I was going to mention this earlier, but some reasonable minds in r/conspiracy (shocking i know) pointed out that this clause has existed for a long time. I think I remember something about preventing money from being funneled to criminals.

Last updated on May 10, 2009 As a global financial institution, PayPal is committed to full compliance with all applicable laws and regulations regarding Anti- Money Laundering (“AML”). PayPal’s policy is to prevent people engaged in money laundering, fraud, and other financial crimes, including terrorist financing, from using PayPal’s services. PayPal has robust policies and procedures to detect, prevent and report suspicious activity. To comply with OFAC (Office of Foreign Asset Control) requirements, and global sanctions, we screen our customer accounts against government watch lists. In addition, we may request that you provide us with documentation to help prove your identity or for business verification purposes. We report suspicious transactions to the financial intelligence unit in the respective country.

But, its mainly used to close out accounts in the grey area, where the funds are often then absorbed by paypal as there is no way to get the money out. Happened to my buddy who had about 12k in a paypal account about a decade ago. He would buy shit from people and then mark it up for a few bucks and sell it. I dont think he ever got that money out, its been a while since I talked to him.

Seems illegal to me what they do honestly.

https://forums.redflagdeals.com/warning-about-paypal-they-can-steal-your-money-2521153/