Is PayPal legally obligated to suck?

September 14, 2010 12:14 PM

I'm curious about PayPal freezing accounts because of "suspicious activity" - large or rapid donations. Why does this happen? Specifically, are they legally obligated to do this, or are they just jerks?

This question inspired by Notch (creator of Minecraft) having his account frozen by PayPal for "a suspicious withdrawal or deposit". According to Notch there was (and may still be) 600,000€ in the account. If it's not happening to game developers who have had the good fortune to have their sales shoot through the roof, it's SomethingAwful and their Katrina donations to the Red Cross, or any other number of stories.

In short for the past few years I've heard lots of tales where people are collecting money for good reasons and then have their accounts locked and find themselves up against the wall of PayPal's unhelpful and unspecific customer service. We usually hear the news that it happened, people get outraged, but what's the end of the story? Do these people get their money? Does PayPal return it to the buyers or donors? Does PayPal keep it?

I would like specific examples of the resolution to these kinds of situations. Good outcome, bad outcome, whichever. The larger the dollar amount the better. I would prefer news-worthy stories over personal anecdata.

I would also like to find out why PayPal does this. Are they adhering to some laws that I don't know about? I'm sure their Terms of Service state that they can do it, but why do they do it?

I'm not interested in articles about them freezing accounts for things like ads they might think are porn or seemingly arbitrary reasons. I am looking for articles about the overall amount of funds or volume of transactions being the "suspicious" activity that gets an account frozen.

(I've seen where some MeFites have had PayPal freeze their accounts or cause them grief (1 2 3 4 5) so re-linking those not necessary unless there's a followup outcome story)

posted by komara to law & government (8 answers total)

I would also like to find out why PayPal does this.

They make money from your money accumulating Interest....so it's *always* in their best interests to keep it as long as possible.

There's LOTS of disgruntled customers online. For anything less than a few grand paypal is fine...if your living depends on it go with a more reputable payment processor.
posted by bobby_newmark at 12:16 PM on September 14, 2010 [1 favorite]

We usually hear the news that it happened, people get outraged, but what's the end of the story? Do these people get their money? Does PayPal return it to the buyers or donors? Does PayPal keep it?

When it happened to mathowie during the user number 100000 thing, he was able to provide enough documentation to get them to release the funds so they could be donated to the charities as planned. If that had fallen through, PayPal was going to refund all of the money back to the PayPal accounts it had been sent from.
posted by burnmp3s at 12:22 PM on September 14, 2010

Whoa, I didn't search MetaTalk for PayPal stuff. I totally missed that one. Thanks for the link, burnmp3s.
posted by komara at 12:26 PM on September 14, 2010

A large portion of PayPal transactions are fraudulent in a way that can cost PayPal money. Thus, they tend to keep the money until they are sure nobody else is going to claim it. For example, someone can reverse their credit card transaction for something like 6 months after PayPal gets the money. If PayPal gives you the money, and that person reverses, then PayPal is out the money. This is bad for them.

Sometimes, they decide that you are so risk-free, they are just going to front you the money. But sometimes, something seems suspicious, and in that case, they really want to make sure the transaction isn't reversed.

It's annoying when they money is yours, but the key is to remember that PayPal is not your friend giving you cash. It's some guy spending some bank's money... and a million robots trying to steal it all. It's hard to be PayPal.

So to answer your question, no they aren't legally obligated to freeze your account. But they could be out of business if they didn't.
posted by jrockway at 12:33 PM on September 14, 2010 [4 favorites]

In addition to what jrockway said, PayPal is a money transmitter that is subject to anti-money laundering legislation, which encompasses a whole lot of rules involving report submissions to Treasury agencies, investigating suspicious transactions and so on. PayPal is on the hook for quite stiff penalties if the Feds find that they've been a conduit for money-laundering or otherwise involved in financing illicit activity. PayPal probably froze the account for the same reason that regular retail banks place holds on large or "out of character" deposits into your checking account--to give them time to investigate and verify the deposit, to file the required reports, and to spook any potential money launderers. The IRS has a high-level summary of money transmitter AML requirements here.
posted by superquail at 1:36 PM on September 14, 2010 [1 favorite]

I would like specific examples of the resolution to these kinds of situations.

I'm selling raffle tickets to raise money for my kid's preschool. Some of the people who've bought tickets paid me via PayPal. PayPal figured out it was for a raffle and froze my account, as -- unknown to me -- raffle tickets are on their forbidden list. I had to type "I agree" on a webpage to say I wouldn't do it again, then they unfroze my account and let me withdraw the money.

I didn't bother to get into it with them about how I was fundraising for a nonprofit organization, how what we are doing is legal in our town (county, state, and country), etc, as I just don't have the time right now.
posted by The corpse in the library at 3:35 PM on September 14, 2010

No one mentioned Paypal Sucks dot com? Their forums are interesting reading.
posted by DrtyBlvd at 12:27 AM on September 15, 2010

Couple of reasons.

Paypal can generally be difficult
Paypal are subject to Anti-money laundering laws
Paypal can have issues with games of chance
Someone accepting "donations" who is not a registered charity may have their accounts frozen
And Paypal will freeze accounts with too many chargebacks
And more reasons (the above are ones I have personally come up against)
posted by jannw at 1:22 AM on September 15, 2010