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PayPal's Hands Are Clean, Business Still Booming

Online auction marketplace eBay said it settled with the U.S. District Attorney's office, paying $10 million to end charges that it violated the U.S. Patriot Act by transmitting funds earned through online gambling.

San Jose, Calif.-based eBay bought the rap along with PayPal, the person-to-person payment service it acquired in July 2002. The U.S. Attorney for the Eastern District of Missouri informed eBay in a letter on March 28, 2003, that PayPal violated provisions in the USA Patriot Act that prohibit the transmission of funds known to have come from criminal activity. Some forms of online gambling are illegal under the Federal Wire Wager Act.

Over the past two years, credit card issuing banks have been blocking direct payments to Internet casinos, but many gamblers got around this by using PayPal.

The matter also led to an investigation of PayPal by New York State Attorney General Eliot Spitzer last year, though Spitzer was satisfied by the company's pledge to stop providing a payment method for gamblers in New York State.

The Feds wanted to collect all earnings that PayPal received from online gambling sites from October 2001 through July 2002 plus interest, about 6 percent of its 2002 revenue. eBay said it would stop PayPal's gambling payments when it announced the acquisition, and folded the business for good last November.

eBay denied wrongdoing, but paid up. The company will adjust PayPal's purchase price by the $10 million it spent to settle, rather than taking it as a charge against earnings. eBay can certainly afford it: Its Q2 net revenues were a record $509.3 million, up 91 percent from a year ago. In its earnings call with analysts yesterday, eBay CFO Rajiv Dutta said the settlement would have no effect on the company's earnings.