Updated December 16, 1998
CRS Report for Congress
Received through the CRS Web
Bank Loan Denial for Nuclear Proliferation under
Section 102(b) of the Arms Export Control Act as
Applicable to India and Pakistan
M. Maureen Murphy
American Law Division
After the President has determined that a "non-nuclear-weapon state" has detonated
a "nuclear explosive device," section 102(b) of the Arms Export Control Act requires
that a number of sanctions be placed on that state including the prohibition of private
bank loans to the government of the country concerned. When the President responded
to the nuclear tests of India and Pakistan by invoking sanctions on May 13 and 28,
immediate questions arose as to how the banking aspects of the sanctions would be
configured. There is a strong U.S. banking presence in India involving many levels of
interactions with Indian banking, trading, and development companies that are
intertwined with the Indian government. This situation raises issues as to whether
sanctions would extend to governmentally owned and controlled institutions. Section
102(b) has never before been invoked. Its language is sparse; and no regulations have
been promulgated explicating its terms. The Department of the Treasury, in the process
of evaluating the requirements of the law, faced pleas from the banking community to
take into consideration the complex interrelationships of banking and government in
India and Pakistan and proceed cautiously lest operations of U.S. bank branches in those
countries be jeopardized. Using authority of the India-Pakistan Relief Act of 1998, P.L.
105-277, Tit.IX, § 901, enacted as part of the omnibus appropriations measure of
October 19, 1998, the President has waived the India-Pakistan sanctions until October
21, 1999. For a description of the requirements of section 102(b), see Jeanne
J.Grimmett, "Nuclear Sanctions: Section 102(b) of the Arms Export Control Act and Its
Application to India and Pakistan, CRS Report 98-486. This report may be updated.
This report discusses one of the sanctions, denial of bank loans, under section 102(b)
of the Arms Export Control Act (AECA), 22 U.S.C. § 2799aa-1(b), enacted in the Nuclear
Proliferation Prevention Act of 1994. Section 102(b) requires the President to impose
economic and military sanctions against countries that have engaged in certain kinds of
Congressional Research Service ˜ The Library of Congress
nuclear proliferation. After India, on May 11 and 13,1 and Pakistan,2 on May 28,
detonated nuclear devices, President Clinton invoked sanctions against those countries.3
Among the sanctions are prohibitions on foreign assistance; sales and licenses under the
AECA; U.S. government credits, credit guarantees, and financial assistance; U.S. support
for multilateral financial assistance; private bank lending to the affected government; and
exports of certain specific controlled goods and technology. On December 1, 1998, under
Presidential determination No. 99-7, the sanctions were waived until October 21, 1999,
pursuant to the India-Pakistan Relief Act of 1998, P.L. 105-277, Tit. IX, § 901.
U.S. Banking in India and Pakistan
U.S. commercial banking concerns, including Bank of America, Bank of New York,
Chase Manhattan Bank, and Citibank have branch operations in India, conducting a full
range of banking services for individual and corporate clients, supporting international
trade and Indian domestic transactions. Although Federal Reserve Board approval must
be secured before a U.S. bank may establish a foreign branch, the foreign branch operates
under the laws of the host country and may engage in some activities that would not be
permitted in the United States.4
The Indian government imposes certain requirements on banks operating within the
country that make the process of drafting the sanction regulations a balancing exercise.
What must be balanced is the need to actualize the intent of the legislation and the
preservation of U.S. banking operations within India.
In order to obtain approval to operate a foreign bank branch in India, a U.S. bank
must maintain cash deposits at the central bank, which is controlled by the state. It must
also hold a 25% reserve ratio in Indian treasury bills or bonds of state-owned companies.
In addition, since the state holds 51% ownership in each bank, correspondent banking
See CRS Issue Brief 93097, India-U.S. Relations.
See CRS Issue Brief 94041, Pakistan-U.S. Relations.
The India directive, Presidential Determination No. 98-22, 63 Federal Register 27665
(May 20, 1998), ordered the "relevant agencies and instrumentalities of the United States
Government...to take the necessary steps to impose the sanctions described in section 102(b)."
In addition to the Department of the Treasury, which will administer the banking sanctions in
the Office of Foreign Assets Control, the Departments of State and Commerce have responsibility
for administering the AECA and the Export Administration Act licensing systems. The
Department of State has already issued a notice revoking munitions exports licenses for India,
63 Federal Register 27781 (May 20, 1998). On May 28, the Department of Commerce issued
"Interim Guidance for Exporters. ( See <www.BXA.DOC.GOV>.)
