U.S. charges PayPal with laundering for transmitting gaming proceeds

U.S. charges PayPal with laundering for transmitting gaming proceeds
05/01/2003

PayPal, the big Internet payment service that facilitates the exchange of money via e-mail, is accused of violating a money laundering law prohibiting the international transmission of money derived from criminal activity.

U.S. prosecutors in St. Louis have accused PayPal, the big Internet payment service that facilitates the exchange of money via e-mail, that by processing payments for online gambling companies it violated a money laundering law prohibiting the international transmission of money derived from criminal activity.

The law makes it a crime to conduct a money transmitting business without a state license. It was fortified by the USA Patriot Act to make it a crime for even a licensed money transmitting company to send funds “known… to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity.” (Title 18, USC Sec. 1960).

The U.S. Attorney in eastern Missouri says PayPal transmitted illegal online gambling proceeds funds repeatedly. The prosecutor notified PayPal by a March 28, 2003, letter that it could be forced to forfeit its online gambling profits earned from October 26, 2001, to July 31, 2002, with interest. The company was also informed it could face criminal prosecution. In July 2002, PayPal turned over to a federal grand jury documents on its online gambling services pursuant to subpoena.

Prior New York problems

In August 2002, PayPal agreed with New York’s Attorney General to stop processing payments by New Yorkers to gambling merchants. It paid $200,000 in penalties and disgorged its profits.

PayPal stopped processing payments for online gambling companies in November 2002, a month after it was acquired by the online giant auctioneer, eBay. About 6% of PayPal’s 2002 revenues came from online gambling merchants, according to eBay’s 2002 10K filing with the Securities and Exchange Commission.

eBay takes cautious position

In that filing, eBay said PayPal “acted in the good faith belief that its conduct did not violate (the money laundering law).” Without disclosing its profits from online gaming, eBay said “the monetary amounts associated with this matter are not expected to have a material impact on our financial position, results of operations or cash flows.”

Still, the company is wary of harm the accusations could cause. “Any finding of a civil or criminal violation by PayPal, or potentially any settlement, could also endanger PayPal’s ability to obtain, maintain or renew money transmitter licenses in jurisdictions where it requires such licenses to operate…,” the filing said.

Government fight continues

Hearings by the U.S. Senate Permanent Subcommittee on Investigations in 2001 disclosed that correspondent accounts of foreign banks at Bank of America and J.P. Morgan Chase had moved tens of millions of dollars in Internet gambling proceeds (MLA, Mar. 2001). Many bills have been filed to curb Internet gambling but no measure has received final approval.

Banks blocking gambling transactions

Some credit card companies have decided to block online gambling payments. Citibank, which has 33 million Visa and MasterCard holders, stopped allowing the use of its cards for online gambling in July 2002. Other U.S. banks, including Bank of America, Fleet, MBNA and JP Morgan Chase, have taken similar steps. (MLA, Aug. 2002).