2023 (7) TMI 1241 - HC - Money Laundering

Money Laundering - Whether an Online Payment Gateway Service (OPGSP) could be said to be a Reporting Agency under the PMLA? - It is the case of the respondents that PayPal is a payment system operator and thus a reporting entity. Money Laundering - Global Experiences - HELD THAT - The FIU-IND essentially acts as the central nodal agency for receiving, processing and analysing information relating to suspicious financial transactions. It is thus tasked with the collection of information, analysis thereof and the consequential sharing of information with other national intelligence and law enforcement agencies. FIU-IND represents the coordinated mechanism adopted by nations aimed at strengthening the collection and sharing of financial intelligence by the creation of a national, regional and a global network to detect illicit financial flows and combat money laundering - The extent and reach of payment facilitation platforms and the exponential increase in transactions accomplished thereon is also evident from the disclosures made by FIU-IND in these proceedings. FIU-IND had, with the aid of data disclosed on the record of these proceedings drawn the attention of the Court to the increase in the value of transactions completed on the PayPal platform between 2020 to March 2022 and stated that the transactional value which stood at Rs. 9951 crores in 2020 had increased to Rs. 12327 crores in 2021 and as of March 2022 that figure stood at Rs. 3048 crores. While the Court has taken note of the global trends and the multifaceted complexities which emerging technologies and tools have brought on in the fight against money laundering and terror financing, it has done so only to broadly note the scenario which prevails and which appears to have prompted FIU-IND to require the petitioner to comply with reporting obligations under the PMLA. Central Theme of Payments and Settlements System Act 2007 (PSS Act) - HELD THAT - The PSS Act essentially appears to regulate the functioning of Intermediaries and PAs who are directly engaged in handling funds and acting as a conduit between customers and e-commerce sites/merchants. This is also evident from the activities relating to settlement and netting which are spoken of in Section 23 of the Act, the opening of separate and independent import/export collection accounts by AD Category I Banks, the opening of NOSTRO accounts, all of which deal with the range of activities which are undertaken by Intermediaries and PAs while being directly engaged in the handling of funds received from customers. The aforesaid conclusion is further fortified from Para 8 of the Guidelines which obligates non-bank PAs to maintain a separate escrow account to which all monies collected by them would be credited. The said escrow account is to be opened and maintained with a scheduled commercial bank. This is apart from the requirement of an additional escrow account being maintained with a different scheduled commercial bank at the discretion of the PA. Paras 8.4 and 8.5 also indicate that the aforenoted directions and guidelines principally regulate the activities of Intermediaries and PAs who directly receive funds from customers in their accounts before they are transmitted onwards to merchants or other beneficiaries. The Court thus comes to the firm conclusion that the PSS Act is concerned with PAs 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. Pari materia question - HELD THAT - The Court also finds itself unable to accept the submission that the similarity of the definition clause in the two enactments would lead to PayPal being held to fall outside the ambit of Section 2(1)(rb) of the PMLA. The conclusions aforenoted, however, do not rest merely on the interpretation accorded on the provisions of the PSS Act, its discernible scheme, the regulatory regime embodied therein or the circulars and directions issued by the RBI noticed hereinabove. This since the Court is of the considered opinion that the answer to the principal question posited must necessarily be answered bearing in mind the objectives and the legislative policy underlying the PMLA and the various provisions incorporated therein. What the Court seeks to underline is that the meaning to be ascribed to the phrase payment system must necessarily be ascertained bearing in mind the theme and ethos of the PMLA as opposed to an answer that is beclouded by how that subject is treated under the PSS Act. Approaching the issue from any other angle would in fact fall foul of certain well accepted tenets of statutory interpretation as would be manifest from the discussion which follows in the latter parts of this decision. Payment system under PMLA - HELD THAT - The PMLA constructs various regulatory measures and safeguards to aid and assist the jurisdictional authorities in uncovering proceeds of crime. It must be remembered that the said enactment is not concerned merely with meting out punishment for commission of the crime created by Section 3 thereof. The various declarations, disclosures and reporting measures put in place by Sections 11A, 12, 12A, 12AA are all aimed towards discovery and prevention of fraudulent and suspicious transactions. Those provisions are concerned with collation of data, a centralized analysis thereof all of which would then enable the authorities to detect patterns of suspicious financial flows and assist in eradicating the scourge of money laundering. Of equal significance are the provisions comprised in Chapter IX which deals with reciprocal arrangements and gives teeth to the