Following the testing of nuclear devices by both India and Pakistan in May, President Clinton acted as required by law to impose trade and economic sanctions on both countries. The President was required to take such action under the Arms Export Control Act (the "AECA," also known as the "Glenn Amendment") which triggers sanctions following the detonation of a nuclear explosive device by a formerly non-nuclear weapon state.
The array of sanctions the President must impose under the AECA includes:
- termination of foreign assistance except for humanitarian assistance, military services and articles, foreign military financing, and export licenses for items on the U.S. munitions list;
- denial of any credit, credit guarantees, or financial assistance by the U.S. government;
- U.S. opposition to the extension of loans or financial or technical assistance by any international financial institution (such as the World Bank);
- prohibiting U.S. banks from making loans or providing credit to the government of the offending country (except for food and agricultural commodities); and
- prohibiting export of specific goods and technology subject to Department of Commerce export licensing.
Once the President issues his determination that such sanctions must be imposed, he must then notify Congress and authorize the appropriate agencies to adopt regulations and other necessary measures to carry out the sanctions listed above. While the President has no discretion in determining whether to impose sanctions, he does have discretion in delineating the scope of the sanctions.
The implementation of the India and Pakistan sanctions will be primarily accomplished by the Commerce Department's Bureau of Export Administration ("BXA"), the Treasury Department's Office of Foreign Assets Control ("OFAC") and the U.S. Export-Import Bank ("Ex-Im").
The key federal agencies responsible for implementing sanctions -- the Treasury Department and Commerce Department -- have been slow to formulate regulations and policy directives to carry out the President's May 13 order following the Indian tests. In part, this has been due to the expectation -- now realized -- that Pakistan would conduct its own nuclear tests, thereby requiring the Administration to impose sanctions on that country as well. The more significant cause of the delay, however, has been the vigorous lobbying of business interests that stand to be adversely affected by the sanctions. The sheer scope of current and in-the-pipeline business with India makes it unusually difficult for the agencies to address the thousands of questions that the broad sanctions categories raise.
This task is complicated by the almost-certain fact that, once imposed, the sanctions on India and Pakistan will remain in place for several years. Clinton Administration officials have indicated that they expect it to be extremely difficult to lift the sanctions, and that discussion of lifting sanctions would only begin after India takes "significant actions" such as signing on to the Comprehensive Test Ban Treaty. Senate Foreign Relations Committee Chairman Jesse Helms has stated in even firmer terms that he would not support lifting sanctions until India abandons "all nuclear ambitions." With Pakistan's repeated tit-for-tat testing in the last days of May, the prospects for lifting the sanctions to be imposed now will become doubly sensitive and complex.
BXA appears to be under severe strain. Late last week it issued "Interim Guidance" that suspends all existing licensing authorizing exports to Indian and Pakistani government entities for items controlled for nuclear or missile reasons. That step was easy. BXA has yet to issue any guidance, however, on the hard issue it faces -- whether to permit continued export to India of "dual-use" goods and technology, i.e., commercial items that also have security or military uses. And it has yet to provide any guidance on an immediate problem many U.S. technology companies will face: if exports of technology items to India and Pakistan are broadly restricted, will the work of Indian or Pakistani nationals working in the U.S. or at overseas facilities for U.S. companies be affected?
The head of BXA, Bill Reinsch (the Undersecretary of Commerce for Export Administration), acknowledged shortly after the President's sanctions order that the AECA is a "little ambiguous" regarding whether BXA is required to ban exports of computers and other dual-use goods and technologies. The statute requires a prohibition on U.S. exports of "specific goods and technology," but does not clarify what that means.
A prohibition on U.S. exports of a broad array of dual-use items could have a strong impact on U.S. exports. The U.S. high tech industry has lobbied to limit the scope of this ban to "particularly sensitive" nuclear items. U.S. companies and trade associations are concerned about BXA blocking the planned export of high-performance computers, or of regular exports of spare parts and technology needed for servicing U.S. products already in place in India. These concerns appear well founded in light of BXA's Interim Guidance, which reveals that BXA intends to deny pending license applications for certain high-performance computers.
