Need For Balance In Trade With Entities Subject To U.S. Sanctions

Extraterritorial U.S. trade laws, regulations, and sanctioned programmes can apply to anyone, anywhere. This poses unique risks in India, which does significant business with both the U.S. and countries it maintains sanctions against, including Iran and Russia. Read on to find out how this might affect your company or client's interests

This past summer,

Indian government officials revealed plans to collaborate with Russian counterparts on a $40 billion natural gas pipeline. The conduit would deliver much-needed fossil fuel from Russian territory to the republic, which the Fitch ratings agency predicts will be the only so-called "BRIC" country to experience economic growth this year.

The pipeline announcement roughly coincided with the start of United States' sanctions against the Russian Federation for its annexation of the Crimea region of Ukraine and related activities. Many of those sanctions target the Russian oil and gas sector, potentially putting the U.S. and India at cross-purposes.

This is not the first time U.S. foreign policy objectives have run counter - or at least not perfectly parallel - to Indian economic interests. During the days of the Cold War, the two countries frequently found themselves on the outs over India's close relationship with the Soviet Union.

More recently, U.S. officials have accused India of undermining efforts to economically isolate Iran by maintaining a brisk trade with that nearby neighbour. Indian leaders have countered that, being dependent on imports for approximately eighty percent of its crude oil needs, the country is in no position to pick and choose where it gets petroleum from based on U.S. preferences.

No doubt that argument resonates among millions of Indians living in poverty who are counting on continued economic growth, and the fossil fuels that sustain it, to lift them into the burgeoning middle class. However, it may not carry sufficient weight with U.S. enforcement officials.

It would almost certainly surprise many to discover that, despite living in India and having no personal ties to the United States, under U.S. statutes and regulations, they, along with the companies they own and work for, may be subject to U.S. jurisdiction in a number of situations. As alluded to above, one of these is the dealings with Iran.

The central element from which much of this 'extraterritorial' authority emanates is the U.S.'s Iran Sanctions Act of 1996 (ISA). The ISA requires the U.S. President to impose at least five sanctions from a menu of options on anyone who knowingly provides services or support that could "directly and significantly" contribute to Iran's ability to make or obtain petroleum products. Available sanctions include ineligibility to receive U.S. exports, exclusion from the U.S. banking system, and orders blocking a sanctioned party's property and interests in property. When property and interests in property are "blocked," U.S. persons are prohibited from dealing in it, essentially freezing any assets a targeted party might have under U.S. jurisdiction and preventing the conduct of business with U.S. companies and individuals.

Subsequent amendments to the ISA require the president to punish anyone who knowingly supplies "significant" goods or services for use in connection with Iran's energy, shipping, and shipbuilding sectors, as well as financial institutions that offer Iran support in activities deemed disruptive to global security. U.S. state and local governments are also authorised to divest from entities that invest in Iran's energy sector.

Nowhere in the ISA or its amendments is there language limiting jurisdiction to U.S. persons. This is intentional. When the U.S. Congress passed these laws, it did so with the express purpose of influencing the behaviour of actors from other nations and putting economic pressure on Iran to change its nuclear policy.

The same intention underlies U.S. re-export controls on dual-use products and defense articles. "Dual-use" items are those that have both commercial as well as defense and weapons proliferation applications. Those are subject to the U.S. Export Administration Regulations (EAR). "Defense articles" are items designed or deemed to be particularly suited for defense applications, and are subject to the U.S. International Traffic in Arms Regulations (ITAR). With limited exceptions, both sets of regulations follow U.S.-origin products around the globe, and continue to apply regardless of where or with whom they end up. Think of U.S.-origin items as having a thread of U.S. jurisdiction attached to them wherever they travel.

This global reach can put non-U.S. actors in a tight spot, forcing them to learn and comply with complicated laws and regulations born of a wholly foreign legal system.

While the ITAR rules on military exports can certainly be strict and byzantine, the EAR's breadth and dynamism make it particularly difficult to navigate. Not only do the regulations cover a vast assortment of items, but whether those items require licensing for re-export depends upon a multitude of factors, including an item's ultimate end-use and the end-user involved. An Indian company in the business of re-exporting U.S.-origin goods has to not only be aware of this interplay, but well-versed in its subtleties.

By way of example, while many commonplace items subject to the dual use EAR controls do not require licensing for export from the U.S. to India (e.g. a hammer), all U.S.-origin items subject to the EAR require licensing for export or re-export to Syria, with which India has done approximately $300 million worth of trade over the last year. This blanket requirement is simple enough to remember. These licenses for Syria are very difficult to obtain.

The calculation becomes significantly more complicated, however, with respect to China, India's largest trading partner this year. Some U.S.-origin items require licensing for re-export to the PRC while others do not. Items that do not normally require licensing take on licensing requirements if they are to be used for specified purposes, or by specified actors. And then there is the matter of what happens when U.S.-origin items are incorporated into larger products. If an Indian company uses a pump from the U.S. in a larger machine, do U.S. laws apply to the entire machine? What if the machine is going to be used in China for a purpose specifically called out in the EAR? The decision tree can quickly become a tangle of branches with no clear resolution in sight for those who are unfamiliar with the rules.

One common response to such complexity is to dismiss it with a wave of the hand or disbelief that U.S. jurisdiction really extends so far. With potential civil monetary penalties of up to $250,000 per violation (or twice the value of the shipment, whichever is higher), this is a dangerous gamble. Even more risky is when non-U.S. actors flout U.S. laws under the assumption that a foreign power has no mechanism by which to enforce its laws abroad. This is where the demonstrated willingness of the U.S. to enforce these rules on non-U.S. companies and the power of the U.S. economy comes into play. While the United States government may not have the same leverage over non-U.S. actors that it does over its own citizens, it can still render foreign violators of these rules ineligible to do business with U.S. persons or in U.S.-origin goods. That means no access to the $10 trillion U.S. consumer market or the financial system that underpins both it and a significant part of the global economy. For most companies around the world, that is a fate far worse than paying a simple fine, and it typically vastly outweighs the potential benefit of a transaction that violates these rules. This is not an endorsement of the unusual U.S. approach to export control jurisdiction, but rather a recognition of how the U.S. repeatedly enforces these rules.

Select Russian nationals and entities are learning this the hard way. Over the past several months, the U.S. government has imposed increasingly stringent sanctions on parties targeted for supporting Russia's actions in Crimea. Among these are Russian firms Gazprom OAO, Gazpromneft, Lukoil OAO, Rosneft, and Surgutneftegas. Licenses are required to export or re-export any U.S.-origin item to any of these actors if it is to be used directly or indirectly in exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil. The same is true of select U.S.-origin items if the exporter or re-exporter knows that, or is unable to determine whether, the item will be used in such applications, regardless of the end-user's identity.

As with the Iran sanctions, these rules apply to everyone, irrespective of location or national origin. They also supplement, rather than replace, existing export controls on U.S.-origin items bound for Russia, which in turn only add to those imposed by the Indian government under the Foreign Trade (Development and Regulation) Act. Thus, as India continues to develop its economic relationships around the world, entities and individuals dealing in U.S.-origin items or with certain countries subject to broad U.S. economic sanctions should take care to avoid placing themselves at risk of potentially crippling penalties. The balance is delicate, and best maintained with the help of experienced professionals.

Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.