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Thursday, August 5, 2010

Violated Foreign Exchange laws: on becoming aware of the contravention, disclose it to RBI to save huge penalty of 2 lakhs or 3 times the amount involved in transaction [Compounding Master Circular]

It has been decided to put in place an updated procedure for compounding of contravention/s under FEMA on the basis of observations made over the last few years on the compounding process on a continuous basis and the experience gained in dealing with compounding applications. The objective is rationalization and streamlining of the process and the procedure for compounding and to enhance transparency and effect smooth implementation of the compounding process. The directions contained in the compounding of contravention/s issued vide A.P. (DIR Series) Circular No.31 dated February 1, 2005 are superseded by this circular vide A.P. (DIR Series) Circular No. 56 dated 28th June 2010 and as provided in Master Circular on Compounding of Contraventions under FEMA, 1999 read with Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules).  Further, Operational checkpoints for submission of a compounding application and the related matters are also given.


When an application is made for compounding of a contravention, the RBI would examine the nature of contravention in the following manner:
• whether the contravention is technical and/or minor in nature and needs only an administrative cautionary advice;
• whether the contravention is serious and warrants compounding of the contravention; and
• whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringements of the regulatory framework. In such a case, RBI may order necessary investigation.

Investigation by Enforcement Directorate (ED)
If RBI finds that it is necessary for further investigation, it may recommend the matter to the Directorate of Enforcement (DoE) for further investigation. Such action may be initiated under FEMA, 1999 by the Enforcement Directorate or the Anti Money Laundering Authority instituted under the Prevention of Money Laundering Act, 2002 or to any other agencies, as RBI may deem fit.

Time Frame for Disposing of Compounding Application
RBI states that applications for compounding will be disposed of in 180 days. If investigation as aforesaid is necessary, compounding will not take place. The application will be returned to the Applicant.

Factors Considered for determining the compounding fee
• The amount of gain or unfair advantage;
• The amount of loss caused to the exchequer;
• The economic benefits accruing to the contravener due to delayed compliance;
• The repetitive nature of contravention by the contravener;
• The conduct of contravener in disclosure of information; and
• Such other matter in the opinion of RBI will be the factors on the basis of which the application will be examined.

Time Frame for Payment of Compounding Fee
The amount payable by the contravener as per the compounding order should be paid within 15 days from the date of the order. If the contravener fails to pay the said amount then it will be deemed that the contravener has never applied for compounding of offence.

Repeated Offences <= 3years
A similar offence within 3 years of the compounding of the earlier offence shall not be compoundable.  Any 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.

Certificate after Compounding
RBI will issue a certificate to the contravener subject to the conditions of the compounding order after realization of the amount paid as per the compounding order.


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