- We expect BXA to adopt a broad export ban on high-tech items currently subject to export license requirements. Such items would encompass a variety of dual-use technology, including computers, civilian aircraft engines and controlled electronic equipment. BXA has indicated that further adjustments to its Interim Guidance are anticipated in the near future, and that exporters should closely monitor changes in BXA's position.
OFAC, the Treasury Department arm responsible for promulgating and enforcing prohibitions on transactions with Libya, Cuba and other disfavored countries, normally prides itself on its ability -- through herculean efforts -- to publish implementing regulations relatively rapidly after a presidential sanction order. Not this time. Our latest inquiries to the OFAC personnel as to where the team drawing up the India sanctions regulations had gotten elicited the following blunt answer: "nowhere."
OFAC is not required by the Glenn Amendment to impose a total embargo on trade with India or Pakistan, and it will not do so. Based on our experience with OFAC sanctions and the information we have developed from talking to persons involved in the sanctions-development process, we do not expect OFAC to impose broad restrictions on trade or financial transactions. OFAC is likely to leave export restrictions to BXA and to the State Department's munitions controls, and it will not block imports of Indian- or Pakistani-made goods. Companies that import raw materials, textiles, or other low- or mid-tech items from India or Pakistan are not likely to face new legal impediments to continuing that business.
In the financing sector, however, the situation has been highly uncertain. OFAC is required to implement regulations enforcing the AECA ban on the provision by U.S. banks of loans or credit to the "government" of India. The law does not specify which entities are considered within the "government." In particular:
- Many projects in India are sponsored -- and financing is extended to -- state governmental bodies. Treasury should determine that these state-level governments are not covered, inasmuch as the Glenn Amendment sanctions are intended to punish the government responsible for the nuclear activity -- which here are the national governments.
- Many, if not most, of the important banks in India are substantially government-owned. Under customary OFAC practice in other contexts, such entities would be considered part of the "government" to be sanctioned. But if this practice is extended to the AECA sanctions on U.S. bank lending, the result could virtually cripple investment and commercial transactions by U.S. companies in India. Nearly all financings involve some form of participation by Indian banks, which might be deemed an extension of credit by the participating U.S. lending banks.
- Ordinary letters of credit for trade transactions usually require credit arrangements with Indian banks on goods moving into or out of India, which would be prohibited if the Glenn Amendment covers those banks.
American banks and banking associations have, predictably, descended upon the Treasury and OFAC in an effort to avoid this result, as have major U.S. companies with investment projects in India. Pressure is being applied to OFAC to adopt a narrow definition that would exempt transactions with the banks or other government-owned instrumentalities that involve "purely commercial functions."
Ex-Im quickly adopted measures to impose sanctions by withholding financing of U.S. exports to India effective May 13. This measure has only prospective effect, however, and will not impact financing for transactions authorized prior to May 13. The Overseas Private Investment Corporation (OPIC) adopted a similar position with respect to India financing and guarantees.
The World Bank has postponed consideration of several loans to India worth approximately $865 million. The U.S. expressed its opposition to these loans, as required by the AECA.
If a U.S. company employs Indian or Pakistani engineers in the development or handling of technology that is export-controlled, it must watch carefully to see how BXA resolves the "deemed export" problem. Under the "deemed export" rule, any disclosure to a foreign national -- even while located in the U.S. -- can be deemed an export of the technology. Once special restrictions are placed on exports to India or Pakistan, such technology disclosure may be prohibited. Given the large number of technical personnel from the Subcontinent that now work for U.S. companies, application of this usual rule could be highly disruptive.
We believe BXA will find a means of excluding such disclosures to employees or consultants while in the U.S. or at a controlled overseas location from the prohibitions. But we have been surprised that BXA has not sent signals yet to calm anxieties on this important issue.
PHJ&W regularly advises clients on U.S. trade restrictions and represents clients in enforcement inquiries and investigations. We design and evaluate export control compliance systems, and we handle license applications for controlled items from missile components to encryption software.