On May 11 and 13, India detonated five nuclear devices. On May 28 and 30, Pakistan responded by exploding six nuclear devices. Nuclear testing is the latest event in over 50 years of contention between the two countries. And it has unexpectedly thrust the two countries into the formerly exclusive ring of the world’s five acknowledged nuclear powers – the U.S., Russia, China, France and Britain.

In response to the testing, the Clinton Administration imposed sanctions on India and Pakistan, pursuant to section 102(b)(1) of the Arms Export Control Act ("AECA"), also known as the Nuclear Non-Proliferation Act ("the Act"). The Act provides mandatory sanctions for nuclear testing by non-nuclear powers. The Act provides a broad range of sanctions including the suspension of exports to the sanctioned destination and the termination of financing for a variety of public and private projects. Based on the legislation, the Commerce Department and the State Department issued several bulletins, press releases and fact sheets containing guidance on the sanctions. On June 18th and 22nd, Commerce and State finalized the sanctions related to export and import activities with India and Pakistan.

To date, the sanctions include:

• the termination and suspension of foreign assistance under the Foreign Assistance Act, except for humanitarian aid;
• the revocation of licenses for the commercial sale of all items on the U.S. Munitions List;
• the suspension of foreign military sales under AECA;
• the termination of all current, and the presumed denial of all new, licenses for dual-use items controlled for nuclear proliferation or missile technology reasons;
• the termination of all current, and the presumed denial of all new, licenses for dual-use exports to entities involved in nuclear or missile development programs in India and Pakistan;
• the suspension of U.S. government commitments of credits and credit guarantees;
• the opposition by the U.S. to international financial institution loans (e.g. the International Monetary Fund and the World Bank) for other than basic human needs purposes, which equates to approximately $1.5 and $2.5 billion a year for Pakistan and India, respectively; and
• the prohibition against the extension of credit to the governments of India or Pakistan by U.S. banks.

The sanctions are aimed at "persuading" India and Pakistan to halt further testing, to sign the Comprehensive Test Ban Treaty ("CTBT"), to refrain from deploying or testing missiles or nuclear weapons, to participate in the Fissile Material Cut-Off Treaty ("FMCT") negotiations, and to develop controls restricting the transfer of sensitive nuclear and missile products and technologies.

Until India and Pakistan take steps to ensure that these goals are met, U.S. exporters conducting business in India or Pakistan should expect heightened scrutiny and delays in export license requests submitted to the Departments of State and Commerce – the primary export control agencies of the federal government. The State Department, which administers the U.S. Munitions List and controls the export of predominantly defense-oriented goods and services, has revoked all outstanding licenses for the export of defense articles and services to India and Pakistan. The Department also announced its intent to review all new license requests with a presumption of denial. Thus, all exports of items, services, or technology controlled by State have effectively been stopped. Individual transactions may be submitted for review to State, but the likelihood of approval is not promising.

The Commerce Department, which administers dual-use commodities and technologies itemized on the Commerce Control List ("CCL"), has revoked licenses for all items that are controlled for nuclear proliferation or missile technology reasons. The Department recently removed the "hold" on license requests for India and Pakistan, authorizing a case-by-case review of these pending applications. U.S. exporters may continue to ship dual-use items to non-government Indian and Pakistani entities under current licenses, unless otherwise notified by Commerce’s Bureau of Export Administration ("BXA"). Favorable treatment may be expected for non-military export license requests to entities not involved in military activities in the two countries.

Commerce also stated that it will publish a list of Indian and Pakistani entities involved in military activities for which export licenses will be required. These licenses will be reviewed with a presumption of denial for all controlled U.S.-origin dual-use items.

Significantly, Commerce did not restrict the use of License Exceptions for shipments to either India or Pakistan, except for those entities published by BXA and those shipments under License Exception CTP. License Exception CTP authorizes the export of computers with ranges of 2,000-10,000 MTOPS to certain destinations without an export license. BXA will be revoking License Exception CTP for both India and Pakistan. As of June 22nd, BXA stated that it:

Practically, therefore, U.S. exporters should presume that export licenses will be needed for current industry standard computers to most entities and end-users in India and Pakistan. In addition, if the end-user is a government or non-government entity supporting a nuclear, missile or military activity, the licenses will be reviewed under a presumption of denial. License applications to other end-users for other end-uses will be favorably considered on a case-by-case basis.

During the coming months, U.S. companies conducting business in the region should be particularly sensitive to re-export issues as well. The Commerce Department recently acknowledged the potential for re-export problems and warned that companies must comply with the restrictions in the export regulations. Essentially, the EAR requires exporters to apply for a license if the exporter "knows" or "is informed" that an export may be re-exported to a restricted end-user or end-use.

U.S. companies should also be sensitive to the transfer of technology or technical data that is controlled to Indian and Pakistani employees. Under the State and Commerce Department export regimes, the transfer of technical information to a foreign national, whether in the U.S. or abroad, constitutes an "export" for which export licenses may be required. The current restrictions counsel companies to exercise increased scrutiny of technical information transfers to sanctioned nations’ foreign nationals. Companies must review existing technical data, collaborations and transfers to ensure compliance with the recent limitations.

Banking sanctions have not yet been finalized but are expected to be implemented with the issuance of an Executive Order by the President. The order will likely restrict U.S. bank transactions with the governments of India and Pakistan. It is not likely to prohibit current bank operations or lending and investment in private entities in India or Pakistan. It is currently unclear how far the sanctions will affect U.S. bank transactions with the Indian and Pakistani governments, or government-related activities such as U.S. bank investment in government treasury bonds or cash deposits in central banks.

Attorney’s at Reed Smith Shaw and McClay are actively tracking developments concerning the sanctions against India and Pakistan. Examples of the types of services which our attorneys may provide include:

• Reviewing current or proposed joint venture, strategic alliance and licensing arrangements with Indian and Pakistani companies;
• Conducting export analyses of specific transactions with Indian or Pakistani entities;
• Providing advice concerning Indian or Pakistani nationals employed by your company;
• Providing advice concerning immigration matters; and
• Reviewing existing or proposed investments and transactions involving Indian or Pakistani entities.