On October 30, 2024, the United States Department of State (US DOS) and the Department of Treasury’s Office of Foreign Asset Control (OFAC) sanctioned nearly 400 entities and individuals across several third-country jurisdictions for enabling Russia’s invasion of Ukraine, including 19 Indian companies and 2 Indian individuals. This action is pursuant to Executive Order (EO) 14024 titled “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.”
Additionally, on November 1, 2024, the US Department of Commerce’s Bureau of Industry and Security (BIS) added 5 Indian companies to its Entities List, inter alia, for procuring, attempting to procure, or diverting US-origin items and technology in support of Russia’s military and/or defense industrial base. These are in addition to the 2 Indian entities that have been added to the Entities List in the last year.
US secondary sanctions against Russia
Secondary or extraterritorial sanctions (peculiar solely to the US) are imposed on entities that are outside the US jurisdiction. The measures imposed can be to limit trade, block assets and interest in assets subject to U.S. jurisdiction, limit access to the U.S. financial system and restrict US private and government financial opportunities and benefits, denial of foreign assistance, government procurement contracts, and participation or support in international financial institutions. Sanctions related to Russia were imposed by EOs beginning in 2014 by successive US Presidents, Barack Obama, Donald Trump, and Joe Biden.
Specific to Russia, OFAC, in consultation with DOS, sanctions designate specific individuals, entities, vessels, and aircraft in addition to the Specially Designated Nationals and Blocked Persons List (SDN). The DOS may also designate such persons in consultation with OFAC. By such addition, the U.S.-based assets of individuals and entities will be blocked, the entities may be denied entry into the US and their visas may be revoked by the DOS.
Understanding the recent sanctions imposed on the Indian Entities
Sanctions pursuant to EO 14024
The EO 14024, under which the current measures have been taken against the Indian entities by the US OFAC and DOS, imposes sanctions against individuals and entities “furthering specified harmful foreign activities of the Russian Federation” with the objective of disrupting sanctions evasion and target entities in third countries. The EO does not mandate the existence of US-origin goods or technologies The activities include actions that “undermine the peace, security, political stability, or territorial integrity of the United States, its allies, or its partners.”
EO 14024 was promulgated in September 2021 purportedly to counter efforts by Russia to undermine free and fair democratic elections, malicious cyber-enabled activities, transnational corruption to influence foreign governments, extraterritorial activities targeting dissidents or journalists, compromise of security in countries and regions important to United States national security, and violation of international law, including respect for territorial integrity.
The US Department of the Treasury has determined that EO 14024 will also apply to sectors of the Russian economy, including financial services, aerospace, electronics, marine, accounting, trust and corporate formation services, management consulting, quantum computing, metals and mining, architecture, engineering, construction, manufacturing, and transportation. It must be noted that identifying a sector does not block all persons operating in the sector but highlights the risk of sanctions for persons trading with such sectors in Russia.
From the above, it is clear that the exporters of items and technology being exported do not have to be of US origin or related in any way to the US. This may be contrasted with the sanctions imposed by the BIS where the Indian entities have been specifically added to the BIS Entity List for procuring or attempting to procure and diverting or diverting US origin items, software and technology to Russia.
BIS Entity List
BIS uses its Lists of Parties of Concern (Denied Persons List, Entity List, Unverified List, and Military End Users List) and Country Guidance to inform US exporters and transhippers of US-origin goods or technologies that are restricted to Russia as an end destination and are subject to an export license. Export to/from entities identified in the Lists of Parties of Concern are subject to an additional license requirement under the Foreign Direct Product (FDP) rule of the Export Administration Regulations (EAR) for all items subject to the EAR with a license review policy of denial.
This is not the first time Indian entities have been sanctioned for such diversion. On November 23, 2023, Si2 Microsystems was sanctioned for supplying “US-origin integrated circuits” to the Russian military without the required license and on February 27, 2024, Crynofist Aviation was sanctioned for repeatedly engaging in dilatory, evasive, or misleading behavior regarding its importing of U.S. origin goods and exporting to Russia without a BIS license.
Compliance with the extant Indian Law
India has its own robust export controls regulating exports of dual-use items, which are listed in India’s Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) list published by the Directorate General of Foreign Trade (DGFT). Export of goods, services or technologies listed in the SCOMET List mandates an Export Authorisation from the designated licensing authorities, namely, DGFT, Directorate of Defence Procurement, and Department of Atomic Energy. Additionally, there are the catch-all controls, where an exporter who knows, or has reason to believe, or has been notified by DGFT, that its export of a non-SCOMET item has a potential risk of use in, or diversion for, weapons of mass destruction, its military systems or military use of state and non-state actors, must apply for a SCOMET authorization from DGFT.
The SCOMET List is in conformity with the dual-use lists of the various multilateral export control regimes, namely, the Wassenaar Arrangement, the Missile Technology Control Regime, the Australia Group and the Nuclear Suppliers Group. India is a member of the first three regimes and an adherent to the Nuclear Suppliers Group.
