delhi high court

Delhi High Court: A petition was filed by Paypal Payments Private Limited (petitioner) impugning the order dated 17-12-2020 passed by the Financial Intelligence Unit India (respondent 1) holding it to be a ‘reporting entity’ under the Prevention of Money Laundering Act, 2002 (PMLA) and consequently proceeding to impose monetary penalties for it failed to comply with the reporting obligations as placed under the PML (Maintenance of Records) Rules 2005. Yashwant Varma, J., held 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.

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 since it is not engaged in rendering services relating to clearing, payment or provision of settlement between a payer, and a beneficiary. It merely provides a technological interface enabling export-related transactions that may be undertaken by an Indian exporter and an overseas buyer. 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. 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, but the said funds are also then transmitted to the AD Partner Bank‘s Export Collection Account. Thus, it was averred by Paypal 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.

A ‘reporting entity’ is defined under section 2(1)(wa) of PMLA in the words that ’reporting entity’ means a banking company, financial institution, intermediary or a person carrying on a designated business or profession.

The expressions ‘payment system’ and ‘payment system operator’ are defined by Section 2(1)(rb) and (rc) in the words:

(rb) payment system means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them. Explanation —For the purposes of this clause, payment system includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations;

(rc) payment system operator means a person who operates a payment system and such person includes his overseas principal. Explanation—For the purposes of this clause, overseas principal means,— (A) in the case of a person, being an individual, such individual residing outside India, who owns or controls or manages, directly or indirectly, the activities or functions of payment system in India; (B) in the case of a Hindu undivided family, Karta of such Hindu undivided family residing outside India who owns or controls or manages, directly or indirectly, the activities or functions of payment system in India; (C) in the case of a company, a firm, an association of persons, a body of individuals, an artificial juridical person, whether incorporated or not, such company, firm, association of persons, body of individuals, artificial juridical person incorporated or registered outside India or existing as such and which owns or controls or manages, directly or indirectly, the activities or functions of payment system in India.

The Court noted that FIU-IND was set up pursuant to the 40+9 recommendations of the Financial Action Task Force which obliged partnering countries to establish an intelligence unit that would serve as the focal point for receipt and analysis of Suspicious Transaction Reports [STRs‘] as well as other information relating to money laundering and other associated predicate offences, the financing of terrorism, for dissemination of analytical results and to ultimately form part of a collaborative system for the benefit of member nations. The FIU-IND essentially acts as the central nodal agency for receiving, processing and analysing information relating to suspicious financial transactions.

The Court also noted that Payment and Settlement System Act (PSS Act) is concerned with Payment Aggregators and Intermediaries who are engaged in the direct handling of funds received from customers and the various aspects connected therewith including the settlement and netting of such funds. The PSS Act does not appear to control technology platforms, interfaces and facilitators, who though not directly concerned with the handling of funds, may yet constitute an intermediary in the movement of funds, though a “cog in the wheel” yet constituting a critical functional element in the remittance of funds. The collaborative and enabling functions performed by such entities, no matter how miniscule, nonetheless constitutes a significant component without which the transaction may not achieve fruition.

On the aspect of Paypal under PMLA, the Court observed that all the elements of the transaction comprised or connected with a payment being effected between two parties would appear to fall within the scope of the expression ‘payment system’ as defined under Section 2(1)(rb) of the PMLA. The Explanation thereto is itself couched in expansive terms and uses the expression ‘includes’ and ‘money transfer operations’. Thus, the Court finds itself unable to accord a restrictive construction to the expression or read it to be confined only to a system that may be literally or concerned with handling funds between a payer and a beneficiary.

The Court also observed 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 which may be directly or undeviatingly engaged in the handling or transferring of funds. Any interpretation contrary, would not only scuttle and impede the measures liable to be deployed but also obstruct and hamper data collection and analysis which constitute critical elements of Anti Money Laundering measures. The imperatives of those measures being borne into consideration are clearly merited considering the interpretative principles which were commended for the consideration of the Court by FIU-IND. Thus, the meaning of the term ‘payment system’ as contained in the PSS Act was not intended by Parliament to be directly infused or blindly transposed in the PMLA.

The Court concluded that the technology on which the platform of PayPal rests enables the transfer of money between parties at different ends. The mere fact that the said platform also interacts with AD Category Banks or other PAs‘ would not detract from the platform of PayPal being otherwise understood and recognised to be a system which enables payment and one which is concerned with money transfer operations. The Court deems it apposite to emphasise that bearing in mind the objectives underlying the promulgation of PMLA and the activity that it seeks to regulate and penalise, there appears to be no legal justification to interpret Section 2(1)(rb) to embrace only those entities which are directly engaged in the handling, retention or transfer of funds.

On the issue of issue of imposition of penalty upon PayPal in terms of the impugned order under Section 13(2)(d) of the PMLA, the Court noted that it is well-settled in law that the imposition of penalty would be justified only if an entity fails to discharge a statutory obligation and provided it is established that it had deliberately chosen to act in defiance of the law or was guilty of dishonest conduct. The levy of penalty is imbued with a quasi-criminal characteristic. Thus, the imposition of penalty is clearly unjustified in the facts of the present case as bearing in mind the nature of the challenge which was raised by PayPal and the substantive objection taken with respect to the construction to be accorded to the provisions of the PMLA, it cannot possibly be said that its conduct was either deliberate, contumacious or dishonest.

Thus, the Court held “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 17-12-2020 is, however, and for reasons aforenoted, quashed. The impugned order shall stand set aside to the aforesaid extent.”

[Paypal Payments Private Limited v. Financial Intelligence Unit of India, 2023 SCC OnLine Del 4336, decided on 24-07-2023]

Advocates who appeared in this case :

Mr. Kapil Sibal and Mr. Sajan Poovayya, Sr. Adv. with Ms. Shally Bhasin Ms. Shreya Mukerjee, Mr. Prateek Gupta, Ms. Varshini Sudhinder and Mr. Palash Maheshwari, Advocates for the Petitioner;

Mr. Zoheb Hossain, SSC with Mr. Vivek Gurnani and Ms. Farheen Penwale, Advs. for R-1 Mr. Parag P. Tripathi, Sr. Adv. with Mr. Ramesh Babu, M. R., Ms. Manisha Singh, Mr. Rohan Srivastava and Ms. Mishika Bajpai, Advocates for the Respondents.

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