Indian companies affected by EU and other sanctions

Recently, new sanctions measures have come into force targeting regimes in countries such as Iran and Syria. Sanctions – or restrictive measures – that affect the business community in India and beyond, can originate at various levels, primarily at the level of the United Nations Security Council, the European Union or individual third states including the US. Indian companies that have extensive international networks should always check carefully if a new or amended regime of restrictive measures affects them.

In a globalized economy, it is a challenge for the business community to fully understand which restrictive measures are in place and which sanctions regimes affect their specific business operations.

Policy instrument

Sanctions in the UN and EU context always find a basis in foreign policy considerations, including combating international terrorism, and are applied on the basis of appropriate legal instruments (e.g. article 41 of Chapter VII of the UN Charter and/or article 11 of the Treaty on the European Union and subsequent EU regulations).

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When assessing sanctions measures that are in place, members of the business community – depending on the sector in which they operate and the activities they want to undertake – should explore the many areas in which restrictive measures can be applied. In general, measures against a particular country or group of countries could include: diplomatic sanctions (expulsion of diplomats, suspending diplomatic relations, or suspension of official visits); suspension of development co-operation; boycotts of sports, cultural and scientific events; arms embargoes; trade sanctions; financial sanctions (including the freezing of accounts and assets, prohibition of financial transactions and services, and restrictions on export credits, insurance or any other form of investment); bans on flights; and restrictions on admission (blacklisting) of individuals.

Pyramid of sanctions

There is a hierarchy in sanctions measures. At the top of the pyramid are UN sanctions, agreed by the UN Security Council. These sanctions are legally binding and in most cases directly applicable in all UN member states. India implements these measures through its national legal system.

Next come regional or national sanctions regimes, in many cases supplementing or strengthening measures already in place at UN level or establishing restrictive measures in cases where the UN cannot reach a decision on “tougher” sanctions. Iran and Syria are good examples of instances where EU and US sanctions are more prominent than the UN package.

The US and the EU are most active in developing and using sanctions as an instrument of foreign policy, and also as a means of peaceful settlement of disputes or maintaining international peace and security. In such cases Indian companies with offices overseas, or any other form of affiliation, should pay attention and check carefully which measures are in place and how these could affect them.

US and EU sanctions will affect an Indian company that is operating outside of India and has offices or affiliates in the US and EU even if India does not have sanctions measures in place. A careful regulatory health check is required.

Wide application

The earliest sanctions were a rather blunt instrument and relatively general in nature. Most common were arms embargoes as well as trade and diplomatic sanctions. However, in the course of time the sanctions measures became more sophisticated and targeted. Financial sanctions, in particular, have been refined.

Financial sanctions can affect a third country’s bank accounts and assets abroad as well as the bank accounts, assets and transactions of individual nationals of the third country, which may be associated with the ruling government.

Outsourcing caught?

It is important to note that the provision of services as part of financial transactions in a broader sense also could be affected by restrictive measures. Indian companies should start paying attention to this.

In many cases, companies that perform outsourced online services for clients (direct or indirect) that might be situated in, for example, the EU or US, but would – through India – effectively serve end-users in sanctioned jurisdictions might potentially face legal action, in particular through their affiliate offices in the US or the EU, where the restrictive measures are in place.

In a globalized business environment with significant business networks (including online services) in which Indian companies are thriving, a regular check of existing sanctions measures as part of overall compliance and due diligence is essential.

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Jeroen Jansen is a partner and the international director of government relations in Brussels. Partner Daniel H Sharma is a member of the litigation and regulatory group in Frankfurt and Brussels who also co-heads DLA Piper’s India group for continental Europe. DLA Piper is the world’s largest legal practice with more than 4,200 lawyers in 76 offices across 30 countries.