Can ED under PMLA give directions to RBI to prevent compounding of FEMA violations?

Court :- Bombay High Court , Citation :- MANU/MH/1816/2018

In this case the issue was whether the RBI should not entertain any compounding application of a subject matter which was part of money laundering being investigated by the Directorate of Enforcement (“ED”) under PMLA, in view of the proviso to sub-rule (2) of Rule 8 in the Foreign Exchange (Compounding Proceedings) Rules, 2000 which stipulates that, in case of certain contingencies as mentioned therein, the RBI should not entertain any compounding application.

It was held by the Bombay High Court that,

 

“It is clear from the plain language of the proviso that it comes into play when with respect to any proceeding initiated under Rule 4 of the Compounding Rules, if the ED is of the view that the said proceeding relates to a serious contravention suspected of money laundering, then, the Compounding Authority shall not proceed in the matter and shall remit the case to the appropriate adjudicating authority for adjudicating contravention under section 13 of the FEMA… Absent the relation of the compounding proceedings as also of the applicant therein with a serious contravention suspected of money laundering, it would not be permissible for the Enforcement Directorate to take any view and communicate the same to the RBI by invoking this proviso. If such a interpretation is not placed on the proviso, there is a likelihood of the RBI being informed by a vague and general communication as in the present case not to go ahead and compound the contravention. If such communication is upheld, that would put an end to the compounding proceedings, though the view of the Enforcement Directorate is general in nature and based on no material or on such material which has no relation with the compounding proceedings.”

 

In view of the above decision of the Bombay High Court, the ED has to give a communication/direction to the RBI which should be based on cogent reasons and material on record, and the same cannot be made a formality. Only in case of serious offences of money laundering, RBI will be obliged to stop the compounding proceedings.

By:

Vijay Pal Dalmia, Advocate
Supreme Court of India & High Court of Delhi

Mobile: +91 9810081079
Email: vpdalmia@gmail.com

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