IN WP (C) 138 OF 2021- DEL HC- PMLA not merely a penal statute but also aimed towards discovery and prevention of fraudulent, suspicious transactions and its salutary objectives: Delhi HC quashes Rs 96 lakh penalty on American online payment gateway PayPal, says it is a ‘Payment System Operator’ which is required to comply with ‘Reporting Entity’ obligations under PMLA
Justice Yashwant Varma [24.07.2023]

Read Order: Paypal Payments Private Limited v Financial Intelligence Unit India

Simran Singh

New Delhi, July 25, 2023: The Delhi High Court, in a 174-page judgment, partly allowing the plea of American online payment gateway PayPal and set aside the penalty of Rs 96 Lakh imposed on it  by the Financial Intelligence Unit-India (FIUI) for alleged non-compliance with the ‘reporting obligation’ under the law against money laundering. The HC held that the petitioner was a ‘payment system operator’ and thus, obliged to comply with ‘reporting entity’ obligations as placed under the Prevention of Money Laundering Act, 2002 (PMLA). It stated that the petitioner would have to comply with Section 12 of PMLA which made it mandatory for a ‘reporting entity’ to maintain records of all transactions and verify and maintain the records of identities of all its clients for a period of 10 years. The provision further placed a range of other obligations on a ‘reporting entity’.

The Single Judge Bench comprising of Justice Yashwant Varma stated that the FIUI's order imposing penalty on the petitioner under the Prevention of Money Laundering (Maintenance of Records) Rules 2005 (Rules 2005) was unjustified because the company was found to be cooperating with FIUI and it had acted under a bona fide belief that its operations did not fall within the ambit of the PMLA. “the instant writ petition is partly allowed. In terms of the conclusions recorded herein above, 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 and for reasons afore noted, quashed ”

It was further held that actual handling of funds could not be decisive of whether an entity would fall within the ambit of the definition of 'payment system’ and rejected the petitioner’s contention that since it was not considered to be a ‘payment system operator’ or ‘reporting entity’ under the Payment and Settlement System Act, 2007 (PSS Act), it must ipso facto be held to fall outside the dragnet of the PMLA. In view of the above, the Bank Guarantee as submitted by the petitioner stood discharged and the Registrar General of the Court was requested to take further steps in light so the above.

BACKGOUND

The FIUI is an organisation under the Department of Revenue, Government of India which collects financial intelligence about offences under PMLA. It receives, processes, analyses and disseminates information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

In the matter at hand, The legal tussle had begun in 2018 when FIUI had directed the the petitioner to register as a ‘reporting entity’ for keeping a record of all transactions, reporting suspicions transactions and cross-border wire transfers to the FIUI and for identifying beneficiaries of these funds. As per the order issued under Section 13 of PMLA, the petitioner had refused to accept the FIUI’s directive and thus a show cause notice was issued in 2019.

The petitioner had defended it’s actions and cited Reserve Bank of India (RBI) guidelines to state that it only operated as an Online Payment Gateway Service Provider (OPGSP) or a payment intermediary in India and was 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

However, FIUI had rejected its claims and stated that the petitioner was very much involved in handling funds in India, was a financial institution and hence qualified to be a ‘reporting entity’ under PMLA

The officials of the petitioner had participated in a meeting with the Additional Director of the FIUI where they had been invited to explain the scope and content of their business operations in India. The petitioner asserted that it had expressed its willingness to cooperate with the FIUI in that meeting and remained bound by that obligation.

FIUI was stated to have granted an opportunity of a personal hearing to the petitioner in terms of its letter of 21-11-2019 and invited it to make a presentation before it on 09-12-2019. After the aforesaid meeting the petitioner filed detailed written submissions dated 20.12.2019 and also submitted a draft on possible information-sharing approaches vide a separate email on 20-12-2019. The draft was stated to have been discussed between the officers of the petitioner and FIUI on 28-02-2020.  On 10-06-2020, FIUI addressed yet another letter to petitioner wherein it reiterated its perceived obligation of the petitioner to register as a ‘reporting entity’. While doing so, it also referred to the guidelines promulgated by RBI regulating payment aggregators and payment gateways.  On 21-08-2020, the petitioner addressed a letter to FIUI indicating its intent to cease all domestic operations as a payment intermediary with effect from 01-04-2021. On 17-12-2020, the impugned order came to be passed. 

