Advisory For ED

Power of Enforcement Directorate under Foreign Exchange Management Act, 1999

The Enforcement Directorate, commonly called ED, is a multi-dimensional and multidisciplinary body engraved with the duty of enforcing the provisions of two important laws in the country- FEMA^[1], 1999 and Prevention of Money Laundering Act (PMLA), 2002. Both the laws are vested with certain unique functions and power of Enforcement Directorate, which can be enlisted as below:

1. ED is primarily indulged in the investigation of contraventions under the provisions of FEMA, 1999. The designated authorities of ED perform the task of ADJUDICATION of contraventions under FEMA and are also empowered to levy the penalty of up to three times the amount of contravention.
2. ED is also involved in the investigation of money laundering offences under the PMLA provisions and can also take actions regarding attachment and confiscation of property which has been qualified as the proceeds of the crime and are also empowered to prosecute the persons involved in the money laundering offences.

ED investigation in the matters of FEMA

According to section 37 of FEMA, 1999, the power of Enforcement Directorate is to conduct the investigation, and so it has empowered the Director and Assistant Director of ED with the power of investigation occurring out of contraventions under the various provision of the aforesaid Act. These officers of ED are vested with the same investigatory powers as it is assigned to the officers under the Income Tax Act, 1961. Therefore, they have the power to issue the summons, conduct search and seizure etc. 

Also, the same power of Enforcement Directorate has been vested under the Code of Civil Procedure, 1908, in the instant of filing a suit in the following circumstances:

1. Inspection and Discovery;
2. Calling for appearance including any person of a banking Company and examining them on Oath;
3. Directing for the production of Books of accounts or other such documents;
4. Issue of Commissions.

Power of Enforcement Directorate to summon under FEMA.

In the Judicial dictionary, the word “summons” is defined to mean “a call of authority to appear before a Judicial Officer’. When the summon is issued by the Director or Assistant Director of the ED to any person as per Section 37(3) of FEMA, the summoned person cannot challenge the issuance of such a summons by the ED in the Court by the medium of a writ.

A case under the Madras High Court will clearly illustrate the meaning. In this case, the petitioner in question was seeking a writ of prohibition against the order of ED for having issued the summons by the exercise of the powers bestowed upon them as per Section 37 of FEMA, read with Section 131 of the Income Tax Act.

Regarding the power of Enforcement Directorate to summon, it has also been held in plenty of court judgments that a person against whom summons have been issued, such person shall not be accompanied by any advocate while appearing before the ED and also the recording of his statement in the presence of advocate cannot be allowed.

Consequences of non-appearing to the summon issued

In the case where a summon has been issued regarding an investigation under Section 37 of FEMA, and the accused person defaults on his appearance on the date mentioned in the summon so issued, the ED shall take action against such defaulter under Section 13 of FEMA.

The procedure starts from the point of filing of a complaint according to Section 16(3) of FEMA by the Assistant Director, Enforcement Directorate, before the Adjudicating Authority of such investigation. The complaint would depict that the appellant was under investigation by the Directorate for contraventions of the provisions of FEMA and which were punishable under Section 13, and in connection with the said investigation, summonses have been issued requiring the presence of the said person before the said Assistant Director for providing the evidence and for producing of the documents as mentioned in the summonses. Failure to comply with the provisions of summonses without any valid reason would amount to non-compliance under the legal procedures. Therefore, failure to appear before the authority issuing the summon would lead to the imposition of a penalty under Section 13 of FEMA for contravening the provisions of Section 37 of FEMA read along with Section 131(1) and 272A(1) of the Income-tax Act, 1961. This will lead to the issue of a show-cause notice to the person failing to appear before the ED by the Adjudicating Authority.

Prosecution during the Adjudication Proceedings

After the Central Government has sufficient reasons to believe that certain foreign exchanges, foreign security, or any immovable property located outside India, and has been suspected to be held in contravention of the FEMA provisions, then after the recording of the reasons in writing, the Government shall by an order, seize value equivalent of such foreign exchange, security or property situated within India. This falls under Section 37A of FEMA.

During the proceedings of adjudication of the above-mentioned exchange, security, and property, the Adjudicating Authority is empowered to recommend initiation of prosecution in respect of the same. The ED is entitled to file a criminal complaint against the guilty person under Section 13(1B) of FEMA after recording the reasons of satisfaction to proceed with the prosecution.

The Court shall take cognizance of all such offences in writing by a complaint by ED. In case any person is found guilty of having acquired such exchange, security or property in contravention of the FEMA provisions and in excess of the threshold as prescribed by the Government in such matters, such person must be punished with imprisonment for a term and which may extend to a period of five years and fine as well as penalty which may be imposed up to three times of the sum involved in such contravention and confiscation of the value equivalent of the Foreign Security, Foreign Exchange or immovable property situated in India as falling under Section 13(1C) of FEMA.

Penalties

In case of any Contravention of any provision of FEMA or any rule or regulation thereunder, it would entail a penalty up to three times the sum involved in such contravention where such amount can be quantified, or up to two lakh rupees where the amount cannot be quantifiable, and in case of continuing contravention, further penalty extending to five thousand rupees for each day during which the contravention or violation continues after the first day shall be levied. This is explained under section 13 of FEMA.

In case of failure of the person to make full payment of the penalty imposed within the given time period of ninety days (90), in such a condition, the designated officer of ED is duly authorized to recover the amount of such arrears of penalty. Such designated officer of the ED shall exercise all powers which are conferred on the income-tax authorities in respect of recovery of tax under the Income Tax Act. 

Compounding of offences

Compounding of an offence under FEMA is a procedure wherein the guilty person is allowed to make the monetary payment for committing contraventions under section 13. Hence, the contraventions under the provisions of FEMA,1999, are compoundable as well as civil in nature. For the compounding of an offence under FEMA, an application shall be filed to the Reserve Bank of India (RBI). However, it is to be noted that if any person deals or transfers any foreign exchange or foreign security to any person who is not an authorized person by way of hawala transactions and thereby is found guilty of such offence, compounding of the such an offence will be done only by the ED under Compounding of Contraventions under FEMA, 1999. 

However, the provision of compounding of offence will not be available in the following cases: –

1- where the amount involved is not quantifiable; and

2- Where the contravention committed by such convicted person has been done within a period of three years from the date of a similar contravention committed by him earlier and which has been compounded.

It is important to understand that where a complaint of criminal nature had been filed by the ED against the accused, then compounding of contravention is explicitly allowed in such cases also. The only condition, in this case, would be that the order of compounding is to be brought to the notice of an Adjudicating Authority, and on receipt of such notice, the person in respect of whom the contravention is so compounded shall be discharged.

Read Our Article:A Detailed Review of Foreign Exchange Management Act 1999