International trade is considerably affected by economic sanctions. Concerned about the national security threats and foreign policy goals, the U.S. government has put in place a whole range of sanctions through the Office of Foreign Assets Control (OFAC). OFAC secondary sanctions are one of the most important tools in this arsenal.
Thus, secondary sanctions are the restrictions applied to non-U.S. entities interacting with sanctioned individuals, companies, or countries when doing business.
Let’s discuss OFAC secondary sanctions in detail.
What Are Secondary Sanctions?
Secondary sanctions meaning the measures that are imposed on foreign companies and individuals, as well as on governments that conduct business with entities that are already under primary sanctions by the U.S. But these sanctions reach well beyond the immediate targets of U.S. sanctions to involve any third-party country or company that maintains some relation with such targets.
A bank somewhere like Europe would be at risk of American government restrictions, for example, if a company with which the U.S. has sanctioned the bank deals in Iran. In this case, the EU secondary sanctions would not directly apply, but OFAC secondary sanctions would be of a high intensity.
OFAC’s approach to implementing secondary sanctions is driven by the intention of inducing foreign entities to end relations with U.S.-sanctioned targets. The aim is to make U.S. sanctions more effective and to compel global companies to conform to U.S. policies without directly sanctioning every party participating in such international transactions.
The Growing Impact of OFAC Secondary Sanctions
The secondary sanctions imposed by OFAC are more complex than ever as of 2024. Despite this, the U.S. applies secondary sanctions against Iran, North Korea, and Russia, among others. These sanctions can have far-reaching impacts on global markets and the companies of different industries across the globe.
For instance, in 2024, the U.S. imposed secondary sanctions against several Chinese firms charged to have violated U.S. export controls and working with entities connected to Russia. In addition to sanctioning the directly involved companies, these sanctions also served as a sign to international companies to be careful about who they do business with. This has dramatically increased the need to understand secondary sanctions risk for companies around the world.
Bonus: While the OFAC sanctions landscape rapidly changes, being proactively informed on OFAC secondary sanctions becomes critical for a company aiming to protect its international operations and financial interests best.
Read also: Businesses That Regularly Use Vehicle Shipping
Why Should Global Businesses Care About Secondary Sanctions?
Here is the detail:
Expanding Reach of U.S. Sanctions
Secondary sanctions increase the effectiveness of U.S. policies and may extend them to companies that are not based in the U.S. but do business with targets who are sanctioned. Many EU, Asian, and Middle Eastern businesses are reevaluating their international relationships ahead of 2024 to avoid secondary sanctions risk.
Reputation Damage
The direct financial consequences of sanctions are only part of a threat; the threat of secondary sanctions can ruin a company’s reputation. Many international companies also have access to the U.S. markets or financial systems. For example, companies found not in compliance with secondary sanctions might encounter public anger or lack trust from customers and investors.
Legal and Financial Penalties
If you come into OFAC sanctions lists, you will be hit hard with a loss of legal and financial benefits. In the case of a business found in breach of the restrictions, it could see serious fines, restrictions on U.S. markets, or even possible legal action from U.S. authorities.
How to Mitigate the Risks of Secondary Sanctions?
To limit the exposure to OFAC secondary sanctions, businesses have to implement robust compliance programs. A few of these basic steps can be considered:
- Due Diligence: Companies should thoroughly vet partners, customers, and suppliers to determine whether they are not associated with any entity on U.S. sanctions lists. This includes checking the secondary sanctions list given by the U.S. Department of the Treasury.
- Advanced Screening Tools: Introducing more advanced screening tools that check through business transactions against a U.S. sanctions list can greatly cut down on the chances of incurring a sanction risk due to inadvertent interaction with a sanctioned entity.
- International trade law: Legal counsel is key to working with experts in the field of secondary sanctions. They can also aid in figuring out what risks are potential and help businesses make sensible choices.
The EU’s Approach to Secondary Sanctions
The European Union (EU) has restricted US-led secondary sanctions, in particular when they have not conflicted with European foreign policy interests. But in the decades since, the EU has been getting more in line with U.S. sanctions in limited cases, including with sanctions on Russia after its invasion of Ukraine. As of 2024, although the EU will continue to pursue secondary sanctions, some European companies may be inadvertently caught between the U.S. and the EU policies.
Click here to read how to avoid expensive fines. Businesses must stick to their partner screening and understand the risks presented by secondary sanctions.
