FinTechNavigating the Regulatory Landscape: Payment System Operators under PMLA in India – Part 1

INTRODUCTION

The interpretation of statutes is a fundamental aspect of legal proceedings, and it becomes particularly complex when dealing with similar words or phrases defined in two different statutes.

The recent judgment of the Hon’ble High Court of Delhi in the case of PayPal Payments Pvt. Ltd. (‘PayPal’) vs. Financial Intelligence Unit India & Anr. [W.P. (C) 138/2021], has sparked a debate on whether similar words or phrases used in different legislation should be construed differently or remain consistent across different laws.

In this part of the article, we shall discuss the difference and impact of definition of Payment System under PMLA and PSS Acts and the consequences of a PSP not getting registered under the FIU reporting system.

FACTS

PayPal Payment Private Limited (“Petitioner”), a company providing a technology interface enabling transactions between Indian exporters and overseas buyers, had come under investigation regarding its responsibilities under the Prevention of Money Laundering Act, 2002 (“PMLA”) in India.

The Financial Intelligence Unit of India (“FIU”), vide order dated 17.12.2020 (“Impugned Order”), held that the business model of the Petitioner falls within the ambit of “Payment System Operator” defined under Section 2(1)(wa) of the Prevention of Money Laundering Act, 2002 (“PMLA”) and therefore, is required to register itself as a Reporting Entity (“RE”) and comply with the reporting obligations placed under the Prevention of Money Laundering (Maintenance of Record) Rules, 2005 (“Rules, 2005”).

The Petitioner had challenged the Impugned Order before the Hon’ble High Court of Delhi (“Hon’ble High Court”) contending that it couldn’t be considered as Payment System Operator under PMLA, as it is operating as an Online Payment Gateway Services in India and it merely provides a technology interface enabling transaction between Indian exporter and overseas buyer.

The Petitioner’s business model is such that the transmission of funds occurs between the constituent Authorized Dealer Category-I Schedule Commercial Banks without any intervention, and at no stage of the entire transaction is the petitioner engaged in the handling of funds.

That furthermore, since the definition of “Payment System Operator” is similar under PMLA and Payment and Settlement System Act (“PSS Act”) and the Reserve Bank of India (“RBI”) does not consider the Petitioner and similar companies like Petitioner as “Payment System Operator” defined under Section 2(1)(rc) of PSS Act, the same interpretation shall be followed under the PMLA as well.

That in view of the contrasting views of the RBI and the FIU, the learned judge of this Hon’ble Court directed the Secretary, Ministry of Finance to form a committee and clarify their position whether companies like the Petitioner who claim to be facilitators of monetary transactions, both in foreign exchange and in Indian Rupees, ought to be classified as “payment system operators” and hence “reporting entities” under the PMLA.

The Committee came to the conclusion that the companies like Petitioner would fall within the definition of Payment System Operators, as the definition provided under the PMLA is a standalone definition and not linked to PSS Act.

Therefore, the Non-requirement of registration of the Petitioner and similar entities with RBI under PSS Act does not exclude them from registering with FIU as Reporting Entity under PMLA and discharge their Anti-Money Laundering and Countering financing of Terrorism (AML/CFT) obligations under PMLA.

In light of the Committee’s report and recommendations and the issue of Petitioner’s categorization and obligations under the PMLA, the Petitioner appealed the impugned order before the Hon’ble Delhi High Court for further resolution.

ISSUE BEFORE THE HIGH COURT

Whether businesses like the petitioners, who market themselves as facilitators of monetary exchanges in both foreign currency and the Indian Rupee, fall under the PMLA definition of “reporting entities” and hence qualify as “payment system operators”.

PAYPAL CHALLENGE

A. Role of the Petitioner

The business model of the Petitioner is such that it provides a technology interface to enable transactions between Indian exporters and overseas buyer and it onboards only Indian Exporter on its platform and does not enroll overseas remitters participating in export transactions.

The Petitioner at no stage of the transaction is engaged in handling the funds undertaken between the Indian exporter and the foreign buyer and the money is directly handled and systematically routed by the authorized Dealer (AD) Banks at the end of each transaction, as it is the AD Bank, which undertake the operation of receiving payments, clearing funds and perform settlement activities.

That under Section 2(1)(rb) of the PMLA, in order to fall within the category of Payment System Operator it is essential that such company while enabling payment between a payer and a beneficiary is engaged in clearing, payment or settlement activities or all of them.

That therefore, since it is evident from the business model of the Petitioner, that it is neither involved in clearing nor is engaged in providing payment or settlement services it cannot be categorized as Payment System Operator under PMLA.

