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FEMA, MONEY LAUNDERING PROVISIONS & ³ KNOW YOUR CUSTOMER (KYC )GUIDELINES´

DEEPAK TANDON (ASSOCIATE PROFESSOR ) IILM GURGAON

FEMA  

In India all the Forex transactions is administered , controlled and regulated by the government or by a centralized agency. FEMA 1999 confers powers to the Central Government and the RBI to control and regulate foreign exchange in India. Notified by Govt. No. GSR 9371)E dated 1.5.2000 and has been in force since June1.2000. Consists of 49 sections and 7 Chapters.

BROAD STRUCTURE OF FEMA
1.PRELIMINARIES, PREAMBLE , DEFINITION²SEC1-2 3.AUTHORISED PERSONS --SEC 10-12 4. CONTRAVENTIONS&PENALTIES ±SEC13-15 5. ADJUDICATION & APPEALS ±SEC16-35 2.REGULATION AND MANAGEMENT OF FOREX ± SEC3-9 6.DIRECTORATE OF ENFORCEMENT ±SEC36-38 7. MISC PROVISIONS-SEC39-49

FEMA,1999
PREAMBLE -An Act to consolidate and amend the laws relating to FOREX -Facilitate external trade and payments -promote orderly development and maintenance of Forex market in India -49 sections out of which 12 sections relate to operations part and rest deal with penal provisions -Basically a civil law Act. No Mens Rea.

FEMA vs. FERA--Details 
  



Applies to citizen of India Only specified Acts relating to FOREX Capital account, Current account transactions, persons , service are introduced Sec10 ± RBI to appoint A.D. Act only to attract fine and not imprisonment

PENALTIES & COMPOUNDING  

Penalty to 3 times sum involved is provided provided it is quantifiable. If not upto RS 2 lacs . If it is of a continuing nature ± further penalty Rs 5000/- per day after first day Sec 15 ± Directorate of Offences has power to compound the offences with the rules of Central Govt.

OTHERS  



Under Sec 32 , the appellant has the right to take assistance of legal practitioner or Chartered Accountant Under Section37-38 Power to search // Seizure laid down Presumption of Mens- Rea-No such presumption of guilty of mind unless the prosecution proves so .

An Analysis of FEMA
1.Authorised Person-Clubbing 2. Capital account transactions-alters the assets and liabilities including the contingent liabilities outside India of persons resident of India 3. Current account transactions ± other than capital account transactions 4. Person resident in India

FOREX REGULATIONS &DEALINGS IN FEMA  

Sec3 prohibits ± dealings in ± FEX//Foreign securities//transfer FEX other than Authorised //Payments to NRI // Receiving except from Authorised person//inward remittance Entering into specified financial transactions which involve a transaction in India having a counterpart transaction outside India or hawala transaction

SIMILARITIES OF FERA & FEMA 
  

The similarities between FERA and FEMA are as follows: y The Reserve Bank of India and central government would continue to be the regulatory bodies. y Presumption of extra territorial jurisdiction as envisaged in section (1) of FERA has been retained. The Directorate of Enforcement continues to be the agency for enforcement of the provisions of the law such as conducting search and seizure

PIO SCHEME 

i. ii.

Person of Indian Origin" means a foreign citizen (not being a citizen of Pakistan, Bangladesh and other countries as may be specified by the Central Government from time to time) if, he/she at any time held an Indian passport; or he/she or either of his/her parents or grand parents or great grand parents was born in and permanently resident in India and other territories OTHER THAN PAK/BANGLADESH.

--------contd--i.

he/she is a spouse of a citizen of India or a person of Indian origin covered under (i) or (ii) above.  

Accordingly, Persons of Indian Origin upto the fourth generation (great grand parents) settled throughout the world may obtain benefits under this scheme. "PIO Card" means a card issued under this Scheme must be made to the Indian Mission. PIO card is valid till 20 years and a joining fees to be deposited is USD 1000 .

PIO CARD
i. ii.

iii.

A PIO Card holder shall not require a visa to visit India. A PIO Card holder will be exempted from the requirement of registration if his stay in India does not exceed 180 days. In the event of continuous stay in India of the PIO Card holder exceeding 180 days, he/she shall have to get himself/herself registered within 30 days of the expiry of 180 days with the concerned Foreigners Registration Officer at District Headquarters

.

-----contd---------i.

