EBay's PayPal accused of violating Patriot Act

Reuters | April 1, 2003

PALO ALTO, California (Reuters) -- A federal prosecutor has alleged eBay Inc. unit PayPal violated a 2001 anti-terror law aimed at fighting money laundering when it provided payment services to online gambling companies, the Web auctioneer said in its annual report filed Monday.

Silicon Valley-based eBay said it received a letter Friday in which the U.S. Attorney for the Eastern District of Missouri accused PayPal of violating a provision of the USA Patriot Act.

The provision 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 prosecutor also said the company could be forced to forfeit the money it received in connection with the alleged illegal activity and that it could also be criminally liable.

EBay said in its annual report that PayPal acted in the good faith belief that its conduct was not in violation of the anti-terror law.

Kevin Pursglove, eBay's spokesman, told Reuters the company's lawyers were reviewing the letter.

Congress passed the Patriot Act one month after the September 11, 2001 attacks on New York City and the Pentagon. The legislation broadened law enforcement powers, especially to combat money laundering that is believed to help finance terror attacks.

PayPal, an online cash transfer service provider, agreed in August to restrict online gambling merchants from using its transaction system and paid a $200,000 penalty to New York state.

EBay bought PayPal for $1.5 billion in October. In November, PayPal stopped processing payments for online gambling companies, an activity that accounted for about 6 percent of PayPal's 2002 revenues, eBay said.

The prosecutor's letter offered a plan that would enable the company to settle all charges and claims, if PayPal turned over earnings, plus interest, from online gambling companies for the nine-month period ended July 31, 2002, eBay said.

Ebay said earnings associated with the activities were smaller than the amount stated in the prosecutor's letter. It also said the related amount was not expected to have a material impact on its financial position, results of operations, or cash flow.