RBI Circular & the compounding of contravention under FEMA

NEW RBI CIRCULAR AND THE COMPOUNDING OF CONTRAVENTIONS UNDER FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA):

INTRODUCTION: The Reserve Bank of India vide its A.P. (DIR series) Circular no. 56 dated 28.06.2010 has prescribed a procedure for compounding of Contravention/s under section 15 of Foreign Exchange Management Act, 1999 (FEMA), thus superseding the previous circular A.P. (DIR series) Circular no. 31 issued on 01.02.2005.

Under this enactment, Reserve Bank of India (RBI) to compound contravention/s, Section 13 of FEMA, which defines Penalties to be imposed on any person who contravenes any provision of this Act, rule, regulation, notification, direction or order issued or contravenes any condition issued by Reserve Bank, 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 continuing one,  then further penalty which may extend up to five thousand rupees for every day after the first day during which the contravention continues. But it excludes to compound the contravention of section 3 (a) of FEMA, on any person who deal in or transfer any foreign exchange or foreign security to any person not being an Authorized Dealer.

MANNER OF THE COMPOUNDING APPLICATION:

An application for compounding of a contravention/s may be submitted to the Reserve Bank either through a memorandum or suo moto being made or becoming aware of the contravention. The compounding authority shall be bound to complete compounding proceedings within the stipulated time frame of 180 days from the date of receipt of the completed application for compounding of the contravention/s by the Reserve Bank.

RBI, before issuing a compounding order, if finds that there is sufficient cause for FURTHER INVESTIGATION, it may recommend the matter to the Directorate of Enforcement (DOE) for further investigation and necessary action under FEMA, 1999 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. The Compounding Authority may call for any additional information, record or any other document relevant to the compounding proceedings.

Cases of contravention, such as, those having a money laundering angle, national security concerns and/or involving serious infringements of the regulatory framework or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the Department of Enforcement for further investigation and necessary action under FEMA, 1999 or to the authority instituted for implementation of the Prevention of Money Laundering Act 2002, or to any other agencies, for necessary action as deemed fit.

The Reserve Bank generally advises the persons concerned of their choice and option to make an application for compounding as and when the contraventions come to its notice.

Compounding application has to be made in specified format and duly completed in duplicate the applicant must indicate the details of authorized person, contravention sought to be compounded, details of the transactions and other relevant information in the application and attach all necessary documentation.

The Compounding Authority on the basis of the application together with the documents submitted and the submissions made during the personal hearing shall form an opinion on the nature of the contravention.

 The application for compounding shall be processed further and disposed of on merits upon consideration of the records and submissions made and at the absolute discretion of the Compounding Authority.

While examining of documents and submissions made in application, the Reserve Bank of India shall evaluate the nature of contravention and allow the compounding of contravention/s, inter alia, by taking in consideration following indicative points:

1.      That the contravention is technical and/or minor in nature and needs only an administrative cautionary advice;

2.      That the contravention is serious and warrants compounding of the contravention; and

3.      That the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringements of the regulatory framework.

4.      The amount of gain of unfair advantage, wherever quantifiable, made as a result of the contravention;

5.      The amount of loss caused to any authority/agency/exchequer as a result of the contravention;

6.      Economic benefits accruing to the contravener from delayed compliance or compliance avoided;

7.       The repetitive nature of the contravention, the track record and/or history of non-compliance of the contravener;

8.       Contravener’s conduct in undertaking the transaction and in full facts in the application and submissions made during the personal hearing; and

9.       Any other factor as considered relevant and appropriate.

FAIR OPPORTUNITY OF BEAING HEARD TO APPLICANT:  As per principles of natural justice every applicant applying to the Compounding Authority shall be given a fair opportunity for personal hearing and for further submission of documents in person in support of the application within a stipulate time period as may be specified by the concerned authority. Compounding authority shall pass a compounding order on the basis of the averments made in the application as well as other documents and submissions made by the contravener during personal hearing.

TIME LIMIT FOR PAYMENT OF AMOUNT AS MENTIONED IN COMPOUNDING ORDER: The sum, for which the contravention is compounded as specified in the order of compounding, shall be paid by way of demand draft in favour of the “Reserve Bank of India” within 15 days from the date of the order of compounding of such contravention

CONCEQUENCES OF NONPAYMENT: In case of failure to pay the sum compounded within the time specified in the compounding order and the Foreign Exchange (Compounding Proceedings) Rules, 2000, it shall be deemed in terms of Rule 10 of the Rules that the contravener had never made an application for compounding of any contravention under these Rules.

CERTIFICATE OF PAYMENT OF AMOUNT:

On payment of the sum for which contravention is compounded a certificate in this regard shall be issued by the Reserve Bank subject to the specified conditions, if any, in the order.

CASES WHERE NO COMPOUNDING OF CONTRAVENTION:

1.      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 the Compounding Rules, such contraventions would not be compounded and relevant provisions of the FEMA, 1999 shall apply. But second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

2.      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. The sum, for which the contravention is compounded as specified in the order of compounding, shall be paid by way of demand draft in favour of the “Reserve Bank of India” within 15 days from the date of the order of compounding of such contravention.

CONCLUSION:

The new RBI circular of 2010 is issued with the object to streamline the process and procedure for compounding of the contraventions so as to ensure better transparency and effective implementation of the compounding procedure under FEMA. The compounding procedure under the Act is swift, inexpensive which saves time, money and energy of the applicant as well as of concerned authority.