals issued by the Reserve Bank shall open a liaison office in India within three months from the date of this circular, after duly finalizing their arrangement with the AD-Category-I banks and obtaining approval from the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Fort, Mumbai 400 001 for this purpose.

In respect of all new arrangements, the OPGSP shall open a liaison office with the approval of the Reserve Bank before operationalising the arrangement.

3. AD Category-I banks desirous of entering into such an arrangement/s should approach the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Fort, Mumbai 400 001, for obtaining one time permission in this regard and thereafter report the details of each such arrangement as and when entered into.

4. AD Category-I banks may bring the contents of this circular to the notice of their constituents concerned.

5. The directions contained in the circular have been issued under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any required under any law.‖

6. The 17 March 2020 circular of RBI essentially framed Guidelines for Regulation of Payment Aggregators and Payment Gateways. It defined the two in the following terms:-

“1. Definitions

1.1. For the purpose of this circular, the PAs and PGs are defined as under:

1.1.1. PAs are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own. PAs facilitate merchants to connect with acquirers. In the process, they receive payments from customers, pool and transfer them on to the merchants after a time period.

1.1.2. PGs are entities that provide technology infrastructure to route and facilitate processing of an online payment transaction without any involvement in handling of funds.

1.2. In the processing of an online transaction the following timelines are involved: