Category: Sanctions Programs

Secondary Sanctions

Simply put

Secondary sanctions are measures used by a sanctioning country to discourage foreign (non-domestic) companies and individuals from doing business with a country, entity, or sector that the sanctioning country has already targeted. Rather than punishing conduct that occurs within the sanctioning country's own jurisdiction, they seek to influence the behavior of third parties abroad by threatening to cut them off from the sanctioning country's markets or financial system. In practice, U.S. secondary sanctions have most frequently been directed at actors operating in certain Iranian sectors such as energy, oil, and petrochemicals.

Formal definition

Secondary sanctions authorize the imposition of sanctions on a person, including a non-U.S. person, for engaging in specified activity involving a primary sanctions target, even where that activity has little or no direct connection to the sanctioning jurisdiction. In the U.S. context, they generally empower OFAC or the Department of State to threaten sanctions consequences against foreign parties trading with, or providing support to, a country or sector subject to primary sanctions, thereby extending the practical reach of the regime beyond persons ordinarily bound by U.S. jurisdiction. They are typically characterized in academic literature as 'retaliatory' measures that seek to cut off foreign parties rather than impose monetary penalties directly, and their application is subject to carve-outs; for example, non-U.S. persons generally do not risk exposure for the sale of agricultural commodities, food, medicine, or certain medical items. Enforcement patterns vary by program, but U.S. secondary sanctions have most frequently been applied to actors in the Iranian energy, oil, and petrochemical sectors. Exact triggering activities, designation criteria, and available exemptions should be confirmed against the specific authorizing statute, executive order, and OFAC guidance applicable to the relevant program.

Why it matters

Secondary sanctions matter because they extend the practical reach of a sanctions regime well beyond the persons ordinarily bound by the sanctioning country's jurisdiction. A non-U.S. company with no U.S. operations, employees, or transactions can nonetheless face exposure if it engages in specified activity involving a primary sanctions target. This means that compliance obligations are not neatly confined by geography: a firm may need to weigh whether continuing lawful business under its own local law could trigger designation or loss of access to the U.S. market or financial system. The result is that secondary sanctions can shape the risk calculus of parties who are not directly subject to the underlying primary program at all.

The mechanism is characterized in academic literature as 'retaliatory' rather than punitive in the monetary sense, the objective is generally to cut off foreign parties from the sanctioning country's markets, rather than to impose direct financial penalties. This distinction is operationally important: the leverage comes from the threat of exclusion, which can make it commercially untenable for a foreign party to maintain both its dealings with a targeted country and its access to the sanctioning jurisdiction. Enforcement patterns are not uniform across programs, and U.S. secondary sanctions have most frequently been directed at actors operating in certain Iranian sectors such as energy, oil, and petrochemicals.

Because exposure can arise from conduct with little or no direct connection to the sanctioning jurisdiction, secondary sanctions create material uncertainty for cross-border trade, correspondent banking, and multinational supply chains. At the same time, their application is subject to carve-outs, for example, non-U.S. persons generally do not risk exposure for the sale of agricultural commodities, food, medicine, or certain medical items. The precise triggering activities, designation criteria, and exemptions vary by program, so exposure should never be assessed in the abstract; it must be confirmed against the specific authorizing statute, executive order, and OFAC guidance that applies.

Who it's relevant to

Non-U.S. companies with international trade exposure

Foreign companies and individuals trading with a country or sector subject to primary sanctions are the primary intended audience of secondary sanctions, even where their conduct has little or no direct connection to the sanctioning jurisdiction. Such parties may face designation or loss of market access as a consequence of specified activity, so they generally need to assess whether their dealings fall within a program's triggering activities or within available carve-outs, such as those for agricultural commodities, food, medicine, and certain medical items.

Sanctions compliance officers and financial crime teams

Compliance professionals must account for the possibility that lawful business under local law could still create secondary sanctions exposure. This requires understanding that the risk arises from the threat of exclusion from the sanctioning country's markets or financial system rather than from direct penalties, and that triggering activities, designation criteria, and exemptions differ by program and must be confirmed against the applicable statute, executive order, and OFAC guidance.

Financial institutions and correspondent banks

Banks facilitating cross-border payments may be relevant parties where transactions touch sectors or targets subject to primary sanctions, for instance, actors in the Iranian energy, oil, and petrochemical sectors, where U.S. secondary sanctions have most frequently been applied. Because access to the sanctioning country's financial system is the practical leverage behind these measures, institutions generally consider secondary sanctions risk when onboarding clients and screening transactions.

Legal advisers and risk professionals

Counsel advising multinational clients must distinguish secondary sanctions from primary measures and explain that exposure can reach non-U.S. persons for activity outside the sanctioning jurisdiction. Given that these measures are characterized in academic literature as retaliatory and that their scope varies by program, advisers should ground any exposure assessment in the specific authorizing instruments and applicable OFAC guidance rather than in general principles.

Inside Secondary Sanctions

Extraterritorial Reach

Secondary sanctions are designed to influence the conduct of non-US persons and entities that have no direct US nexus, by threatening to cut off their access to the US financial system or market if they engage in specified dealings with a sanctioned target. This distinguishes them from primary sanctions, which apply to US persons and to transactions with a US touchpoint.

Targeted Conduct

Secondary sanctions typically attach to defined categories of activity with a sanctioned jurisdiction, sector, or person, such as significant transactions with designated parties. The precise triggering conduct is set out in the relevant authority and should be confirmed against the applicable statute, executive order, or regulation.

Consequences for Non-US Persons

Rather than imposing criminal or civil penalties directly, secondary sanctions generally operate by exposing the offending party to measures such as designation, loss of correspondent banking access, or exclusion from US markets. The specific menu of consequences varies by program and should be verified against the governing instrument.

