FinTechNavigating the Regulatory Landscape: Payment System Operators under PMLA in India – Part 2

The argument that non-handling of funds should exempt payment platforms from regulatory oversight is no longer viable. The focus of the PMLA goes beyond the technicalities of fund handling and instead aims to prevent money laundering, track the origins of proceeds from criminal activities, and ensure effective AML measures. Platforms that facilitate financial transactions, even without direct fund handling, can be integral to the larger payment system and play a role in enabling money transfers. Therefore, the non-handling of funds is no longer a criterion for remaining outside the purview of the regulatory system.

b. The Role of Technology Service Providers in the Payment Ecosystem

All technology service providers (TSPs) within the payment ecosystem, including payment gateways, are subject to regulation and required to follow the technology and security recommendations of the Reserve Bank of India (RBI). The classification of TSPs as payment gateways is determined based on their business models and modus operandi. While some TSPs may function differently to avoid certain liabilities and regulations from the RBI, the specific categorization depends on individual circumstances. It is crucial to understand the nuances of each TSP’s operations and their alignment with regulatory requirements.

c. The Importance of Purposive Interpretation

The FIU argues for a purposive interpretation of the statutes, considering the overall legislative intent and objectives. While the PSSA aims to regulate the financial system, the PMLA establishes a framework to address specific fiscal offenses and illicit financial flows. The distinct definitions of “payment system” and “payment system operator” in the PMLA indicate the legislative intent to assign a distinct meaning to these terms within the context of combating money laundering. The combination of regulatory and penal provisions in the PMLA necessitates a strict interpretation of its provisions to align with the clear intent of Parliament.

d. Global Compliance and International Obligations

India’s obligations as a member of the Financial Action Task Force (FATF) and its commitment to global efforts against money laundering must be considered when interpreting the regulatory framework. The effectiveness of anti-money laundering and counter-terrorist financing measures relies on the exchange of financial intelligence. The FIU, as a member of the Egmont Group of Financial Intelligence Units, facilitates collaboration and intelligence exchange to combat money laundering, terrorist financing, and related offenses. Non-registration as a reporting entity with the FIU impedes vital security and law enforcement interests, depriving authorities of comprehensive transactional information.

e. The Role of RBI and Legislative Intent

The RBI asserts that the interpretation of the term “payment system” under the PSSA should not be mechanically applied when interpreting the scope and purpose of regulating a payment system operator under the PMLA. The PSSA regulates payment systems involved in the transmission of funds, while the PMLA focuses on preventing, regulating, and combating money laundering. The specific definition of “payment system” in the PMLA, introduced through an amendment in 2009, indicates a conscious decision to differentiate its scope from that of the PSSA. The legislative intent behind the PMLA is to have a wide and inclusive definition of “payment system” to prevent unmonitored financial channels.

AMLEGALS REMARKS

The recent judgment by the Hon’ble High Court of Delhi suggests a shift towards a more holistic and purposive interpretation of regulatory frameworks, particularly in the context of financial platforms. The court emphasizes the broader regulatory scope of the PMLA, the contextual interpretation of definitions, the effective implementation of AML measures, and the prevention of entities evading regulation.

The purpose of the PMLA is to prevent money laundering and ensure comprehensive oversight of financial transactions, irrespective of the direct handling of funds. This interpretation aligns with the objectives of global compliance and international obligations in combating money laundering and related offenses.

The recent judgment signifies a changing landscape of regulatory oversight for payment platforms. The argument that non-handling of funds should exempt platforms from regulatory scrutiny is no longer valid. The purposive interpretation of statutes, the legislative intent behind the PMLA, and the global compliance obligations emphasize the need for comprehensive oversight of financial transactions, irrespective of the technicalities of fund handling.

Payment platforms play a crucial role in enabling money transfers and can impact the effectiveness of anti-money laundering measures. It is essential for businesses operating in this space to understand and comply with the evolving regulatory landscape to foster trust, security, and transparency in the financial ecosystem.

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