As regards sanctions, the Indian sanctions regime includes the adoption and effective implementation of sanctions imposed by the UN Security Council (UNSC) and is presently limited to a prohibition on import and export to Iran and North Korea, arms and related materials to Iraq and Charcoal from Somalia. The sanctions regime also prohibits trade with Islamic State in Iraq and the Levant, Al Nusrah Front, and Al Qaida. India also adheres to and has enforced the UNSC Resolution-1540 on non-proliferation of weapons of mass destruction, vide enactment of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005.
However, India does not adopt unilateral or extraterritorial sanctions imposed by other countries, including the US, in its sanction regime. Therefore, violating US sanctions law does not mean imprisonment or penalty in India per se. this is where the disconnect is since actions taken in compliance with Indian law may be contrary to the unilateral sanctions imposed by the US.
The latest US sanctions pursuant to EO 14024 target Russia’s military-industrial base, including military repair facilities, producers of advanced technologies, and entities supporting the Belarus–Russia defense relationship. By imposing sanctions inter alia on Indian entities, the United States is purportedly seeking to disrupt the networks and channels through which Russia procures technology and equipment from entities in third countries to support its war efforts. It sanctioning order alleges that the designated persons are producers, exporters, and importers of items included in the Common High Priority List identified by the US alongside the European Union, United Kingdom and Japan.
Indian position vis-à-vis the US sanctions
The position of the Indian Government is that the sanctioned persons and transactions are in conformity with the Indian laws. This begs the assumption that if the items allegedly exported by the sanctioned entities are dual-use, relevant export authorisations have already been obtained in India, hence their end-user and end-use check has already been done.
International trade, however, is not limited to the domestic laws of the exporting entity. Any international transaction today must be screened for compliance with laws attracted to every single entity in the supply chain. Hence, if raw materials, components, input technology, and so on, is being exported from other countries and being re-exported, as-is or as part of the finished product, it is critical to ensure compliance with laws of the countries from where the inputs were exported.
Testing the latest sanctions on this threshold, the entities added to the BIS Entity List have clearly re-exported US–origin goods to Russia, which may / may not be in conformity with US laws. The sanctioned persons pursuant to EO 14024, however, are arguably differently placed and are effectively being told to elect which country to do business with – Russia or the US.
Pursuant to its international non-proliferation obligations, the Indian government has already undertaken to conduct its investigation to prevent proliferation. The Government has also stated that it is working with all the relevant Indian departments and agencies to sensitize Indian companies on applicable export control provisions in keeping with India’s established non-proliferation credentials.
Remedies available – If you think compliance is expensive, try non-compliance
The Indian entities subjected to the recent sanctions may choose to undertake the procedure for delisting from the OFAC, DOS and BIS lists. An application for de-listing can cost millions of dollars. It is also to be understood that de-listing is not an entitlement but a discretionary measure. The government bodies will review the application and allow, deny, or in some cases, suggest structural changes to be undertaken for delisting. Upon implementation of such changes, the entity may be delisted from the lists as applicable. Some examples of situations listed by DOS that can result in delisting include positive behavior change, death of an SDN, non-existence of basis for designation, mistaken identity, etc.
In case an entity discovers that it has violated the sanctions laws of India or the US but has not come within the radar of the government bodies, both jurisdictions encourage voluntary self-disclosure. As per the BIS, a voluntary self-declaration strongly indicates a commitment to complying with US export policy. In the past, companies in the US and in third countries have avoided sanctions and paid much smaller penalties instead by filing voluntary self-disclosures relating to actions that may lead to sanctions.
The government must also undertake G2G discussions with the US to negotiate against such unilateral extraterritorial measures imposed on entities.
Cautionary steps for Indian businesses
In the heightened environment of Russia sanctions, it is imperative for Indian businesses that deal with Russia to proactively examine their businesses to decode the global commercial and regulatory risks involved in their transactions by adopting the three-pronged strategy of knowledge, training, and compliance. There is an imminent need for businesses to establish robust internal compliance programs within their organization.
Failure to do so can result in an irreparable loss of reputation, limited commercial prospects, and severe financial losses, at the least. Entry of a business in any of the aforementioned lists not only results in US businesses not trading with the Indian companies but also prevents other commercial entities around the world that trade with the US from trading with the Indian companies. Therefore, Indian businesses must be fully aware of the indirect regulatory, commercial, reputational, and financial risks associated with the secondary sanctions imposed by the US.
Urgent steps need to be taken by the Indian regulators as well. Outreach measures are already being undertaken by the regulators to inform Indian businesses of the Indian export control regime. The regulators must also publicize enforcement actions by the DGFT and Customs for violations of the export control laws to sensitize Indian businesses to the importance of compliance.
