8/8/2019 US Sanctions on Iran and their Impact on India | India Corporate Law

India Corporate Law

A Cyril Amarchand Mangaldas Blog

US Sanctions on Iran and their Impact on

India
By Faraz Alam Sagar & Samiksha Pednekar on August 5, 2019

The Of ce of Foreign Assets Control (OFAC) of the US Department of the Treasury

administers and enforces economic and trade sanctions based on US foreign policy and
national security goals against foreign countries, regimes, terrorists, and similar forces
that are engaged in activities related to the proliferation of weapons of mass destruction
and other acts that may be considered as threats to the national security, foreign policy
or economy of the United States of America (US).

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The nature of sanctions imposed by the US is two pronged, i.e. Primary and Secondary.
 Primary sanctions are in the nature of asset freezing, trade embargos, and a prohibition
on US citizens and companies from engaging with Iran. Secondary sanctions place an
embargo on third-party countries, its citizens and companies with no nexus to the US, for
dealing with sanctioned countries. Secondary sanctions are invariably extra-territorial in
nature and raise important questions about legitimacy, international law principles, and
the concept of sovereignty.

To further explain the impact of US sanctions on the global economy, we will be using
Iran as the case in point. The US has recently imposed sanctions through the Countering
America’s Adversaries Through Sanctions Act (CAATSA), which imposes unilateral
sanctions against Iran, Russia and North Korea. This has been further strengthened by
the US’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA), an agreement
on Iran’s nuclear programme, which aims to control and limit Iran’s nuclear activity in
exchange for lifting previously imposed sanctions.

The imposition of sanctions resulted in eight countries including India, China, Japan and
South Korea requesting waivers from the US to continue buying oil from Iran in
November 2018. The US granted waivers for a period of six months, which expired in early
May 2019. Any country or company importing crude oil from Iran will now invite penalties
from the US.

The OFAC has put a primary sanction on Iran buying or acquiring US Dollars, trading in
gold and other precious metals, trade of metals such as aluminium and steel, as well as
graphite, coal and certain software for “integrating industrial processes”, sanction on
“signi cant” sales or purchases of Iranian rial, or the maintenance of signi cant funds or
accounts outside the country using Iranian rial, sanction on Iranian debt and the auto-
industry. The secondary sanctions limit access to Iran’s ports and shipping sectors,
disallowing the buying of petroleum and petrochemical products with a number of
Iranian oil companies, sanctions on foreign nancial institutions transacting with the
Central Bank of Iran and other Iranian nancial institutions, sanctions on the provision of
certain nancial messaging services to Iran’s central bank and other nancial institutions,
sanctions on Iran’s energy sector and, lastly, sanctions on underwriting services,
insurance and reinsurance[1].

At the outset, Iran’s economy is largely dependent on its oil exports; with the sanctions in
place, the country is cut off from its main source of revenue. Further, companies such as
Airbus and Boeing  had agreed deals with Iran to sell 100 and 80 aircrafts respectively
after the JCPOA was signed in 2015. These deals now stand void at a loss of billions of
dollars. Tourism in Iran is again to see a steep decline after a brief period of relief after the
2015 deal[2]. The Iranian economy has been deeply impacted and saw a contraction of 6%
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in 2018 due to the value of Iranian rial plummeting, capital ight from the country and
banking transactions becoming more complicated. There is a severe lack of essential
commodities leading to in ation, which is making the life of the civil population
extremely tough within Iran, and of Iranian citizens abroad.

Iran-India relations are of vital importance for India strategically because of Iran’s
Chabahar port, which plays a fundamental role in India’s trade connectivity with
Afghanistan, Central Asia, Eurasia and Europe. India being the second largest importer of
crude oil from Iran has begun to effectuate a plan to ensure that there is no shortage in
supply by increasing imports from other countries. While this may seem like an adequate
response to a situation like this, such a quick- x solution may not work in the long run as
prices will inevitably increase due to lack of supply from Iran[3]. The immediate impact of
the sanctions on India is that it can no longer use US dollars for transactions with Iran.
Investment by Indian companies in Iran’s oil and gas development projects and pipeline
projects, if sanctioned, may result in companies not being permitted to open new US
bank accounts and facing restrictions on loans, licences and Ex-Im credit. Further, banks
that permit crude oil transactions from Iran may face a restriction of activities on their
existing US accounts, which invariably would lead to international banks not engaging
with the Central Bank of Iran for payments pertaining to petroleum.

