History of FEMA

• To further strengthen the control and regulate, the then congress government enacted a new law
Foreign Exchange Regulation Act 1973 with 81 section and it came into force from 1st Jan 1974.
• FERA 1973 Act was introduced at a time when foreign exchange (Forex) reserves of the country
were low.
• The main objective of FERA was to regulate, control and to ensure proper utilization of foreign
exchange so as to promote the economic development of the country.
• FERA was a draconian police law, where violation was a criminal offence.
• There was a demand for substantial modification in FERA owing to economic liberalization and
improving foreign exchange reserve positions, which lead to new act, Foreign Exchange
Management Act, 1999.
Difference
BASIS FOR COMPARISON FERA FEMA
An act promulgated, to regulate payments and foreign FEMA an act initiated to facilitate external trade and
exchange in India, is FERA. payments and to promote orderly management of the
Meaning forex market in the country.

Enactment Old New

Number of sections 81 49

Introduced when Foreign exchange reserves were low. Foreign exchange position was satisfactory.

Approach towards forex transactions Rigid Flexible

Basis for determining residential status Citizenship More than 6 months stay in India

Violation Criminal offence Civil offence

Punishment for contravention Imprisonment Fine or imprisonment (if fine not paid in the
stipulated time)
Objective of FEMA

• Substantial increase in foreign exchange resources.

• Growth in foreign trade.

• Rationalisation of tarrifs.
• Current account convertibility.
• Liberalisation of Indian investment abroad.
 AUTHORISED PERSON - (SEC.10)

• The Reserve Bank may, on an application made to it in this behalf, authorise any person to be known as authorised person to deal in foreign
exchange or in securities, as an authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit.

• An authorisation under this section shall be in writing and shall be subject to the conditions laid down therein.

• An authorisation granted under sub-section (1) may be revoked by the Reserve Bank at any time if the Reserve Bank is satisfied that —

• (a) it is in public interest so to do; or

• (b) the authorised person has failed to comply with the condition subject to which the authorisation was granted or has contravened any of
the provisions of the Act or any rule, regulation, notification, direction or order made thereunder

• An authorised person shall, in all his dealings in foreign exchange or foreign security, comply with such general or special directions or
orders as the Reserve Bank may, from time to time, think fit to give, and, except with the previous permission of the Reserve Bank, an
authorised person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the
terms of his authorisation under this section.
 AUTHORISED PERSON - (SEC.10)
• An authorised person shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person
to make such declaration and to give such information as will reasonably satisfy him that the transaction will not involve, and is
not designed for the purpose of any contravention or evasion of the provisions of this Act or of any rule, regulation, notification,
direction or order made thereunder, and where the said person refuses to comply with any such requirement or makes only
unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall, if he
has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person, report the matter to
the Reserve Bank.

• Any person, other than an authorised person, who has acquired or purchased foreign exchange for any purpose mentioned in
the declaration made by him to authorised person under sub-section (5) does not use it for such purpose or does not surrender
it to authorised person within the specified period or uses the foreign exchange so acquired or purchased for any other purpose
for which purchase or acquisition of foreign exchange is not permissible under the provisions of the Act or the rules or
regulations or direction or order made thereunder shall be deemed to have committed contravention of the provisions of the Act
for the purpose of this section.
 RESERVE BANK’S POWERS TO ISSUE DIRECTIONS
TO AUTHORISED PERSON.— (SECTION 11)

• The Reserve Bank may, for the purpose of securing compliance with the provisions of this Act and of any rules, regulations,
notifications or directions made thereunder, give to the authorised persons any direction in regard to making of payment or
the doing or desist from doing any act relating to foreign exchange or foreign security. — (1) The Reserve Bank may, for the
purpose of securing compliance with the provisions of this Act and of any rules, regulations, notifications or directions made
thereunder, give to the authorised persons any direction in regard to making of payment or the doing or desist from doing
any act relating to foreign exchange or foreign security."

• The Reserve Bank may, for the purpose of ensuring the compliance with the provisions of this Act or of any rule, regulation,
notification, direction or order made thereunder, direct any authorised person to furnish such information, in such manner,
as it deems fit.

