PayPal to Fine Users for Gambling, Gawking and Popping

Third-party Internet payment processor PayPal says it will penalize users who violate its acceptable use policy with fines of up to $500.

The policy, announced Friday, specifically refers to online gambling, adult content and prescription drug sales and will be strictly enforced by the company's compliance team starting Sept. 24. The team has been given clearance from management to fine Web site operators who use PayPal to collect payment for any of the "illegal" services.

PayPal also said that it might take legal action to recover losses in excess of the fines. Officials from PayPal didn't return phone calls from Interactive Gaming News seeking additional comment on the decision, but spokeswoman Amanda Pires told Reuters that the policy is intended to cut down on fraud.

"What you're seeing here is an evolution of our program," Pires explained. "We're trying to deter people who would offer PayPal as a way to pay for anything in these categories. There is a business risk associated with those categories, and we are moving to protect our users."

Users who violated PayPal's acceptable use policy previously ran the risk of having their accounts limited or closed, and the company is hoping the threat of a monetary fine will be a more effective deterrent.

The new policy applies to both buyers and sellers, and marks the first time PayPal has imposed fines for such violations.

PayPal processes transactions on the Internet and at one time had received almost 10 percent of its revenue from online gambling. But it halted the practice (as well as processing adult-content transactions) under regulatory pressure after being acquired by eBay (its biggest client) in 2002.

Eric Jackson, a former PayPal executive and author of the book "The PayPal Wars," said the announcement was probably aimed at government regulators who continue to have the company in their crosshairs.

"Ever since we went public with our IPO, it seemed that our business environment changed," Jackson said. "We had trial lawyers and government regulators--led by none other than New York Attorney General Eliot Spitzer--that seemed to come after us and wanted to take us down."

PayPal agreed in August 2002 to block all Internet gambling transactions from New York residents after a lengthy investigation by Spitzer's office. The company also agreed to pay $200,000 to the state of New York for disgorged profits, investigation costs and penalties.

In July 2003, a grand jury investigation in the Eastern District of Missouri resulted in eBay paying a $10 million fine. The Department of Justice in this case alleged that PayPal had been used for online gambling transactions for several years. Raymond W. Gruender, the U.S. Attorney who spearheaded the case, was also behind the highly publicized U.S. grand jury investigation into advertising for online gambling services.

Jackson, who was still with PayPal during that time, said the decision to cut ties with the gaming industry wasn't easy.

"We were aware that while it was only 10 percent of our business, the online gaming industry was very reliant on us," Jackson said. "We saw a need there in the beginning and that was part of the reason why we entered it in the first place. The regulatory pressure would not let up though. It was a politically charged decision, but we had no other choice."

Last week's announcement, he added, was more than likely politically motivated as well. To that end, he doesn't expect there to be any fines.

"These types of transactions (for gambling) aren't happening anymore," he said. "There are very stringent procedures in place to ensure that PayPal is no longer available for the gaming industry. The people at eBay and PayPal are putting forth a good-faith effort."