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Bank of Foreign Economic Affairs v. Enforcement Directorate: Tribunal Addresses Compliance and Justice in FERA Violations

Introduction

In a significant adjudication under the Foreign Exchange Regulation Act, 1973 (‘FERA’), the Appellate Tribunal under SAFEMA (‘Tribunal’) in the case of Bank of Foreign Economic Affairs (‘BFEA’) v. the Enforcement Directorate (‘ED’)[i] delivered a pivotal decision concerning alleged violations in international fund transfers. The Tribunal’s verdict, which reduced a substantial penalty imposed on BFEA, underscores its meticulous evaluation of legal defences, transactional complexities, and adherence to regulatory frameworks. This ruling exemplifies the Tribunal’s commitment to equitable justice, balancing stringent regulatory requirements with the intricacies of global financial transactions.

Facts

  • The order in question pertained to an appeal filed by the BFEA against a penalty imposed under FERA. A penalty amounting to approximately Rs. 7.67 crores had been imposed for violations specified under ss. 6(4), 6(5), and 49(i)(a) of FERA, which arose out of 22 show cause notices (‘SCNs’) issued in 1993 and 1994.

  • The case revolved around transactions in which BFEA had allegedly facilitated unauthorized international fund transfers through Indian banks, known as Authorized Dealers (‘ADs’). The aforementioned transactions involved various methods, such as Telex Transfers (‘TT’), cheque issuance, and direct credits to non-resident accounts without obtaining the required permissions from the Reserve Bank of India (‘RBI’) etc.

  • Upon being referred by the RBI, the ED conducted investigations into the aforementioned transactions, which led to the issuance of SCNs and subsequent initiation of adjudication proceedings. The said proceedings were initially stayed by the Bombay High Court (‘BHC’); however, the Hon’ble Supreme Court (‘SC’) later allowed the ED to proceed with the adjudication, thus paving the way for the eventual imposition of penalties.

  • The appellant had contended that the Tribunal had, through a previous order (‘PO’), disposed of several appeals involving ANZ Grindlays Bank and Canara Bank and set aside adjudication orders related to similar transactions. Hence, considering the aforementioned precedent, the penalties imposed on the other banks involved in similar transactions should not be made applicable any further.

  • Further, the appellant also contended that FERA provisions would not be applicable to BFEA, as USSR Exchange Control Laws governed the aforementioned transactions.

  • The Appellant also contended that under ss. 6(4) and (5) of the FERA and the Exchange Control Manual, the responsibility to reject transactions contrary to FERA provisions lay with the AD banks in India, not with BFEA. Thus, BFEA will be absolved of any liability for the actions of Indian AD banks. Moreover, the appellant argued that mens rea and criminal intent were not established in the charges against BFEA.

Held

  • The Tribunal partly allowed the appeal, and the impugned order was modified by reducing the penalty to Rs. 75 lakhs. However, considering that the PO was under consideration by the Bombay High Court, the Tribunal did not rely on it.

  • Further, the Tribunal made the following observations:

    • The transactions violated the bilateral agreements between India and the USSR and subsequent agreements with the Indian banks.

    • The Tribunal also concluded that the Appellant was rightly charged under ss. 64(2), 6(4), 6(5), and 49(i)(a) of FERA despite the Appellant’s status as a foreign central bank, emphasizing their responsibility under agreements and regulatory framework.

    • The Appellant had also failed to produce contracts underlying the payments made in convertible Indian rupees to foreign accounts, which would have clarified their position. They attributed violations to Indian banks but failed to verify account details.

    • The Tribunal also highlighted that the meeting summaries had shown that the Appellant blamed Indian banks for violations, despite their role in instructing transactions from Vostro Accounts to non-resident accounts abroad, contrary to what had been established in the bilateral agreements.

Our Analysis 

This ruling is significant as the Tribunal ensured a fair assessment by acknowledging the non-binding nature of previous orders, which were still under judicial review, and focusing on the specific merits of the current appeal. The decision underscores the Appellant's failure to comply with bilateral agreements and regulatory requirements despite claims to adhere to client instructions, affirming violations under Indian regulatory laws. Moreover, the substantial reduction of the penalty from Rs. 7.67 crores to Rs. 75 lakhs reflects the Tribunal's commitment to proportionality and fairness in adjudication. This adjustment aims to uphold justice while recognizing the complexities involved in international financial transactions and the need for regulatory compliance.






End Note

[i] [2024] 163 taxmann.com 272 (SAFEMA - New Delhi) [07-05-2024]






Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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