Bad credit and fraud are actually good reasons to deny a service, and fraud is, you know, an actual criminal offence that is easily demonstrable, unlike the arbitrary decision of the Department of State to not like an organization and whine about it to their corporate friends.

Actually if you read the updated story, the State Department didn't say anything to Paypal. It was Paypal's decision.

That said, Paypal is not making nearly enough on transaction fees to cover wasting a single minute of a lawyer's time. If there's even a chance of there being legal issues with an account holder, it's almost certainly in their business interest to end that account.

Don't be naive. Credit card companies have lobbies which operate in their interests and help pass legislation which favors their industry, much like other financial interests.

There doesn't even need to be explicit conversation between government officials and Visa/MasterCard for there to be a conspiracy; it's more of a matter of a gentleman's agreement to cover each other's backs.