Compounding of Offences under the Foreign Exchange Management Act (FEMA) of 1999
‘Compounding of Offences‘ means a compromise between the two parties, where the complainant agrees to drop charges against the accused. Section 320 of The Code of Criminal Procedure, 1973 (Cr P.C.) provides for compounding of certain offences which are punishable under the Indian Penal Code (IPC) of 1860. There are certain serious offences for which parties cannot compromise, these offences are called Non-Compoundable Offences.
Contravention under FEMA, is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued thereunder. Under FEMA, Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.
The Section 15 of FEMA gives power to the Reserve Bank of India (RBI) and the Enforcement Directorate(ED) to compound offences mentioned in Section 13 according to the type of offence. Furthermore, according to Section 15(2), after compounding under sub-section (1), no proceeding or further proceeding, as the case may be, shall be initiated or continued against the accused.
The Reserve Bank of India (RBI) is empowered to compound contraventions defined under section 13 of FEMA (except contraventions under section 3(a)) for a specified sum after a personal hearing of the accused. For contraventions under section 3(a), compounding will be done by Enforcement Directorate.
The process of compounding provides relief to the defaulter by minimizing transaction costs. If the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, such cases will not be compounded by the Reserve Bank.
Some key features of Compounding of Offences are:-
- Compounding is a voluntary process
- The accused must admit to the contraventions
- The amount involved must be quantifiable (Rule 5)
- The accused cannot give arguments during the process of compounding
- The process must be completed within the period of 180 days from the date of applying for compounding; if not, then it shall be deemed that no application was filed for compounding.
According to Rule 6.5 of FED Master Direction No.4/2015-16 RBI can decide whether the contravention is technical and/or minor in nature and, as such, can be dealt with by way of an administrative/ cautionary advice; whether it is material and, hence, is required to be compounded for which the necessary compounding procedure has to be followed or whether the issues involved are sensitive/serious in nature and, therefore, need to be referred to the Enforcement Directorate (ED). If the application is filed suo moto, compounding has to be done, the offence cannot be considered technical/ minor.
Process of Compounding:-
An application needs to be submitted along with the demand draft of Rs. 5000/- to the RBI, along with the following:
● Compounding application: As per the format mentioned in Annexure-II of the Foreign Exchange (Compounding Proceedings) Rules, 2000.
● Undertaking: An undertaking is to be presented that currently, there is no proceeding against the accused.
● Copy of Memorandum of Association
● Latest Audited Balance Sheet
All the documents and submissions will be investigated upon by the RBI and then the penalty will be decided based on the type of contravention involved.
The amount imposed after compounding can be up to three times the amount involved in the contravention. The final amount is based on a guidance note given in A.P. (DIR Series) Circular No. 73 dated May 26, 2016, and is also available on the RBI’s website. The amount 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.
Authored By: Adv. Anant Sharma & Chhatresh Kumar Sahu