The Gauhati High Court has held that the FEMA-DGFT merchant trade regulations require banks to conduct enhanced due diligence before forex remittances.
The bench of Justice Kaushik Goswami has upheld ICICI Bank’s decision to refuse processing certain foreign exchange transactions, holding that banks are duty-bound to conduct enhanced due diligence when sanctions-related concerns arise.
The account holder is engaged in international merchant trade, maintained banking facilities with ICICI Bank, an Authorised Dealer Category-I Bank under FEMA. The company had obtained working capital facilities worth ₹10 crore under a Master Facility Agreement executed in January 2023.
The dispute arose when the petitioner sought processing of foreign exchange remittances relating to merchant trade transactions involving overseas suppliers and buyers. As part of the compliance process, ICICI Bank required the petitioner to furnish declarations confirming that the transactions did not involve any sanctioned persons or entities; they did not concern sanctioned jurisdictions including Iran; and the goods neither originated from nor were sourced through sanctioned countries.
The petitioner declared that the goods originated from the United Arab Emirates and were shipped from Jebel Ali to Bangladesh.
During its due diligence, ICICI Bank obtained information indicating that the transactions may actually have involved Iran.
According to the bank, verification through the International Maritime Bureau (IMB) revealed that the goods had allegedly originated from Bandar Abbas, Iran rather than the UAE; the shipments were carried through vessels allegedly owned by entities appearing on the U.S. Office of Foreign Assets Control (OFAC) sanctions list; the Bills of Lading allegedly misrepresented the actual port of loading and vessel details.
After seeking clarifications from the petitioner and conducting a compliance review, ICICI Bank refused to process the transactions, prompting the writ petitions.
The petitioner contended that FEMA and RBI regulations did not prohibit the transactions; OFAC sanctions under U.S. law have no legal force in India; the bank could not deny remittances solely because of foreign sanctions concerns; it had no knowledge of any alleged Iranian nexus and had made no deliberate misrepresentation.
ICICI Bank argued that the dispute was not about the enforceability of OFAC sanctions in India but about its own statutory and contractual obligations.
The bank submitted that the facility agreement specifically required sanctions compliance; the petitioner had furnished express declarations regarding origin of goods and sanctions exposure; once doubts arose regarding those declarations, the bank was obligated under FEMA and RBI directions to conduct enhanced scrutiny before processing remittances.
The Court first rejected ICICI Bank’s preliminary objection regarding maintainability.
Although a private bank is ordinarily not amenable to writ jurisdiction, the Court held that the present dispute involved discharge of statutory functions by an Authorised Dealer Bank under FEMA, thereby attracting public law scrutiny.
The Court observed that contractual relationships do not automatically exclude judicial review where allegations of arbitrariness in performance of statutory duties are raised.
The High Court emphasised that Section 10(5) of FEMA imposes a statutory obligation upon Authorised Dealer Banks to independently verify foreign exchange transactions.
According to the Court, banks cannot function as mere conduits for remittances.
Instead, they must verify declarations; examine regulatory compliance; seek clarifications where necessary; and refuse transactions if satisfactory compliance is not established.
The Court held that once sanctions-related concerns surfaced, ICICI Bank was legally justified in carrying out enhanced scrutiny before deciding whether to process the remittances.
A significant aspect of the judgment concerns the contractual provisions executed between the parties.
The Court found that the facility agreement specifically required the petitioner to comply with sanctions obligations;covered sanctions issued by OFAC, the United Nations, the European Union, India and other jurisdictions; authorised ICICI Bank to refuse transactions that violated or could violate sanctions obligations; treated breach of sanctions declarations as an event of default.
The Court observed that these clauses clearly allocated sanctions-related risks to the customer and expressly empowered the bank to refuse processing where such concerns arose.
The petitioner argued that it was unaware of any Iranian connection in the shipment.
Rejecting this contention, the Court observed that in international trade transactions involving multiple jurisdictions, customers bear the responsibility of ensuring that declarations made to banks are complete, accurate and truthful.
The Court held that a subsequent plea of ignorance cannot compel an Authorised Dealer Bank to ignore information uncovered during compliance review.
The Court accepted the legal proposition that OFAC sanctions do not automatically become enforceable municipal law in India.
However, it clarified that the present dispute did not depend upon enforcing OFAC sanctions directly.
Instead, ICICI Bank’s action was based upon contractual commitments voluntarily accepted by the petitioner; declarations furnished by the petitioner; statutory obligations under FEMA; and information received during compliance verification.
Accordingly, the Court held that the bank’s decision could be sustained without deciding whether OFAC sanctions themselves were enforceable in India.
The Court reiterated that it was not sitting on appeal over the bank’s commercial wisdom.
Its role was limited to examining whether the decision-making process was lawful, rational and procedurally fair.
After reviewing the record, the Court noted that the bank had sought clarifications; exchanged multiple communications with the petitioner; conducted an internal compliance review; considered relevant regulatory and contractual factors before arriving at its decision.
Finding no mala fides, procedural impropriety or arbitrariness, the Court declined to interfere.
The Court held that authorised Dealer Banks are obligated under FEMA and RBI regulations to undertake due diligence before processing foreign exchange transactions. Banks may conduct enhanced scrutiny when doubts arise regarding sanctions compliance. Contractual provisions permitting refusal of sanctions-related transactions are valid and enforceable. The bank acted within both its statutory obligations and contractual rights. No ground existed for interference under Article 226.
The Court accordingly dismissed both writ petitions, vacated all interim orders and clarified that the petitioner remains free to pursue any other remedies available in law outside the writ proceedings.
