Compounding of Offences under FEMA – Clarifying RBI's Role in Processing Applications and Identifying Ineligible Offenses

The Reserve Bank of India (RBI) plays a key role in ensuring compliance with the Foreign Exchange Management Act (FEMA), 1999, by facilitating the compounding of contraventions through its Foreign Exchange (Compounding Proceedings) Rules, 2024. These rules provide a mechanism for individuals and entities who have violated FEMA provisions to resolve their contraventions by paying a penalty, without undergoing formal adjudication. The compounding process, administered by the RBI, helps streamline compliance, reduce enforcement costs, and ensure that violators can settle their issues efficiently, provided the violations are eligible for compounding under the specified rules.

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The most recent framework governing compounding is outlined in A.P. (DIR Series) Circular No. 17/2024-25, issued by the RBI on October 1, 2024. This circular provides updated guidelines and procedures for the compounding of contraventions, offering a clear path for those wishing to rectify their violations in accordance with FEMA.

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This article aims to clarify the specific RBI offices authorized to process compounding applications for contraventions committed by concerned parties, as well as outline the types of offenses that are not eligible for compounding under the current regulatory framework.

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A.????? Jurisdiction of RBI Offices for dealing with the compounding matters

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B.????? Offences that not eligible for compounding

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In respect of a contravention committed by any person (applicant) within a period of three years from the date on which a similar contravention was committed and the same was compounded, such contraventions shall not be compounded, and the relevant provisions of the Act shall apply. Any contravention committed after the expiry of a period of three years from the date on which a similar contravention was previously compounded shall be deemed to be a first contravention.

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Further, in terms of the Rule 9 of Compounding Rules, 2024, transactions, in which amount involved is not quantifiable or, attracting provisions of Section 37A ?which lays down the contravening provisions for holding any foreign exchange, foreign security or immovable property, situated outside India and where the Adjudicating Authority has already passed an order imposing penalty under section 13 of the Act or where the DoE is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, contraventions of such transactions shall not be eligible for compounding by the Reserve Bank.

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Also, in terms of Section 3(a) of the Act, when any person transfers any foreign exchange or foreign security to any person not being an authorised person without general or special permission of Reserve Bank of India, such transaction is said to be in contravention of the said section and the contravention shall not be eligible for compounding by the RBI.

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The compounding application shall not be processed unless the requisite administrative action is completed by the applicant.

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The term ‘Administrative action’ shall mean such action as may be necessary with respect to the transactions involved in such contravention and shall include such corrective action that shall be undertaken by the applicant to bring the transaction involved in contravention in compliance with applicable provisions of FEMA. An indicative list of such administrative actions include:

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(i)???????? Obtaining requisite approvals/ permissions from the Government or Reserve Bank or any other statutory authority concerned, as case may be;

(ii)?????? Unwinding/ reversing the transaction;

(iii)???? Repatriating the receivables due;

(iv)???? Compliance with pricing guidelines or submission of valuation certificate;

(v)?????? Compliance with reporting requirements;

(vi)???? any other such corrective action as may be required

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Contraventions of a serious nature viz. transactions suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation or where the contravener fails to pay the sum for which contravention was compounded within the specified period in terms of the compounding order, shall be referred to the DoE for further investigation and necessary action under the FEMA.

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It is clarified that whenever a contravention is identified by the Reserve Bank or brought to its notice by the person involved in contravention, the Reserve Bank shall examine whether such contravention(s) may be compounded, and necessary compounding procedure must be followed or the issues involved are sensitive/serious in nature and, therefore, need to be referred to the DoE for adjudication or further investigation

Authors: I Abhishek Bansal , Partner ([email protected]) I Laxmi Sinha , Principal Associate ([email protected]) I Tiya Agarwal ([email protected]) l ACUMEN JURIS , l

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