PayPal Investigated Over Money Laundering, Anti-Terrorism Compliance

Financial crime watchdog AUSTRAC has ordered an independent audit of PayPal, amid concerns over the online payment service giant's compliance with money laundering and counter-terrorism financing laws.

AUSTRAC announced on Tuesday it had concerns over PayPal's compliance with reporting obligations, which require the company to report the transfer of funds or property to or from Australia.

While it remains to be seen whether any significant compliance concerns will be found by an auditor, who has 120 days to report back after their appointment, AUSTRAC said suspected non-compliance would result in the watchdog taking action to protect the Australian community.

AUSTRAC Chief Executive Officer, Nicole Rose said Australia's reporting mechanisms provide vital intelligence which enables the financial intelligence agency to combat serious crimes like child sex exploitation.

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Rose said PayPal was an "important partner" in fighting crime.

"Regulated businesses like PayPal Australia, who facilitate payments and transactions for millions of Australian customers every year, play a critical role in helping AUSTRAC and our law enforcement partners stop the movement of money to criminals and terrorists,” she said.

PayPal said it discovered an issue in its reporting system, and "self-disclosed" the issue to AUSTRAC.

"We are working in full cooperation with AUSTRAC to remediate this reporting system issue and to undertake the audit as outlined by AUSTRAC in the time specified," a spokesperson said in a statement.

PayPal, which has been operating in Australia since 2005, told 10 daily it has more than eight million active customer accounts here.

The online payment provider insists it will remain business as usual for customers as the investigation into its compliance begins.

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But Dr Lien Duong, senior lecturer at Curtin University's School of Accounting, said the sheer size of PayPal's business -- with over 200 markets and millions of transactions every day -- could complicate matters if an issue was discovered.

"The scale of the transaction, you've got so many transactions every day, it could be a huge complication for PayPal," she said.

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Duong suggests part of the concern stemming from the PayPal and AfterPay investigations could be because of identity and verification issues that comes from online service providers.

She said although fintech companies have security processes in place, it was still relatively easy for people to get access to online apps and make transactions.

"Mainly it's about identification and verification. That's something you just can't do properly over the internet," Duong said.

RMIT Industry Fellow, Senior Lecturer Victor Borg said the investigation is not likely to affect consumers, unless a very serious non-compliance breach is found.

Borg said it was important to understand that PayPal processes millions of transactions daily meaning it's "quite a complex process" to stay on top of.

"The sheer scale poses the risk that something can go amiss," he told 10 daily.

Borg said the reporting mechanisms were important to make sure these service providers were not being used for "nefarious purposes."

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Borg explained that hypothetically, money laundering could occur where criminal organisation set up fronts to look like legitimate businesses and exchange proceeds of crime between them. Then, by using these services, the money transaction would look legitimate.

"The crime could be anything, from fraud to terrorist financing," he said.

Borg said it was this "very high profile" concern that would warrant AUSTRAC to take any action against a company.

He said it was up to AUSTRAC to determine the level of penalty to hand to a company if non-compliance was found, and that could range anywhere from an infringement notice to criminal prosecution.

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