FEMA Contravention and Penalties

Narendra Kumar

30 Nov, 2020

With effect from June 1, 2000, FEMA came to power with the objective of enabling all the external trades and payments for promoting the orderly development and maintenance of foreign exchange market in India. There is a paradigm shift from objective under FERA viz. controlling/conversation of foreign exchange for utilization of economic development of the country. With this shift in objective in mind there was also a shift in dealing with the issue relating to penal provisions.

Compliance with FEMA

Compliance means, compliance with the provisions of FEMA 1999, any rule, regulation, notification, direction or order issued in exercise of the powers under this Act.

Three stages of compliance –

• Before undertaking the transaction;
• While undertaking the transaction; and
• After undertaking the transaction.

Penal provisions

Governed by Chapter IV viz. Contravention and penalties.

• Sec 13: Penalties
• Sec 14: Enforcement of the order of the Adjudication Authority
• Sec 15: Powers to Compound contravention RBI
• Sec 49: Sunset clause [ FERA violations] 

Section 13

• Contravention ofAct, Rules, Regulations, Notifications, Directions or Orders.

Penalties – (prescribed under Sec.13)

• Up to thrice the sum involved in such contravention 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

Methods to deal with contraventions

• Compounding;
• Adjudication ;
• Appeals ;
• FERA contraventions
• Contraventions by Authorised Persons

Compounding of Contravention

What does it mean?

• By obligation of a monetary penalty by not going in for litigation after the contravener acknowledges voluntarily having committed the contravention settling an offense committed by the contravener.

• Contravention is the breach of provisions and norms under the Foreign Exchange Management Act, or FEMA 1999. Compounding of contraventions refers to the process where the individual or the corporate entity can admit the contravention and seek redress from the Reserve Bank, restricted to a specific sum.

What is the nature of these contraventions and how far can the central bank go?

• The applications for compounding contraventions are categorized into technical, material or sensitive by the Reserve Bank of India. Money laundering, national and security concerns including serious infringement of the regulatory framework, etc. are some of the sensitive contraventions. RBI has no power to compound cases which are sensitive. Such cases will then have to be directed to the Directorate of Enforcement. If technical, the applicant has issued cautionary advice.

• When the contravention is material in nature, the individual or the corporate entity is given an opportunity for a personal hearing by the compounding authority, which is optional. By admitting the contraventions, the erring entity can save on the transaction costs as it would get away by paying a smaller penalty levied by RBI. In not doing so, the individual remains exposed to the action that can be taken by the central bank under FEMA. The penalty after compounding the contravention, though much reduced, can be up to thrice the sum involved, in cases where the amount if quantifiable and it can be up to 2 lakh in cases, where it is not quantifiable, and for a continuing contravention, RBI charges 5,000 each day, till the resolution of the case.

• All these matters related to compounding are handled by the Cell for effective implementation of FEMA (CEFA), which has to be kept informed about matters of compounding at all times.

What is the fee to be paid for applying for compounding and how long do the cases last?

• The individuals are required to furnish all the details of the contravention along with the application form which costs 5,000. The person, in his application, is also required to mention if the case is under the investigation of the Directorate of Enforcement or the Prevention of Money Laundering Act (2002).

• The contravention penalty has to be paid up within 15 days of the compounding order being signed. If the erring individual fails to pay the penalty within three days, it is treated as if the individual never applied for compounding contravention. Thus he would be liable for the legal action under FEMA (1999). The compounding process is normally completed within 180 days of the receipt of compounding application.
• Powers to compound (Section 15) – any contravention under Section 13 may, on application made by the person committing such contravention, be compounded within 180 days from the date of application by Directorate of Enforcement and Reserve Bank of India.

Powers to the compound by

• Directorate of Enforcement
  • Sec.3(a) i.e. Hawala transactions.
• Reserve Bank of India
  1. Sec.3 – Dealing in Foreign Exchange
  2. Sec.4 – Holding of foreign currency
  3. Sec.5 – Current account transactions
  4. Sec.6 – Capital account transactions
  5. Sec.7 – Export of goods and services
  6. Sec.8 – Realisation and repatriation of FE
  7. Sec.9 – Exemption from realisation & repatriation
  8. Sec.10.6 – Mis-utilisation of FE

Not compoundable

• If an appeal under Sec. 17 or 19 of FEMA filed;
• The contravention is not quantifiable;
• A contravention has been finally adjudicated and disposed of by the Adjudication Authority;
• Contraventions related to any transaction without proper approval or permission from the concerned Govt. or any Statutory Authority: the requisite approval not obtained;
• A contravention, prima facie, involves money laundering, security, etc., & needs investigation.

Detection of contravention

• Voluntary disclosure;
• Information from Ads;
• Analysis of data;
• Market Intelligence;
• RBI’s inspections;
• Others – Media reporting/complaints.

Compounding Process

• Receipt of application;
• Receipt of fees;
• Examination by RBI;
• Calling for additional documents, if required;
• Opportunity for personal hearing;
• Passing of Compounding Order;
• Payment of penalty; and
• Issuance of Certificate of payment of a penalty.

Examination by RBI

• The compounding application is disposed of on merits, upon consideration of records and submissions made by the applicant in the application as well as during the personal hearing and at the absolute discretion of the Compounding Authority.
• Compounding Authority acts under the supervision of the Governor of the RBI.

Benefits

• Comforts of citizens and corporate community
• Mandatory personal hearing
• Minimum transaction cost
• Time-bound disposal (180 days)
• Simple and hassle-free procedure
• No proceedings or further proceedings initiated or continued
• Absolutely transparent

Common contraventions

• ECB – Draw down without LRN – allowing draw down under autoroute from the unrecognized lender, to an ineligible borrower, for non-permitted end uses.
• ODI – Second & subsequent remittances without obtaining UIN form RBI to JV/WOS; Non-submission of APR, the copy of share certificate to Ads.
• FDI – Delay/non-filing of Inflow, FC-GPR, FCTRS or other reporting returns to RBI.

Penalties under section 13 of the Foreign Exchange Management Act, 1999

• 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 contravention which has quantifiable amount or up to ₹ 2 lakhs which includes not quantifiable amount 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.

• 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 of India, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention 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.”

• 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 money, safety 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 the directions made in this behalf.
• The explanation for this subsection, “property” in respect of which contravention has taken place, shall include-
  1. Deposits in a bank, where the said property is converted into such deposits;
  2. Indian currency, where the said property is converted into that currency; and
  3. Any other property which has resulted out of the conversion of that property.