Money Laundering Is No More the Only Concern for the Directorate of Enforcement

What the ED's FY 2025-26 report shows

The Directorate of Enforcement ("ED") has recently issued its annual report for FY 2025-26. Gone are the days when the ED's attention was predominantly on cases involving money laundering under the Prevention of Money Laundering Act, 2002 ("PMLA"). The ED seized property worth Rs. 642.36 crore in FY 2025-26 owing to violations of the Foreign Exchange Management Act, 1999 (FEMA).

FEMA has always been a statute which has not received the due respect and attention it deserves from people engaged in foreign exchange transactions, whether inbound or outbound in nature. FEMA violations imply ED searches and investigations. In FY 2025-26, hefty penalties aggregating to Rs. 2,051.27 crore were imposed on FEMA violators.

FEMA is not a passive law

FEMA is not at all a passive law. Through the exchange and receipt of information from various government departments, including the Income Tax Department, the ED has summoned a large number of people involved in foreign transactions where violations are suspected.

Enactment of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) has made FEMA more effective, by virtue of the information on undisclosed foreign assets and undisclosed foreign incomes received from the Income Tax Department. FEMA and the Black Money Act work simultaneously, as both statutes stress the detection of cases involving investments in foreign assets which have not complied with the provisions of the Black Money Act and FEMA.

Everyday transactions that triggered ED investigations

Foreign exchange transactions are done on a regular basis; however, people executing these transactions often ignore the FEMA Rules, Regulations, Master Directions, A.P. (DIR Series) circulars, etc. in place. This is observed by the ED and such cases are called upon for investigation. In its annual report for FY 2025-26, the ED observed certain transactions of a routine nature which have been part of its investigations owing to the violations made:

• Misuse of the Foreign Portfolio Investment / Foreign Direct Investment route
• Issue of fraudulent Global Depository Receipts
• Trade-based money laundering
• Use of cryptocurrency for receiving and sending remittances
• Transfer of money to foreign-based wallets for online betting, gaming or crypto
• Misuse of the Liberalised Remittance Scheme route
• Remittance of money abroad by forging a CA certificate (Form 15CB / Form 146)
• Issue of Employee Stock Options (ESOPs) by a foreign entity to India-based employees
• Violation of the provisions on External Commercial Borrowings (ECB)
• Purchase of agricultural land in India by NRIs
• Misuse of the Money Transfer Service Scheme
• Holding undisclosed foreign properties
• Write-off of Overseas Direct Investment (ODI)
• Possession of foreign currency in excess of the prescribed limit
• Misuse of NRE / NRO / EEFC accounts

Why FEMA must be considered before the transaction

It is therefore critical to give due consideration to FEMA while undertaking any foreign exchange transaction, given the hefty penalties involved, which can go as high as 3 times the amount involved. There is a general tendency among persons engaged in such transactions to work out the FEMA implications only at the end.