"Does Paypal have government approval to ask such questions?"
Yes they have... this is a requirement for bank operation in the US and if PayPal do not obey the rules in the US they will not be able to process any of the major credit cards since:
- VISA and MasterCard/EuroCard are operated by Citibank (that is their mothership CitiCorp)
- American Express is based in USA as the name suggests.
- Diners is also based in USA.
....and all transactions goes thru SWIFT which is owned by the major members... that is more or less the big US banks.
Unless we build an economy without USA we will not be able to do anything without approval from USA.