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TMI BlogOFFENCES, CONTRAVENTION AND COMPOUNDING OF OFFENCES UNDER FOREIGN EXCHANGE MANAGEMENT ACT, 1999X X X X Extracts X X X X X X X X Extracts X X X X ..... OFFENCES, CONTRAVENTION AND COMPOUNDING OF OFFENCES UNDER FOREIGN EXCHANGE MANAGEMENT ACT, 1999 - By: - Mr. M. GOVINDARAJAN - FEMA - Foreign Exchange Management - Dated:- 13-1-2014 - - Introduction The objective of Foreign Exchange Management Act, 1999 ( Act for short) is to facilitate external trade and payments and maintenance of foreign exchange in India. It should be noted that FEMA is not a revenue law. Compounding of offences is allowed in this Act. The compounding of the contravention under FEMA was implemented by the Reserve Bank of India (RBI) by putting in place the simplified procedures for compounding with effect from 1.2.2005 with the following views enshrining the motto of enhancing transparency and effect smooth implementation of the compounding process: Minimization of transaction costs; and Taking a serious view of the willful, mala fide and fraudulent transactions. The compounding proceedings have the intention of deterring people from making repetitive lapses. Offence Contravention of FERA was considered as criminal offence, whereas contravention of FEMA is considered as civil offence. In the Act there is no provision as to offence co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmitted by a person. Contravention Contravention is a breach of the provisions of the Foreign Exchange Management Act, 1999 ( Act for short) and rules/ regulations/ notification/ orders/ directions/ circulars issued there under. The contraventions, prima facie, involving money laundering, national and security concerns involving serious infringement of the regulatory framework, etc., are sensitive contraventions. Contraventions that occur The contraventions do happen despite the best efforts taken. The following are some of the contraventions despite the best efforts taken: Delayed or non filing of Annexure II (intimation on receipt of share application/capital money); Delayed or non filing of FG-GPR form for allotment of share capital to non resident; Delayed or non filing of Annual Returns of Assets and Liabilities; Delayed or non filing of softex form; Delayed or non filing of ODI form; Delayed or non filing of Annual Activity Report for liaison office or branch office; Delayed or non filing of Form IPI; Establishment of branch without permission; Advance against export order received remaining outstanding for lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger period; Transfer of shares between residents and non residents without filing FC-TRS form. Though we have valid reasons for such contraventions, there is no provision for condoning the same by the Authorities provided in the Act. Contravention by companies Section 42 of the Act deals with contravention of the provisions of the Act by the companies. Section 42(1) of the Act provides that where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company ("company" means any body corporate and includes a firm or other association of individuals ) as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. Nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contraventio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Section 42(2) provides that notwithstanding anything contained in sub-section (1), where a contravention of any of the provisions of this Act or of any rule, direction or order made there under has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director("director", in relation to a firm, means a partner in the firm ) , manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. Penalties Section 13 of the Act provides penalties for contravention of the provisions of the Act. Section 13(1) provides that if any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contrav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. Section 2(u) of the Act defines the term person which includes- An individual; A Hindu Undivided Family; A Company; A firm; An association of persons or a body of individuals, whether incorporated or not; Every artificial juridical person, not falling within any of the above. Section 13(2) provides that any Adjudicating Authority adjudging any contravention under sub-section (1), may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directions made in this behalf. For the purposes of this sub-section, "property" in respect of which contravention has taken place, shall include- Deposits in a bank, where the said property is converted into such deposits; Indian company, where the said property is converted into that currency; and Any other propertywhich has resulted out of the conversion of that property. Compounding The term compounding has not been defined either in the Foreign Exchange Management Act, 1999 or the rules issued there under. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. As per Block s Law Dictionary, compound means to settle a matter by a money payment, in lieu of other liability. In short compounding of an offence is a settlement mechanism, by which, one is given option to pay money in lieu of prosecution, thereby avoiding a prolonged litigation. Only those contraventions that do not attract imprisonment as a mandatory penalty are compoundable. In other words, offences that are specifically punishable with imprisonment only or imprisonment and fine are not compoundable. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the amount involved in the contravention is not quantifiable, then the contravention shall not be compounded. Section 15 of the Act provides for compounding of offences. Section 15(1) provides that any contravention under section 13 may, on an application made by the person committing such contravention, be compounded within one hundred and eighty days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and Officers of the Reserve Bank as may be authorized in this behalf by the Central Government in such manner as may be prescribed. Section 15(2) provides that where a contravention has been compounded under sub-section (1), no proceeding or further proceeding, as the case may be, shall be initiated or continued, as the case may be, against the person committing such contravention under that section, in respect of the contravention so compounded. Whether contravention under the Foreign Exchange Management Act (FEMA) is to be treated as technical and/ or minor or serious would be decided by the