FEMA

Enforcement of FEMA Regulation

To promote cross-border payments and trade, the central government passed the Foreign Exchange Management Act. It lays out the policies and steps for every foreign exchange transaction that takes place in India. Foreign exchange transactions come in two types: capital account and current account. All transactions involving money are included in capital account transactions, whereas merchandise trade is included in current account transactions.

All organisations and offices run by Indian citizens in India or abroad must comply with the FEMA Act 1999. The FEMA Act is enforced by the Enforcement Directorate, a division of economic intelligence.

The Enforcement Directorate, also known as ED, is a multidimensional and multifunctional organisation tasked with upholding the terms of two significant pieces of legislation in the nation: the Prevention of Money Laundering Act (PMLA), passed in 2002, and FEMA, which was passed in 1999. Both statutes grant the Enforcement Directorate the power to enforce these regulations, and they are responsible for the task of enforcement. 

What is the Enforcement Directorate?

In India, the enforcement of economic laws and the pursuit of economic crimes fall under the purview of the Enforcement Directorate (ED), a special financial investigation and economic intelligence organisation. Its parent authority is the Department of Revenue of the Ministry of Finance, the Government of India, and its headquarters is located in New Delhi, the country’s capital.

The Enforcement Directorate was established on May 1, 1956, when the Department of Economic Affairs founded an “Enforcement Unit” with the goal of enforcing the Foreign Exchange Regulation Act, 1947’s Exchange Control Laws. Later, in 1957, it underwent a name change to become the “Enforcement Directorate,” and it has retained that name ever since.

Objectives of the Enforcement Directorate

Following the repeal of FERA, 1973, and subsequent replacement with the Foreign Exchange Management Act, 1999 (FEMA), the power of implementation was given to Enforcement Directorate.

Thus, the Foreign Exchange Management Act (FEMA), 1999, and the Prevention of Money Laundering Act (PMLA), 2002, two of India’s most significant fiscal Acts, are the principal goals of the Enforcement Directorate. In addition, the Enforcement Directorate has the following goals:

• To conduct an investigation into any alleged violations or infringements of the FEMA’s requirements and impose appropriate penalties on those offenders.
• To conduct investigations, locating, seizing, and confiscating assets connected to financial crimes, as well as arresting and charging criminals in accordance with the PMLA of 2002.

Investigation Under FEMA

The Assistant Director of the Enforcement Directorate has the authority to conduct investigations into any potential FEMA violations according to Section 37 of the FEMA Act.

Under FEMA, these officers are given the authority to execute all investigative rights which have been conferred upon income-tax authorities by the Income Tax Act of 1961^[1].

That means that the summons, search, seizure powers, etc., granted to the competent authorities under the provisions of the Income Tax Act 1961 will similarly apply to the ED under FEMA. The Director and Assistant Director of ED are given the authority to conduct investigations for any FEMA-related violations by FEMA (more precisely, section 37).

In the case of Suman Sehgal v. Union of India, the Delhi High Court provided an explanation for this by ruling that: “For that matter, Section 37(3) does not allude to any stated provision of the Income Tax Act. The only logical inference that can be drawn from this is that there is no requirement that a “proceeding” be pending against a specific person or group of people, nor that the exercise of such power is subject to an ongoing legal proceeding. The concerned authority may use the power under Section 37(3) as long as there are specific matters under investigation by such authority.

When acting in accordance with the Code of Civil Procedure 1908, the Director and Assistant Director are granted the same authority as a court.

Authority to summon under FEMA

Summon is nothing but a call by an authority to appear before the officer in judicial. A person cannot use a writ to dispute the ED’s issuance of a summons in court when the summons is issued under Section 37(3) of FEMA by the Director or Assistant Director of the ED. The Madras High Court made this ruling in the matter of KA. Manshoor vs Assistant Director, Enforcement Directorate, Government of India. In this instance, the petitioner was essentially asking for a writ of prohibition against the Enforcement Directorate for issuing the summons while acting within the scope of their authority. The petitioner’s attempt to stall the ED’s summons was deemed necessary to be unsuccessful by the court.

It is crucial to remember that the authority granted to the ED under Section 37 is identical to the authority granted to an income tax officer under Section 131 of the ITA. As the summons is merely for the initial investigation and the production of papers before the authority for further investigation, it will not in any way impair the person’s rights.

Consequences of failing to appear when summoned

If a person fails to appear on the date specified in a summons that has been issued under Section 37 of the Act in connection with an inquiry, that person could face legal action under Section 13 of the Act. 

The process starts with the Assistant Director of ED formally filing a complaint under Section 16(3) of the Act before the Adjudicating Authority regarding such an investigation. According to the complaint, the appellant was being investigated by the Directorate for violating FEMA, which is punishable under Section 13 of FEMA. As a result of this investigation, a summons was issued for the person’s appearance before the Assistant Director to present evidence and produce the relevant documents.

Failure to comply with the summons without a good explanation would constitute a violation of the law and result in the imposition of a fine under Section 13. The adjudicating authority may then issue a show cause notice to the party who failed to appear before the ED.

Enforcement of FEMA regulation through penalties

Suppose anybody violates any of this Act’s provisions, rules, orders, regulations, or directions. The fine for such violation plus three times the amount specified in the Act, if the violation is quantifiable, or up to two lakh rupees, if it cannot be quantified or ascertained, shall be due by the offender. In cases where the breach is persistent, a further fine of 5,000 rupees per day would be imposed.

Any individual who does not pay the full amount of the penalty imposed against him within ninety days of the day on which notice of the penalty’s due payment is given to him is subject to civil detention.

The function of the Enforcement Directorate under the FEMA

The Foreign Exchange Management Act of 1999 is a civil law that was passed to amend and consolidate the laws pertaining to enabling international payments and trade as well as to support the orderly growth and maintenance of the Indian foreign exchange market. ED has been entrusted with the duty of conducting investigations into alleged violations of foreign exchange regulations, making decisions, and punishing individuals found guilty of breaking the law.

Power of enforcement by Central Government

Section 41: The Central Government’s Authority to Issue Directives. The Central Government may occasionally provide the Reserve Bank with any general or specific directions for the purposes of this Act, and the Reserve Bank shall abide by any such directions in carrying out its obligations under this Act. 

Directions that the RBI may give to enforce the FEMA Regulation (section11)

The following are the power of the Reserve Bank of India to issue directions for the enforcement of FEMA regulation:

Issue Direction: In order to ensure compliance with the FEMA regulations, the RBI may give any direction to the authorised persons for making payments or the performance or desist from doing any acts connected to foreign exchange or foreign securities.

Providing Information: The RBI may also order any authorised individual to provide the required information in the way prescribed in order to ensure FEMA compliance.

Penalty: The RBI may impose a penalty of up to Rs. 10,000 on any authorised person who violates a directive or fails to file a return after providing them with a reasonable opportunity to be heard. If the violation persists, an extra daily fine of up to Rs. 2000 may be issued.

Conclusion

The Enforcement Directorate is one of the Indian government’s top financial investigation agencies, and it operates in compliance with the different laws that apply and their corresponding requirements. It has handled numerous cases over the years under PMLA and FEMA, serving as a watchdog against financial crimes in India.

Read our Article: Acquisition and Transfer of Property in India under FEMA