• Where any authorised person contravenes any direction given by the Reserve Bank under this Act or fails to file any return as
directed by the Reserve Bank, the Reserve Bank may, after giving reasonable opportunity of being heard, impose on the
authorised person a penalty which may extend to ten thousand rupees and in the case of continuing contravention with an
additional penalty which may extend to two thousand rupees for every day during which such contravention continues.
 POWER OF RESERVE BANK TO INSPECT
AUTHORISED PERSON.— (SECTION 12)
• The Reserve Bank may, at any time, cause an inspection to be made, by any officer of the Reserve Bank specially authorised in writing
by the Reserve Bank in this behalf, of the business of any authorised person as may appear to it to be necessary or expedient for the
purpose of—
• (1) The Reserve Bank may, at any time, cause an inspection to be made, by any officer of the Reserve Bank specially authorised in
writing by the Reserve Bank in this behalf, of the business of any authorised person as may appear to it to be necessary or expedient for
the purpose of—
• (a) verifying the correctness of any statement, information or particulars furnished to the Reserve Bank;
• (b) obtaining any information or particulars which such authorised person has failed to furnish on being called upon to do so;
• (c) securing compliance with the provisions of this Act or of any rules, regulations, directions or orders made thereunder.
• (2) It shall be the duty of every authorised person, and where such person is a company or a firm, every director, partner or other officer
of such company or firm, as the case may be, to produce to any officer making an inspection under sub-section (1), such books,
accounts and other documents in his custody or power and to furnish any statement or information relating to the affairs of such person,
company or firm as the said officer may require within such time and in such manner as the said officer may direct.
INTERNATIONAL ATTEMPTS TO CURB MONEY
LAUNDERING
• The Committee on Banking Regulations and Supervisory Practices was formulated at a meeting in Basle in
Switzerland, in Dec 1988. It evolved a set of principles to address the dangers posed by Money Launderers. These
Principles deal with the prevention of criminal use of the banking system for the purpose of Money Laundering.

Principles and Procedures of Curb Money Laundering.

• Customer Identification –RBI introduced the ‘Know Your Customer'(KYC) compliance to make sensible
pains for true identification of the client and related measures to check the bona-fide information provided
by customers.
• Compliance with Laws –The rules with regards to the financial transactions are to be
implemented as put in the banking statutes. Banks should further not allow any financial
service if there is a suspicion that the money might be used for money laundering.
• Cooperation with Law Enforcement agencies – Banks should interlinked with law
enforcement authorities and regulate the laws for maintaining the privacy of its customers.
MONEY LAUNDERING IN INDIA – THE
PROBLEMS AND SOLUTIONS
• Money laundering is interlinked with drug trafficking - In India, Money
laundering is largely connected with drug trafficking. The alternate remittance
system such as the Hawala transactions are used effectively for this very purpose.
• Liberalization of Indian Economy - The money laundering impact in India is
substantial; the Union Revenue Department unearthed 900 bank accounts, holding
a pooled cash of nearly Rs. 1,000 crore being owned by fabricated names in Delhi
alone. As per a KPMG report, India holds around 2-3% laundered money of the
whole country’s GDP. To prevent or at the least reduce money laundering in India,
the Government introduced the Prevention of Money Laundering (amendment) Bill,
2008 (PMLA) in Parliament. This was a new milestone in the anti-money laundering
initiatives spectrum by the Government of India.
RBI ROLE IN CURBING MONEY LAUNDERING

• The RBI to has played an important role in curbing the menace of money laundering.

• The RBI issued the Know-Your-Customers (KYC) Guidelines – Anti Money Laundering Standards on 16th Aug 2005.

• The Government has also established a Financial Intelligence Unit-India (FIU-IND), In rank with FATF recommendations.

• The RBI has stressed that banks can successfully control and decrease their risk only if they have an understanding of the normal
and practical activity of the customers.

• In the Internet banking, there is always a danger that being extremely mobile ,these transactions shall remain undetected. Such
banks have opened account only after physical introduction. The online banking system are also required to keep record of all
transactions and series of transactions its set up by the Central Government.

• The RBI’s know customer standards are important in controlling money laundering. As per these standards Bank outline their KYC
Policies

1. Customer Acceptance Policy,

2. Customer Identification Procedures,

3. Monitoring Transactions and,

4. Risk Management.