The problem with this analysis is that we're only seeing a tiny fragment of the whole. All of the work that paypal does to combat fraud and illegal activity is largely kept secret, sometimes for legal reasons. A fraudster, moneylaunderer, or a fence isn't going to blog or tweet about paypal shutting them down, and paypal isn't going to make a fuss about it either. The tragedy is that such things happen routinely, almost certainly more often than paypal screwing over an otherwise legitimate business transaction. The latter tends to happen when there are unusual aspects in play (people operating without a business or non-profit license or using paypal incorrectly but not intentionally fraudulently).

That said, clearly paypal needs to improve the way it handles customer service and probably introduce a better way of disputing holds on funds.