PayPal Cited for Patriot Act Violation

Online auction company EBay said its PayPal auction payment unit is being investigated for possible violations of the USA Patriot Act.

In its 10-K financial report to the U.S. Securities and Exchange Commission, filed Monday, EBay said its PayPal unit received a letter on March 28 from the U.S. Attorney's office for the Eastern District of Missouri about the alleged violations. The letter states that PayPal's earlier practice of providing payment services to online gambling merchants violated provisions in the Patriot Act that "prohibit the transmission of funds that are known to been derived from a criminal offense or are intended to be used to promote or support unlawful activity."

Ongoing Investigation

Kevin Pursglove, an EBay spokesperson, said the company's attorneys are continuing to review the allegations.

"This is addressing an issue that happened close to two years ago," well before EBay purchased PayPal last July. The purchase was finalized in October. As part of its acquisition of the online payments company, EBay said it would pull the PayPal unit out of the gambling transaction business, Pursglove said.

Jan Diltz, a spokesperson for Raymond W. Gruender, the U.S. Attorney for the Eastern District of Missouri, today said she couldn't confirm the communication with EBay or any investigation because of court rules.

Violation Questioned

According to EBay's 10-K filing, the U.S. Attorney's letter said the alleged violations expose PayPal to "potential civil forfeiture of the amounts it received in connection with such activities," as well as "potential criminal liability." The letter offered to rescind the allegations if PayPal pays the amount of money it earned by handling online gambling transactions from October 26, 2001, through July 31, 2002, plus interest.

In the filing, the company stated that PayPal "acted in the good faith belief that its conduct did not violate [the statute]." The company also claims that its earnings from the transactions were lower than figures asserted by the government.

The USA Patriot Act was passed a month after the September 11, 2001, terrorist attacks on the United States to give law enforcement authorities expanded tools for investigating and deterring future terrorist acts.