By Sahil Kanuga
On October 30, 2024, the Office of Foreign Assets Control (OFAC) in pursuant to its existing Executive Order (E.O.) 14024, issued General License (“GL”) 8K, GL 25G, GL 110, GL 111, and GL 112 and has sanctioned certain Indian nationals and entities and added to them to the Specially Designated Nationals and Blocked Persons list ("SDN List") in relation to trades with Russia. The implications of this action by OFAC is something that Indian entities are yet to fully understand and examine.
The mission of the OFAC is to administer and enforce economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffic etc. OFAC administers a number of different sanctions programmes, including using the blocking of assets and/or trade restrictions, prohibition from conducting any transactions with the sanctioned entities, to accomplish its foreign policy and national security goals.
Effect on secondary sanctions on Indian businesses
The recent escalation of OFAC sanctions against Russia appears to have shifted gears in the recent past. These sanctions seem to have significant and an increased consequence for the Indian market and companies in the form of secondary sanctions.
The long arm reach of OFAC sanctions on Third-Country sanction evaders will have a significant exposure on Indian companies and businesses carrying on trade with Russia. Contractual parties would generally be hesitant to engage in business with them since they themselves would be at risk of indirect sanctions. There would be other commercial issues such as the inability to process payments through banks, and other practical difficulties which would affect businesses on a day-to-day basis. Suffice it to say, once sanctioned, it becomes increasingly difficult for an entity to do global business in a world where borders are increasingly disappearing.
It is also not practical for an Indian company to take a view that they will merely ignore the sanctions. This is because consequences may well follow the entity and its future prospects and also follow its directors/promoters in due course. Failure to comply with the continuously evolving sanctions can lead to significant reputational damage, financial losses, and operational disruptions. Further, even an argument that the business of the entity be transferred to a different entity would not work.
Essentially, these may be viewed as an attempt to circumvent US sanctions. The consequences of such actions can be quite detrimental and disastrous including penalties for violation of the sanctions program.
What is the solution and the way forward?
The OFAC sanctions regime is one that is driven by US policy and the intention is essentially for behavioural correction. The answer lies in taking an educated and informed decision and thereafter approaching the OFAC with an appropriate application wherein the party demonstrates why the administrative decision leading to the sanction was incorrect in the first place or invalid and consequently seeking delisting.
Where the sanction is based on a particular transaction/contract with a sanctioned counterparty, it may be prudent to show that the said counterparty was not sanctioned when the contract was being entered into or the said contract was terminated once knowledge of the sanction came to be known. The party will need to demonstrate to the authority how they will effect a course correction going forward. They should provide a detailed explanation and evidence in furtherance of this. All of this should be done in a time-bound manner.
It is recommended that companies conducting cross border trade/transactions should (a) build robust internal compliance programs to develop and implement a Sanctions Program; (b) implement necessary measures, policies and procedures to reduce potential violations by implementing risk assessment and identifying red flags to improve the system and internal controls by regular audits.
It is advisable to seek legal counsel in this regard, prior to proceeding with a transaction with parties located in sanctioned regions. Companies must avoid engaging in transactions with entities and individuals on OFAC’s SDN list.
Conclusion
In addition to OFAC, there are several sets of sanctions issued by the United Nations as well as other entities like the European Union and the United Kingdom. India recognizes sanctions issued by the United Nations but the practical effects on Indian companies of all kinds of sanctions remain. India has adopted various countermeasures and come up with creative solutions to fulfil its trade obligations while respecting its sanction compliance liabilities.
In the heightened environment of US-Russia sanctions, it is imperative for Indian companies that deal with Russia, directly or indirectly, to proactively assess their businesses to decode the global commercial and regulatory risks involved in their transactions.
The future is anybody’s guess, especially with a new administration set to take charge in the USA; its policy will need to be understood in due course.
(Sahil Kanuga is Partner, Cyril Amarchand Mangaldas.)
Views are personal, and do not represent the stand of this publication.
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