PIO Card holder shall enjoy parity with NRIs in respect of all facilities available to the latter in the economic, financial and educational fields except in matters relating to the acquisition of agricultural / plantation properties

The Foreign Contribution (Regulation) Act, 1976 

The Foreign Contribution ( Regulation ) Act, 1976 is an Act to regulate the acceptance and utilization of foreign contributions / donations or foreign hospitality by certain persons or associations

--------------FCRA  

i. ii.

It is basically an act to ensure that the integrity of Indian institutions and persons is maintained and that they are not unduly influenced by foreign donations to the prejudice of India's interests. The Act extends to the whole of India, and it also applies to :citizens of India outside India and associates, branches or subsidiaries, outside India.

--contd-

i.

ii. iii.

Foreign contribution" means the donation, delivery or transfer made by any foreign source :of any article, not being an article given to a person as a gift for his personal use, if the market value, in India, of such article, on the date of such gift, does not exceed one thousand rupees of any currency, whether Indian or foreign of any foreign security

CAPITAL ACCOUNT TRANSACTIONS
1.

R.B.I. may make all these restrictions, in general or with respect to "Capital Account Transactions." "CAPITAL ACCOUNT TRANSACTIONS" means a transaction, which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India.

EXEMPTIONS  

1. Possession of foreign currency or foreign coins by any person upto such limit as the Reserve Bank may specify. 2. Foreign currency account held or operated by such person or class of persons and the limit upto, which the Reserve Bank specifies.

---contd-

3. Foreign Exchange acquired or received before the 8th day of July 1947 or any income arising or accruing thereon, which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank.

--contd--4.Foreign Exchange acquired from employment, business, trade vocation, services, honorarium, gifts, inheritance or any other legitimate means upto such limit as the Reserve Bank may specify . 5. Such other receipt in foreign Exchange as the Reserve Bank may specify. 

FERA Provisions & statutes 
     

81 Sections and complex than FEMA. Inherent Mens Rea. Negative intention . No Terms as Current & Capital A/c. ³Authorised Person´ definition narrow one Offence a criminal Offence( Cr.P.C.1973). Five Times Penalty for amount involved. Appeals under High Court.

__Contd ± FERA  

No Provision on right to be impleaded person to take legal assistance Power of search of police officer not below rank of DSP to make search .

FEMA 
    

FEMA is much simple ± 49 sections. No presumption of Mens Rea & abetment Current A/c & Capital account in detail Definition Of Authorised Person widened Offence is treated as civil offence punishable with same amount as penalty Quantum of penalty decreased to three times amount involved

---Contd -- FEMA   

FEMA is the special Director( Appeals)and lies before Appellate Tribunal for Foreign Exchange in sec 17,18,35 at High Court. Right to take a legal practitioner¶s / Chartered Accountant assistance. Sec 32 Scope and power of seizure has been curtailed.

MONEY LAUNDERING  

Process to make Illegitimate money appear legitimate. Pakistan, India and the United States are among 55 money-laundering countries of ³primary concern´, where financial institutions ³engage in transactions involving significant amounts of proceeds from serious crime

The Prevention Of Money Laundering Act 2002  

Money laundering means direct or indirect involvement in cleansing of dirty money (by engaging in financial transactions) from criminal activities with the objective of hiding their true source and making them legally usable. Hawala is a preferred mechanism in crossborder money laundering as it involves secret and paperless deals.

OBJECTIVE OF THE ACT: 

To prevent, combat and control money laundering. To confiscate and sieze the property obtained from the laundered money. To deal with any other issue connected with money laundering in India.  

SALIENT FEATURES OF THE ACT 

Personal accountability of the officers implementing the Act. Reasons to be recorded in writing before any action is taken and dispatched in sealed envelope to the Adjudicating Authority. Time limit provided for any action and its follow up. This would provide faster disposal of the matter.  

LOK SABHA ADOPTS MONEY LAUNDERING BILL (6/5/05)   

Provides Chairperson or member of any tribunal may be appointed the chairperson or a member of the Appellate Tribunal A Police Officer would investigate an offence after he has been specifically authorised by the Central Government . All offences are Non cognisable . FIR filing must . Criminal proceedings lead to Civil Proceedings

Stages of Money Laundering

Stages of Money Laundering
Placement/conversion introduction of illegal profits into financial system Layering/Concealment transfer of money into different bank accounts all over globe Integration/creation funds re-enter the legitimate economy through investment real estate,business etc. 

