Considering Compounding FEMA Offences? Weighing the Pros and Cons

Introduction

Facing a contravention under the Foreign Exchange Management Act, 1999 (FEMA), can be a cause for concern for individuals and entities involved in foreign exchange transactions. One avenue to resolve such issues without undergoing lengthy adjudication proceedings is compounding. This article offers a balanced perspective on whether compounding FEMA offences is the right course of action by exploring its potential benefits and drawbacks.

What is Compounding of FEMA Offences?

Compounding under FEMA, as outlined in Section 15 of the Act, provides an opportunity for a person who has committed a contravention to make an application to the Reserve Bank of India (RBI) or the Enforcement Directorate (ED) to have the contravention compounded. Compounding essentially means voluntarily admitting to the contravention and paying a certain sum to avoid further legal proceedings and potential penalties after adjudication. The Central Government has also issued the Foreign Exchange (Compounding Proceedings) Rules, 2000, which further govern this process.

Benefits (Pros) of Compounding FEMA Offences

Choosing to compound a FEMA contravention can offer several advantages:

• Avoiding Lengthy Adjudication: One of the primary benefits is the avoidance of prolonged and potentially complex adjudication proceedings before the Adjudicating Authority. This can save time, resources, and reduce uncertainty associated with legal battles.
• Quicker Resolution: Compounding can lead to a faster resolution of the contravention compared to going through the entire adjudication and potential appeal process. The rules stipulate that the compounding authority should endeavour to decide the application within 180 days from the date of application.
• Reduced Potential Penalties: While a compounding amount is payable, it may potentially be lower than the penalty that could be imposed after adjudication, which can be up to thrice the sum involved in the contravention.
• No Criminal Prosecution (Generally): FEMA treats contraventions as civil offences, unlike its predecessor FERA (Foreign Exchange Regulation Act), which had criminal consequences. Compounding provides a civil route to resolving the issue, generally avoiding criminal prosecution unless certain serious contraventions suspected of money laundering, terror financing, or affecting national sovereignty and integrity are involved, in which case the ED may remit the case for adjudication.
• Opportunity for Closure: Compounding offers a sense of closure and allows businesses and individuals to move forward without the ongoing burden of an unresolved FEMA contravention.

Drawbacks (Cons) of Compounding FEMA Offences

Despite the benefits, there are also potential drawbacks to consider before opting for compounding:

• Discretionary Nature: Compounding is not a matter of right. The RBI or ED has the discretion to decide whether or not to compound a contravention. They may refuse compounding, especially for serious violations.
• Payment of Compounding Amount: While it may be less than potential penalties after adjudication, a significant compounding amount may still be payable. The quantum of this amount depends on various factors, including the nature, gravity, and the amount involved in the contravention.
• No ‘Guilt-Free’ Compounding: Even though you are settling the matter through compounding, it is not a ‘guilt-free’ process. By applying for compounding, you are essentially admitting to the contravention.
• Potential for Detailed Scrutiny: The compounding authority has the power to call for any information, record, or documents relevant to the compounding proceedings. This could involve a detailed scrutiny of your transactions and compliance.
• Ineligibility if Appeal Filed: If an appeal has already been filed under Section 17 or Section 19 of FEMA, the contravention cannot be compounded.

Is Compounding the Right Course of Action?

Deciding whether to compound a FEMA offence requires careful consideration of the specific circumstances:

• Nature and Severity of Contravention: Assess the seriousness of the violation. For minor or technical breaches, compounding may be a more suitable option.
• Quantifiable Amount Involved: If the amount involved is quantifiable, consider the potential penalty (up to thrice the amount) versus the likely compounding amount.
• Time and Resources: Evaluate the time and resources required for adjudication versus the potentially quicker resolution through compounding.
• Likelihood of Successful Adjudication: Consider the strength of your case and the likelihood of a favourable outcome in adjudication.
• Financial Implications: Analyse your ability to pay the potential compounding amount.
• Reputational Impact: Weigh the potential reputational damage of prolonged legal proceedings versus admitting to a contravention through compounding.

It is often advisable to seek legal counsel to understand the specific implications of your FEMA contravention and to get guidance on whether compounding is the most appropriate strategy in your situation.

Citations

• Introduction to Investigation & Adjudication under FEMA – Explains the compounding process.

• Excerpts from “Arbitration and Exchange Control Laws of India.pdf” – Mentions compounding of offences.

• Excerpts from “Foreign Exchange Management Act – FEMA” – Outlines penalties under FEMA.

 

Article by : Aditya Bhatt

Association: Bhatt and Joshi