The petitioner had challenged the penalty of ₹96 lakh imposed on it by the FIUI for not registering itself as a ‘reporting entity’. FIUI had directed the petitioner to pay the fine within 45 days and also register itself as a ‘reporting entity’ with the FIUI on account of being a ‘payment systems operator’ and appoint a principal officer and director for communication within a fortnight of the receipt of the order. Under the law, a ‘reporting entity’ had to report to authorities any foreign exchange transaction which occurred on its system.

It was contended that FIUI wrongly interpreted PMLA provisions against all settled principles of statutory interpretation. The petitioner further contended that FIUI had arbitrarily imposed the highest monetary penalty of Rs.1,00,000 for each of the three alleged offences for every month, stretching over a period of 32 months and that the quantification of penalty was clearly rendered unsustainable. The petitioner claimed that it functioned as a payment intermediary and online payment gateway service provider to its customers, and did not provide clearing, payment, money transfer or settlement services. It was further contended that it was not a ‘financial institution’ under Section 2(1)(l) of the PMLA, and therefore, did not register itself as a reporting entity under Section 2(1) (wa) of PMLA.

It was the case of FIUI that the petitioner had defeated and frustrated the tenets of public interest and the provisions of PMLA by not complying with the law and that these contraventions were deliberate and wilful as the company did not register itself as a ‘reporting entity’ as mandated under PMLA. FIUI also flagged that while the petitioner defied the process in India, it reported suspicious transactions to the American FIU and also to the agencies in Australia and the UK.

ISSUE

Ultimately the question was whether the petitioner was liable to be recognised as a payment system operator which was answered solely on the anvil of the statutory provisions embodied in PMLA. This was precisely what the Court had attempted to focus upon and its ultimate conclusion had remained uninfluenced by the conduct of petitioner in foreign jurisdictions

ANALYSIS

The Bench observed that all 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 and the petitioner fell under the said definition.

“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 to what has been noted above, 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 AML  (Anti-Money Laundering) measures.”

The Court stated that mere fact that the technology on which the petitioner rested enabled the transfer of money between parties at different ends and the fact that it also interacted with Authorised Dealers (AD) Category Banks or other Payment Aggregators (PA) in the transactions would not detract from the platform being recognised to be a system which enabled payment and one which was 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. ”

The Court stated that PMLA was not merely a penal statute but also aimed towards discovery and prevention of fraudulent and suspicious transactions and its salutary objectives must be borne in mind while seeking to unravel the intent and scope of its various provisions. The FIUI had accused the petitioner of contravening the PMLA and concealing suspect financial transactions and abetting disintegration of India’a financial system. Terming the contravention as deliberate and wilful, the FIUI had held the company guilty on three broad counts, the fundamental being its failure to register itself as a reporting entity with the federal agency as mandated under the PMLA.

The Bench relied upon the case of Hindustan Steel Limited v. State of Orissa where it was stated that “an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

The Bench found merit in the challenge raised by petitioner in this regard because undisputedly the levy of penalty was imbued with a quasi-criminal characteristic. Hindustan Steel (Supra) observed that the penalty would be justified, provided it was established that a party had failed to comply with legal obligations deliberately, in defiance of the law or be guilty of contumacious or dishonest conduct. The Supreme Court pertinently observed that penalty would not be leviable merely because it was lawful to do so. It went further to hold that the imposition of penalty would also not be justified where a person was found to have proceeded on the bona fide belief that it was not covered by the provision or legally obliged to effect compliance. 

The  Bench observed that the imposition of penalty was clearly unjustified in the facts of the case. As the record would bear out, petitioner had consistently taken the position that it could not be held to be a ‘payment system operator’ under the PMLA, a stand taken which could not possibly be said to be wholly specious or in wilful disobedience to abide by a legal obligation which was either apparent or free from doubt.

The Court noted that Section 13(2)(d) did not prescribe or stipulate the imposition of penalty for each month of default. It also did not speak of non-compliance amounting to a continued infraction or one which may warrant the imposition of penalty on a monthly basis. It was imperative for FIUI to have recorded reasons in justification of the levy of the maximum penalty provided under the statute.

The Bench also found itself unable to sustain the impugned order insofar as it proceeded to observe that the petitioner would be deemed to be a ‘payment system operator’. In view of the above, the Bench partly allowed the petition and held that petitioner is liable to be viewed as a payment system operator and consequently obliged to comply with reporting entity obligations as placed under the PMLA.