collaborative resolve of nations to tackle the complexities surrounding money laundering - The aforesaid discussion indubitably brings to the fore the regulatory aspects of the legislation and establishes that the PMLA goes far beyond being intended to be a mere penal statute. This aspect has also been noticed by the Supreme Court in VIJAY MADANLAL CHOUDHARY ORS. VERSUS UNION OF INDIA ORS. 2022 (7) TMI 1316 - SUPREME COURT . It is these salutary objectives of the statute which must be borne in mind while seeking to unravel the intent and scope of its various provisions. Undoubtedly, 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. In terms of the Amending Act, clauses (ra) to (rc) came to be inserted in Section 2(1). If it was the intent of Parliament to accord an identical meaning upon the phrase payment system as already defined in the PSS Act, it could have conveniently adopted the tool of legislation by reference/incorporation. Notwithstanding such recourse being available, it appears to have consciously introduced Section 2(1)(rb) as well as the other amendments embodied in the 2009 Amending Act being aware of the distinct scheme and objective of the PMLA. This too leads the Court to come to the irresistible conclusion that 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. Paypal's Global Compliances - HELD THAT - The Court finds merit in the submission so addressed and is of the considered opinion that the question of whether PayPal is liable to be treated as a payment system operator must fundamentally be answered on a construction of Section 2(1)(rb) and (rc) of the PMLA alone and not by its conduct in other jurisdictions where the gamut of services provided by it range far wider than those that are ordinarily extended by an OPGSP. Ultimately the question of whether it is liable to be recognised as a payment system operator would have to be answered solely on the anvil of the statutory provisions embodied in the PMLA. This is precisely what the Court has attempted to focus upon and has hopefully achieved. Its ultimate conclusions, as would be evident from the body of this decision, have remained uninfluenced by the conduct of PayPal in foreign jurisdictions. PAYPAL AND TPAPs - HELD THAT - The National Payments Corporation of India is an organisation that owns and operates the Unified Payments Interface and is essentially charged with the authority of prescribing rules for and approving the participation of Customer Banks, PSPs, TPAPs and Prepaid Payment Instrument issuers in the UPI. More fundamentally in terms of the UPI structure, all details relating to the remitter as well as the beneficiary are captured end to end. In fact, in order to participate on that system both the remitter as well as the beneficiary have to be pre-enrolled. Appropriate particulars of individuals and entities are thus fully captured quite apart from the transactions themselves being conducted through banking channels. Penalty unjustified - HELD THAT - The Court finds merit in the challenge raised by PayPal in this regard for the following reasons. On first principles, the Court notes that undisputedly the levy of penalty is imbued with a quasi- criminal characteristic. It is this aspect which was highlighted by the Supreme Court in Hindustan Steel when it observed that penalty would be justified provided it is 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. Hindustan Steel went further to hold that the imposition of penalty would also not be justified where a person is found to have proceeded on the bona fide belief that it was not covered by the provision or legally obliged to effect compliance. It is manifest that the imposition of penalty is clearly unjustified in the facts of the present case. As the record would bear out, PayPal had consistently taken the position that it could not be held to be a payment system operator under the PMLA. The stand taken by the petitioner in this regard cannot 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 issue was further compounded by the affidavit filed by RBI in the Abhijit Mishra proceedings. PayPal can thus be justifiably said to have been proceeding under the bona fide belief that its operations did not fall within the ambit of the PMLA. The Court also cannot lose sight of the fact that the stand of PayPal as evident from its communications with FIU-IND was essentially collaborative and a testament to its intent to arrive at a mutually acceptable solution. This is also manifest from its approach of both parties identifying a mutually acceptable mechanism and the suggestion of three models of information sharing forming part of their letter dated 20 December 2019. It was, in the considered opinion of this Court, imperative for FIU-IND to have recorded reasons in justification of the levy of the maximum penalty provided under the statute. For all the aforesaid reasons, the Court finds itself unable to be sustain the imposition of penalty as embodied in the impugned order. Deeming fiction argument - HELD THAT - The Court also finds itself unable to sustain the impugned order insofar as it proceeds to observe that PayPal would be deemed to be a payment system operator. A deeming fiction must stand specifically engrafted in a statutory provision. A legal fiction would be available to be invoked only in a situation where the Legislature engrafts such a measure or frames the provision in language which justifies the existence of such a fiction being recognised to operate. 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 quashed. The instant writ petition is partly allowed.