   



Financial institutions and country suffer from reputation damage due to loss of financial integrity. Increased scrutiny of regulatory bodies increases compliance cost of banks. Banks may suffer from financial and criminal sanctions. The increased volatility in international capital flows and exchange rate is because of disruptive effects of money laundering. Dampening effect on foreign direct investment. This business contributes 8% of total world trade.(2-5% OF Global GDP)

Punishment for Laundering (Sec 4)  

  

Minimum penalty is rigorous imprisonment for 3 years along with fine, which may extended to Rs 5 Lacs . Maximum imprisonment is for 7 years in general offences. No Law of Limitation is applicable No time period where proceedings can be initiated. Act w.e.f 1/07/2005 and has no retrospective effect. Can be punished for the same offence twice -Prevention of Money-Laundering Act,2002 & IPC.

PROCESS OF ADJUDICATION
Authorized officer seizes the property or any record File a complaint with Adjudicating authority Within 30 days Examines the matter and after confirming issue a notice to concerned person Min of 30 days to the accused to explain the source of his income and assets If confirm, authorised officer take possession of property and proper action is taken.

HAWALA 

Hawala is an alternative or parallel remittance system. It exists and operates outside of, or parallel to 'traditional' banking or financial channels. It was developed in India, before the introduction of western banking practices, and is currently a major remittance system used around the world. It is but one of several such systems. 

Hawala works by transferring money without actually moving it.

Why would anyone bother with hawala? 
    

1.Cost effectiveness 2. Efficiency 3. Reliability 4. Lack of bureaucracy 5.Lack of paper Trail 6.Tax evasion 

hawala 'works' - or competes effectively with other remittance mechanisms - because of its cost effectiveness. A secondary consideration is that hawala is often related or even integral to existing business dealings.]

How is hawala used to launder money?  

Many 'white' hawala transactions are essentially remittances, and, while illegal under Indian and Pakistani law, are not illegal in other jurisdictions. `Black' hawala transactions, however, are almost always associated with some serious offense (e.g. narcotics trafficking, fraud), that is illegal in most jurisdictions. Money laundering consists of three phases: placement, layering and integration. Since hawala is a remittance system, it can be used at any phase.

What are some indicators of hawala? 

A 'hawala' bank account almost always shows significant deposit activity, usually in the forms of cash and checks, which are often from one or more ethnic communities (e.g. Afghan, Bangladeshi, Indian, Pakistani, Somali) associated with the hawaladar

The following diagram summarizes 'hawala account' behavior: 

The Prevention of Money Laundering Act, '02 (PMLA), which came into force from Friday, July 1 2005, had made it clear that even if the value of individual cash transactions is less than Rs 10 lakh each, but are seemingly between related parties and takes place in a month, records have to be maintained. 

The U.S. Congress estimates that every year, between $500 billion and a trillion dollars generated through criminal activity is "laundered" through international banks and financial institutions. According to a KPMG study, money laundered in India is approximately 2 to 3% of the country's GDP. An increasing emphasis on anti-money laundering solutions would counter terrorism and drug trafficking, a lot of which originates from the Indian subcontinent. 

TCS --finDNA software would allow multinational banks to standardize procedures, meet regulatory requirements and protect assets. The solution encompasses sophisticated technologies including pattern analysis, link analysis, statistical analysis and artificial intelligence. It is a part of the entire Quartz solutions offering, which is their product for banking solutions. 



Sarbanese Oxley (Sox)²AML Software Infrasoft -software can do pattern detections and rule-based checks on the millions of transactions happening across the enterprise, to assist in figuring out anomalies in transactions. Besides this, the software can help a bank know the source of the deposit in a customer¶s account and track it across different accounts.

KNOW YOUR CUSTOMER I.E KYC NORMS
‡Branches are to issue TCs/ DDs/MTs/TTs for Rs50000/-and above to the debit of the Customers accounts only or against Cheques but not against cash. ‡Applicants for such transactions above Rs 50000/- must affix PAN number on the Applications. ‡Branches to report the data monthly in FORM AUF-2 to their controlling offices for cash transaction and deposits of Rs 10 lacs and above in a month and as well as the transactions of suspicious nature. ‡Risk Management , Internal Control System , Precautions against terrorism finance ., Internal Audits and inspections and adherence to Foreign Contribution Regulation Act .