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Kevin Smith

PayPal Comes Under Fire Again

31 March 2003

A U.S. federal court on Friday informed third-party online transaction processor PayPal in a letter that the company has violated U.S. law by processing payments for online gambling services. The receiving of the letter was confirmed in the company's 10-K annual report, which it released today.

PayPal disclosed in its quarterly report, release in July 2002, that the U.S. Attorney's office for the Eastern District in Missouri was conducting a federal grand jury investigation relating to the company's business ties to online gaming merchants. That investigation ultimately led to Friday's notification

The letter stated that PayPal had transmitted funds known to have been derived from a criminal offense or intended to be used to promote or support unlawful activity. Such activity is in direct violation of the federal PATRIOT Act, a law aiming to deter terrorism through anti-money laundering provisions.

Despite the accusation, no charges have been filed. As per Department of Justice regulations, the U.S. Attorney's office could not confirm nor deny whether there's a pending investigation.

PayPal and its parent company, eBay Inc., have turned down a settlement plan put forth by the U.S. Attorney's office. According to the 10-K statement, the U.S. Attorney offered a complete settlement of all possible claims and charges covering a purported amount of earnings plus interest that PayPal derived from online gambling merchants between Oct. 26, 2001 and July 31, 2002.

The filing didn't disclose the amount of money the U.S. Attorney asserted PayPal to have made from Internet gambling, but eBay said it was more than the actual earnings. Both eBay and PayPal have always maintained that online gambling transactions were a small fraction (roughly 6 percent of revenues) of PayPal's overall business. PayPal discontinued handling I-gaming transactions Nov. 24, 2002, roughly seven weeks after eBay's purchase of the company was completed. The $1.4 billion acquisition was contingent PayPal discontinuing its handling of I-gaming transactions.

eBay also contends that PayPal has not violated the PATRIOT Act.

"We just got this letter towards the close of business on Friday," eBay Senior Director of Communications Kevin Pursglove said. "Our legal team is still looking it over, but at this point in time we don't feel that any portions of the law have been violated."

If it goes to court, PayPal could be forced to forfeit the amounts it received in connection with the alleged activities and could also be subject to criminal liability.

eBay said it would be harmed by negative publicity, costs of litigation and the diversion of management time if an investigation leads to a civil or criminal charge. It also said any finding of a civil or criminal violation, or potentially any settlement, could hurt PayPal's ability to obtain, maintain or renew money transmitter licenses in jurisdictions where such licenses are required.

Nevertheless, Pursglove doesn't appear to be too concerned about the long-term effect of the news, or any possible court action, on eBay and PayPal.

"I just think this reiterates the importance of our decision before we acquired PayPal that it not be used for online gaming," he said. "The events in question all happened prior to the acquisition, but we still feel that PayPal was operating in good faith and within legal guidelines."

Shares of eBay were at $85.31 late Monday, down $3.98, or 4.5 percent. The company's shares are traded on the Nasdaq.

PayPal Comes Under Fire Again is republished from
Kevin Smith
Kevin Smith