PRESENTATION ON CONTRAVENTION AN PENALTIES UNDER FEMA , 1999. By: ARVIND SALVI. APRIL, 2013

1. PRESENTATION ON CONTRAVENTION AN PENALTIES UNDER FEMA , 1999. By: ARVIND SALVI. APRIL, 2013

2. Foreign Exchange Management Act, 1999 • FEMA came into force with effect from June 1, 2000. • The objective of facilitating external trade 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 utilisation 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.

3. Offences and Penalties • The objective of FEMA is to ease FE control and restrictions. The freedom thus provided to the residents can be legitimately enjoyed by them in respect of all their bonafide transactions, current or capital. Reasonable restrictions are imposed on such rights to the extent provided under the Act. Such restrictions are notified through the Rules / Regulations. Contravention of such Rules / Regulations may only attract monetary fines and penalties within the broad limits defined under the Act. • The above freedom can only be enjoyed if resident Indians abide by the law and undertake bonafide transactions through banking channels or authorised dealers. Persons indulging in patently illegal transactions must continue to attract stiff penalties. • Violation of FERA was a criminal offence, whereas of FEMA provisions would be contravention of civil nature and would attract monetary fines and penalties within the broad limits defined under the Act. • Therefore, Chapter-IV consisting of sections 13 to 15 has been incorporated in the Act, which deals with penalties under FEMA.

4. Salient Features of Penal Provisions under FEMA • FEMA is civil law. • Penal provisions are exercised in two ways – Compounding (Voluntary) & Adjudication (Govt) • Investigation & Adjudication segregated. • Prosecution to prove guilt of the contravener. • No arrest except non payment of penalty. • Time bound disposal. • Maximum penalty prescribed. • Absence of mensria. • Separate penal provisions for APs.

5. Compounding of Contravention What does it mean ? Settle an offence committed by the contravenerthrough imposition of a monetary penalty without going in for litigation after the contravener acknowledges voluntarily having committed the contravention..

6. Meaning, scope & effect. • Compounding means acceptance of satisfaction by the person who has suffered injury in lieu of punishment prescribed under law. Compounding of offence enables the injured persona and the offender to terminate the criminal proceedings against the offender. Under the law, the injured person accepts satisfaction in lieu of punishment to the offender. Under this law, the public authorities who represent the society at large, are empowered to accept satisfaction in lieu of continuance of proceedings. Generally courts are of the view that compounding is not opposed to public policy. It does not amount to hushing up either. Compounding enables restoring of relationship in place of feud between the parties.

7. Meaning, scope & effect contd… • Sec .15(2) of the Act provides that upon compounding of offence, no proceedings or further proceedings shall be initiated or continued in r/o offences compounded. Sec.320(8) of the Cr.P.C. the effect of compounding is brought out more clearly. “The composition of an offence under this section shall have the effect of an acquittal (i. e. discharge) of the accused with whom the offence has been compounded”. Therefore, under the law also, an offence is compounded, the order of the compounding must clearly discharge the applicant.

8. Legal Position : • Section 13 – Contravention of • Act • Rules, • Regulations, • Notifications, • Directions or • Orders

9. Legal position contd.. • 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. • Reserve Bank of India.

10. 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.

11. Powers to compound…. RESERVE BANK : • Sec.3 – Dealing in Foreign Exchange • Sec.4 – Holding of foreign currency • Sec.5 – Current account transactions • Sec.6 – Capital account transactions • Sec.7 – Export of goods and services • Sec.8 – Realisation and repatriation of FE • Sec.9 – Exemption from realisation & repatriation • Sec.10.6 – Mis-utilisation of FE DIRECTORATE OF ENFORCEMENT : • Sec.3(a) i.e Hawala transactions.

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

13. Contravention done as per - • Foreign Exchange (Compounding Proceedings) Rules, 2000 notified by Government of India as amended from time to time. • A.P. (DIR Series) Circular No.31 / 01.02.2005 issued by RBI to implement Compounding Rules with a view to providing comfort to the citizens and corporate community by minimising transaction cost while taking serious view of the willful, malafide and fraudulent transactions. • Administrative Guidelines “Scheme of Compounding under FEMA”. • Cir No. 31/2005has been superseded vide recent Circular No. 56 dated 28-06-2010 with the objective of rationalisation and streamlining of the process and the procedure for compounding and to enhance transparency and effect smooth implementation of the compounding process.

