Are Payment gateways 'reporting entities' under PMLA?

Introduction

Should a word or a phrase defined similarly in two different statutes be interpreted differently? Hon’ble Delhi High Court has answered this interesting and important legal issue this week in its judgement dated JUly 24, 2023 in case of PayPal Payments Pvt. Ltd. (‘PayPal’) Vs. Financial Intelligence Unit India & Anr. [W.P. (C ) 138/2021]. The ratio and detailed rationale provided in the judgement is likely to have wide implications on existing payment gateways and other payment intermediaries (indicatively).  

The Prevention of Money Laundering Act, 2002 (PMLA) read with Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“2005 Rules”) prescribe certain reporting, record keeping and compliance obligations on ‘reporting entities’ which are defined under Section 2(1)(wa) of the PMLA.

Facts of the Case

PayPal had admittedly been operating in India as an Online Payment Gateway Service Providers (‘OPGSP’) providing technology interface enabling payment transactions between Indian exporters and overseas buyers. PayPal provided the services through authorized Indian banks (‘AD Banks’) and categorically submitted that the funds were at no stage handled by PayPal during execution of the payment transactions.   

Financial Intelligence Unit – India (‘FIU’), which is the central, national agency responsible for receiving, processing, analyzing and disseminating information from ‘reporting entities’, had a meeting with PayPal to understand the scope and contents of PayPal’s business operations in October, 2017. In April, 2018, FIU asked Paypal to register as a reporting entity, but PayPal in its various submissions clarified that it cannot be considered as a ‘reporting entity’ as it does not operate a payment system. A show cause notice was issued to PayPal in July, 2019 and eventually an order dated December 17, 2020 passed by FIU declaring PayPal as a reporting entity and imposing a penalty for not complying with the obligations under PMLA Act and 2005 Rules. 

As a procedural fact, it is pertinent to note that due to contrast in the views taken by RBI and FIU, Hon’ble court also directed the Secretary, Ministry of Finance to set up a committee to submit a report on this issue. The committee in its report concluded that entities like PayPal should be held to be covered under the PMLA and that they are liable to be categorised as payment system operators.

Are OPGSPs ‘payment systems’ under the PSS Act?

‘Payment system’ has been defined under both Payment and Settlement Systems Act, 2007 (‘PSS Act’) and under PMLA in similar terms. PSS Act and detailed regulations passed under the Act envisage different types of licences and entities which handle, support or participate in execution of payment transactions. 

Payment System is defined under PSS Act as a system that “enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them”. Hon’ble Court noted that PSS Act along with guidelines issued essentially appears to regulate payment systems, payment aggregators or other entities which receive, retain, hold funds or undertake the role of a repository of funds received from a customer and those funds being retained before their onward transmission to the beneficiary. 

On the other hand, OPSGPs only provide technology infrastructure to facilitate the transaction and do not involve in repository of funds or affect settlement. Hon’ble Court also referred to the Intermediaries Directions, 2009 to derive the essential characteristics of ‘payment system’ and other intermediaries. 

Court also noted different regulatory regimes and obligations created for ‘payment systems’ and OPGSPs under Guidelines on Regulation of Payment Aggregators and Payment Gateways (‘Guidelines’) along with circulars dated 16th November, 2010, 11th June, 2013 and 24th September, 2015. These Regulations provide detailed licensing and other compliance obligations for payment aggregators which handle customer funds whereas OPGSPs are only recognised to be entities that merely provide the technology infrastructure for the purposes of routing and facilitating online payment transactions. The covering letter of the Guidelines also makes it abundantly clear that the Guidelines only provide baseline technology related ‘recommendations’.  

Based on such differential regulatory treatment, Hon’ble Court reached a firm conclusion that the PSS Act does not seem to regulate or control technology platforms like OPGSPSs. 

Does ‘payment system’ as defined under PMLA include OPGSPs? 

PayPal submitted that the definition of ‘payment system’ under PMLA is pari materia with the definition of the same under PSS Act and, therefore, both the definitions must be construed and interpreted similarly. Definition of ‘payment system’ under both the statutes are reproduced below for ready reference:

Section 2(1)(i) of PSS Act ― 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, but does not include a stock exchange.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.

Explanations under both the definitions are verbatim the same.

Section (rb) of the PMLA Act: “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. 

Hon’ble Court rejected this pari materia argument holding that the meaning ascribed to 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”. 

Differential legislative intent

Hon’ble court held that a legislative measure need not necessarily be viewed as ‘being encyclopaedic or an all-encompassing essay on a particular subject’. The Legislature may choose to only regulate a few facets relating to a wide spectrum of economic activities under a particular statute. OPGSPs not being regulated under PSS Act cannot be a basis to conclude that the same are also outside the regulatory net of PMLA.  