B. Identical Definition

The guidelines issued for Regulation of Payment Aggregators and Payment Gateways (“Guidelines”) and circulars thereon, clearly establishes that there is distinction between Payment Aggregators (“PA”) and Online Payment Gateway Service Providers (“OPGSP”). The same view was taken in the case of Lotus Pay Solutions (P) Ltd. v. Union of India [2022 SCC OnLine Del 2939],

PA are those 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, whereas, OPGSP are entities, which only provides technology interface to enables online payment transactions and at no point of time is engages in handling funds.

Therefore, the Petitioner by virtue of being an OPGSP, it is clear as day light that it cannot be classified as Payment System Operator under PSS Act, and henceforth, is not required to apply for authorization before the RBI under PSS Act.

That a bare perusal of the definition of payment system as embodied under the PSS Act and the PMLA would indicate that they are pari materia in all aspects. Therefore, since the Petitioner does not fall within the ambit of Payment System Operator under PSS Act, the same interpretation shall be followed under PMLA.

C. Strict Interpretation shall be made

Petitioner asserted that the PMLA imposes numerous penal sanctions and it is a trite law that statutes with penal implications shall be interpreted strictly and shall not be accorded expansive interpretation. The same view was taken in the case of Glaxo Laboratories (I) Ltd. vs. Presiding Officer [(1984) 1 SCC 1]

That furthermore, even if the objective of the PMLA is to tackle money laundering and it embodies both regulatory and penal provisions, then too such a combination should not detract from the strict interpretation of the provisions of the PMLA.

The definition of a “Payment System” within the PMLA is clear and specific, it should not be hypothetically interpreted solely to include the Petitioner within the ambit of Payment System Operator, despite it being explicitly excluded from the definition.

D. Deemed Interpretation shall not be allowed

The Petitioner asserted that the Impugned Order is fundamentally flawed, as it relies on the notion of the Petitioner being a deemed payment system operator. In the absence of a statute deploying a fictional characterization, is absolutely absurd and bad in law. That the FIU in the present case has gone beyond the scope of the statute and exceeded its jurisdiction and authority.

That although preventing terror financing and implementing safeguards is crucial and FIU is bound by the international obligations which flow from the various international covenants to which India is a party as well as the Financial Action Task Force. However, this alone cannot be a valid basis for re-writing Section 2(1)(rb) and classify Petitioner as a reporting agency under the PMLA.

FIU CHALLENG

A. Purposive Interpretation

The FIU asserted that a statutory provision must be construed in harmony with the purpose of the legislation. Therefore, with respect to the PSS Act and PMLA, while the objective of the former statute is to regulate financial system, the latter establishes a framework aimed at addressing specific fiscal offenses and illicit financial flows.

Therefore, the mere fact that the Petitioner does not fall within the ambit of Payment System Operator under the PSS Act, would not be the determinative of the question, whether the Petitioner would be considered as Payment System Operator under the PMLA.

The very fact that the framers of the PMLA choose to independently define “payment system” and “payment system operator” under the PMLA, as opposed to mere incorporation by reference from the PSS Act, indicate the legislative intent to assign a distinct meaning to “payment system” within the context of the PMLA.

That the dual character of the PMLA encompassing penal, preventive, and regulatory elements, it cannot be assumed that the Petitioner registration as a reporting entity is solely punitive. The fact that PMLA contains both penal and regulatory provisions negates the notion that Petitioner registration as a reporting entity under the statute is solely punitive in nature.

B. Global Compliance

The FIU asserted that the questions put forth before the Hon’ble High Court cannot be comprehensively understood without considering India’s obligations as a member of FATF and its commitment to global efforts aimed at combating money laundering.

The fight against money laundering must align with the ongoing digital transformation reshaping global economies and societies. The effectiveness of anti-money laundering and counter-terrorist financing measures hinges upon the exchange of financial intelligence.

The FIU, as a member of the Egmont Group of Financial Intelligence Units comprising 167 global FIUs, facilitates collaboration and intelligence exchange to combat money laundering, terrorist financing, and related offenses.

That it is a fact on record that the Petitioner, through its concerned or parent entity, has also committed to adhere to analogous legislations prevailing in the United States, Australia, Hong Kong, Luxembourg, among other jurisdictions. However, it seeks to create an exception insofar India is concerned.

The failure of the Petitioner to register as a reporting entity continues to impede vital security and law enforcement interests, depriving the FIU of comprehensive transactional information that is not even shared with the Petitioner’s nodal bank.

Money laundering and financial crimes fall within the category of special offenses, necessitating a strict interpretation of the provisions of the PMLA to align with the clear intent of Parliament. Therefore, unless the provisions of the PMLA statute is interpreted keeping in mind the intention of enacting this statute, it could lead to the proliferation of unmonitored financial channels, facilitating the very misconduct the PMLA aims to combat.

