Recently, the well-known global payment gateway PayPal has been penalised with a hefty amount of 96 lakhs. The reasons? It hasn’t registered itself as a payment system operator under India’s PMLA – the Prevention of Money Laundering Act, 2002. In essence, the main fault of Paypal was that it isn’t an RBI licensed payment system operator, instead, it is an “intermediary” in the country’s payment system. The deal is, the intermediaries that are licensed by the local financial sector of the country are the only ones to get subjected to anti-money laundering laws. This scenario has raised a big question in the mind of Indian payment gateway users – should all the payment gateway services come under PMLA? What will be its pros and cons? Keep reading to find out!
Money laundering is a criminal offence that results in heavy penalties.
What Is Money Laundering?
Money laundering is an illegal activity of converting illegal money into legal money. In simple words, it’s a process of converting black money into white money. It is a process of hiding illegally acquired money from the eyes of the government. Money laundering is a serious criminal offense and to prevent it, each country has its own laws and regulations.
In the act of money laundering, illegally earned money is invested in a way that no one can track the main source from where it is acquired.
What Is PMLA?
The Prevention of Money Laundering or simply the PMLA is India’s anti-money laundering law that was passed in 2002. It was enacted to combat the rising criminal offence of legalizing illegally earned money and/or profits.
As per this law, any person or company that is directly or indirectly involved with a person who’s actually indulged in the process or is partly connected with the activity in any way is subjected to penalties.
Now, the main question, should the payment gateways be subjected to PMLA?
Should An Indian Payment Gateway Come Within The Scope of Anti-money Laundering Law?
If the payment gateways are subjected to PMLA, it will be done only to set an example for breaching the anti-money laundering law to the intermediaries in questions – which makes no sense for two reasons :
Indian Payment Gateway Services Are Linked To Fully KYC Bank Accounts
The first and the biggest reasons why subjecting Indian payment gateway services to PMLA is not necessary because they involve the accounts that are linked with banks.
Generally, a payment gateway processes the digital transactions between two financial entities or persons that are linked with their respective bank accounts. The involved account holders have already gone through a KYC process with their banks. The point to be noted is, banks are already subjected to PMLA.
The same rule applies to the merchant to merchant-to-merchant transactions. When you start a transaction with a merchant using an Indian payment gateway, it gets cleared in a nodal account maintained by a local bank. No one can access or operate this nodal account, not even the account holders. And also, these nodal bank or settlement accounts are reporting entities under anti-money laundering laws.
In essence, banks know everything about the payee, payer and they monitor the entire transaction processed by the online payment gateways. Further, this stays true for international transactions via Indian payment gateway services as well.
So, there is complete transparency maintained by the Indian payment gateway services and most importantly, they are monitored by banks.
Higher Maintenance Cost For The Businesses
The second reason why bringing Indian payment gateway services within the scope of PMLA is the fact that it will put unnecessary pressure and financial burden on the business.
To trace the actual wealth origin, PMLA will require the payment gateways to track down and report the suspicious transactions, for example – sudden withdrawals, higher deposits, transactions from a person with a criminal record, transactions from a politically connected person, etc. This imposes a great burden on the payment gateway services. Business owners will need to build a solid internal system for tracking their customers. Also, to monitor the customers, businesses will need robust technologies and infrastructure. And in case they fail to report the alerts and suspicious activities, they will have to face heavy penalties and scrutiny.
By understanding the objective of PMLA, payment gateways aren’t really the right targets to enforce the anti-money laundering regime. The reason is, they don’t instruct the banks to debit or credit the accounts of their users. They only act as an interface between a customer and a merchant and help them to make transactions in a safe and easy way.
The chances of someone using an online payment gateway for converting his illegally acquired money to legally earned profit /money are negligible.
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In essence, bringing payment gateways within the scope of PMLA will not make any sense but will only increase the problems of business owners and payment gateway services.