Hon’ble Court held that the intent and objective of  the PMLA is concerned with preventing the acts of money laundering and towards obfuscating the origins of proceeds of crime which is very different from the intent behind PSS Act. Judgement relies on precedents from the Hon’ble Supreme Court holding that words used in a statute must be read in a manner which effectuates its objectives and enables the authorities to effectively combat the mischief that it seeks to address. 

Referring specifically to the definition of payment system under Section 2(1)(rb) of PMLA, Hon’ble Court relied on the use of word ‘enables’ to include any system which facilitates the transfer of funds from a payer to a beneficiary. Further, the inclusive and expansive nature of the definition was highlighted by relying on terms such as ‘includes’, ‘enabling’ and ‘similar operations’. 

Hon’ble Court accordingly concluded the in view of the legislative intent of the statute, definition of payment system under PMLA must be widely construed and interpreted to include OPGSPs to ensure an effective implementation of relevant provisions as well as to avoid the spectre of the offender sneaking out of the “meshes of the law”. Hon’ble Court held that excluding OPGSPs from the scope of payment system will also obstruct and hamper data collection and analysis which constitute critical elements of AML measures, thus will not fulfil the object of the PMLA.

Chronology matters

Hon’ble Court pertinently noted that the PSS Act containing definition of payment system was enacted in 2007 while the definition of payment system vide Section 2(1)(rb) was introduced in the PMLA through an amendment in 2009. Hon’ble Court thus reasoned that had the legislative intent been to adopt a similar scope of definition under PMLA, the legislature could’ve conveniently referenced the definition of ‘payment system’ under PSS Act into the PMLA. Since a specific definition was consciously inserted into PMLA, the same must be independently construed and interpreted as per the scheme and intent of the statute.

On imposition of penalty

Despite finding OPGSPs like PayPal to be included in the definition of payment system and, therefore, classifying as a ‘reporting entity’, Hon’ble Court quashed the penalty imposed on PayPal on the ground that there was lack of clarity in law, as also highlighted by RBI’s affidavit in case of Abhijit Mishra case, and that Paypal exhibited a collaborative approach devoid of any dishonest or non-compliant conduct. 

Remarks

Principle of interpretation enunciated by the Hon’ble court in this judgement is in line with multiple rulings of Hon’ble Supreme Court and is likely to be relied upon in many subsequent cases. Hon’ble Court rightly held that even same words or phrases used in different statutes must be construed differently if the legislative intent and purpose of the statutes differ. However, the ratio of the judgment will have huge implications on various stakeholders of the industry.

An exception for UPI?

Relying on the examples of Gpay and Amazon Pay, PayPal made an ancillary argument that many third party application providers (‘TPSP’) are not being treated as ‘payment systems’ and are consequently not complying with reporting entity obligations. Interestingly, Hon’ble Court sought to distinguish such TPSPs on the ground that such TPSPs are “embedded in and are part of the Unified Payments Interface ecosystem unrolled in India and participate within that structure through Payment System Provider Banks”. Hon’ble Court aso distinguished TPSPs on the ground that in case of UPI structure, the details of both the parties are fully captured which makes it quite apart “from the transactions themselves being conducted through banking channels”.

Relying on these observations, it seems possible to argue that the Hon’ble Court has created an implied exception for the intermediaries or OPGSPs providing services based on UPI. It is also difficult to ascertain whether and why the Hon’ble court implied that details of the parties may not be fully captured in case the transactions are conducted through banking channels.

Duplication of compliance burden

Hon’ble Court heavily relied on words ‘enable’ and ‘involve’ to justify casting a wider regulatory net to include ‘all elements of the transaction comprised or connected with a payment being affected between two parties’. Despite the admitted fact that the partner AD Bank would report the transactions as ‘reporting entity’, Hon’ble Court held that data entailing ‘each step of the transaction’ should be made available to the FIU. Thus, the judgement mandates duplication of compliance on various intermediaries involved in handling the same payment transaction. For instance, a particular payment transaction would now be required to be reported by the bank/NBFC/PA and also by the payment gateway supporting that institution. 

A dangerous precedence? 

The wide regulatory net cast by the judgement is likely to be used by the authorities, particularly the FIU, to harass and designate many fintech companies and ‘intermediaries’ which are not yet registered or classified as reporting entities. This judgement may also impact interpretation of other notifications issued by the government recently designating certain business or professions (e.g. virtual asset service providers, chartered accountants, directors of a company, company secretary etc.) as reporting entity as a few of these notifications also contain wide and inclusive definitions.

 

 

Authors: Purushottam Anand & Mihir Vashishtha

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