Secondary Sanctions and Their Reach

Most sanctions work by binding the people and companies within a country's own jurisdiction. Secondary sanctions are different and more controversial: they reach beyond a country's borders to penalise foreign parties for dealing with sanctioned targets, even when no US person, dollar, or territory is directly involved. Understanding their reach is essential for any institution with international exposure, because the risk they create is often indirect and easy to underestimate.

Primary versus secondary

Primary sanctions, in the US context administered chiefly by the Office of Foreign Assets Control (OFAC), prohibit US persons — US citizens and residents, entities organised under US law, and anyone physically in the US — from transacting with sanctioned parties. They also catch transactions with a US nexus, such as payments cleared in US dollars through the US financial system. If you are a US person or your payment touches the US, primary sanctions apply directly.

Secondary sanctions extend the perimeter. They target non-US persons who engage in defined dealings with certain sanctioned parties or sectors — for example significant transactions with specified Iranian, Russian, or North Korean entities — regardless of any US nexus. The foreign party has not necessarily broken a law it is subject to; instead, engaging in the prohibited conduct exposes it to being sanctioned itself.

How the reach is enforced

Secondary sanctions do not rely on ordinary extraterritorial jurisdiction. Their power comes from a stark choice presented to foreign firms: you can do business with the sanctioned party, or you can keep access to the US market and financial system — but not both. The consequences of crossing the line can include:

• Designation on the SDN List. The foreign firm can itself be added to OFAC's Specially Designated Nationals list, cutting it off from the US financial system entirely.
• Loss of correspondent banking. A foreign bank may be barred from maintaining or be restricted in its US correspondent accounts, severing its ability to clear dollars.
• Other menu-based measures. Some regimes let authorities impose a selection of penalties, from financing and export restrictions to asset blocking.

Because access to US dollar clearing is close to indispensable in global trade, the mere threat of these measures is usually enough to change behaviour.

The compliance dilemma

Secondary sanctions create genuine conflicts. A firm in a third country may face no local prohibition on a transaction — and in some cases local blocking statutes may even forbid it from complying with foreign sanctions — yet still risk losing its US market access if it proceeds. This is why many global institutions adopt a conservative posture, screening against US lists and avoiding dealings that could trigger secondary exposure even where they are not strictly US persons. The commercial reality of dollar dependence tends to override the technical question of jurisdiction.

Practical implications for payment firms

For anyone moving money internationally, three lessons follow. First, screening cannot stop at your own jurisdiction's lists — exposure to US secondary sanctions can arise even without a direct US nexus. Second, you must understand your counterparties' counterparties: dealings by a customer with a sanctioned party can taint the relationship. Third, the concept of a significant transaction matters — many secondary regimes bite on conduct that is significant or knowing, so context, materiality, and intent shape the risk. Building sanctions programmes that account for this extraterritorial reach, rather than assuming borders provide shelter, is the difference between managed risk and an unexpected loss of banking access.

The 50 Percent Rule and hidden exposure

Secondary-sanctions risk is amplified by ownership rules that reach beyond the entities explicitly named. Under OFAC's 50 Percent Rule, an entity owned 50 percent or more, directly or indirectly, by one or more blocked persons is itself treated as blocked even if it never appears on any list. A foreign firm can therefore deal with a party that looks clean on a name-screen yet is majority-owned by a sanctioned person, inheriting the exposure unknowingly. This is why beneficial-ownership diligence sits at the heart of sanctions compliance: screening a counterparty's name is not enough if you cannot see who ultimately controls it. Aggregating ownership across multiple blocked persons, and tracing indirect chains through intermediate companies, is essential to avoid dealing with a sanctioned interest by proxy.

Key takeaways

• Primary sanctions bind US persons and transactions with a US nexus, such as USD clearing.
• Secondary sanctions target non-US persons for defined dealings with sanctioned parties, even without a US nexus.
• Enforcement works through the threat of SDN designation and loss of US correspondent/dollar access.
• They can conflict with local law, including blocking statutes, but dollar dependence usually drives conservative compliance.
• Payment firms must screen beyond their own jurisdiction and understand counterparties' dealings.