What part of the law requires they look at his site? What part of having a really spiffy site on the internet instantly translates into someone running a legitimate company rather than a shell corporation?
To be frank, you're talking out of your ass here. You have no idea of the problems that paypal is facing, and you are imaging that frozen funds are somehow identical to profit for paypal. That's not the case at all. In reality paypal has to deal with a veritable army of fraudsters and organized crime members on a daily basis. And they are hugely sophisticated, well funded, and impressively capable. Paypal's successes against such folks happen in the dark, because typically these guys aren't going to go blogging and tweeting up a storm about how paypal shut down their international money laundering operation. But it happens all the time. And that's why paypal is often so aggressive in these cases. Because they've seen the "clueless international student with a side-business and no paperwork but a really fancy website" gambit played out a thousand times already. How do you tell the difference?
Easy, when the legitimate operation goes and gets its legal issues sorted out, gets a business license, gets a tax ID, EID, inputs an SSN, etc. and sorts out any other legal or ToS violations they have then paypal won't have a cause for freezing the funds anymore.
Now, you might say that we should change the rules, and make it easier for anyone and everyone to toss around hundreds of thousands of dollars across international borders without any documentation or the involvement of any sort of registered business entity. I'm somewhat sympathetic to such notions, but such changes would entail a plethora of complex and thorny ramifications that I think most people who implicitly hold such ideals almost certainly haven't thought through.
There is one complaint against paypal that is sensible and backed up by evidence, and that is that they often have crappy customer service. That does indeed suck, and it aggravates these sorts of situations beyond a level that is reasonable, and, of course, generates a lot of antipathy toward paypal that isn't fully warranted.
If people want to switch to paypal alternatives, they are certainly able to try. Of course, one wonders why there are so few which have a global reach and the convenience of paypal. It couldn't be that the problem of peer-to-peer international payments is at its core fundamentally quite difficult and that only one company has done the immensely challenging work to actually make it possible, could it?
Surely not.
Paypal sux.