Background
In the previous blog published on November 19, 2024, we had discussed the United States (“US”) Office of foreign Asset Control (“OFAC”) sanctioning nearly 400 entities and individuals for their contribution to Russia’s efforts against Ukraine and the implications of this action on Indian businesses. The US has since imposed sanctions on several entities under its Russia-related sanctions program as well as under its other sanctions programs. There has also been a major focus on the Iran-related sanctions program.
Recently, on December 03, 2024, the US imposed sanctions on 35 entities and vessels, including 2 Indian companies, that play a role in transporting illicit Iranian petroleum to foreign markets. This was pursuant to the expansion of sanctions on Iran’s petroleum and petrochemical sectors on October 11, 2024 by OFAC. This action was taken in response to Iran’s attack on Israel on October 01, 2024. This was Iran’s second direct attack on Israel this year. This expansion of sanctions was to create further pressure on Iran by hindering its critical energy revenues, thereby limiting its capacity to disrupt stability in the region and attack US partners and allies.
Executive Order 13902
Executive Order (“EO”) 13902, dated January 10, 2020, allows for imposition of sanctions with respect to certain sectors of Iran, including construction, mining, manufacturing and textile sectors. Further, it allows the US Secretary of Treasury, in consultation with the Secretary of State to determine any other sectors of the Iranian economy with respect to which sanctions may be imposed. The expansion of sanctions to Iran’s petroleum and petrochemical sectors on October 11, 2024 was pursuant to this power guaranteed under EO 13902.
The imposition of sanctions with respect to certain sectors implies that sanctions may be imposed on persons (i) operating in these sectors; or (ii) having knowingly engaged in significant transactions in connection with one of these sectors of the Iranian economy, or (iii) having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to EO 13902; or (iv) being owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to EO 13902. This also expands to financial institutions that knowingly conduct or facilitate any significant financial transaction with a person blocked pursuant to EO 13902.
Sanctioning third country actors
The sanctioning of the Iranian petroleum and petrochemical sector was followed by designating several entities in multiple jurisdictions and identifying some vessels as blocked property for their involvement in shipments of Iranian petroleum and petrochemical products, in support of US-designated companies like National Iranian Oil Company and Triliance Petrochemical Co. Limited, as well as for knowingly engaging in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran.
These third country operators are sanctioned to prevent evasion and circumvention of US sanctions laws.
Impact of secondary sanctions
Designations on third country vessels and entities are in the nature of secondary sanctions. These are distinct from primary sanctions, which only apply to US persons or in situations where there is a US nexus, such as involvement by a US person, US-originating goods, use of US Dollars in transactions or a transaction taking place within the US. Secondary sanctions authorize the US to threaten sanctions on a person, including a non-US person, for certain activities. These sanctions are intended to discourage non-US persons from engaging in certain transactions, even if the transaction has no US nexus (and is thus not subject to primary sanctions). These sanctions seek to target third-country actors that conduct business with foreign governments, individuals and businesses, subject to primary sanctions.
Violation of secondary sanctions can lead to significant monetary and reputational losses. It can result in prohibition from engaging with the US economic system – whether transacting through the US financial system, in US dollars or with US persons or entities. It may also lead to addition to the Specially Designated Nationals (“SDN”) list.
Inclusion on the SDN list has far reaching consequences, even for third country actors. Their assets are frozen and US persons are generally prohibited from dealing with them. However, the reputational impact on these SDNs is far greater. A general apprehension is faced by such companies in their dealings, especially from financial institutions and companies that have a presence in the US or any US nexus. This reputational impact in turn impacts business continuity of these companies, resulting in financial losses.
Action points for Indian companies
In light of recent expansion of the sanctions law regime of the US, it is evident that the focus of Iran-related sanctions is currently on Indian shipping companies, ports and importers of Iranian petroleum and petrochemical products.
The following steps may be undertaken by Indian companies with the aid of their legal counsels:
- Sanctions compliance policies: Drafting and enforcing certain policies regarding sanctions compliance, including institution of sanctions programs to create awareness among employees and including sanctions clauses in trade and finance contracts.
- Due diligence: Instituting due diligence mechanisms before entering into any business/ trade relations.
- Reevaluating operations: Reevaluating operations and operation strategies to avoid potential red flags under sanctions laws and reevaluate operations basis potential red flags. Further, it is advisable that such companies have certain sanctions compliance mechanisms in place.
It is prudent for companies operating in the abovementioned sectors especially, and in sanctioned countries generally, to engage Indian legal counsel for navigating the OFAC sanctions to mitigate the risk of exposure under the US sanctions laws and the financial and reputational losses that emerge therefrom.
Conclusion
US OFAC’s recent actions against operators in certain specific sectors in Russia and Iran are indicative of increased sanctioning of Indian companies and individuals by it. Awareness and preparedness are crucial pillars for Indian companies to safeguard against US actions, to allow for continuity of global trade.
For further information, please contact:
Faraz Alam Sagar, Partner, Cyril Amarchand Mangaldas
faraz.sagar@cyrilshroff.com
