Paypal Saga, the Conclusion: Paypal and the Patriot Act

What would the outcome have been if I did not have time and determination to jump through hoops?

paypalIn a series of write-ups that I have been working on about Paypal (whose latest class action lawsuit was filed in May, for placing 6-month holds on customer accounts without explanation), offers members the opportunity to place their money into a non-FDIC insured money market account — controlled by Paypal. No joke…
Not too long ago, Paypal put a hold on my account while demanding that I send them certain documentation and jump through all sorts of hoops. They eventually released my money, reinstated my account and sent me an email asking me to take a survey about the experience; but, what would the outcome have been if I were not on a two-week break from school with time and determination to jump through their hoops?
Apparently the trigger for my account was when I applied for the debit card that Paypal offers and the fact that I have recently changed addresses. In my case, I learned after hours of conversation with customer service representatives that their reasoning was that by verifying my identity they were protecting the bank that they use to fund the debit card.
Paypal uses the USA Patriot Act and the Know Your Client Act as justification for placing these holds on customer accounts.
The CIP provision (section 396) and Title III (MLCA 1986 and BSA 1970) to the 'Anti Money Laundering,' or 'AML' laws, passed by Congress from 1970 and amended through the Bush Administration, makes it compulsory for financial institutions and service providers to be accountable for initial customer identification (before they do business with a client), and requires them to maintain extensive records of steps taken to verify the identities of prospective clients. Banks, lawyers and accountants are all covered under these laws.
These entities are required to:
Verify prospective client's identity.
Verify that clients are not, nor have been, involved in illegal activity — such as fraud, money laundering or organized crime.
Maintain proof of steps taken to identify the client's identity.
To establish whether a prospective client is listed on any sanctions list in connection with suspected terrorist activity, money laundering, fraud or other crimes.
Paypal is not a bank, not a lawyer, and not an accountant. Paypal does not perform initial checks on prospective client. In a CNET News article, Paypal has even been asked by the State of Louisiana to cease transactions in that state until such a time that Paypal obtained the proper licensing to conduct such a business.
When a new customer wants to open a Paypal account, all he or she is required to do is to provide an email address, a phone number, fill out the form and agree to their 25 page click wrap agreement (user agreement). After a simple email verification process, the account is almost instantly available for use.
Consistently, the complaints against Paypal allege that Paypal waits until a significant amount of funds build up in the user's account before Paypal decides to enact these "verification procedures," at which time they place a 6-month hold on the user's account to "protect Paypal against any charge backs."
The USA Patriot Act does not, however, entitle the financial institution to lock accounts and hold monies against the user's will. Only the government has the right to do that, and then usually only with a warrant. Paypal is apparently misrepresenting their rights and purposes to their clients.
In the Paypal user agreement, there is a clause dealing with arbitration, which limits the venue to Santa Clara, California. This may sound typical to businesses that conduct interstate commerce, but it isn't. A business may say that "These rules are subject to California laws," but they usually do not hold the venue exclusively in California or any other state. In general, a plaintiff can file in any federal court in any state, but the case will be heard as it applies under California laws.
Under federal regulations, a user agreement is illegal if it is found to contain fraud, duress or unconscionably.
The 4th appellate Court of California did indeed find that the Paypal user agreement was illegal, citing that, "…Limiting the venue to Paypal's own backyard appears to be yet one more means by which the arbitration clause serves to shield Paypal from liability…"
In other words, the arbitration clause is unconscionable because it makes it impractical and unlikely that people who are seeking minor amounts in damages (it is estimated that the average amount of the suits are $55) are going to travel all the way to California to arbitrate such small amounts. The agreement also (illegally) requires the user to agree to not engage in collective action lawsuits against Paypal.
Under the California Unfair Business Practices Act (CUBPA) and the California Consumer Legal Remedies Act (CCLRA), the complaints allege that the "Defendant is unjustly enriched by its scheme at the expense of Plaintiffs and the Class" Basically, the suit says that–by putting a hold on these accounts, the money sits in Paypal's account collecting interest, which in the click wrap agreement (user agreement) the customer acknowledges that Paypal does not pay interest on the money in a user's account.
By holding the funds of their clients, while demanding documentation, Paypal has also been found to be in violation of Title IX of the Electronic Funds Transfer Act because it leaves the client "little alternative but to submit" to Paypal's demands.
Associated Content also seems to be in violation of 913:2 of EFTA, which states that "No person may require a consumer to establish an account for receipt of electronic funds transfer with a particular financial institution as condition of employment or receipt of government benefit."
By requiring members to keep an account open with Paypal in order to be paid, Associated Content–who boasts that many of their writers use the website as a primary source of income–seems to be in direct defiance of this clause in Federal law.
It can also be said that since Paypal refuses deposits on accounts that are locked and <i>returns the funds to the sender</i>, Associated Content, by continuing to do business exclusively with Paypal gets "Unjustly enriched by its scheme at the expense of their writers…" when the royalties due their writers are returned to them by default.
According to the Paypal website, Paypal wants members to put money into money market accounts controlled by Paypal, with no guarantee of return on principle or interest. In the Paypal disclaimer, it states that there is no gurantee of return on your investment if Paypal goes insolvent.