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-Caveat Lector- PayPal charged with breaking Patriot Act
By Dawn Kawamoto
Staff Writer, CNET News.com
March 31, 2003, 1:22 PM PT
A U.S. Attorney's office has alleged that PayPal violated laws regarding
the
processing of online gambling payments, and is asking parent company
eBay to hand
over nine months of the gambling-related earnings in settlement.
The U.S. Attorney for the Eastern District of Missouri told eBay that
its online payment service
violated provisions in the USA Patriot Act between October 2001 and July
2002, according to
eBay's annual report, filed Monday with securities regulators. Under the
act, it is prohibited to
transmit funds known to have come from a criminal offense, or that are
intended to promote or
support unlawful activities.
The agency is seeking to collect any earnings that PayPal received from
online gambling
merchants during the nine-month period, as well as interest. Last year,
PayPal received 6
percent of its revenue from online gambling, according to its filing
with the Securities and
Exchange Commission.
eBay, however, takes issue with the U.S. Attorney's allegations.
"PayPal acted in the good faith belief that its conduct did not violate
(the USA Patriot Act), and
PayPal calculates that the amount of its earnings from online gaming
activities was less than
asserted in the (U.S. Attorney's) letter," the filing states.
The San Jose, Calif.-based auction company, which received the U.S.
Attorney's notice on
Friday, is reviewing the matter and has not decided whether it will pay
the requested
settlement price, said Kevin Pursglove, an eBay spokesman.
If a settlement is reached, it won't be the first time PayPal has paid
up over processing online
gambling payments. Last August, the service reached a settlement with
the attorney general
for the state of New York, under which it ceased processing payments for
New York online
gambling merchants and also paid the state $200,000 in penalties.
eBay, which acquired PayPal in October, has halted the practice of
processing online
gambling payments. In its filing, the company says the most recent
controversy could hit the
service hard.
"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, which would
materially harm our
business," according to the filing.
The company is aware that PayPal's business could also suffer if future
regulation under the
USA Patriot Act requires it to revise its process for verifying the
identity of its customers. The
USA Patriot Act, signed into law in 2001, gives law enforcement agencies
greater latitude in
monitoring Internet usage and sharing information. The law is designed
to reduce the prospect
of terrorist attacks.
"PayPal's business could suffer if customers use its system for illegal
or improper purposes, or
if usage of its system is reduced because of increased verification
requirements," the filing
states.
But Pursglove noted that PayPal already uses a rigorous customer
identification system and
has a good view, internally, of payments that merchants try to process
for illicit or illegal
activity. The loss of such business would be insignificant to eBay's
revenue, he said.
He also noted that whether eBay settles for the amount the U.S. Attorney
in Missouri is
seeking, something less or nothing at all, there would be no material
affect on its finances or
operations. eBay declined to disclose the amount the U.S. Attorney
office is seeking.
Shares of eBay slipped $3.98, or about 4 percent, to $85.31 in Monday
trading.
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