PayPal's Anti-Money Laundering Compliance Raises Questions For Amazon And Google Pay

U.S. multinational PayPal's Indian subsidiary has been directed to comply with the requirements of the anti-money laundering laws by the Delhi High Court.

This means that PayPal will now be required to comply with the reporting entity obligations under the Prevention of Money Laundering Act, 2002, including maintaining records of all transactions and verifying the identities of its clients.

The high court noted that a "payment system" under PMLA will include all the elements of a transaction flowing between two parties. In saying so, the court rejected PayPal’s contention that it's not a payment system operator or reporting entity under the Payment and Settlement System Act, 2007 (PSS Act), and so it did not fall under PMLA.

The court has essentially said that an entity like PayPal that is not really accessing funds may not be considered a payment system under the PSS Act but still be considered so under the PMLA, Astha Srivastava, a senior member at Ikigai Law, said.

To come to this conclusion, the high court examined the scope and applicability of the Payment and Settlement System Act (PSS Act) and the Prevention of Money Laundering Act (PMLA).

It pointed out that the PMLA is a special statute that deals with money laundering, while the PSS Act is a regulatory law that deals with Online Gateway Service providers to protect consumers and merchants. The high court interpreted Section 2(1)(rb) of the PMLA, which defines "payment systems," in a way that supports its legislative objectives.

Simply because PayPal is to be treated as a payment system does not mean that other entities such as Amazon Pay or Google Pay will also fall under the same category, experts pointed out. That is, not all entities dealing with the flow of payments will be considered payment systems.

Whether or not an entity is a payment system depends on whether it is responsible for ensuring settlement between a payer and a beneficiary, according to Namita Viswanath, partner at IndusLaw.

Amrita Tonk, partner at Luthra and Luthra, echoed a similar view. Third-party application providers like Amazon Pay or Google Pay are part of the UPI ecosystem and are dealt with by the National Payments Corporation of India.

According to Srivastava, PayPal onboards merchants in India and allows them to route their payments through its partner banks. For this, it conducts KYC and is responsible for being at a gate and letting merchants enter the ecosystem. UPI apps, on the other hand, ride on the KYC registration already done by banks where their consumers have accounts.

This is why entities like PayPal would be considered payment systems under the PMLA, she explained.

Srivastava also shed light on the effect of the judgement on crypto companies. To send money overseas with crypto, individuals have to acquire some of it with Indian currency and send it to the wallet address of the other person to offload it through an offshore service.

When it comes to these offshore entities, according to Shrivastava, it is more likely than not that they will come under PMLA, as the act is supposed to be widely interpreted to include any entity that can act as a conduit for the transfer of funds.