The American Banker
April 2, 2003, Wednesday
PayPal Said In Violation Of Patriot
Act
BY LAVONNE
KUYKENDALL
eBay Inc.'s
PayPal unit has again come under legal scrutiny for its online gambling
business.
The U.S. attorney for the Eastern District of Missouri sent
PayPal a letter Friday contending that by providing services to online
gambling merchants
PayPal had violated the USA Patriot Act. The act "prohibits the
transmission of funds that are known to have been derived from a criminal
offense or are intended to be used to promote or support unlawful activity," the
letter noted.
If it violated the 2001 law,
PayPal would be subject to "potential civil forfeiture of the amounts its
received in connection with such activities, as well as potential criminal
liability," according to
eBay's annual report. The report was filed Monday with the Securities and
Exchange Commission.
The Patriot Act, a sweeping law approved less than two months after the
September 2001 terrorist attacks, has already tripped up another nonbank, First
Data Corp.'s Western Union Financial Services Inc. In December, New York State
officials said the money transmitter agreed to pay $8 million to settle claims
that it had failed to file suspicious-activity and currency-transaction reports
designed to detect money laundering.
eBay said in its annual report that the U.S. attorney offered to settle
the allegations for a sum said to equal
PayPal's earnings from online gambling merchants between Oct. 26, 2001,
and July 31, 2002, plus interest. But the company claimed the U.S. attorney's
figure exceeded
PayPal's earnings from online gaming during that period. Though it did
not reveal the amount in contention,
eBay said it would not "have a material impact on our financial position,
results of operations, or cash flows."
A spokeswoman with the U.S. Attorney's Office for the Eastern District of
Missouri declined to confirm or deny
eBay's statements on the matter, saying that it had no current
indictments against the person-to-person payment subsidiary of the online
auctioneer. "It's not coming from here," she said of news reports on the letter.
eBay did not disclose the letter Monday but discussed it in detail in the
annual report.
This is not the first time that early disclosures of pending developments have
diffused bad news about
PayPal. Last August,
eBay signed an agreement with New York Attorney General Eliot
Spitzer's office on
PayPal's online gambling business. The story appeared in The New York
Times the same day as Mr.
Spitzer's announcement.
In that case,
eBay paid $200,000 to settle the New York prosecutor's inquiry.
PayPal also agreed to stop processing online gambling payments from its
New York members.
PayPal received its first notification of the Department of Justice's
Missouri investigation last July, when it received a subpoena from a federal
grand jury requesting documents and information related to services for online
gambling merchants.
PayPal warned investors that if the current investigation leads to civil
or criminal charges it would face litigation costs, bad publicity, and the
"diversion of management time."
"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,"
eBay's annual report states.
In addition to the Missouri investigation,
eBay said that it has "from time to time" received inquiries by other
"foreign, federal, state, and local regulatory agencies and been told that they
have questions with respect to the steps we take to protect our users from fraud
and about our operations."
eBay offered no specifics on any of these inquiries. A spokesman did not
immediately return a call asking for comment on this or the broader story.
eBay bought
PayPal last year for $1.4 billion in stock and decided to shut down
PayPal's troubled online gambling business, which it said generated
around 6% of
PayPal's revenues last year.
PayPal stopped taking online gambling fees in November.
PayPal processes a daily average of 440,000 payments totaling $24
million.