The Board has authority to authorize activities that it determines to be usual in connection
with the business of banking in the host country. 12 C.F.R. § 211.3(b)(10). Among the powers
authorized foreign banks that are pertinent to the question of application of the sanctions are
some that appear to be essential to the operation of foreign bank branches in India. Under
Federal Reserve Board regulations, a foreign branch may issue buy, sell, and hold the obligations
of the host country's national government and its political subdivisions; invest in the securities
of the host country's central bank and other securities needed to meet reserve requirements; and
it may invest in government-sponsored development banks of its host country and in securities
needed to meet reserve requirements. 12 C.F.R. § 211.3(b).
relations by which banks maintain deposits with one another to clear checks and other
forms of negotiable instruments, may be routine between Indian state-owned banks and
Indian branches of U.S. banks. 5
The banking situation in Pakistan is distinguishable from that of India, although
some of the same large banking organizations as are operating branches in India also have
branches in Pakistan. Banks with Pakistani branches include Citibank, Chase Manhattan
Bank, American Express Bank, and Bank of America. There are requirements similar to
those in India. Pakistan requires 10% of demand and time liabilities be placed with the
central bank, and banks must hold an additonal 25% in government securities.6 On the
other hand the central bank in Pakistan, the State Bank of Pakistan since 1993 is subject
to reduced government control but is not completely autonomous. Until a new liberalized
investment policy was announced in November 1997, Pakistan restricted foreign bank
branching and business with state-owned corporations.7
Lack of Definitions in Section 102(b) Prohibition on Bank Loans
The language in section 102(b) respecting bank loans is unadorned.8 As recently
amended, it reads:
The United States Government shall prohibit any United States bank from
making any loan or providing any credit to the government of that country,
except for loans or credits for the purpose of purchasing food or other
agricultural commodities, which includes fertilizer.
Although this provision was enacted in 1994, Treasury has not issued any
implementing regulations. It apparently has adopted a policy of waiting until the
President invokes sanctions against a particular country to address each country's
individual situation9 as is customary when economic sanctions are invoked under the
See Michael M. Phillips, "Banks Lobby Washington for Slack in Indian Sanctions," Wall
Street Journal A-15 (May 22, 1998) and "Business Groups Face Uphill Battle in Effort to Limit
Indian Sanctions," Inside US Trade (May 22, 1998). Krisan S. Nehra, Specialist in Indian and
Pakistani Law, Library of Congress Law Library, was consulted on the material relating to legal
requirements in India and Pakistan.
Department of the Treasury, National Treatment Study 06 (1994).
Federal Research Division, Library of Congress, Pakistan: A Country Study 161-165
The legislative history has no further elaboration. See: 140 Cong. Rec. S411-S413 (daily
ed. January 31, 1994); H.Rept. 103-482 , 103d Cong. 2d Sess. 261-266(1994). The language
specifically including fertilizer within the agricultural exception to the bank loan sanction was
added by P. L. 105-194, enacted July 14, 1998. On July 15, the Senate approved by a voice vote
an amendment to the FY1999 agriculture appropriations bill (S. 2159), which would authorize
the President to waive certain of the sanctions, including the bank loan sanction. See S. Amdt.
3155, 144 Cong. Rec. S8183-85 (daily ed. July 15, 1998). On July 16, the Senate passed H.R.
4101, the FY1999 agricultural appropriations measure, inserting the language of S. 2159 for the
text passed by the House. See 144 Cong. Rec. S8329 (daily ed. July 15, 1998).
In testimony before the House International Relations Committee June 3, 1998, Hearing
International Emergency Economic Powers Act (IEEPA).10 In that case, after the
President's order, Treasury issues regulations, to be administered by the Office of Foreign
Assets Control. These regulations specifically apply the sanction to the institutional
structure of the targeted country.11
To illustrate the process by which an order is refined into regulations, one might
examine the sanctions against Iraq. When, on August 9, 1990, President Bush invoked
IEEPA to sanction Iraq, the directive, Executive Order 12724, generally prohibited "any
commitment or transfer, direct or indirect, of funds or other financial or economic
resources by any United States person to the Government of Iraq or any other person in
Iraq."12 The President, therefore, had decided to impose broad economic sanctions against
not only the government of Iraq, but also any person in Iraq. This, of course, is
distinguishable from the present situation where the law, itself, mandates a broad
prohibition on bank loans to a "government."