In December 2018, India and Iran agreed to revive its 2012 rupee-rial payment mechanism
to receive payments in Indian rupee, where half of the payments would be used to
import products from India. The said transaction is supervised by the UCO Bank, and the
National Iran Company has been exempted from “withholding tax”, which is imposed on
the pro t of a foreign company in India. Further, there are talks that Iranian banks such
as Pasargad and Parsian are planning to open branches in Mumbai to back transactions
between India and Iran.

Apart from sanctions as mentioned above, the US has recently included Hauwei in its
entity list, which means that US companies require a prior export licence to sell any
equipment/software/technology to Huawei. The impact of this has been that the US has
threatened to subject Indian businesses to penal actions/sanctions, if they act as a
supplier of US-origin equipment, software, and technology to Huawei and its af liates in
the entity list. While cutting ties between India and Huawei may not be easy due to the
company’s vast presence in the country, such an embargo on companies and Indian
nationals is just another example of how sanctions de ne the nature of business done
not just in the US but across jurisdictions[4].

The impact of US sanctions on the global economy is far-reaching and at times highly
invasive of other states’ sovereignty. However, India may consider protecting its
companies by using countermeasures such as blocking statutes, non-recognition of
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foreign judgments, clawback rights, reporting requirements – which all aim at preventing
citizens or national entities from complying with the sanctions. A blocking statute is a
mechanism used by countries to reduce or mitigate the impact of US sanctions on their
citizens and businesses. It essentially includes passing of a local law that makes it illegal
for any national to abide by the terms of the sanction imposed. This mechanism was rst
used by the US itself, to protect its trade with Israel in 1977 after the Members of the Arab
League imposed sanctions on the country. However, it must be noted that while blocking
statutes do help to a certain extent, they don’t make the country completely immune to
the sanction. A prohibition on any credit payments between the entity and any US
nancial institution, restriction on imports from the sanctioned entity, a ban on a US
person from investing in or purchasing signi cant amounts of equity or debt
instruments from a sanctioned person and exclusion from the US of corporate of cers or
controlling shareholders of a sanctioned rm will still continue to persist.

Another issue that arises with countermeasures is that companies may nd themselves
in between con icting orders by the sanctioning country and the country imposing
countermeasures. Companies on the other hand can use countermeasures to invoke the
“foreign compulsion” defence in US courts, which means that they had no other option
but to comply with the regulations of the country of its origin. Any defence of this nature
has to satisfy two aspects, namely: (i) there must be a proof of compulsion; and (ii) the
foreign nation’s interest must override the US’ competing interests[5].

In conclusion, India needs to be ready to deal with US sanctions in a more ef cient and
viable manner in the present and in the future. Indian companies need to be watchful in
complying with US sanctions – those doing business in the US are far more vulnerable
and must undertake a comprehensive due diligence of their business relationships.
Indian companies should also consider taking a legal opinion on the requirements under
Indian law to adhere to Indian law requirements in relation to US sanctions.

[1] Kevin Breuninger, Here are the sanctions that will snap back into place now that
Trump has pulled the US out of the Iran Nuclear Deal, dated May 8, 2018, available on
https://www.cnbc.com/2018/05/08/here-are-iran-sanctions-returning-after-trump-leaves-
nuclear-deal.html

[2] BBC News, Impact of Iran Sanctions – in charts, dated May 10, 2018, available on
https://www.bbc.com/news/world-middle-east-44052734 .

[3] Rajan Kumar, India must nd a way to bypass US Sanctions on Iran, Financial
Express, April 24, 2019. Available on: https://www.financialexpress.com/economy/india-must-
find-a-way-to-bypass-us-sanctions-on-iran/1557493/

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[4] ET Bureau, Indian Cos Supplying To Huawei May Face US Sanctions: Govt, Economic
Times, July 3, 2019. Available on
https://economictimes.indiatimes.com/industry/telecom/telecom-news/india-cos-supplying-to-
huawei-may-face-us-sanctions-india-govt/articleshow/70059715.cms

[5] Aarshi Tirkey, US Secondary Sanctions: Framing an Appropriate Response for India,
ORF Issue Brief, Issue No. 273, January 2019.

India Corporate Law

A Cyril Amarchand Mangaldas Blog

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