Source Instruments and Administering Bodies

In the US context, secondary sanctions authorities generally derive from statutes and executive orders, administered and enforced by bodies such as OFAC and, in some programs, the State Department. The scope and mechanics differ substantially across programs, so the controlling authority must be identified in each case.

Distinction from Primary Sanctions

Primary sanctions restrict what US persons and US-nexus transactions may do; secondary sanctions seek to deter third-country actors who are otherwise outside US jurisdiction. Treating the two as interchangeable can lead to misjudging both exposure and available defenses.

Common questions

Answers to the questions practitioners most commonly ask about Secondary Sanctions.

Do secondary sanctions only apply to US persons and US-based entities?

No. This is a common misconception. Primary sanctions generally apply to US persons, entities, and transactions with a US nexus. Secondary sanctions are distinct in that they are designed to reach non-US persons and entities that engage in certain activities with sanctioned parties, even where there is no direct US touchpoint. Rather than imposing criminal penalties in the same way as primary sanctions violations, secondary sanctions typically operate by threatening to cut off the targeted foreign party from the US financial system or market. The precise scope depends on the specific authorizing instrument, and exact reach should be confirmed against the applicable US legal authority.

Does exposure to secondary sanctions mean a firm has committed a sanctions violation?

No. Being subject to potential secondary sanctions is not the same as having committed a violation of primary sanctions. Secondary sanctions are generally a designation or consequence mechanism aimed at deterring non-US parties from dealing with sanctioned persons, rather than a finding that a law binding on that party has been broken. A firm may face secondary sanctions risk as a matter of exposure and business decision-making without that exposure establishing wrongdoing under any single legal test. Firms should treat this as a risk to be assessed and managed, and the specific consequences depend on the relevant authority.

How should a non-US financial institution assess its exposure to secondary sanctions?

A non-US institution typically assesses exposure by mapping its customer base, counterparties, and transaction flows against the activities and parties that trigger secondary sanctions under the relevant US authorities. This generally involves identifying dealings that may involve sanctioned persons, targeted sectors, or specified conduct, and evaluating the materiality of any US nexus to the business more broadly, such as reliance on US correspondent banking or US-dollar clearing. Because the triggering activities differ by authorizing instrument, the assessment should be tied to the specific programs relevant to the institution's footprint, and legal advice is often warranted.

What role does screening play in managing secondary sanctions risk?

Screening can help detect potential connections to parties or activities that may give rise to secondary sanctions exposure, but it is a measure to identify and mitigate risk rather than a guarantee against it. Effective screening for this purpose generally extends beyond matching against sanctions lists to consider the nature of the underlying activity and the counterparties involved, since secondary sanctions may attach to conduct rather than solely to listed names. A screening match, alert, or hit indicates a potential area for review and does not by itself establish that a transaction is prohibited or unlawful.

How can firms address secondary sanctions risk in contracts and onboarding?

In practice, firms often manage this risk through due diligence at onboarding and through contractual provisions such as sanctions representations, warranties, and termination or suspension rights that allow them to respond if a counterparty becomes exposed to secondary sanctions. The depth of due diligence typically follows a risk-based approach, with enhanced measures applied where dealings involve higher-risk jurisdictions, sectors, or counterparties. These measures help manage and mitigate exposure but do not eliminate it, and their design should reflect the specific programs and legal authorities relevant to the firm.

How should firms handle tension between secondary sanctions and blocking or countervailing laws?

Firms operating across jurisdictions may face situations where measures taken to avoid secondary sanctions exposure conflict with blocking statutes or other laws in their home jurisdiction that restrict compliance with foreign sanctions. Managing this generally requires identifying where such conflicts may arise, obtaining legal advice on the competing obligations, and documenting the basis for decisions taken. Because the interaction between US secondary sanctions authorities and countervailing laws varies by jurisdiction and instrument, there is no single global rule, and the applicable requirements should be confirmed against each relevant legal regime.

Common misconceptions

Secondary sanctions only affect US persons and companies.

Secondary sanctions are aimed specifically at non-US persons and entities lacking a direct US nexus. Their purpose is to influence third-country conduct by threatening consequences such as loss of access to the US financial system, which is precisely what separates them from primary sanctions.

Breaching a secondary sanctions provision results in the same fines and criminal liability as violating primary sanctions.

Secondary sanctions generally operate through measures such as designation or exclusion from US markets rather than by imposing direct penalties on a party outside US jurisdiction. The available consequences depend on the specific program and should be confirmed against the governing authority.

A single, uniform set of secondary sanctions rules applies across all sanctioned jurisdictions and sectors.

Triggering conduct and consequences vary significantly between programs, each with its own statutory and executive-order basis. Practitioners should not assume that exposure under one program mirrors another and should examine the controlling instrument for each.

Best practices

Identify the specific authority governing any secondary sanctions concern, since triggering conduct and consequences vary by program and should be confirmed against the applicable statute, executive order, or regulation rather than assumed.

Assess exposure separately for primary and secondary sanctions, because a party may have no direct US nexus yet still face secondary-sanctions risk based on its dealings with a sanctioned target.

Map counterparties and transactions against the defined categories of targeted conduct for the relevant program, and treat the analysis as fact-specific rather than applying a single global standard.

Evaluate the practical consequences most relevant to the business, such as potential designation or loss of correspondent banking and US market access, when weighing secondary-sanctions risk.

Escalate uncertain thresholds or definitions of triggering conduct to legal counsel, and verify precise terms against the controlling instrument before drawing conclusions.

Document the basis for any determination that a dealing does or does not fall within scope, given that secondary sanctions target non-US parties whose exposure turns on program-specific criteria.