How RBI Handles LRS limit breach cases, offences and penalty. Compounding.

[YAGAY andSUN]

The Liberalized Remittance Scheme (LRS), which was introduced by the Reserve Bank of India (RBI) in 2004, allows Indian residents to send money abroad for various permissible purposes, such as education, medical treatment, travel, and investments. Under this scheme, the RBI has set a limit for remittances, which can be updated periodically. As of now, the limit is USD 250,000 per financial year for each individual.

When the LRS limit is breached, or when there is a violation of the scheme’s conditions, it can lead to legal and regulatory consequences, including penalties. Below is a breakdown of how the RBI handles LRS limit breaches, offenses, and penalties, as well as the legislative and regulatory framework surrounding these issues.

1. RBI's Role in Handling LRS Breach Cases

The RBI monitors and regulates the LRS under the Foreign Exchange Management Act (FEMA), 1999, and other related provisions. If the remittance made under the LRS exceeds the prescribed limit or violates the conditions set out by the RBI, the following actions may be taken:

a. Investigation and Scrutiny

• Banks’ Responsibility: Authorized Dealers (ADs) such as commercial banks play a key role in ensuring compliance with the LRS guidelines. They are responsible for verifying the remittance details and checking whether the remittance exceeds the prescribed limit.
• RBI Oversight: The RBI may conduct inquiries and scrutiny if irregularities or breaches are reported by banks or other financial institutions.

b. Breach Cases and Consequences

If the LRS limit is breached (i.e., remitting more than the permissible limit of USD 250,000 or violating the conditions of remittance), the following steps may be taken:

• Non-compliance: A breach of the LRS limit is considered a violation of FEMA provisions.
• Notice and Penalty: RBI or Enforcement Directorate (ED) may issue a notice to the concerned individual or entity involved in the breach, and penalties may be levied as per the FEMA provisions.

2. Penalties for Breaching the LRS Limit

The penalties for breaching the LRS limit or violating FEMA can be significant. The provisions under FEMA enable the RBI and Enforcement Directorate to take action against individuals or entities violating the rules.

FEMA Violations - Penalty Provisions:

• Section 13 of FEMA, 1999: Provides that anyone found guilty of violating FEMA provisions can face a penalty of up to three times the sum involved in the contravention, or ₹2 lakh, whichever is higher. This is subject to discretion, depending on the severity of the violation.
• Section 14 of FEMA, 1999: Further penalties are laid out for individuals or entities who fail to comply with RBI regulations, with possible penalties being:
  • ₹5,000 per day of contravention.
  • Up to ₹5 lakh for non-compliance with regulations.

3. Compounding of Offenses

Compounding refers to the settlement of an offense by paying a penalty, instead of going through a lengthy legal process. The RBI allows individuals or entities who have breached the LRS limit to compound offenses under certain conditions.

• RBI's Compounding Scheme: The RBI, in consultation with the Enforcement Directorate (ED), has set up a framework to allow compounding of violations. The penalties under compounding are typically lower than the penalties prescribed by FEMA, and the process is faster.
• Procedure for Compounding:
  • A person or entity must apply to the Reserve Bank of India for compounding.
  • The compounding request is reviewed, and the RBI decides whether the violation can be compounded, subject to specific criteria.
  • Once compounded, the offender is deemed to have no further liability for the offense.
• Process:
  1. The violator submits a compounding application to the RBI, including details of the breach and the payment.
  2. If the RBI accepts the application, it will impose a penalty based on the type and severity of the violation.
  3. The violator must pay the penalty, after which the violation is settled.

Note: Certain serious offenses may not be eligible for compounding.

4. Legislation and Regulatory Framework

The LRS and its enforcement are primarily governed by the following legislative and regulatory frameworks:

a. Foreign Exchange Management Act (FEMA), 1999

FEMA provides the legal basis for foreign exchange regulations in India, including the LRS. It authorizes the RBI to create and enforce regulations for the management of foreign exchange transactions, including cross-border remittances under the LRS.

• Section 10: Deals with regulations related to the remittance of foreign exchange by residents.
• Section 11: Provides the authority for the RBI to frame regulations related to remittance limits.
• Section 13 and 14: Provide penalties for non-compliance with FEMA regulations.

b. RBI Guidelines

• The RBI issues periodic Circulars and Notifications to clarify the scope and conditions of the LRS. It sets the annual remittance limit, permissible purposes for remittance, and the documentation required.

c. Enforcement Directorate (ED)

• The Enforcement Directorate is responsible for investigating violations of FEMA and initiating actions when the violations are deemed significant or criminal.
• They can impose severe penalties or even pursue legal actions if the violation is considered deliberate or involves money laundering.

5. Where to Appeal Against RBI Orders

If an individual or entity is dissatisfied with an order issued by the RBI in relation to LRS violations or penalties, there are legal avenues available for appeal:

a. Appeal to the Appellate Tribunal for Foreign Exchange (ATFE)

• Appellate Authority: Under Section 17 of FEMA, any person aggrieved by an order passed by the RBI or Enforcement Directorate can appeal to the Appellate Tribunal for Foreign Exchange (ATFE).
• Timeline: The appeal must be filed within 45 days from the date of the order.
• Location: The ATFE is located in New Delhi, and appeals can be filed electronically or physically.

b. High Court

• If an individual is not satisfied with the decision of the ATFE, they can approach the High Court for judicial review under Article 226 of the Constitution of India.
• The High Court has the authority to scrutinize the legality and fairness of the decision made by the Appellate Tribunal.

6. Conclusion

The Liberalized Remittance Scheme (LRS) is an important mechanism that allows Indian residents to remit money abroad for various purposes. However, breaches of the LRS limit can lead to serious legal and financial consequences, including penalties as prescribed under FEMA, 1999. The RBI plays a key role in overseeing LRS compliance, and penalties for violations can be significant. However, offenders may opt for compounding to settle the offense more efficiently.

If the violator feels aggrieved by the RBI’s order, they can appeal to the Appellate Tribunal for Foreign Exchange (ATFE) and, in extreme cases, seek judicial review from the High Court.