Analysing Mixing of Funds under Foreign Contribution Regulation Law

• Author(s): Rudra Srivastava, Neha Meena
• Date: 04-Apr-2024
• Post in: Finance Internal Security Law

Foreign contribution is regulated under the provisions of the Foreign Contribution (Regulation) Act, 2010 (FCRA) and the Foreign Contribution (Regulation) Rules, 2011. For receiving foreign contribution from a foreign donor, an NGO/association/individual/company (recipient) must hold FCRA registration and comply with FCRA provisions which prescribe the manner of receiving and utilising foreign funds for FCRA activities and thereby exclude any other method for doing the same. Several FCRA registered NGOs in India also receive funds from local/domestic donors and usually utilise both foreign funds and domestic funds for the completion of their projects and while doing so they tend to merge/mix both type of funds, which makes it difficult for the authorities to track foreign fund, thereby defeating the very purpose of the FCRA law. As per section 17 of the FCRA, receiving or depositing of funds other than foreign funds in FCRA and Utilisation accounts i.e. mixing of domestic funds in FCRA/utilisation accounts is absolutely prohibited, however it is important to analyse if the same is applicable in case of receiving and depositing foreign funds from FCRA or utilisation accounts into domestic account/(s) of the same recipient/entity.

The prohibition under section 17 pertaining to the transfer of domestic funds into FCRA/utilisation accounts remains unchanged even after the 2020 amendment. There have been several cases wherein FCRA registered associations had mixed funds by transferring domestic funds to FCRA/utilisation accounts and the Courts have held the same to be violative of section 17 FCRA. However, since there is no specific provision prohibiting transfer of foreign funds from FCRA/utilisation account to domestic accounts, recipients are often found to be taking advantage of this lapse and transferring foreign funds to their domestic accounts. As per the Author’s understanding such transfers also amount to mixing of funds which is not permissible under the FCRA law, due to the following reasons:

1. FCRA specifically provides the permissible ways of receiving, keeping, transferring, depositing and utilising foreign contribution in and from accounts specified under the Act. Thus, adopting any other method/manner/account for receiving, transferring and utilising foreign contribution will be violative of FCRA.
2. Section 17 of the FCRA clearly specifies only three types of accounts namely “FCRA Account” / “Another FCRA Account” and “Utilisation Account”. Thus, it is clear that foreign contribution:
3. can be received from a foreign donor only in an FCRA Account.
4. may be transferred from FCRA Account into Utilisation Account for utilising foreign contribution in terms of the purposes declared while obtaining FCRA registration.

The provision does not specify any other account/domestic account. If funds are moved from FCRA Account to Domestic Account that can be considered to be violative of section 17 of FCRA, punishable under section 37 of the FCRA. 

3. Mixing of foreign funds with domestic/local funds/receipts and transfer from FC bank to Non-FC (even direct bank transfer) are not permissible under the FCRA regime. Thus, neither domestic funds can be transferred into a FCRA Account, nor can foreign funds be transferred/deposited in domestic accounts. While there is no specific provision in the FCRA, but inference can be drawn from the DO’s and DON’Ts[1] provided by the Ministry of Home Affairs on FCRA website. The absolute prohibition in respect of mixing of foreign and domestic funds is provided in the DON’Ts section and there are no exceptions mentioned therein.
4. The aforesaid prohibition has also been explained in the FAQs section[2] on FCRA website. One of the FAQs clearly states that foreign contribution cannot be deposited or utilised from the bank account being used for domestic funds[3]. The FAQs section is updated on the FCRA website from time to time, but the aforesaid position stays unchanged. It is pertinent to note that the FAQs concerning this aspect is in line with section 17 of FCRA and thus serves as an aid for interpreting the provision. Accordingly, the provision/(s) cannot be assumed to be allowing domestic account/any other account transfers.
5. The DO’s and DON’Ts and FAQs provided on the website are based on the practical implementation of the FCRA by authorities which tend to strictly interpret the provisions of the Act.
6. Previously, authorities have issued show cause notices in similar matters wherein there were direct transfers from FCRA Account to Domestic Account and from Utilisation Account to Local/Domestic Account, leading to mixing of funds and authorities have taken appropriate action against the contravening associations and it appears that courts do not generally interfere with the investigations undertaken by FCRA authorities unless there is an apparent error or grave injustice due to procedural laps/irregularity and inadequate evidence.

Based on the above reasonings, it can be concluded that mixing of foreign funds in domestic/non-FC accounts of the same entity is not permissible under the FCRA regime and any contravention in this respect will attract penalty under the FCRA as mixing of funds amounts to violation of section 17 and it may also be considered to be an attempt to defeat the purpose of the FCRA which restricts transfer of foreign contribution in any other manner except as provided therein. Thus, the chances of suspension or cancellation of a recipient’s FCRA registration under sections 13 or 14 are high and in case any contravention with respect to mixing of funds is detected, the liability under the FCRA will arise under sections 37 and 39 of the FCRA. Section 37 provides for imposition of penalty/punishment in terms of one year imprisonment/fine/both in case of non-compliance of FCRA provisions which do not specifically provide for a separate penalty/punishment and section 39 provides for punishment if an offence under FCRA has been committed by a company/association/society. Additionally, the concerned authority may impose penalty for contravention during previous years also as the FCRA does not prescribe a specific time limit/period for investigation, however, the maximum fine is decided by the concerned authority, depending on the facts of each case and extent of violation.   

Given the above position, if any association/society has already indulged in a similar transaction on grounds like  reimbursement i.e. payment from domestic account and later reimbursing the same by transferring foreign funds into it, the said entity can try to justify the same on the basis of the entries in its books of accounts, bank statements and donor agreements to show that the remittance from domestic account was done for FCRA specific purposes only and that the exact amount was transferred from FCRA account to domestic account without any intention of violating the FCRA provisions. Thus, the authorities need to be explained and assured that there has been no FCRA violation and that the foreign funds can be tracked easily in the entity’s transactions and the same are not being diverted for non-FCRA/illegal/prohibited purposes. The discretionary power to decide whether such a reimbursement transaction or arrangement amounts to FCRA violation or not lies with the FCRA authority/MHA, which may on scrutinising the said documents adopt a flexible approach and not initiate proceedings followed by no imposition of penalty or cancellation/suspension of FCRA registration. However, if the authority is not convinced with the recipient entity’s justification and treats the transaction to be violative of FCRA due to mixing of funds, proceedings will commence under the FCRA provisions.  

In order to avoid adverse consequences under FCRA law, Indian recipients must strictly adhere to the FCRA provisions as well as the Do’s and Don’ts/FAQs section on the FCRA website and maintain their records and accounts in terms of the Act. As a matter of fact, FCRA authorities keep a track on foreign contributions and mixing of foreign funds into domestic accounts can make the tracking process difficult, thereby defeating the purpose of the FCRA which is to regulate the flow of foreign contribution, control its misuse and prevent adverse effect on internal security of India. Thus, FCRA contraventions are taken very seriously and the chances of authorities being satisfied by any justification for mixing, are low. Even the judiciary tends to interpret the FCRA law strictly, which suggests a conservative stance aligning with the conclusion drawn above that foreign funds from FCRA account must not be transferred to domestic accounts.

In light of the ongoing confusions and probabilities of misuse due to absence of this prohibition under section 17, the Author is of the view that there is a need to specifically clarify this aspect by way of an amendment or a clarificatory circular or notification.