14. Compounding rules • FE (Com. Proceedings) Rules, 2000. G.S.R. 383 (E) dated 03/05/2000 and amended on 02/11/2002, 13/09/2004 & 27/08/2008. • Total 13 rules. • Important Rules : - No. 6 : no enquiry after compounding; - No. 7 : AA to discharge the contravener; - No. 8 : Opportunity of hearing by CA & disposal of application in 180 days; - No. 9 : The sum compounded to be paid within 15 days from the date of order; - No. 10: Non payment is treated as if not applied for compounding.

15. Application Form • Only 8 items; • Must be completed in all respects; • Accompanied with the fees of Rs.5000; • Full details of the person authorised to handle the application; • Col. 5 specify the details of contravention, explicitly and expressly; • Specify/ describe the details/ facts, parties involved etc.

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

17. Examination by RBI.. Points considered.. • Whether the contravention is : - technical and/or minor in nature and needs only an administrative cautionary advice; - serious and warrants compounding; - prima-facie involves money-laundering, national and security concerns involving serious infringements if the regulatory frame work; and - there is a sufficient cause for further investigation by the DoE under FEMA or Anti-Money Laundering Authority instituted under the AML Act 2002, or any other agency. - Press Release : 2010-2011/234 dt: 13/08/2010 RBI has clarified the matter relating to clssification.

18. Examination by RBI contd.. • 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.

19. Examination by RBI contd.. • Indicative factors taken in to account by RBI while deciding the sum for which the contravention is compounded while passing compounding order : - the amount of gain of unfair advantage, where quantifiable, made as a result of contravention; - the amount of loss caused to any authority/ agency/exchequer as a result of contravention; -economic benefits accruing to the contravener from delayed compliance or avoidance of compliance; continued…

20. Examination by RBI contd.. - 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 disclosure of full facts in the application and submission made during the personal hearing; and - any other factor as considered relevant and appropriate.

21. Benefits - • Comforts to citizens and corporate community. • Minimum transaction cost. • Time-bound disposal (180 days). • Simple and hassle-free procedure. • No proceedings or further proceedings initiated or continued. • Absolutely transparent.

22. Adjudication • Govt. has appointed AA for holding an enquiry for the purpose of imposing penalty Sec 16 ) for contravention of Section 13. • AA is DoE. • FEM (Adjudication Rules) 2000. • Enforcement of adjudication order ( Sec 14 ). • Appeal to Special Director ( Sec 17 ). • Appeal to Appellate Tribunal ( Sec 19 ). • Appeal to High Court against the decision of AT ( Sec 35 ).

23. Contents of Compounding order .. • The provisions of FEMA, 1999 or any rule, regulation, notification, direction or order issued under FEMA, 1999 in r/o contravention has taken place along with details of the alleged contravention; • The sum for which the contravention is compounded; and • The manner and time limit for payment of the sum compounded – 15 days from the date of the compounding order.

24. Legal position… • Sec 34 : No Civil Court shall have jurisdiction to entertain any suit or proceedings in r/o any matter which an Adj. Authority or the Appellate Tribunal or the the Spl. Director ( Appeals) is empowered by or under the Act to determine and no injunction shall be granted by any Court or other authority in r/o any action taken or to be taken in pursuance of any power conferred by or under this Act.

25. Legal position.. • Sec 35 : Appeal to High Court : Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of the communication of the decision or order of the Appellate Tribunal on any question of law arising out of such order.

26. Violations under FERA 1973(Sec. 49 of FEMA) • In case no cognizance/action is taken within a period of two years (i.e. sunset clause-up to 31/5/2002),then the offences do not subsist & no Court or AA can take such cognizance after 31-05-2002. • There can be three type of such cases-(i) Cognizance taken within a period of two years by Court, (ii) Cognizance taken by DoE (iii) Cognizance not taken [ Consistent with the provisions of FEMA 1999 or not Consistent with the provisions of FEMA 1999 ].

27. Contravention by the Authorised Person.. • Sec. 11 (3) : Where any authorised person contravenes any direction given by the RB under this Act or fails to file any return as directed by the RB, the RB may, after giving reasonable opportunity of being heard, impose on the AP a penalty which may extent to the ten thousand rupees and in the case of continuing contravention with an additional penalty which may extent to two thousand rupees for every day during which such contravention continues.

28. Latest developments … • As a measure to customer service and in order to facilitate the operational convenience, it has been decided to delegate the powers to the ROs of the RBI mentioned below to compound the contraventions of FEMA involving (i) delay in reporting of inward remittance, (ii) delay in filing of form FC-GPR after allotment of shares and (iii) delay in issue of shares beyond 180 days (viz. paragraphs 9(1)(A),9(1)(B) and 8, respectively, of the Schedule I to FEMA.20/2000-RB of 03.05.2000 (A.P.DIR-57/ 13.12.2011)

29. THANK YOU