Summary

Issues Involved:
1. Whether PayPal is a "payment system operator" under the Prevention of Money Laundering Act, 2002 (PMLA).
2. Whether the imposition of penalties on PayPal by the Financial Intelligence Unit India (FIU-IND) was justified.
3. Whether PayPal's compliance with anti-money laundering (AML) measures in other jurisdictions impacts its obligations under the PMLA.
4. The interpretation of the term "payment system" under the PMLA in comparison to the Payments and Settlements System Act, 2007 (PSS Act).

Summary:

1. Whether PayPal is a "payment system operator" under the PMLA:

The Court held that PayPal is indeed a "payment system operator" under the PMLA. The definition of "payment system" under Section 2(1)(rb) of the PMLA includes any system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment, or settlement services. The Court emphasized that the term "payment system" should be interpreted broadly to include systems that facilitate the transfer of funds, even if they do not directly handle the funds. The Court noted that PayPal's platform enables the transfer of money between parties and thus falls within the ambit of a "payment system" under the PMLA.

2. Whether the imposition of penalties on PayPal by FIU-IND was justified:

The Court found that the imposition of penalties on PayPal was not justified. The penalties were imposed for PayPal's failure to register as a reporting entity, failure to communicate the name and address of its Principal Officer, and failure to communicate the name and address of its Designated Director. The Court held that the imposition of penalties requires a finding of deliberate, contumacious, or dishonest conduct, which was not established in this case. The Court noted that PayPal had consistently taken the position that it was not a payment system operator under the PMLA and had engaged in collaborative discussions with FIU-IND. The Court also found that the computation of penalties on a monthly basis was not supported by the statutory provisions. Therefore, the imposition of penalties was quashed.

3. Whether PayPal's compliance with AML measures in other jurisdictions impacts its obligations under the PMLA:

The Court held that PayPal's compliance with AML measures in other jurisdictions does not impact its obligations under the PMLA. The Court noted that the nature of services provided by PayPal in other jurisdictions differs from those provided in India. The question of whether PayPal is a payment system operator under the PMLA must be answered solely based on the statutory provisions of the PMLA and not by its conduct in other jurisdictions.

4. The interpretation of the term "payment system" under the PMLA in comparison to the PSS Act:

The Court held that the definition of "payment system" under the PMLA should not be restricted by the definition under the PSS Act. The PMLA is a special statute aimed at combating money laundering, while the PSS Act regulates payment systems and safeguards consumer interests. The Court emphasized that the PMLA's definition of "payment system" should be interpreted in a manner that subserves its legislative objective of preventing money laundering. The Court noted that the PMLA's definition of "payment system" is broader and includes systems that enable the transfer of funds, even if they do not directly handle the funds.

Conclusion:

The Court held that PayPal is a "payment system operator" under the PMLA and is obliged to comply with reporting entity obligations. However, the imposition of penalties on PayPal was quashed. The Court emphasized that the interpretation of the term "payment system" under the PMLA should be broad and inclusive to effectively combat money laundering.