COMPOUNDING OF OFFENCES UNDER FOREIGN EXCHANGE MANAGEMENT ACT 1999

Compounding of offences

Compounding of offence means “making good the loss suffered by a victim”.

The statutes bar the offences which are very serious in nature from being compounded. Only offences that are simple in nature and a compromise can be made between the parties will come under the purview of compounding.

Why do we go for compounding?

Contravention of law and Non compliance leads to penalties and prosecution and to save ourselves from punishment we go for compounding.

Compounding is a boon under our statute to save the offender from prosecution and other legal penalties.

Compounding of offences under FEMA, 1999

The objective behind the formulation of FEMA 1999 replacing FERA 1974 was to boost foreign trade and investment into India. The contravention under FERA was treated as Criminal offence punishable as per Criminal Procedure code, 1973. But the offences under FEMA is considered only to be civil punishable with monetary penalty.

Penalty (Section 13)

“On adjudication, if it is proved the a person has contravened  the provisions of Foreign Exchange Management Act, 1999 and the rules, regulations, notifications made there under shall be liable to a penalty of thrice the sum involved in the contravention, where the amount is quantifiable or upto rupees two lacs where the amount is not quantifiable . And in case of continuing offence with a further penalty which may extend up to Rs. 5000 every day during which the default continues.

In addition to the above, the adjudicating authority may direct that any currency, security or other money or property shall be confiscated.”

The provision for penalty under FEMA 1999 makes it clear that the contravention leads to payment of huge sum of money, rendering it difficult for the offender to revive his business or make good the monetary loss.

Section 15 deals with the power to compound contravention. It states that any contravention under Section 13 may be compounded within 180 days of submitting an application to the Directorate of Enforcement or its officers and officers of the RBI as may be prescribed.

Once an offence has been compounded, no further proceeding shall be initiated or continued against the offender in respect of the compounded contravention.

From the above it is clear that the compounding of contravention is a Voluntary process on the part of the person committing such contravention. i.e., the Offender can proceed to be adjudged and pay the necessary penalties or he can compound his offences.

When application for compounding can be made?

• ·         On being advised of a contravention under FEMA 1999
• ·         Either through Memorandum
• ·         Suo moto
• ·         On becoming aware of the contravention

The Foreign Exchange (compounding proceeding) rules, 2000

The RBI has been empowered to compound contraventions under FEMA 1999 with  a view to provide comfort to individuals and corporate community by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions.

The transactions that can be compounded with Reserve Bank of India are,

1. 1.       Delay in reporting of Inward Remittance
2. 2.       Delay in filing of Form FC-GPR after allotment of shares
3. 3.       Delay in issue of shares beyond 180 days

Under Rule 4 the power of RBI to compound the contraventions have been prescribed with regard to the sum involved in such contravention and no contravention shall be compounded unless the amount involved in the contravention is quantifiable.

Amount involved	Compounding Authority
Upto Rs. 10 lacs	Assistant General Manager of RBI
Rs. 10Lacs  -Rs. 40 lacs	Deputy General Manager of RBI
Rs. 40 lacs –Rs. 100 lacs	General Manager of RBI
More than Rs. 100 lacs	Chief General Manager of RBI

The above provision shall not apply to a contravention committed by any person within a period of 3 years from the compounding of contravention committed under these rules.

The application for compounding must be submitted to the Reserve Bank of India, Exchange control department, Central office, Mumbai, along with a fee or Rs. 5000/- by Demand Draft in favor of the Compounding Authority.

The following are the powers of Enforcement Directorate to compound contravention:

The Directorate of Enforcement (DOE) is entrusted with compounding of contraventions under Section 3(a) of FEMA 1999 (dealing with Hawala and Money Laundering transactions).

Amount involved	Compounding Authority
Upto Rs. 5 lacs	Deputy Director of DOE
Rs. 5 Lacs - Rs. 10lacs	Additional Director of DOE
Rs. 10lacs – Rs. 50lacs	Special director of DOE
Rs.50lacs- Rs.1crore	Special director + Deputy Legal Adviser of DOE
Rs.1crore and above	Director +Special director of DOE

No contravention shall be compounded unless the amount involved in such contravention is quantifiable.

The above provision shall not apply to a contravention committed by any person within a period of 3 years from the compounding of contravention committed under these rules.

The application for compounding must be submitted to the Director, Directorate of Enforcement, New Delhi along with a fee of Rs. 5000 /- by Demand Draft in favor of the Compounding Authority.

Where a contravention has been compounded before the Adjudication of the contravention, No inquiry shall be held for adjudicating (judging) such contravention against the person.

A compounding which has been made after the making of a complaint by the RBI or DOE, then such compounding must be brought to the notice of Adjudicating Authority.

Within 180 days from the date of receiving an application for compounding, the Compounding Authority should pass an order after giving the parties an opportunity of being heard.

Issuing compounding order

The Reserve Bank reserves the right to classify the contraventions as technical or minor in nature, or whether it is serious in nature or does it involve money laundering and other national security concerns, the contravener nor others have any right to classify any contravention as technical Suo Moto.

The compounding application is disposed of by issuing a compounding order specifying the relevant provisions of FEMA 1999 or rules, regulation, notification.

An opportunity for personal hearing is given to the applicant for further submission of documents in person in support of the compounding application within a specified period. The contravener or its authorized representative can choose not to appear in person or make any submissions before the CA for personal hearing.

The compounding authority will make an order based on the representations made by the applicant. When contravention is made after the complaint made under Section 16(3) the order will be provided to the contravener and also to the Adjudicating authority.

Post compounding order:

Within 15 days of receiving the compounding order, the sum payable for the contravention must be paid by way of a demand draft in favor of “Reserve Bank of India”. On receipt of the contravened amount, the RBI issues a certificate

.

The contravener does not have any right to seek the withdrawal of the order or to hold the compounding order as void or request the review of the order made by the Compounding Authority.

Failure to pay the sum compounded within the specified time, then it would be deemed that the contravener has never made an application for compounding.  

Other provisions:

When a similar contravention has been committed by any person within a period of 3 years from the date of compounding a contravention, such subsequent contravention will not be compounded. They would be dealt under the relevant provisions of FEMA 1999.

Where the approval or permission of certain government authority is needed and has not been obtained, such contraventions would not be compounded unless the requisite approvals are obtained.

Thus, the offences under FEMA 1999, can be compounded with Directorate of Enforcement(in case of money laundering transactions) or with Reserve Bank of India (in any other case).