eBay Inc.'s PayPal unit has again come under legal scrutiny for its online gambling business.
The U.S. attorney for the Eastern District of Missouri sent PayPal a letter Friday contending that by providing services to online gambling merchants PayPal had violated the USA Patriot Act. The act "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 noted.
If it violated the 2001 law, PayPal would be subject to "potential civil forfeiture of the amounts its received in connection with such activities, as well as potential criminal liability," according to eBay's annual report. The report was filed Monday with the Securities and Exchange Commission.
The Patriot Act, a sweeping law approved less than two months after the September 2001 terrorist attacks, has already tripped up another nonbank, First Data Corp.'s Western Union Financial Services Inc. In December, New York State officials said the money transmitter agreed to pay $8 million to settle claims that it had failed to file suspicious-activity and currency-transaction reports designed to detect money laundering.
eBay said in its annual report that the U.S. attorney offered to settle the allegations for a sum said to equal PayPal's earnings from online gambling merchants between Oct. 26, 2001, and July 31, 2002, plus interest. But the company claimed the U.S. attorney's figure exceeded PayPal's earnings from online gaming during that period. Though it did not reveal the amount in contention, eBay said it would not "have a material impact on our financial position, results of operations, or cash flows."
A spokeswoman with the U.S. Attorney's Office for the Eastern District of Missouri declined to confirm or deny eBay's statements on the matter, saying that it had no current indictments against the person-to-person payment subsidiary of the online auctioneer. "It's not coming from here," she said of news reports on the letter.
eBay did not disclose the letter Monday but discussed it in detail in the annual report.
This is not the first time that early disclosures of pending developments have diffused bad news about PayPal. Last August, eBay signed an agreement with New York Attorney General Eliot Spitzer's office on PayPal's online gambling business. The story appeared in The New York Times the same day as Mr. Spitzer's announcement.
In that case, eBay paid $200,000 to settle the New York prosecutor's inquiry. PayPal also agreed to stop processing online gambling payments from its New York members.
PayPal received its first notification of the Department of Justice's Missouri investigation last July, when it received a subpoena from a federal grand jury requesting documents and information related to services for online gambling merchants.
PayPal warned investors that if the current investigation leads to civil or criminal charges it would face litigation costs, bad publicity, and the "diversion of management time."
"Any finding of a civil or criminal violation by PayPal, or potentially any settlement, could also endanger PayPal's ability to obtain, maintain, or renew money-transmitter licenses in jurisdictions where it requires such licenses to operate," eBay's annual report states.
In addition to the Missouri investigation, eBay said that it has "from time to time" received inquiries by other "foreign, federal, state, and local regulatory agencies and been told that they have questions with respect to the steps we take to protect our users from fraud and about our operations." eBay offered no specifics on any of these inquiries. A spokesman did not immediately return a call asking for comment on this or the broader story.
eBay bought PayPal last year for $1.4 billion in stock and decided to shut down PayPal's troubled online gambling business, which it said generated around 6% of PayPal's revenues last year. PayPal stopped taking online gambling fees in November.
PayPal processes a daily average of 440,000 payments totaling $24 million.
