Exchange Control Violations Penalties

Exchange control is now called Foreign Exchange Management / Capital Movements Control. Two regimes dominate practice: India (FEMA) and Spain/EU (Law 19/2003).

1. India - FEMA 1999 (Replaced FERA 1973)

Philosophy shift: FERA was criminal, strict. FEMA is civil, management oriented - "contravention" not offence, except Sec 3,4 hawala.

Statutory Penalties - Sec 13 FEMA

Sec 13(1): When any person contravenes Act or any regulation, notification, direction or order, or contravenes any condition subject to which authorisation issued by RBI, upon adjudication liable to:

• Penalty up to thrice sum involved where amount quantifiable, OR
• Up to Rs 2 lakh where not quantifiable, and where contravention continuing, further penalty up to Rs 5000 per day after first day

Sec 13(1A)-(1C): If penalty not paid within 90 days, liable to civil imprisonment + additional penalties.

Sec 37A: Special penalty for non-realization of export proceeds - penalty up to thrice sum.

Who adjudicates? Directorate of Enforcement (ED) - Adjudicating Authority, Special Director, Appellate Tribunal for Foreign Exchange (ATFE), High Court, Supreme Court.

Types of Violations:

• Sec 3: Dealing in foreign exchange without authorised person - hawala
• Sec 4: Holding foreign exchange abroad except permitted
• Sec 6: Capital account transactions - ECB, ODI violations
• Sec 7 & 8: Export / Import violations - non-realisation of export proceeds, non-surrender
• Sec 10(6): Improper utilization of foreign exchange for import

Case Laws India

1. Lalit Kumar Modi v BCCI - Diary No 14199/2024 - Supreme Court 30 June 2025 - Personal Nature of Penalty

Former IPL Chairman sought direction that BCCI indemnify Rs 10.65 crore FEMA penalty imposed by ED for IPL media rights remittances.

SC Held: Declined plea. FEMA penalty is personal liability. Cannot be contractually shifted to third party unless contract expressly says indemnity for regulatory penalty and not against public policy. Modi free to pursue civil remedies. Bombay High Court 19 Dec 2023 view upheld.

Ratio: In Lalit Modi v BCCI SC held FEMA penalties are personal liabilities unless contractually shifted - frequently cited.

2. Suborno Bose v Enforcement Directorate - 5 March 2020 - Supreme Court - Director Liability

Zoom Enterprises Ltd Managing Director used foreign exchange for imports improperly.

SC Held: Contraventions under Sec 10(6) FEMA attract penalties. Managing Director liable if company contravenes with his consent/connivance or due to negligence. Need to prove director in charge at time of contravention. Penalty on company and director separate.

3. Standard Chartered Bank v ED - SC

Ratio: SC observed FEMA/FERA aims to protect country's economic interests, addressing violations causing economic loss, ensuring conservation and proper utilisation of forex resources for economic development. Penalty must be proportionate but deterrent.

4. Union of India v Premier Ltd (2019) INSC 49 - FERA to FEMA Transition

Show cause notice 1 May 1991 under FERA Sec 9(1)(a), 9(1)(c), 16(1) against Godrej Industries. Adjudication order 5 Dec 2003 under FEMA read with FERA imposing Rs 15.5 lakh penalty.

SC clarified appellate jurisdiction: FERA violations continuing after FEMA commencement still governed by FERA for penalty but adjudication under FEMA procedure. Limitation: No limitation for FERA contraventions.

5. Thirumalai Chemicals Ltd v UOI (2011) - Limitation in Appeals

Company importing benzene, faced penalties over Rs 9 crore for FERA contraventions. SC held limitation periods under FEMA Sec 19(2) for appeals to ATFE is 45 days, delay condonable with sufficient cause, but Tribunal cannot extend indefinitely.

6. Tulip Star Hotels Ltd v Special Director (2014) - FFMC Transactions

Full Fledged Money Changers unauthorized foreign currency transactions. SC upheld penalties under FERA for FFMC operating beyond licence. Penalties imposed by original authority reduced by appellate tribunal considering gravity.

