Picking up from our previous discussion, the last article dispelled the common misconceptions around secondary sanctions. We established that there is no single definition of secondary sanctions; it varies across different sanction programs and between the sanctioning authorities (EU, UK, and US). This is where this article picks up: What are the current uses of secondary sanctions by the three regimes, what are their specific definitions, and how are they being applied?
It is important to note that the EU and UK, until quite recently, were firmly against using secondary sanctions. The EU even re-enacted the Blocking Statute to combat US “overreach” after the US withdrew from the Joint Comprehensive Plan of Action (JCPOA) agreement. Yet, the eighteen sanctions packages targeting Russia have so far fallen short of meeting their objective of compelling Moscow to end its war. Because of this failure, the use of secondary sanctions has now been adopted, in practice, by both the EU and the UK. The problem, of course, is that with three major players adopting this complicated tool in three different ways, it is easier than ever to be confused.
🇪🇺 The EU’s Secondary Sanctions Regime
The EU was once a long-standing and vocal critic of US secondary sanctions, citing their “unlawful” nature. However, with Russia continuing its war in Ukraine, the EU has now started to see the merits of using secondary sanctions.
The Scope of EU Secondary Sanctions
EU sanctions are program-specific; measures applied to Russia and Belarus are not identical to those implemented under any other program. For now, only the EU’s Russia and Belarus sanctions programs contain the authority to target the “helpers of its enemies.”
How the EU’s New Tools Look
The EU’s first step towards expanding its sanctions regime was made on 23 June 2023. As part of the 11th package, the Russia sanctions regime was amended. This amendment threatens third parties with designations if they were found actively circumventing, or — in the most expansive measure of EU sanctions — to be “significantly frustrating” the effectiveness of any of the EU sanctions against Russia.
Naturally, one might wonder what “significantly frustrating” entails. Still, the EU has offered zero clarity on the criteria used to determine what has crossed the line to be “significantly frustrating.” Despite this, multiple companies, individuals, and entities keep getting designated by this criterion. Even being outside of the EU’s borders offers no protection; individuals and companies from China have been designated as well. It is clear that, much like the US before it, ambiguity is what the Commission and Council are going for. We call it “strategic ambiguity”. This is the means to deploy the tool when the EU deems it necessary, and via criteria that it gets to determine. Consequently, the risk for potential designation of parties is, by definition, boundless. Companies, therefore, bear the burden of ensuring they are not participating in actions that “significantly frustrate” EU sanctions.
A year later, on 24 June 2024, with the 14th package, the pressure intensified. The EU added the ability to target foreign financial institutions (FFIs) if they facilitate transactions that support Russia’s defense-industrial base. The punishment for the prohibited activity is a transaction ban. A transaction ban is a less restrictive measure than an asset freeze, and the restriction is exactly as its name implies: it is the same as a reject requirement, whereby EU parties are prohibited from conducting transactions for the sanctioned FFI, rather than freezing the FFI’s assets.
For more than 2 years now, we have had EU “secondary sanctions” in place. To say this shift in EU thinking and approach is monumental is a bit of an understatement, considering that just a few years ago, the EU was enacting regulations to combat US secondary sanctions.
The EU’s new openness to secondary sanctions is evident. There is a clear resemblance to the US through the use of the vague but threatening phrase “significantly frustrating,” which bears a very similar resemblance to the US’s “significant transactions” language. The questions now are: How will the EU utilize these authorities going forward? Will the application of secondary sanctions be the default for future sanctions regimes? This and other questions will be answered in our next article.
🇬🇧 The UK’s Secondary Sanctions Regime
Historically, the UK, along with the EU, has been quite frustrated with the US’s broad use of secondary sanctions. However, the failure to cripple Russia’s war efforts became undeniable, forcing the British government, just like Brussels, to face reality. As we know, the EU bit the bullet in 2023; the UK took a little longer, but finally rolled out its own secondary sanctions to its Russia sanctions program on the 31st of July in 2024.
What Do UK Secondary Sanctions Look Like?
The UK adoption of secondary sanctions is also exclusive to its Russia and Belarus sanctions programs. Within the UK’s Russia sanction regime, the Secretary of State has several instruments at its disposal that can be used to punish an “involved person” — that is, someone found guilty of either destabilizing Ukraine or supporting the Russian government. The amendment made on 31 July 2024 added a new criterion for being regarded as an “involved person”, which falls into the realm that we know as secondary sanctions.
The new criteria for being regarded as an “involved person” are “providing financial services, or making available funds, economic resources, goods or technology” to, amongst others, “a sector of strategic significance to the Government of Russia”. The sectors of strategic significance include any of the Russian: (a) chemical-, (b) construction-, (c) defence-, (d) electronics-, (e) energy-, (f) extractives-, (g) financial services-, (h) information-, (i) communications, and digital technologies-, and the (i) transport sectors. This is consistent with what the EU and the US have defined as Russia’s military-industrial complex.
