Paypal may have a point, they may not. Regardless, freezing thousands of dollars on a whim because "they're worried" and then freezing the individual's personal account is just boneheaded. You can't run a bank like that.

On the contrary, NOT freezing them would be totally boneheaded. OP describes an EXTREMELY sketchy way of collecting money (take money from one random person on the internet, promise you they are sending a "mystery" gift to some other person on the internet) that clearly violates PayPal's TOS (you can only ship to billing addresses on paypal).

There is not a payment processor in the world that wouldn't freeze someone under these conditions.

PayPal is not a bank, which perhaps is the problem. People expect them to behave like a bank, despite the fact they clearly state they do not behave like one.

To my knowledge, Paypal is not a bank!