Reserve Bank on the merits of the case. The application will be disposed of keeping i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view the procedure notified in this regard. Persons who have contravened the provisions of FEMA should not take upon themselves suo moto , or on the basis of external advice to decide whether a particular contravention is technical or minor in nature and, hence, no compounding application need be submitted to the Reserve Bank. If such applications for compounding are not made, the person concerned shall expose himself/herself to such action under the provisions of FEMA as the authorities may deem appropriate. The persons concerned should, therefore, in their own interest submit their applications for compounding of contravention under FEMA to the Reserve Bank at the earliest opportunity. Powers of RBI to compound The Reserve Bank is empowered to compound any contraventions as defined under section 13 of FEMA, 1999 except the contravention under section 3(a) ibid , for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. It provides comfort to any person who contravenes any provisions of FEMA, 1999 [except sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 3(a) of the Act ] by minimizing transaction costs. Willful, mala fide and fraudulent transactions are, however, viewed seriously, which will not be compounded by the Reserve Bank. Authority to compound Rule 4 Foreign Exchange (Compounding Proceedings) Rules, 2000 ( Rule for short) gives powers to the following officers of RBI according to monetary limit in contravention of any of the provisions of the Act except Sec.3(a) of the Act : Where the sum involved in contravention is Rs.10 lakhs or below Assistant General Manager; Where the sum involved in contravention is Rs.10 lakhs or more but below Rs.40 lakhs Deputy General Manager; Where the sum involved in contravention is Rs.40 lakhs or more but below Re.1 crore General Manager; Where the sum involved in contravention is Re.1 crore or more Chief General Manager Every officer shall exercise the powers subject to the director, control and supervision of the Governor of RBI. Rule 5 gives powers to the following officers of Enforcement Directorate according to monetary limit in contravention of the provisions of Sec. 3(a) of the Act : Where the sum i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in contravention is Rs.5 lakhs or below Deputy Director; Where the sum involved in contravention is Rs. 5 lakhs or more but below Rs. 10 lakhs Additional Director; Where the sum involved in contravention is Rs.10 lakhs or more but less than Rs.50 lakhs Special Director; Where the sum involved in contravention is Rs.50 lakhs or more but below Re. 1 crore Special Director with Deputy Legal Advisor; Where the sum involved in contravention is Re.1 crore or more Director with Special Director Every officer shall exercise the powers subject to the director, control and supervision of the Director of Enforcement. In M/s. Brentfield Travels Co. Pvt. Ltd., Versus The Reserve Bank of India Anr. - 2011 (9) TMI 428 - BOMBAY HIGH COURT , it was held that t he power to compound has to be exercised judiciously having regard to the considerations which have been set out in the statute and in the circular issued by the Reserve Bank of India. There is no absolute right to claim a compounding of contraventions. An application for compounding in fact does postulate that a breach has taken place. It is for the Competent Authority to decide a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to whether the contravention is of a technical nature or whether it is of a sensitive nature involving broader issues of national security or money laundering or a serious infringement of the regulatory framework in which case a compounding cannot be allowed. In fact, even this is not an exhaustive list of factors since the facts of each case will have to be considered by the Competent Authority when it decides whether the application for compounding should be granted. There is a public interest element in the enactment of regulatory statutes such as the FEMA. Whether compounding of a breach would compromise the public interest involved in the enforcement of law has to be considered in the facts of each case. Procedure When a person is made aware of the contravention of the provisions of FEMA, 1999 by the Reserve Bank or the Foreign Investment Promotion Board (FIPB) or any other statutory authority or the auditors or by any other means, she/he may apply for compounding. One can also make an application for compounding, suo moto, on becoming aware of the contravention. No contravention shall be compounded unless the amount involved in such contravention is q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantifiable. Further it shall not be applicable to a contravention committed by any person within a period of three years from the date on which a similar contravention committed by him was compounded under these Rules. Any second or subsequent contravention committed after the expiry of three years from the date on which a similar contravention was previously compounded shall be deemed to be a first contravention. No contravention shall be compounded if an appeal is filed. If the petitioner does not file an Appeal under Section 17 / 19 of the Act , the petitioners will loose its right of appeal. If the petitioners file an appeal they will loose the right to have their application for compounding considered as held by Bombay High Court in M/s KRISHIRAJ TRADING LTD ORS VERSUS UNION OF INDIA ORS - 2013 (10) TMI 1006 - BOMBAY HIGH COURT. Every application for compounding any contravention under Section 3(a) of the Act and other than Section 3(a) of the Act shall be made in the Form to Director, Directorate of Enforcement and Reserve Bank of India, Exchange Control Department, Central Office, Mumbai respectively with a fee of Rs.5,000/- drawn in favor o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the compounding authority; Contraventions relating to any transaction where proper approvals or permission from the Government or any statutory authority concerned, as the case may be, have not been obtained, such contraventions would not be compounded unless the required approvals are obtained from the concerned authorities; On receipt of the application for compounding, the Reserve Bank shall examine the application and assessee whether contravention is quantifiable and if so the amount of contravention; The Reserve Bank shall examine the