Compounding means voluntarily admitting contravention of FEMA, pleading guilty and seeking redressal, while Contravention is the breach of provisions of FEMA. One can go for compounding after contravention. As per general perception, RBI is the compounding authority under the FEM and that perception is substantially correct. However, here we are exploring the power of Enforcement Directorate for compounding under FEMA:
- Section 15 of FEMA provides that any contravention under Section 13 may be compounded by Enforcement Directorate along with by RBI, as may be authorised by the Central Government.
- As per Rule 4 of FEMA (Compounding Proceedings) Rules, 2000 read with GSR 609 (E,) dated 13-09-2014, RBI can compound all matters except Section 3 (a) of FEMA.
- Section 3 (a) of FEMA states that no person shall deal in or transfer any foreign exchange or foreign security to any person not being authorised person.
- Rule 5 states that any offence under Section 3 (a) can be compounded by the Enforcement Directorate.
Power of Officers of ED with respect to the contravention under Section 3 (a) for the amount as mentioned below:
- Deputy Director- Upto Rs. 5 lakhs
- Additional Director form Rs. 5 lakhs to 10 lakhs
- Special Director- from Rs. 10 lakhs to Rs. 50 lakhs
- Special Director with Deputy Legal Advisor- Rs. 50 lakhs to Rs. 1 crore
- Director with Special Director – Rs. 1 crore and above.
When to making application: Application can be made when the person becomes aware of contravention, on suo moto or otherwise.
Application for Compounding: Application in the prescribed format along with relevant documents must be addressed to:
To Director
Directorate of Enforcement, New Delhi along with DD for the fees of Rs. 5000/-
Process of Compounding:
(i) On receipt of application and documents, the ED may call for any information, record or any other documents relevant to the compounding proceedings.
(ii) There is no need for personal appearance, unless specifically asked for by the ED. It is advised to authorise someone, may be CA or lawyer who is aware of law as well as contraventions.
(iii) The whole process is to be completed by ED within 180 days from the date of receipt of application complete in all respects.
(iv) Compounding order shall state the provisions of law as well as the alleged contravention. It will also state the sum to be payable within 15 days of the date of order through DD. Further, the order shall be signed, sealed, and dated by the ED.
(v) After the payment, ED will issue a certificate/letter that the Applicant has complied with Order of ED.
Conditions for Compounding:
- Only one compounding within 3 years of date for contravention is allowed under Compounding Rules. Every second or subsequent contravention after 3 years from date of compounding shall be treated as fresh contravention.
- Please note that the compounding application can be filed only after obtaining post-facto approvals or unwinding the transactions if not permitted under FEMA.
- In case of adjudication made by ED and subsequent appeal has been filed under Section 17 or Section 18, no contravention can be compounded in terms of Rules 11 of the Compounding Rules. In this regard, an undertaking needs to be filed along with the application.
- No compounding is possible in case of serious contravention of money laundering, terror financing or affecting sovereignty and integrity of India.
- For compounding of any contravention, the amount of contravention must be quantifiable.
Factors for adjudicating the sum payable under Order: The ED may take into consideration the following factors:
- The amount of gain or unfair advantage;
- The amount of loss caused to the government or other agencies;
- Economic benefits of delayed compliance or non-compliance;
- Repetitive nature of contravention and track record of contravener;
- Behaviour of contravener during contravention, his disclosure in application and submission during hearings
- Any other relevant factors.
Computation of amount imposed: Under FEMA, the penalty can be huge upto 3 times of the amount involved in case of quantifiable contravention. However, there is a guidance note provided by RBI for public and the amount is calculated as per this note.
- It is to be noted that there is no provision for appeal against the compounding order of ED or for a request or reduction of amount imposed or extension of period for payment of amount imposed in the Order.
In conclusion, it is advised to come clean with the suo moto application for compounding of any contravention and give complete details and documents and co-operate with ED.
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In case you have any concern and queries or need any support in compliance/FEMA/ED you may like to contact us.
Abhinarayan Mishra, FCA, FCS; Managing Partner, KPAM & Associates, Chartered Accountants, Dwarka, New Delhi; 9910744992, ca.abhimishra@gmail.com
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