The regulations implementing the Iraq sanctions, however, do illustrate the issues
that the drafters of the India regulations will face. The Iraq regulations, issued on January
18, 1991,13 contained an intricate definition of the term "Government of Iraq," which, if
applied to India, would mean closure for U.S. branches operating there. That definition
The term Government of Iraq includes:
(a) The state and the Government of Iraq, as well as any
political subdivision, agency, or instrumentality thereof, including
the Central Bank of Iraq;
(b) Any partnership, association, corporation, or other
organization substantially owned or controlled by the foregoing:
(c) Any person to the extent that such person is, or has been, or
to the extent that there is reasonable cause to believe that such person
is, or has been, since the effective date, acting or purporting to act
directly or indirectly on behalf of any of the foregoing; and
on Sanctions in U.S. Policy, Undersecretary of State Stuart Eizenstat referred to section 102(b)
as "in some respects a very vague act." Many of the Committee Members were concerned about
the impact on people in the United States and in the subject countries as well as on the deterrent
effect. The Undersecretary referred to the process of drafting the regulations as involving
mitigating the impact on U.S. business and workers.
50 U.S.C. §§ 1701 - 1706.
Under IEEPA, the President issues an Executive Order invoking the sanctions and
delegates to the Department of the Treasury implementation authority, with respect to economic
sanctions. At that point regulations are developed. This process may be lengthy. For example,
it was not until May 21, 1998, that final rules were published implementing Executive Order
13047 of May 20, 1997, prohibiting new investment in Burma. 63 Federal Register 27846
55 Federal Register 33091, 33092 (August 13, 1990).
56 Federal Register 2113 (1991).
(d) Any other person or organization determined by the Director
of the Office of Foreign Assets Control to be included within this
Nowhere in section 102(b) is a definition given for the term "government," with
respect to the country against which the sanctions are to operate. How broadly or
narrowly that term is defined by the implementing regulations is critical. For example,
will the state-controlled central bank be included in the definition? Will banks in which
the state holds 51% equity be covered? How will staate-controlled and owned
development banks be handled? How will state controlled corporations engaged in
international trade be treated? Will Treasury distinguish between governmental entities
acting or performing sovereign functions from government-owned or -controlled entities
performing commercial functions? One approach that has been suggested is to limit
sanctions to Indian or Pakistani governmental operations that are performing sovereign
functions, rather than commercial or proprietary ones. The Foreign Sovereign Immunities
Act, 28 U.S.C § § 1601 - 1611, by which foreign states are subject to U.S. court
jurisdiction for commercial, but not governmental functions, may provide an analytical
framework for making such distinctions.15
Section 102(b) does not define "United States bank." Does it mean only U.S.
commercial banks or does it include development banks? Does it include branches of
Indian banks operating in the United States? Does it include securities firms?
Section 102(b) does not define "making any loan or providing any credit to the
government of [the sanctioned] country." How will Treasury treat the required investment
in Republic of India currency and obligations imposed upon branches of U.S. banks doing
business in India? How will it treat currency swaps involving Indian currency? What will
be the treatment of sales and exchanges of securities that have already been issued by the
Republic of India? What distinctions will be drawn with respect to banking transactions
facilitating India's purchases of exempt commodities, such as food and agricultural
products? What rules will apply to interbank loans, deposits, and clearing of negotiable
instruments? Will there be exceptions for interbank clearances of checks and payment
settlements that may result in overnight debit balances?
Section 102(b) does not designate an agency to enforce the bank loan sanctions. This
raises the question of whether the Office of Foreign Assets Control at Treasury or the
Federal Reserve Board will be designated with that authority. Arguments in favor of the
31 C.F.R. §§ 575.306.
The Foreign Sovereign Immunities Act applies to foreign states and determines whether
to differentiate an agency or instrumentality of the state as being subject to jurisdiction based on
whether the core functions of that entity are governmental in nature. The statute has an exception
by which jurisdiction is denied over suits "based upon a commercial activity carried on ... by the
foreign state." 28 U.S.C. § 1605(a)(2). In Republic of Argentina v. Weltover, Inc., 504 U.S. 607
(1992), the Supreme Court held Argentina subject to suit to recover on bonds, called Bonads,
issued through its central bank, under a program whereby the government had assumed the risk
associated with cross-border currency transactions. To reach the decision, the Court
distinguished between a government as a market regulator and as a player in the market. The
issuance of the bonds, of public debt instruments, was held to be a commercial activity and was
seen to be similar to issuance of debt instruments by private parties.
latter include its familiarity with the banks involved and its distance from any presidential
administration. There also may be the perception that Federal Reserve Board oversight
would bring more flexibility.
Absent a mechanism in section 102(b) for terminating or suspending a sanction,
legislation appears to be the only way of lifting sanctions, once imposed. In the case of
the sanctions against India and Pakistan, under the Indian-Pakistan Relief Act of 1998,
P. L. 105-277, Tit. IX, § 901, Congress authorized a Presidential waiver for a period of
up to one year. The President used this authority to waive the sanctions until October 21,