7. Realisation Cases: INR 25 Cr FEMA Penalty - Export Proceeds

Adjudicating Authority imposed INR 12.5 Cr each on respondents for contravention of Sec 7 & 8 FEMA read with Reg 9(1) & 13 Export Regulations - failure to realise export proceeds. ATFE upheld: Sec 13(1) maximum up to 3 times amount, no minimum, discretion with authority but must be reasoned, proportionate.

Penalty Calculation: Tribunal held no fixed penalty, but must consider nature, quantum, duration, intent, cooperation.

2. Spain - Ley 19/2003 de 8 julio sobre régimen jurídico de movimientos de capitales y transacciones económicas con exterior + Prevención Blanqueo

Spain liberalized capital movements, but maintains declaration obligations and AML controls.

Law 19/2003:

• Establishes freedom of capital movements with EU, but requires declaration of certain transactions to Banco de España / DG Tesoro for statistical purposes
• Categorisation of infractions and penalties: Proceedings carried out by Directorate-General of Treasury and Financial Policy, penalties imposed by Council of Ministers / DG.

Types:

• Muy graves: Transactions without required authorisation when authorisation still required (e.g. arms, sanctioned countries), non-declaration of amount > €10m
• Graves: Failure to declare within time, false declaration
• Leves: Minor formal defects

Penalties: Fine 25% to 50% of non-declared amount for grave, up to 100% for muy grave, plus possible suspension of activity.

Most famous Spanish exchange control penalty - Form 720 (Modelo 720) - Asset Declaration Abroad

Law: Spanish tax residents must declare overseas assets > €50,000 via Form 720 (Jan 1 - March 31 each year). Non-compliance penalties originally draconian:

• Fixed fine €5,000 per data item, minimum €10,000
• Proportional fine 150% of tax calculated on amounts corresponding to value of assets held overseas treated as unjustified capital gain if not declared

Case Law Spain / CJEU

1. Commission v Spain (Obligation to Provide Tax Information) C-788/19 - CJEU 27 Jan 2022 - LANDMARK - Penalties Disproportionate

Facts: European Commission reasoned opinion 15 Feb 2017 found Form 720 incompatible with free movement of capital (Art 63 TFEU).

Spanish law automatically imposed proportional fine of 150% in event of failure to fulfil obligation to provide information in respect of overseas assets and rights or late submission.

CJEU Held: Spain failed to fulfil obligations under free movement of capital.

The imposition of proportional fine of 150% of tax calculated on amounts corresponding to value of assets or rights held overseas, which are classified as capital gains, plus fixed fines, is disproportionate and breaches EU law.

Court said penalties extremely repressive, establishing sanctions of 150% of undeclared capital gain, as breach of proportionality. Purely formal obligation cannot trigger such severe penalty.

Consequence: Spain had to amend via Law 5/2022 of 9 March 2022 - reduced penalties to general tax penalty regime: fines €100-€1500 for formal non-compliance, no 150% penalty.

2. Spanish Supreme Court and TEAC on Form 720

Following CJEU judgment, Spanish National Court and Central Economic Administrative Court concluded application of 150% penalty must be annulled retroactively, taxpayers entitled to refund.

3. Law 19/2003 Reform - Exchange Control and AML

On 5 July 2003, Law 19/2003 amended former system of penalties and established categorisation of infractions and corresponding penalties. Previously penalties criminal; now administrative.

3. Comparative Penalty Principles

Proportionality: Both Indian and Spanish courts now apply proportionality test. In India, Supreme Court in Excel Crop Care says penalty must be proportionate to gravity; in Spain/EU, CJEU C-788/19 struck down 150% fine as disproportionate.

Personal Liability: FEMA penalty personal, cannot be indemnified (Lalit Modi). Spain similarly director liable if consent.

Mens rea: Under FEMA, mens rea not required for contravention (civil), but required for criminal prosecution under Sec 3 & 4 FERA-style. Under Spanish Law 19/2003, negligence sufficient for grave infraction, intent for muy grave.

Practical Compliance for Banks:

• India: Ensure ODI, ECB, export realisation complied; maintain FIRC, BRC; ED has powers to search, seize, attach under PMLA overlap
• Spain: Ensure Modelo D-2A (investment abroad), Modelo ETE (foreign transactions), Modelo 720 (now less penal but still required) filed via Banco de España / AEAT; for banks, report cross-border payments > €50,000 under Circular 4/2012