If someone is found guilty of doing this, the Secretary of State has several instruments at their disposal, which include, but are not limited to, asset freezing and/or correspondent banking and payment processing sanctions. More simply put, the new criteria introduced in June of 2024 directly target FFIs that facilitate transactions on behalf of, or in support of, Russia’s strategic sectors. Whereas the US has primarily threatened with the loss of correspondent accounts, the UK has taken this a step further. An FFI being regarded as an “involved person” might be subject to both an asset freeze and correspondent banking/payment processing sanctions.
Who is Not Affected – at least yet…
You might wonder: Don’t all non-UK businesses already risk designation if they help a sanctioned party? Yes, but that’s the key difference. Standard rules require that a party “materially assist” a sanctioned party (a higher threshold) to be UK-designated. The new UK secondary sanctions are to target FFIs merely facilitating activity. This allows the UK to target the facilitator with potential asset freezing and/or correspondent banking and payment processing sanctions for providing financial services to a sector that is linked to Russia. This difference in threshold is precisely why secondary sanctions were introduced—to lower the burden on the government to punish financial enablers. For now, non-financial businesses are therefore not in the scope of UK secondary sanctions, but, as non-UK businesses have long been, are subject to potential designation for providing “material assistance” to UK-designated parties.
🇺🇸 The US Secondary Sanctions Regime
The US has, for a long time, been the most enthusiastic and frequent user of secondary sanctions, a practice that has consistently drawn frustration from both allies and adversaries. This was most recently demonstrated with the US decision to designate two of Russia’s largest oil companies, which has already forced Lukoil to consider selling its international assets. The effectiveness of secondary sanctions, and the resulting challenges for allies and adversaries, stems from the US dollar’s dominance in the global financial system. Nearly 90% of all foreign transactions are conducted in dollars, and US financial institutions are woven into investment infrastructure and markets around the world. This dominance provides the US with much leverage to compel FFIs to comply with US sanctions, that is, if they want to maintain access to the US financial system.
What Do US Secondary Sanctions Look Like?
Secondary sanctions target FFIs that engage in “significant transactions” with adversaries of the US, even if these FFIs lack a direct connection to the US.
What constitutes a “significant transaction”? In essence, anything the Secretary of the Treasury or the Office of Foreign Asset Control (OFAC) decides it to be. The US, therefore, applies pressure on FFIs to decide between two options: they can stop banking US-designated individuals/entities/activities and keep access to the US, or risk losing access to the US financial system. However, as pretty much any bank would tell you, this isn’t really much of a choice, as losing access to the US financial system for any financial institution aiming to serve its customers for global operations is an irreparable blow.
In essence, this mechanism prevents FFIs from doing business that is otherwise perfectly legal in their own country. To put it another way, the US sanctions regime operates on the principle: the enabler of my enemy is my enemy.
The misconception: Targeted for providing material support ≠ Secondary sanctions
It is important to be able to differentiate what constitutes US secondary sanctions from what does not. A common misconception is that U.S. secondary sanctions target persons who continue to provide material support to the primary target. This is incorrect.
While the US has a long history of designating entities for providing material support, this practice does not fall under the US definition of secondary sanctions. Providing material support traditionally requires satisfying a higher burden of proof to demonstrate that the “support” is “material” to the target — meaning it must be more than just incidental. Often, this would include the US having information demonstrating that the party “knew or should have known” they were engaging with a designated entity. As anyone at Treasury (or formerly) will tell you, constructing and building these processes is often time-consuming and costly. Therefore, the US changed the rules to make it easier to target the actors where they have the most leverage.
The introduction of secondary sanctions lowered the threshold for authorities to penalize FFIs. Now, intent is irrelevant: any “significant transaction” is enough, and the US government gets to define what “significant” means.
The US Secondary Sanction Programs
The US secondary sanctions regime extends to North Korea, Russia, Iran, and terrorist organizations, which has most recently been used to target Mexican cartels. However, nothing can be simple, and the exact secondary sanctions applied by the US vary by each regime:
- Iran (2018): The US reimposed sanctions on Iran, and FFIs were put at risk of losing their correspondent accounts if they facilitated any significant financial transaction to Iran’s automotive, petroleum, and petrochemical sectors, or on behalf of any person or entity on the U.S. SDN List.
- North Korea (2017): With North Korea, FFI are at risk of losing their correspondent accounts or designation if they facilitated any significant transaction to either a North Korean designated person or to anything in connection with trade with North Korea.
- Terrorism sanctions (2019): With terrorism, FFIs are at risk of losing their correspondent account if they facilitate any significant transaction on behalf of any designated person who is blocked by EO13886.
- Russia (2023): The most recent application of secondary sanctions occurred in 2023 against Russia, where FFIs face the risk of losing their correspondent accounts or, more severely, being designated as a Specially Designated National (SDN) if they facilitate a “significant” transaction with the Russian military-industrial base.
All of the examples above are secondary sanctions. Although they all look vastly different, they all target FFIs for facilitating “significant transactions”. The punishment of doing so is the thing that varies, which highlights the fact that secondary sanctions are not static. While the 2018 Iran sanctions primarily threaten the loss of correspondent accounts, the 2023 Russia sanctions introduced the additional risk of FFIs themselves being designated.