The concept of secondary sanctions is a foreign policy tool, most often employed by the United States, that extends the reach of its economic restrictions beyond its borders. Unlike primary sanctions, which prohibit U.S. persons or entities with a U.S. nexus from transacting with a sanctioned party, secondary sanctions target non-U.S. persons for doing business with the sanctioned party, even if the transaction has no direct link to the U.S..
The modern use of secondary sanctions originated in 2010 with the passage of the Comprehensive Iranian Sanctions Accountability and Divestment Act (CISADA), created to pressure Iran over its nuclear program. The mechanism works by threatening the third-party foreign entity with penalties that restrict its access to the U.S. financial system and markets. For example, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) can prohibit or restrict a foreign financial institution's access to correspondent accounts or payable-through accounts in the United States. The most severe penalty is designation as a Specially Designated National (SDN), which blocks all U.S. property and prohibits U.S. persons from transacting with the designated entity.
A key related concept is the extraterritorial application of U.S. law, which is often criticized by other nations. Secondary sanctions are currently a crucial part of U.S. sanctions programs against countries like Iran, North Korea, and Russia. Recently, the scope of secondary sanctions was significantly expanded on December 22, 2023, when President Biden issued an Executive Order that expressly allows the U.S. to impose sanctions on non-U.S. financial institutions that facilitate transactions related to Russia's military-industrial base. This amendment, which targets a specific sector, broadens the risk for foreign banks, including those in India, that deal with Russian entities.