C. Broader Ambit

The FIU asserted that the definition of Payment System defined under Section 2(1)(rb) of the PMLA employs the term “enables” when discussing payments between a payer and a beneficiary coupled with the disjunctive word “or” between “payment” and “settlement service.”, which clearly establishes that the definition of Payment System Operator encompasses a broad range of entities facilitating payments.

Therefore, the Petitioner lack of direct involvement in clearing or settlement activities does not preclude its recognition as a system providing payment services under PMLA and the technological platform established by the Petitioner squarely falls within the definition of a payment system under the PMLA.

DECISION AND FINDINGS

The Hon’ble High Court agreed with the contentions raised by FIU and noted that the interpretation of a payment system operator under the PSS Act should not be mechanically applied when interpreting the scope and purpose of regulating a payment system operator under the PMLA, despite the definitions of ‘Payment System’ being identical in both the statutes in all aspects.

The Hon’ble High Court emphasized that the understanding of this term should consider the overall theme and essence of the PMLA, rather than being clouded by how the subject is dealt within the PSS Act. The Hon’ble High Court asserted that any alternative approach would violate established principles of statutory interpretation.

That the Hon’ble High Court further stated that a legislative measure need not encompass every aspect of a particular subject, highlighting that the legislature can choose to regulate specific aspects within a broad range of economic activities under a particular statute. The fact that OPGSPs are not governed by the PSS Act should not lead to the conclusion that they are also exempt from the regulatory framework of the PMLA.

That furthermore, the 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. Therefore, the meaning to the definition of payment system under Section 2(1)(rb) of the PMLA, shall be ascertained bearing in mind the objective of the PMLA.

That the term “enables” empowers a person to achieve a particular objective, capacitate or facilitate a person to achieve a particular objective. Therefore, with respect to the to the definition of payment system under Section 2(1)(rb) of the PMLA, the use of the term “enables”, means that any system which makes possible or advances the objective of a payment between a payer and a beneficiary would on a plain reading of the provision would fall within the ambit of a payment system.

That as it is a fact or record that the Petitioner facilitates the movement of funds between disparate parties. The mere circumstance that the Petitioner also interfaces with AD Category Banks or other PAs would not detract the Petitioner from being recognized as a system inherently capable of effecting payments and engaging in money transfer transactions.

Therefore, in light of the underlying objectives that gave rise to the enactment of the PMLA and the activities it seeks to oversee and penalize, there appears to be no valid legal rationale to construe Section 2(1)(rb) in a manner that exclusively encompasses entities directly involved in the handling, retention, or transmission of funds.

That moreover, chronology of events matter, as the PSS Act containing definition of payment system was enacted in 2007 while the definition of payment system in the PMLA was introduced through an amendment in 2009. The Hon’ble High Court emphasized that had the legislative intent been to adopt a similar scope of definition under PMLA, the legislature could have 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.

AMLEGALS REMARKS

The judgment highlights that although the definitions of “Payment System” in both statutes are similar in wording, they serve different legislative purposes. The PSS Act primarily functions as a financial regulatory statute, governing various aspects of payment and settlement systems, ensuring smooth and efficient fund transfers. Whereas, the PMLA is aimed at combating money laundering and preventing illicit financial flows, encompassing both regulatory and penal provisions.

The Hon’ble High Court, stated that while the definitions of “Payment System” might be identical, interpreting them without considering the distinct objectives and contexts of the two statutes would be contrary to established principles of statutory interpretation.

The Hon’ble High Court emphasizes that the PMLA operates in a separate sphere with a focus on preventing money laundering and tracking the origins of proceeds from criminal activities, which differs from the intent of the PSS Act.

Therefore, the legislative intent behind the PMLA is to have a wide and inclusive scope for the definition of “Payment System”, which is also reflected by the terms used in the definition such as “enables,” “includes,” “enabling,” and “similar operations” under the PMLA.

The Hon’ble High Court’s interpretation aims to ensure effective implementation of anti-money laundering measures and avoid the risk of offenders evading legal measures. Whereas, in contrast, the PSS Act has a narrower focus on regulating specific aspects of payment and settlement systems within the financial sector.

Therefore, even though the definitions are identical in all aspects, the fact that OPGSPs are not governed by the PSS Act should not lead to the conclusion that they are also exempt from the regulatory framework of the PMLA.

That with respect to the consequences of a PSP not getting registered under the FIU reporting system. That in lieu of Section 12(1) of PMLA, the Reporting Entity registered with the FIU is required to maintain records of all transaction undertaken by such entity and fulfill reporting requirements pertaining to suspicious transactions, money laundering, and other financial irregularities.

That in case fails to get itself registered as Reporting Entity with the FIU, then such entity may be subject to legal and regulatory liabilities in accordance with Section 13(2)(d), which include fines, restrictions on operations, or other punitive measures as determined by the authorities.

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or jason.james@amlegals.com