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PayPal and New York in Accord on Gambling
By MATT RICHTEL
ayPal, which lets people make payments over the Internet, said yesterday that it had reached a settlement with New York State to prevent residents from using its service to gamble online and that it would pay a $200,000 fine for handling such payments in the past.
The settlement also includes a much broader provision that requires PayPal to alert law enforcement officials if it finds that any of its customers operate a Web site that "reflects or represents conduct that violates any state or federal law" — even outside New York.
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Representatives of several public interest groups that follow Internet issues said the provision could put PayPal in the position of acting as an agent of law enforcement.
Mike Godwin, staff lawyer for the Center for Democracy and Technology, a public interest group that deals with Internet legal issues, said the provision seemed overbroad, asserting that PayPal had been deputized to "be always on watch."
"It's not like PayPal is run by trained judges," Mr. Godwin said. "But they're effectively judging."
The settlement was announced with the attorney general, Eliot Spitzer, who had subpoenaed PayPal this summer seeking information about the company's involvement in online gambling.
PayPal, which is based in Mountain View, Calif., has become widely used as an Internet payment mechanism, particularly on auction sites like eBay. In fact, the two companies have become so intertwined that eBay recently announced plans to acquire PayPal in a $1.5 billion deal, which, New York State regulators said, is scheduled to close later this year.
PayPal allows people to send payments electronically and it then takes a percentage of each transaction. The company already closely monitors its user base for incidence of fraud, and has a staff of about 150 employees who investigate merchants that offer fraudulent goods or do not deliver to buyers what is promised, said Julie Anderson, a company spokeswoman.
Ms. Anderson said yesterday that the settlement reached with New York would not be particularly onerous because the company already reports people engaged in fraud to law enforcement. She said she did not know whether the company had reported people involved in other illegal activities, like selling contraband on Web sites, but that it would do so in the future.
According to the settlement, the company would, for instance, be required to file a report "should PayPal determine that a member advertises for sale on its Web site controlled substances without a doctor's permission."
Ms. Anderson said the company agreed to the provision in general because "we've never wanted to facilitate something that would be considered illegal."
New York, however, has considered some of the activity in question to be illegal. Mr. Spitzer's office said that the operation or promotion of online casinos violated state law.
This is not the first time the state has gone after a financial institution accused of abetting online casinos. In June, after state regulators asserted that Citibank could face criminal charges for aiding online casinos, Citibank said it would block the use of its credit cards for Internet gambling transactions.
Under the settlement between PayPal and New York, the company said it was not admitting any violation of the law.
When eBay announced its intention in July to acquire PayPal, it said that once the deal was completed it would no longer allow the system to be used for gambling.
Ms. Anderson, PayPal's spokeswoman, said yesterday that until the deal closed, the company would continue to take online gambling business from people placing wagers in states other than New York.
Shares of PayPal rose 20 cents, to close at $23.30.
By MATT RICHTEL
ayPal, which lets people make payments over the Internet, said yesterday that it had reached a settlement with New York State to prevent residents from using its service to gamble online and that it would pay a $200,000 fine for handling such payments in the past.
The settlement also includes a much broader provision that requires PayPal to alert law enforcement officials if it finds that any of its customers operate a Web site that "reflects or represents conduct that violates any state or federal law" — even outside New York.
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Representatives of several public interest groups that follow Internet issues said the provision could put PayPal in the position of acting as an agent of law enforcement.
Mike Godwin, staff lawyer for the Center for Democracy and Technology, a public interest group that deals with Internet legal issues, said the provision seemed overbroad, asserting that PayPal had been deputized to "be always on watch."
"It's not like PayPal is run by trained judges," Mr. Godwin said. "But they're effectively judging."
The settlement was announced with the attorney general, Eliot Spitzer, who had subpoenaed PayPal this summer seeking information about the company's involvement in online gambling.
PayPal, which is based in Mountain View, Calif., has become widely used as an Internet payment mechanism, particularly on auction sites like eBay. In fact, the two companies have become so intertwined that eBay recently announced plans to acquire PayPal in a $1.5 billion deal, which, New York State regulators said, is scheduled to close later this year.
PayPal allows people to send payments electronically and it then takes a percentage of each transaction. The company already closely monitors its user base for incidence of fraud, and has a staff of about 150 employees who investigate merchants that offer fraudulent goods or do not deliver to buyers what is promised, said Julie Anderson, a company spokeswoman.
Ms. Anderson said yesterday that the settlement reached with New York would not be particularly onerous because the company already reports people engaged in fraud to law enforcement. She said she did not know whether the company had reported people involved in other illegal activities, like selling contraband on Web sites, but that it would do so in the future.
According to the settlement, the company would, for instance, be required to file a report "should PayPal determine that a member advertises for sale on its Web site controlled substances without a doctor's permission."
Ms. Anderson said the company agreed to the provision in general because "we've never wanted to facilitate something that would be considered illegal."
New York, however, has considered some of the activity in question to be illegal. Mr. Spitzer's office said that the operation or promotion of online casinos violated state law.
This is not the first time the state has gone after a financial institution accused of abetting online casinos. In June, after state regulators asserted that Citibank could face criminal charges for aiding online casinos, Citibank said it would block the use of its credit cards for Internet gambling transactions.
Under the settlement between PayPal and New York, the company said it was not admitting any violation of the law.
When eBay announced its intention in July to acquire PayPal, it said that once the deal was completed it would no longer allow the system to be used for gambling.
Ms. Anderson, PayPal's spokeswoman, said yesterday that until the deal closed, the company would continue to take online gambling business from people placing wagers in states other than New York.
Shares of PayPal rose 20 cents, to close at $23.30.
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