What Are Secondary Sanctions: Goals, Impact, and Examples

Various governments and international bodies all over the world put in place certain rules, also known as sanctions, to ensure discipline and cooperation from restricted persons, companies, or even entire countries, and maintain general global order.

Sanctions are meant to put a stop to certain harmful activities and crimes such as money laundering, financial fraud, and other, even more dangerous threats that could result in serious human rights violations. These can come in various forms, such as diplomatic, military, or economic sanctions.

In the context of global governance, sanctions have played a critical role in policymaking, aligning said policies with international standards.

As global economies become more and more intertwined, sanctions have become increasingly effective, too. Restricting access to foreign financial institutions and markets compels governments and corporations heavily reliant on international operations to work on themselves and promise changed behavior.

So, to what extent do these sanctions go? Let's talk about what secondary sanctions are and what role they play in bridging compliance gaps by expanding the scope of primary sanctions.

‍

What Are Secondary Sanctions?

Secondary sanctions are steps taken by one country aimed at targeting either individuals or organizations involved in partnerships with a sanctioned country or organization. While primary sanctions directly affect a sanctioned country, secondary sanctions affect third parties that interact with sanctioned countries to meet certain goals that the sanctioning country may be trying to achieve.

These laws are meant to discourage businesses or countries from participating in activities that compromise enforcers of primary sanctions and prevent them from helping sanctioned parties as well, thus indirectly broadening their influence and scope.

Secondary sanctions create a ripple effect, taking compliance rules far beyond the initial target and influencing global diplomacy and business.

‍

By going after third parties, governments are able to successfully cover the gaps left by primary sanctions. For example, if a business in one country trades with a sanctioned nation, secondary sanctions can discourage that activity by imposing fines.

Secondary sanctions also have a big impact on global finance and trade. They push companies to follow the rules more carefully and avoid high-risk industries or regions, having widespread consequences, including affecting investment choices and global trade network operations.

‍

The Difference Between Primary and Secondary Sanctions

Primary sanctions generally apply to a specific nation, company, or individual, prohibiting citizens and businesses of the sanctioning country from engaging in trade or other transactions with the targeted entity. They try to harm or hinder the operational and financial capacities of the sanctioned entity directly.

In contrast, secondary sanctions target third parties (entities outside the sanctioning nation) that associate with the targeted entity, thereby working in a more roundabout manner. They aim to discourage others from associating with the sanctioned entity, building a more extensive network of isolation.

For instance, US laws penalize companies that do business with entities that have been sanctioned for being involved in nuclear proliferation, terrorism, fraud, or similar banned activities, even if said companies are based outside the US. This shows the global impact secondary sanctions can have.

Furthermore, implementing primary sanctions is usually more straightforward because they clearly and unambiguously state all their rules and goals. Secondary sanctions are more complicated because they involve subjective judgment of intent and affiliation. This complexity may result in over-compliance, i.e., companies trying to play it safe might end up rejecting legitimate valuable commercial prospects “just in case”.

‍

The Origin and Development of Secondary Sanctions

The concept of secondary sanctions emerged primarily as a US response to non-compliance with primary sanctions. Given its strong position in the global financial system, the United States has taken the lead when it comes to implementing secondary sanctions. Other countries have objected to their extraterritorial influence for violating sovereignty. Despite the criticism, secondary sanctions have worked in achieving the intended policy goals, more so when there is little multilateral backing for primary sanctions.

‍

How Do Secondary Sanctions Work?

The Office of Foreign Assets Control (OFAC) and other international organizations impose secondary sanctions. They track compliance by taking actions such as freezing assets, blocking accounts, and issuing penalties to individuals and organizations violating primary or secondary sanctions. This also opens up potential offenders to reputational damage and blacklisting, which further keeps them on their toes.

Secondary sanctions declare that compliance with international laws and norms is mandatory and leaves no room for negotiation. High-profile cases, such as sanctions on Iranian banks, show the combined use of legal and reputational pressures to achieve effective compliance.

Similarly, sanctions targeting China-based banks that facilitate transactions for North Korean entities while leveraging the US dollar system cut off access to the global economy, applying significant pressure on targeted entities.

The dependence of entities on financial networks dominated by the US gives secondary sanctions a greater impact due to the US dollar being a global reserve currency.

‍

Key Objectives: Why Are Secondary Sanctions Put In Place?

1. Security

With their layered approach to restrictions and punishments, secondary sanctions effectively work to protect national and international security. They indirectly discourage and forbid partnerships that threaten global peace and stability, such as funding terrorism or dealing in dangerous weapons. For example, sanctions on entities that deal with the North Korean nuclear program aim to reduce the regime's ability to further develop weapons of mass destruction.

2. Diplomacy

Secondary sanctions seem to be more effective than primary ones in changing the actions of non-compliant states since they apply pressure without involving any persuasion or negotiation. However, they can still create opportunities for dialogue and negotiations for states willing to resolve conflicts peacefully.