nature of contravention keeping in view, inter alia, the following indicative points: Whether the contravention is technical and/or minor in nature and needs only an administrative cautionary advice; Whether the contravention is serious and warrants compounding of the contravention; and Whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringements of the regulatory framework. If, before disposal of the application the RBI finds that there is sufficient cause for further investigation, it may recommend the matter to the Directorate of Enforcemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for further investigation and necessary action under the Act by them or to the Anti Money Laundering Authority instituted under the Prevention of Money Laundering Act, 2002 or to any other agencies, as deemed fit. Since the compounding application will have to be disposed within 180 days, the application will be disposed by returning the application to the applicant in view of such investigation required to be conducted; The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. In case the contravener fails to submit the additional information/documents called for within the specified period, the application for compounding will be liable for rejection; The application for compounding shall be processed further and disposed of on merits upon consideration of the records and submissions and at the absolute discretion of the Compounding Authority. The following factors, which are only indicative, may be taken into consideration for the purpose of passing compounding order and adjudging the quantum of sum on payment of which contravention shall be compounded: The amount of gain of unfair advantage, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherever quantifiable, made as a result of the contravention; The amount of loss caused to any authority/agency/exchequer as a result of the contravention; Economic benefits accruing to the contravener from delayed compliance or compliance avoided; The repetitive nature of the contravention, the track record and/or history of non compliance of the contravener; Contravener s conduct in undertaking the transaction and in disclosure of full facts in the application and submissions made during the personal hearing; and Any other factor as considered relevant and appropriate; It is not mandatory to attend the person hearing. In case a person opts not to attend the personal hearing he may indicate his preference in writing. The application would be disposed of on the basis of documents submitted to the Compounding Authority; Another person may be authorized by the applicant to attend the personal hearing on his behalf but only with proper written authority. It has to be ensured that the person appearing on behalf of the applicant is conversant with the nature of contravention and the related matters; The Compounding Authority shall pass an order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f compounding after affording an opportunity of being heard to all concerned as expeditiously as possible as and not later than 180 days from the date of application. Every order shall specify the provisions of the Act or of the rules, directions, requisitions or orders made there under in respect of which contravention has taken place along with details of the alleged contravention; Every such order shall be dated and signed by the Compounding Authority under his seal; One copy of the order shall be supplied to the applicant and the Adjudicating Authority, as the case may be; The sum for which the contravention is compounded as specified in the order of compounding shall be paid by demand draft in favor of the Compounding Authority within 15 days from the date of the order of compounding of such contravention; The provisions of the Rules do not confer any right to the contravener, after a compounding order is passed, to seek to withdraw the order or to hold that the compounding order is void or request review of the order passed by the Compounding Authority; If a person fails to pay the sum compounded within the time specified he shall be deemed to have nev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er made an application for compounding of any contravention under these rules and the provisions of the Act for contravention. Such cases will be referred to the Directorate of Enforcement for necessary action. On realization of the sum for which contravention is compounded a certificate in this regard shall be issued by the RBI subject to the specified conditions, if any, in the order. Appeal against order As compounding is based on voluntary admissions and disclosures, there cannot be an appeal against the order of the Compounding Authority. Authorized dealer In its circular No. 76/17.1.2013 RBI observed that during the compounding process, on a number of occasions, it has been brought to our notice by the applicants that the contraventions of the provisions of FEMA by corporates and individuals are due to the acts of omission and commission of the Authorized Dealers and some of the applicants have also produced documentary evidence in support of their claim. All the transactions involving Foreign Direct Investment (FDI), External Commercial Borrowing (ECB) and Outward Foreign Direct Investment (ODI) are important components of our Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance of Payments statistics which are being compiled and published on a quarterly basis. Any delay in reporting affects the integrity of data and consequently the quality of policy decisions relating to capital flows into and out of the country. Authorized Dealers are, therefore, advised by RBI to take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions so that contraventions of provisions of FEMA, 1999 attributable to the Authorized Dealers do not occur. CONCLUSION From the data on compounding cases received by Reserve Bank, it is observed that more than 70% of the total cases pertain to FDI within which about 72% relate to delay in advance reporting/submission of FCGPR. In the case of ECB, 24% of the cases received relate to drawdown without obtaining LRN. Similarly, 66% of the ODI cases relate to non-reporting of overseas investments online. Authorized Dealers have an important role to play in avoidance of such contraventions and accordingly, the dealing officials in the banks need to be sensitized and trained to discharge this function efficiently. - - Scholarly articl ..... 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