What changed
This Master Circular consolidates all existing instructions on compounding of FEMA contraventions into a single document, effective July 1, 2010. It includes a sunset clause, meaning it will be withdrawn on July 1, 2011 and replaced by an updated version. The circular does not introduce new rules but organizes existing ones for easier reference.
What it means for you
For banks, this circular streamlines the process for customers seeking to voluntarily settle FEMA violations, reducing transaction costs and legal hassles. Banks must be aware that compounding is available for most FEMA sections except Section 3(a) (hawala), which falls under Enforcement Directorate. Once compounded, no further proceedings can be initiated against the contravener, providing finality.
What you must do
- Familiarize your forex and compliance teams with the compounding process outlined in this circular.
- Advise customers who admit FEMA contraventions to apply to the Compounding Authority voluntarily.
- Ensure customers understand that willful, malafide, or fraudulent transactions are viewed severely and may not be compounded.
- Maintain records of compounding applications and orders for audit and regulatory reference.
Who it affects
All Authorised Dealer Category - I banks, Authorised Banks handling forex transactions, Corporate and individual customers with FEMA contraventions, RBI's Compounding Authority and Enforcement Directorate
What is the penalty for a FEMA contravention under this circular?
Under Section 13(1) of FEMA, 1999, penalty can be up to thrice the sum involved if quantifiable, or up to ₹2 lakh if not quantifiable. For continuing contraventions, an additional penalty of up to ₹5,000 per day may apply.
Can a contravention be compounded after adjudication proceedings have started?
Yes, the circular states that an application for compounding can be made either before or after the institution of adjudication proceedings.
Who handles compounding for hawala transactions?
Compounding for contraventions under Section 3(a) of FEMA (hawala transactions) is handled by the Directorate of Enforcement, not RBI.