If you see papaya you can take it, means that if others let down their guard, for example by saying something stupid then you have to make fun of them according to the papaya rule. Back home we would say that the friends who laugh at each other are not very good friends, but here that is not true. Here they would still be their best friend, because it is not you who should be blamed when they say something stupid that they should not have said.
The expression is not meant to scare you, but merely to think smart and take care of your belongings and what you say and do! After having actually given papaya in Colombia I will remember this rule in order not to have my thing stolen the next few months while travelling through the rest of South America.