PayPal beat India's FIU in court, then registered as a reporting entity anyway

On 17 December 2020, India's Financial Intelligence Unit imposed a penalty of Rs 96 lakh on PayPal Payments Private Limited for failing to register as a reporting entity under the Prevention of Money Laundering Act, despite operating in India for years. FIU-IND had issued a show-cause notice in September 2019; its order called it an ample evidence of willful violation, gave PayPal 45 days to pay, and ordered registration plus a principal officer. It was the first time the agency penalised a payment system operator for AML non-compliance.

PayPal fought back, arguing it was merely an online payment gateway and technology intermediary that never handled funds — settlement ran between AD Category-1 banks — and it even relied on an RBI affidavit, filed in other proceedings, saying PayPal was not a payment system operator. Kapil Sibal and Sajan Poovayya argued the point before the Delhi High Court.

On 24 July 2023, Justice Yashwant Varma ruled in a 174-page judgment that PayPal is a payment system operator under the PMLA and must comply with reporting-entity obligations — but he quashed the penalty itself as clearly unjustified, accepting that PayPal had operated under a bona fide belief about its status, and ordered its bank guarantee discharged. In February 2024, PayPal completed its FIU registration and appointed a principal officer, roughly six years after the dispute began.

A Rs 96 lakh penalty (later vacated), three years of litigation before the Delhi High Court, and AML registration completed only in February 2024.

PayPal spent years treating an ambiguity (payment gateway vs payment system operator) as an exemption, never seeking clarity while the regulator's view hardened from show-cause to penalty.

FIU-IND built its first big payment-sector penalty on a classification theory the courts had never tested, leaving the record fine vulnerable to being read down on judicial review.

The litigation ran alongside a shrinking business: PayPal wound down domestic payment services in India in 2021, so the compliance it resisted governed a smaller operation by the time it conceded.

The court split the baby: status confirmed, penalty voided — which gave the industry a precedent on who is covered, and gave the regulator nothing on enforcement.

Winning the legal point is not keeping the market. PayPal beat the fine on process and still ended up doing exactly what the regulator asked, years later, with a smaller business.

The judgment stood as the leading authority that payment system operators fall within the PMLA even if RBI had taken a different view under the Payments and Settlement Systems Act. Business Standard reported in February 2024 that PayPal had completed registration with FIU-IND, submitted the requisite documents and appointed a principal officer. No part of the Rs 96 lakh penalty was ever paid, having been quashed with the bank guarantee discharged.