‘Enabling’ Provisions of PMLA: Casting a Net Too Wide?

[Bhamini Tanwani and Vanshika Manglani are fourth-year B.A. LL.B. (Hons.) students at Hidayatullah National Law University, Raipur]

The High Court of Delhi (‘the Court’) in case of PayPal Payments Private Limited v. Financial Intelligence Unit Indiaheld that payment platform PayPal is included in the definition of ‘payment system operator’ under the Prevention of Money Laundering Act, 2002 (‘PMLA’) and is therefore liable to comply with the reporting obligations as per rule 3 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘the Rules’). However, the Court held that imposition of penalty was not justified as PayPal was under a bona-fide belief of not having been covered by the provisions of PMLA.

In this post, the authors argue that the Court erred in categorizing PayPal as a ‘payment system operator’ and such an interpretation would have dire consequences, both for other payment gateways and the regulating authorities.

The Dispute

The petitioner, PayPal Payments Private Limited (‘PayPal’) was found to be a ‘payment system operator’ under section 2(1)(rb) of PMLA by the respondent, Financial Intelligence Unit India (‘FIU-IND’), which imposed monetary penalties for non-compliance with the reporting obligations. PayPal asserted that it cannot be categorized as a ‘payment system operator’ because it does not engage in ‘clearing, payment or provision of settlement between payer and beneficiary’. It is merely an ‘online payment gateway service provider’ as the transmission only takes place through authorized dealer banks and at no point does PayPal hold any funds. This argument finds basis in a stance taken by the Reserve Bank of India, which when posed with the question as to whether PayPal is a payment system operator under the Payment and Settlements System Act, 2007 (‘PSS Act’), responded in negative. It was also argued that it could not be forced to register as a reporting entity till requisite amendments are brought to PMLA which unequivocally cover such payment gateway systems. 

On the other hand, FIU-IND asserted that PayPal squarely falls under the definition of ‘reporting entity’ under section 2(1)(wa) of the PMLA by virtue of it being a financial institution under Section 2(1)(l). It was contended that PSS Act and PMLA have diverse purposes. PSS Act is a financial regulatory statute whereas PMLA deals with laundering of money and financing of illicit activities. Therefore, despite the existence of identical definitions, an interpretation under one act cannot be used to settle questions that arise under the second act. It was also the case of FIU-IND that PayPal is presently acting in accordance with anti-money laundering statutes of several countries and cannot create an unjustifiable exception for its operations in India.

Decision of the Court

On the question of pari materia interpretation of the PSS Act, the Court sided with the respondents, holding that the mere fact that online payment gateway systems are not covered under the PSS Act, would not, by itself create a ground to exclude them from the PMLA. It also took note of the legislative intent and objectives of the PMLA, stating that each interpretation should be in line with the ethos of the PMLA and cannot be substituted with an interpretation under a different act.

On PayPal’s status under the PMLA, the Court held that a payment system is one which ‘enables’ payment between payer and beneficiary and that the legislative intent was to regulate a wide spectrum of activities under the PMLA. Reliance was placed on the case of Rasila S. Mehta v. Custodian, Nariman Bhavan, holding that special statutes are to be interpreted in a manner that results in highest fulfilment of their objects.

On the question of penalty as per the order, the Court relied on Hindustan Steel Ltd. vs. State of Orissa and quashed the penalty that was imposed by FIU-IND on the grounds that PayPal was under a bona-fide belief of not having been covered under the provisions of PMLA. 

Is PayPal a Reporting Entity: An Analysis 

The decision of the Court is instrumental in India’s fight against money-laundering and would also help increase the country’s ranking in the Financial Action Task Force (‘FATF’) ratings. It will have huge implications for all the players in the fin-tech sector. However, the authors believe that the court has missed the boat with regards to certain issues which deserved a well-rounded explanation.

Wide Ambit of Payment System Operator

The decision has left payment gateways and other regulators in the dark. There exists uncertainty around how the PMLA would regulate other payment gateways that offer similar technological platforms for money transfers but do not handle funds directly. The question that arises is that do other entities that carry out similar functions also qualify as payment system operators under section 2(1)(rc) if PayPal is to be considered a payment system operator? The court has given a broad interpretation to the term “enable” as used in section 2(1)(rb) to include every platform that is connected to the payment in some way or the other. Such an interpretation is not correct in light of the penal nature of certain provisions of PMLA. It is a well-settled principle that the penal provisions should be construed strictly. The same was substantiated in the case of Glaxo Laboratories Ltd. v. Presiding Officer, wherein the court held that the penal provisions must receive a strict construction. Further, in another case of Tolaram Relumal v. State of Bombay, the Supreme Court, while applying the aforementioned principle observed that a more liberal approach should be adopted while dealing with two possible constructions of a penal provision.

Other Third-Party Apps Not Included

The Court categorically excluded third party apps like GPay and Amazon Pay from the purview of a payment system operator. By doing so it created a distinction between two platforms which ‘enable’ payments. The court observed that these third-party apps are regulated by National Payments Corporation of India (‘NPCI’) and are a part of United Payments Interface (‘UPI’). In the view of the authors, this distinction is not correct because if the same interpretation is given to the word “enable” as adopted in the case of PayPal then both these platforms would also come within the purview of PMLA. Therefore, it is the contention of the authors that if PayPal is categorized as a ‘reporting entity’ then a clarification should be provided as to what the future holds for these third-party apps which constitute a major part of the financial transactions that take place in the country.

Compliance Burden

The reporting entities are required to make all the disclosures as prescribed under section 12 of the PMLA which includes maintaining and furnishing records of all transactions, among other things. Reporting entity is defined under section 2(1)(wa) to include a banking company, a financial institution, an intermediary or any person so designated. This definition covers authorized dealer banks which handle the funds. As a consequence, unnecessarily including PayPal would lead to duplication of efforts. Moreover, the question remains that even if these repetitive disclosures are allowed, does the state have the necessary infrastructure to process such a heavy amount of data? Therefore, it is argued by the authors that such compliance would be burdensome, not only for the disclosing entities, but also the state machinery that will have to process the same data multiple times.

Conclusion and Way Forward

The fintech sector in India is growing at a rapid pace and such growth calls for regulation of fintech companies. The judgment by the Court is one such attempt to include a fintech company i.e. PayPal under the ambit of a reporting entity under the PMLA. This move has caused a lot of uncertainty for other payment gateways and aggregators. Crypto-currency is currently not regulated by any agency and going by this interpretation of the definition, even entities dealing in crypto-currency would form part of ‘reporting entity’. The judgment has cast a wide net as to the ambit of a ‘payment system operator’ which demands urgent clarification. 

Indeed, the Court has followed a balanced approach by disallowing the penalty imposed on PayPal for lack of mala-fide intention. However, there are certain key issues which the judgment missed and even though they seem small, can have dire consequences for the fin-tech sector in India.

– Bhamini Tanwani & Vanshika Manglani

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