3. Global Stability

By targeting actions that endanger regional or world peace, such as sponsoring armed conflicts or undermining democratic systems, secondary sanctions help maintain order and prevent further instability.

4. Protecting Human Rights

Secondary sanctions play a crucial role in safeguarding human rights. They prove the international community’s strong dedication to global rights and freedoms by zeroing in on countries involved in inhumane practices such as ethnic cleansing and human trafficking.

5. Economic Strength

Another reason why secondary sanctions are important is that they safeguard the citizens of the sanctioning country by restricting exploitative or unethical business practices. They may even set off a chain reaction resulting in the devaluation of the targeted country's local currency by obstructing their access to international financial markets.

‍

The Impacts and Consequences of Secondary Sanctions

The effects of secondary sanctions are felt by all parties involved (i.e., not just the sanctioning and sanctioned entities but also any third parties involved with the latter) where additional resources have to be spent to either ensure compliance or bear the punishment.

The worst off in this case are financial institutions, who must make sure that they don’t get caught in the crossfire, so to speak.

The negative consequences can also strain relationships between countries, disrupt the global trade network, or prevent the provision of aid where it is needed. These sanctions can also impact global supply chains, affecting both target nations and unrelated third parties.

For example, the secondary sanctions imposed on North Korea impeded the delivery of essentials to the civilian population. Another case was that of sanctions imposed on Russia, which have highly affected the energy markets, causing damage to one of the primary industries of the country.

‍

Compliance Challenges That Come With Secondary Sanctions

The conceptualization and successful implementation of secondary sanctions can be much more challenging than that of primary sanctions. Here are some important points to consider.

‍

Financial Constraints

Running extensive sanctions checks can be a costly process. Individuals or businesses must allocate significant resources to implement and continuously monitor compliance measures, which can push their financial capacities to the max. This burden is further worsened by the possibility of massive penalties as well as the legal costs that might be incurred.

‍

Supply Chain Issues

Global supply chains have suffered from inefficiencies and delays due to the restrictions brought about due to sanctioned businesses. Companies may encounter roadblocks in the procurement of materials and have a hard time finding suitable alternate vendors.

‍

Resource Limitations

Smaller organizations often lack the resources to navigate complex compliance requirements, exposing them to vulnerabilities beyond their control. This is especially concerning for businesses based in developing countries that cannot match complex compliance requirements no matter how hard they might want to.

‍

Jurisdictional Conflicts

Secondary sanctions often create conflicts between local and international legal frameworks, further complicating compliance rules. For instance, European companies navigating US sanctions on Iran faced significant legal challenges due to conflicting EU regulations.

‍

Local or Global Resistance

Resistance from any affected parties can lead to challenges against the legitimacy and effectiveness of secondary sanctions. This has been evident in the backlash against US sanctions on Cuba and Venezuela.

‍

Real-Life Examples of Secondary Sanctions

To get a better idea of the impact sanctions can have, let’s take a look at real examples of three countries.

‍

Russia-Related Sanctions

Over the years, we’ve seen countless sanctions placed against Russia, most recently for its invasion of Ukraine, primarily to hurt the country’s energy, finance, and defense industries that lend significant support to its actions in the war-torn region. These measures have led to capital flight and restricted Russia from accessing international markets, resulting in undeniable economic harm.

‍

The Helms-Burton Act

Through the Helms-Burton Act, citizens of the United States were permitted to initiate lawsuits against foreign nationals and corporations for taking over properties in Cuba. This legislation severely strained diplomatic relationships and commercial activity by imposing cross-border penalties on organizations handling seized property in Cuba, for which it has drawn a lot of criticism.

‍

Iran-Related Sanctions

Secondary sanctions introduced to limit Iran’s development of nuclear weapons advanced policies that made it difficult for global organizations to conduct business with Iran. In this case, secondary sanctions supplemented primary sanctions in preventing certain diplomatic issues by pressuring Iran to engage in negotiation.

‍

Wrapping Up

Secondary sanctions play a critical role in global compliance by targeting terrorists, their sponsors, fraudsters, and other kinds of criminals, and any third parties dealing with them. They promote security, diplomacy, and the protection of human rights.

However, these sanctions can also lead to challenges, such as disruptions to free trade, the rise of resistant factions, and strained diplomatic relations.

Thus, the effectiveness of secondary sanctions lies in their balanced use. A carefully thought-out strategy is crucial to upholding their sanctity and having a large-scale positive impact.

‍

How Vespia Can Help Your Business Navigate Secondary Sanctions

Vespia’s PEP and sanctions screening tool simplifies compliance and reduces costs for businesses.

Let us manage the complexities of navigating secondary sanctions while you focus on critical operations. Book a demo today!

‍

‍