PayPal confronts Austrac enforcement threat, probe deepens

PayPal faces a real risk of enforcement action, after Austrac stepped up its investigation and assessment of hundreds of millions of potential breaches of the law.

.The threat of action against PayPal follows Austrac ramping up its enforcement activities in the past four years, including against the major banks. Picture: AFP

PayPal faces a real risk of enforcement action, including in court, after regulator Austrac started a detailed investigation as it scours an independent report into hundreds of millions of potential breaches of the law.

The global payments behemoth has been the subject of scrutiny by financial crimes regulator Austrac, which in 2019 forced the appointment of the external auditor to PayPal to assess its compliance with anti-money-laundering and counter-terrorism financing laws.

PayPal appointed accounting firm EY as the independent auditor and submitted four interim reports to Austrac, with a final one being lodged in August last year.

The reports — which stem from PayPal incorrectly filing required international funds transfer instructions — are understood to have raised some alarm bells at Austrac which is considering what enforcement action to take.

An Austrac spokeswoman wouldn’t comment on the details of the PayPal case, except to say: “Austrac has notified PayPal Australia that it has commenced an enforcement investigation into certain matters reported upon by the external auditor.

“Austrac has examined the report and is working with PayPal on responding to the recommendations and findings. Austrac will not be providing commentary on the details of the auditor’s report or the remediation work being undertaken by PayPal.”

Sources said PayPal’s reports were lodged with Austrac’s regulatory operations division, and also dispatched by the payments giant to the banking regulator and Australian Securities and Investments Commission.

As foreshadowed by The Australian, PayPal was hit with a spate of legal notices in 2019-20 to produce information to Austrac. That followed the self-reporting of potential violations by PayPal of its legal obligations.

A PayPal Australia spokesman would not comment directly on whether it had informed other local regulators about its Austrac engagement or whether it expected legal action.

“PayPal Australia continues to work closely and co-operatively with Austrac in all respects, including the section 162 notice previously issued. At this stage, it would not be appropriate to discuss any further details,” he said.

“We regularly engage and fully co-operate with all of our regulators in Australia.”

The spokesman previously said any quantification of the number of potential breaches by PayPal was speculative.

Austrac’s website notes that it has a range of enforcement actions in its armoury to ensure entities comply with the law.

They include civil penalty orders, enforceable undertakings, infringement notices and remedial directions.

PayPal CEO Daniel Schulman. Picture: David Swan

The threat of action against PayPal follows Austrac ramping up its enforcement activities in the past four years, including against the major banks.

Last year, Westpac agreed to pay a record $1.3bn penalty to Austrac after admitting to a spate of shortcomings in its anti-money laundering compliance systems and processes. That settlement came after Austrac launched legal action against Westpac relating to more than 23 million transactions, some of which were linked to the financing of child sexual exploitation material.

Commonwealth Bank had its own battle with Austrac and paid a $700m penalty in 2018.

Both Westpac and CBA had their legal breaches referred to Austrac’s enforcement unit and further investigated, ahead of court action being lodged and then eventual agreements on penalty settlements.

While buy now pay later group Afterpay was mandated in 2019 by Austrac to appoint an external auditor, the regulator did not refer that matter to enforcement and a remediation plan was agreed.

PayPal’s potential breaches of legislation need to be considered against the fact it ­facilitates a large number of small-value amounts on sites such as eBay.

Austrac and chief executive Nicole Rose will take that into account as they decide how to proceed. Any action will also reverberate in other jurisdictions.

PayPal’s compliance with its legal obligations in Australia will be watched by other technology and payments groups, and regulators around the world given the company’s global clout.

PayPal global CEO Daniel Schulman — whose reported pay was $US23.4m ($30m) last year — is navigating several regulatory issues.

The company’s global accounts mentioned a civil investigative demand from the US government’s Consumer Financial Protection Bureau, and also cited subpoenas from the Department of the Treasury’s Office of Foreign Assets Control.

The latter relates to PayPal’s compliance with economic and trade sanctions, and the self-reporting of transactions after the company reached a settlement in 2015 on possible violations.

PayPal’s global accounts said Austrac had notified it of an investigation by its enforcement team on matters identified in the external auditor’s final report.

“We cannot estimate the potential impact, if any, on our business or financial statements at this time,” the company said. “In the event an adverse outcome arises from any associated enforcement, proceeding, or other further matter initiated by Austrac, this could result in enforceable undertakings, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.”

PayPal Australia reported a profit of almost $19.9m for the 12 months to December 31, more than double the $7.3m in 2019.

They also showed Eric Lassen, former Live Nation Entertainment deputy general counsel, was appointed PayPal Australia CEO in February.

PayPal facilitates the buying and selling of goods and services online, in a mobile app or in person by linking a customer’s bank account, debit and credit card to their PayPal ­account.

The company is also pushing into the buy now pay later segment. The PayPal Pay in 4 instalment option is rolling out to Australian accounts by June.