Here's the official Paypal response:

"While we cannot talk about this particular case due to PayPal's privacy policy, we carefully review each case, and in general we may ask a buyer to destroy counterfeit goods if they supply signed evidence from a knowledgeable third party that the goods are indeed counterfeit. The reason why we reserve the option to ask the buyer to destroy the goods is that in many countries, including the US, it is a criminal offense to mail counterfeit goods back to a seller."

Not very reassuring. Nothing to indicate that they understand the (admittedly subtle) distinction between a fake or copy instrument and a counterfeit. It is entirely possible - perhaps even likely - that the instrument in question was not made by the maker named on the label. This article sums it up nicely:

So you think you've found a Strad?