They haven't labelled him a terrorist. All they've said is that they must seize the assets of a Mohammed Hassan with the following information: x, y, z. Please send us something to confirm you are not this person, whose name you share. IMO the alternative is EVERYONE who uses PayPal must submit all that info. I think most people would be very leery to submit that much info on a site and it wouldn't be as popular as it is, and might not even be viable.
Furthermore:
In general. In addition to the rights laid out in section 7.2 of the User Agreement, PayPal, at its sole discretion, also reserves the right to limit access to sending money or making withdrawals from an account for any one of the events listed below.
x. Refusal to cooperate in an investigation or provide confirmation of identity when requested;
The gentleman is refusing to confirm his identity and PayPal has the sole right to close or limit his account. I'm afraid he doesn't have a leg to stand on, he necessarily agreed to these terms by registering an account and using the service.