eBay said the U.S. Attorney for the Eastern District of Missouri sent a letter claiming PayPal violated part of the USA PATRIOT Act. eBay revealed the news in its annual report filed with the U.S. Securities and Exchange Commission.
eBay's annual report stated the letter, received on March 28, 2003, contended that PayPal’s provision of services to online gambling merchants violated 18 U.S.C. § 1960 of the USA PATRIOT Act, which 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 letter offered a complete settlement of all possible claims and charges from the U.S. Attorney for the Eastern District of Missouri if Paypal paid the purported amount of its earnings derived from online gambling merchants during the nine-month period from October 26, 2001 to July 31, 2002, plus interest, according to eBay's 10K filing.
eBay acquired PayPal on October 3, 2002, and PayPal exited the online gambling payment processing business in November 2002. eBay said approximately 6% of PayPal's revenues in 2002 were derived from online gambling payment processing.
President Bush signed the USA PATRIOT Act into law on October 26, 2001, in response to the September 11, 2001, terrorist attacks. The USA PATRIOT Act stands for the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. The legislation changed immigration laws, tightened controls on money laundering, and expanded the legal use of electronic surveillance.
eBay stated that PayPal acted in the good faith belief that its conduct did not violate 18 U.S.C. § 1960. It also said PayPal calculated that the amount of its earnings from online gaming activities was less than asserted in the letter.
PayPal had reached an agreement last year with the New York State Attorney General in his inquiry into payments made through PayPal's service to online gambling merchants. In an Assurance of Discontinuance made to the New York Attorney General, PayPal agreed to cease processing payments from its New York members to online gambling merchants by September 1, 2002.
PayPal took the action in voluntary cooperation with New York's Attorney General and did not admit to a violation of law. PayPal also paid penalties of $200,000 to the State of New York to cover the Attorney General's costs of the investigation.
PayPal has faced hurdles in other states as well. PayPal disclosed last year that the states of Louisiana and New York had written to PayPal expressing the views that PayPal's service constituted an unauthorized banking business in their states. PayPal later reported that the New York Banking Department concluded that PayPal was not engaged in illegal banking in New York state and encouraged PayPal to submit an application to obtain a New York money transmitter license.
PayPal enables any business or consumer with email access in 38 countries to send and receive online payments. eBay purchased the online payment company because it is popular with its online auction users. eBay has already phased out its own failed Billpoint payment service on its U.S. site.
eBay also reported it expects to record $3 million in costs related to retention and severance of Half.com workers. eBay is in the process of integrating the Half.com site into the eBay site, and expects that by the third quarter of 2004, Half.com should be fully integrated into the eBay platform.
