Beware of sharks in the water – Navigating trade in a world of sanctions

31 October 2022

by Jayant Raghu Ram


On 24 February 2022, Russian tanks and troops rolled into Ukraine, thus triggering the beginning of the ongoing conflict in Ukraine region and putting an end to the months of speculation regarding the possibility of war. Western nations like the EU, UK, and the US, who have been supporting Ukraine in the war have adopted several political, military and economic measures to weaken Russia with the objective of turning the tide.

Among the numerous measures adopted by the West, the war has brought into focus the use of sanctions as an instrument to penalize Russia and its allies such as Belarus. While sanctions as an instrument are well known among political and economic institutions in the West, comparatively little attention has been paid to Western sanctions by businesses in India. Characterized as instruments for achieving Western policy objectives, the implications for Indian businesses remain less understood. This article attempts to shed light on the nature and extent of Western sanctions, and why Indian businesses should provide more attention to their implications on Indian business interests.

Origin and nature of sanctions

The imposition of global sanctions against Iraq in the 1990’s to penalize it for invading Kuwait probably popularized today’s contemporary notion of sanctions. However, the use of sanctions as a punitive instrument goes back all the way to the times of the ancient Greeks when they used to retaliate against warring neighbors. In modern times, the United States has been one of the prominent users of the sanctions, having used it for decades to act against unfavorable regimes or their policies.

The sanctions adopted by countries such as the United States are different from the ones adopted by the Security Council of the United Nations (UN) in that the former are unilateral in nature while the latter are multilateral in nature. Further, while unilateral sanctions are instruments of domestic law, UN sanctions are instruments of international law and binding upon all UN members.

An important aspect of sanctions is that the targets are not limited to countries but even particular individuals and organizations, government or private, can become the target of sanctions.

Another distinguishing feature is that unilateral sanctions are autonomous in nature, i.e., they are based on national policy objectives. On the other hand, non-aligned countries like India enforce sanctions to implement UN Security Council resolutions; they do not have a formalistic or autonomous regime of sanctions based on their own policy objectives. Though India has taken its own tough measures in challenging moments, for example, by imposing tariffs of 200% on imports from Pakistan, whether these measures can constitute ‘sanctions’ is debatable.  

Another classification of sanctions is based on their applicability. While a country may sanction a particular country, organization or individual, the obligation to comply with such sanctions is usually on subjects connected to the country imposing the sanctions, such as individual citizens of the sanctioning country, companies incorporated in the sanctioning country, etc. Such sanctions are called ‘primary sanctions’.

In case of sanctioning countries like the United States, their ambition to penalize the sanctioned entities can be far-reaching. With the objective to increase the focus of their actions, these sanctioning countries may even impose sanctions on third-country entities unrelated to the primary sanctioned entity. Such sanctions are called ‘secondary sanctions’. A prominent example is the United States’ Countering America's Adversaries Through Sanctions Act (CAATSA), that penalizes third countries for engaging in military transactions with, inter-alia, Russia.

Overview of legal framework for unilateral sanctions

Most unilateral sanction regimes that exist today are adopted by Western countries. The United States has an advanced and complex systems of sanctions that towers in comparison to non-autonomous sanctions regimes. In case of countries like the United States, there may be multiple legislations that authorize the US Government to impose sanctions on transactions including export and import of goods, services and investments in sanctioned entities.

The unilateral sanctions framework administered by such countries are rigorous and vast in scope, applicability, and coverage. In fact, where sanctioned items are exported to third countries, the sanction laws also impact such transactions if there is ‘knowledge’ that such sanctioned items are destined to the sanctioned country.

The penalties imposed for violating sanctions include fines and imprisonment; and can be severe depending on the violation. Interestingly, these sanction laws allow businesses to disclose inadvertent violations of sanctions, which can mitigate the quantum of probable penalties. 

More importantly, such sanctions are not prohibitions, but instead are restrictions, which means that transactions, such as exports, where sanctions are otherwise attracted, can be made under valid license obtained from the competent authority.

Extra-territorial reach of unilateral sanctions

One of the biggest concerns that has arisen in connection to unilateral sanctions is their extra-territorial applicability to citizens and subjects outside their legal jurisdiction and unaffiliated to subjects in the sanctioning country (such as, being a subsidiary of a company incorporated in the sanctioning country). In fact, under the American sanction regime, the prohibition on engaging in sanctions-related conduct extends to ‘any person’, a term which has been defined to include citizens not just of the United States but also citizens of a foreign country.

Though the legal recognition of such extra-territorial applicability of domestic laws under the framework of international law is highly debatable, their operation in practice presents a different picture. The following cases illustrate this point.

In October 2022, a United States district court indicted (formally charging) three Latvian citizens and a Latvian incorporated company for allegedly attempting to export a dual-use export-controlled item, manufactured in the US, to Russia in violation of US export restrictions. Latvian authorities assisted the United States in making the arrests and preventing the export of the goods to Russia.[1]

In September 2022, the US government sanctioned a Mumbai-based company for facilitating the trade of petrochemical products between Iranian producers and Chinese purchasers. It was reported that such action was the first against an Indian company in Iran-related sanctions.[2]

Further, even from a jurisprudential point of view, US courts in decisions such as United States v. Zarrab (2016 WL 6820737) and United States v. Tajideen (319 F. Supp. 3d 445 (D.D.C. 2018)) have affirmed the extra-territorial applicability of US sanctions laws to non-US persons.

Conclusion and implications for Indian businesses

The advent of globalization has brought with it both benefits and risks for Indian businesses, which are today more inter-connected than ever. However, while globalization has opened opportunities for Indian businesses to access markets beyond the West, the current global political climate has increased the legal risks and costs of doing business with such markets.

While the risks are obvious but not precisely defined for Indian companies who are either branches or subsidiaries of companies headquartered or based in the West, the risks may be unknown for unaffiliated Indian companies who are intermediates in transactions that may connect sanctioning countries and sanctioned entities. These risks are heightened in light of the extra-territorial applicability of such sanction laws.

Though one may legally debate the appropriateness of countries to extend the applicability of unilateral sanctions beyond their territorial jurisdictions, practical considerations warrant that Indian businesses should at least be aware of the legal implications of any violations of sanctions laws. Though this may necessitate a higher level of legal due diligence and caution on part of Indian businesses, the costs of making informed decisions far outweigh the costs of potential liability under unilateral sanction laws.

[The author is a Principal Associate in WTO and International Trade Division in Lakshmikumaran & Sridharan Attorneys, New Delhi]


[1] Press Release, European Nationals and Entities Indicted on Charges of Violating U.S. Laws for Their Attempt to Export a Dual-Use High-Precision Jig Grinder to Russia, Department of Justice, U.S. Attorney’s Office: District of Connecticut, 19 October 2022, https://www.justice.gov/usao-ct/pr/european-nationals-and-entities-indicted-charges-violating-us-laws-their-attempt-export

[2] Press Release, Treasury Targets Financial and Shipping Facilitators of Iranian Petrochemicals and Petroleum Sales, 29 September 2022, U.S. Department of the Treasury, https://home.treasury.gov/news/press-releases/jy0980

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