03 May 2017
About Secondary Sanctions
What are Secondary Sanctions and why should banks care about them?
Secondary Sanctions are the third tool in OFAC’s sanctions arsenal, which also include the traditional country-based and list-based sanctions. They serve as supplemental sanctions to support diplomatic, law enforcement, economic, and national security goals more directly addressed in the other two sanction methods. Secondary Sanctions often seek to close the loopholes that listed entities may use to circumvent trade and financial prohibitions via enlisting a non-sanctioned third party to act on their behalf. For example, a non-listed bank in a non-sanctioned country may find itself subject to Secondary Sanctions if OFAC deems that the entity is facilitating economic activity for a listed entity or country (either intentionally or by negligence).
Banks maintain impetus to screen against Secondary Sanctions violators (de facto and official) because:
BSA/AML regulations compel them to do so; and
It is a corporate responsibility imperative to prevent money laundering and terrorist financing.
Banks can assist in the development and enforcement of Secondary Sanctions through maintaining effective transaction monitoring and screening programs, as well as implementing “know-your-customer’s-customer” (KYCC) principles where high-risk correspondent relationships exits.
Are they effective?
While Secondary Sanctions have become utilized more frequently in the past five years, their effectiveness has mixed results. First, banks are not obligated by formalized regulation (or even FATF recommendations) to perform KYCC as a primary function of their AML programs. Second, there are too many data and information sharing roadblocks to make KYCC and in-depth correspondent banking diligence programs effective on a meaningful scale. The fact that global financial institutions’ appetites for investing even more money into their compliance programs is diminishing after 15 years of regulatory scrutiny (and heavy fines) is also a challenge.
With regards to effect, a recent Washington Post commentary argues that leveraging Secondary Sanctions with China led to Iran joining the negotiating table to abate their nuclear program, and should be further leveraged against North Korea through China. Though the basis for Secondary Sanctions and their intended outcomes is solid in logic, I am concerned about any course of action where the primary sought outcome is “sending a message”.
Sure, Secondary Sanctions helped bring Iran to the negotiating table, but to what end? Potentially stifling economic activity with a leading global trade partner in China for the sake of a yet-to-be-determined Joint Comprehensive Plan of Action result is likely to result in third order effects the U.S. (and its allies and trade partners) may not benefit from. Basing new courses of action on the unknown results of previous ones is unwise, so why should the U.S. exhaust an economic tool with its largest trading partner outside of the EU?
Can Secondary Sanctions be effective?
Yes, with the following considerations:
- Remember, sanctions are just a single tool of U.S. strategic foreign policy, and should be wielded sparsely when applied towards a country with significant capability to implement different tools to meet their own strategic aims.
- KYCC can become more effective with increased information and data sharing, making the investment into those programs more effective and financially palpable.
- Creating screening gateways to major financial systems can reduce secondary risk and overall costs of compliance.
While the intent of Secondary Sanctions is noble, the practicality of using them on a large scale, and with nations that possess the capability to refute them is problematic. Banks are generally well-intentioned in supporting the regulatory requirements that augment foreign policy aims, but they are limited in resources by the nature of compliance return on investment. Focused and deliberate Secondary Sanctions, however, can be quite effective as a supporting measure of the intent of OFAC’s goals and BSA/AML regulations.
Michael Carter is an expert consultant and thought leader in the area of Financial Crimes which includes Bank Secrecy Act / Anti-Money Laundering, OFAC programs, export compliance, and counter terrorism financing. His Twitter feed curates the latest in #AML, #ITAR, #FCPA, #EAR, and #WhiteCollar crime & #compliance news.
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