PayPal freezes Regretsy’s donations for needy children

paypal freezes regretsys account for needy children button1For as big as the holiday shopping season is, it is generally complimented by a massive groundswell of charitable donations. It is the true spirit of the holidays, and one that defines our generosity as a people. Usually.

In what is turning into one of the most bizarre stories of the holiday season, the small business and purveyors of some of the best WTF items available on the internet, Regretsy.com, was told by PayPal that its account had been frozen. After then essentially accusing Regretsy of fraud, PayPal told the site’s owner that to unfreeze the account, it would need to return all the donations along with an apology to each of them. In the meantime, PayPal would take another cut from the processing fees associated with the thousands of individual returns, thus setting off a groundswell of support that would make a pre-hallucination Ebenezer Scrooge give money to the homeless.

It began simply enough: Regretsy founder and owner April Winchell (who operates the site under the name Helen Killer) decided to collect donations to buy gifts for 200 needy children. After vetting numerous applicants, Winchell chose the lucky 200, then asked her site’s customers to donate $2 to a fund that would be used to purchase gifts. Things went well–so well that even after buying the promised gifts, the site earned enough money to give financial donations to the children’s families along with the presents.

Along the way, Regretsy made the mistake of accepting the funds via PayPal’s “Donate” button. PayPal noticed and immediately froze the account, as well as a related account for the site Zazzle.com, which was being used as an emergency fund to purchase gifts if necessary.

“You can use the donate button to raise money for a sick cat, but not poor people.”

Assuming this was a situation that could be resolved simply enough, Winchell called PayPal and proceeded to have a bewildering conversation that ended with PayPal not only keeping the accounts frozen, but telling her she needed to return all the donated funds—minus both PayPal’s initial processing fees, as well as an additional processing fee on each of the returns.

It is unclear whether or not the PayPal representative concluded the call by saying “bah humbug,” but it seems to be inferred. A full transcript of the call can be found here

The rep first stated that the problem stemmed from the use of the “Donate” button, which was reserved solely for non-profit organizations–an assertion that is not entirely correct according to PayPal’s own terms of service. The website The Green Girl has a breakdown on the legal speak located in the TOS, but under PayPal’s own guidelines, a group can request to receive donations without a non-profit status “Donations not associated with a charity or nonprofit organization don’t need to meet these requirements, but all donations are subject to review.”

Winchell countered and claimed that the PayPal instructions specifically allow the use of the button for “worthy causes,” and the rep countered that they had not seen those instructions, and that “what you’re doing is not a worthy cause, it’s a charity.”

paypal freezes regretsys account for needy children april winchell 2004Winchell then asked what the difference was, and in a line that has the potential to quickly become an internet meme, the rep replied, “You can use the donate button to raise money for a sick cat, but not poor people.”

Customer “Service”

With her mind firmly blown, Winchell continued to try to find a resolution, which just made things worse. The rep stated that PayPal would only allow the toys to be classified as gifts is if they were sent to the person that purchased them, and PayPal would track to make sure. The rep further stated that “only a non-profit would send gifts to someone else on [the] buyer’s behalf.”

“What about Amazon?” Winchell countered.

“We know what you’re doing and we’re through playing games with you,” the rep replied.

The rep then pointed out that the gift is being sold without a clear description of what the gift actually is, to which Winchell responds that it is a grab bag, and that customers knew that. The rep then said, “You aren’t going to be able to get around this. It’s too late, we know what you’re trying to do and we’re not going to let you do it.”

Winchell eventually asked to speak with a supervisor, but was told that “No one above me will talk to you. No one at my level ever makes phone calls. We’re only doing this to help you.”

When she asked to close her account, she was told that she would have to “refund everything, write a letter saying you understood what you did was wrong and you will never do it again, and then request permission to close your account.”

But while that may sound a bit like an overzealous and unreasonable, but possibly good-hearted rep attempting to prevent what they saw as a possible fraud, the story doesn’t end there.

Following the conversation, PayPal then froze Winchell’s personal account and told her that they will be holding the money for six months. And there’s more.

Winchell had already purchased the gifts, and has personally guaranteed that they will still be shipped regardless of the issues with PayPal, but the money PayPal made from each of the thousands of individual $2 sales and donations goes to PayPal—as does the fee the company has charged for each of the thousands of manual returns the company forced Winchell into issuing.

So to recap, despite the clear indications on the Regretsy website (that the rep claimed they did see) of the intent and purpose of the donations, despite the repeated assertions that the extra money was going to be given to children in need, due to a technicality that began when Winchell incorrectly–but reasonably–used the “Donate button” (which is itself a legally gray area that PayPal’s own Terms of Service actually do allow this), PayPal forced her to return each donation in order to unfreeze her business’ account. But not after taking its cut for a second time.

PayPal versus the World

This is not the first time that PayPal has been in trouble for freezing charitable accounts. In 2005, the company made headlines when it froze the account of Richard Kyanka, the owner of the humor website Something Awful, after he created an account to collect charitable donations for the Red Cross to aid Hurricane Katrina victims. After receiving too many donations, PayPal froze the account.

Despite providing evidence of his charitable intent including all his personal financial records, PayPal told Kyanka that he would have to wait several days as an investigation was conducted. Kyanka then suggested that PayPal redirect the funds directly to the Red Cross, but PayPal refused, claiming that it has an exclusive charitable relationship with the United Way. In the end, Kyanka decided to return the donations. PayPal waived the domestic processing fees, but kept the international service fees.

Then in 2010, without warning PayPal froze a large amount of service in India. It returned all funds in transit, which wreaked havoc on numerous people and businesses as they suddenly found themselves owing money they thought had been paid, with no explanation, and in some cases no means to pay.

In March of 2010, PayPal froze donations to Cryptome, a site that specializes in whistleblower documents. PayPal took over $5300 in in-transit donations, but refused to explain why, even to Cryptome, citing privacy. PayPal eventually issued an apology, but not an explanation.

The list goes on and on. To PayPal’s credit, many of these issues arose out of the company’s intention to avoid fraud at all levels, but the company’s customer service has repeatedly been criticized for failing to satisfactorily resolve the issues and oftentimes leaving the situation worse off.

A non-apology, apology

Winchell posted the full story yesterday and the response was immediate. Posters flooded the PayPal Facebook page, but were quickly deleted. Since the situation with Winchell has exploded onto the internet, PayPal has issued a non-apology apology on its website:

Last night we became aware of an issue with one of our account holders, Regretsy.com. Though we can’t comment specifically on the account due to our privacy policy, we can confirm that the funds have been released and we are working directly with the account holder on this matter. Just like anyone else, we believe strongly in helping those in need, especially around the holiday season. We are working with Regretsy to make a donation to help their cause, and we’re truly sorry this occurred.

For background, we have clear guidelines for any business that uses PayPal to accept donations. For example, we require certain documentation to prevent misuse of the donated funds and, if the recipient claims charitable status, to determine whether they are properly registered. We do this to protect our customers and to protect our business.  As a regulated payment service, we’re also required by law to follow these guidelines.

We appreciate that this can be an inconvenience, but we have a responsibility to all our customers – both donors and recipients; and buyers and sellers. In this instance, we recognized our error and moved as swiftly as possible to fix it.

Oddly, Winchell posted a link to PayPal’s response but claims the company has yet to contact her.

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