Sanctions are important instruments in international relations to influence political behaviour, limit lawless acts, or discourage hostile regimes. The two most debated types of primary and secondary sanctions are important in global compliance and enforcement plans. Although primary sanctions directly restrict both citizens and the entities of the sanctioning nation from dealing with particular foreign actors, secondary sanctions expand the reach. They are directed at third-party people or groups who do business with sanctioned parties. This essay analyses these two sanctions, their mechanisms, compliance issues, and their wider implications on international law and economics.
Primary sanctions refer to first-level sanctions that a country imposes on its citizens, residents, and organisations. These sanctions prohibit these individuals or entities from conducting certain transactions or associations with foreign parties, individuals, or governments. These sanctions are based on domestic law and are applicable within the imposing country’s jurisdiction.For example, a primary U.S. sanction prohibits an American firm from dealing with North Korea or offering any form of financial services to companies in Iran. These sanctions apply to all U.S. persons – citizens, permanent residents, and companies incorporated in the U.S. as well as their foreign branches.
The legal basis for such sanctions is usually national legislation like the U.S. International Emergency Economic Powers Act (IEEPA) or the Patriot Act. Primary sanctions are the cornerstone of a country’s sanction regime, reflecting its foreign policy and security concerns.
Secondary sanctions are indirect mechanisms to punish foreign entities (persons, corporations, countries) that have relations with the sanctioned target, even if these relations do not include the sanctioning country. Rather than primary sanctions, they have extraterritorial control, extending the compliance responsibility beyond national frontiers.
Multilateral agreements are not always needed, since sanctions can be used by one nation, like the United States, to create extra pressure on a target globally. Secondary sanctions cannot force foreign parties by law, but they make it obvious to them: refuse to work with the sanctioned party, and you will be blocked from the sanctioning country’s financial system.
In the world of compliance and international finance, knowing the difference between primary and secondary sanctions is crucial for fintech working in various countries.
A government’s primary sanctions are applied directly to its people and economic players. U.S. citizens are not permitted to deal with organisations that are blacklisted by U.S. sanctions, such as those located in Iran or North Korea. Sanctions are required by law and can be enforced in the country.
Secondary sanctions are not directed at a specific target. They target people or companies outside the sanctioned country for engaging with sanctioned parties, whether there is a direct relationship or not. In the U.S., for example, a European bank that helps Iran send oil to Europe could lose access to American financial systems.
Wayward entities and authorities in other countries may be affected by secondary sanctions even if those entities are not listed in the country’s original sanction regime. Instead of limiting certain acts, they use economic tools to urge all countries to obey the rules.
Here’s how they work:
There is a risk of punishment from the sanctioning country for any foreign business supplying anything to Iran’s energy industry or offering funds to Russian defence organisations—it risks being penalised by the sanctioning country, typically through:
Secondary sanctions do not require foreign companies to comply, but because not meeting them can mean losing access to places like the United States, many businesses comply. In turn, some companies in other countries may voluntarily end relations with customers viewed as high risk.
For fintechs and companies with global reach, secondary sanctions encourage them to strictly follow the policies of the country involved so their connections and access to banking remain worldwide.
Global businesses need to handle sanctions compliance effectively. Though both types place legal obligations on individuals, the rules they apply vary dramatically.
Primary sanctions concern citizens, permanent residents, companies based in America, and branches of foreign companies registered in the U.S. They prevent any form of transactions with particular individuals, companies, or nations (e.g., Iran and North Korea), and committing such actions may lead to tough consequences.
These sanctions cause non-American parties to lose access to U.S. financial markets for engaging with sanctioned individuals or companies. If foreign firms carry out activities that the U.S. objects to—currently, business with Russia’s military—they can still lose access to the U.S. financial system.
Any business with a global presence must be aware of its risks. U.S. sanctions apply to all businesses, and companies outside the U.S. need to watch the sanction watchlists and carry out proper screening to stay free from penalties. Operating openly and cautiously is important for anyone in a connected financial environment.
Primary and secondary sanctions often target the same groups, but each works differently. The Cuban embargo prohibits American citizens and companies from conducting trade or financial activities with entities in Cuba. Similarly, services by U.S. firms to Iranian banks are not allowed under the sanctions imposed by OFAC. In contrast, secondary sanctions hit third parties. In other words, a European bank involved in trade activities with Iran’s Islamic Revolutionary Guard Corps could experience U.S. secondary sanctions, including being barred from using the U.S. dollar, not just banks based in the U.S.
Key Countries and Sectors Targeted
Most frequently, primary and secondary sanctions target nations accused of involvement in terrorism, nuclear weapons development, or offences against human rights or military adventures. These include Iran, North Korea, Russia, Syria, and Venezuela. Often, sanctions target key sectors, such as oil and gas, banking and finance, shipping, defence, and new technology. Because of this, fintechs and global businesses must exercise greater care during their dealings with clients, partners, or transactions regarding these sectors or areas.
Legal and Economic Implications
It is required by law that primary sanctions are enforced, and those who disobey them may face civil or criminal penalties. Although secondary sanctions cannot be enforced overseas, countries use financial powers to make foreign entities obey. As a result, countries recognise the issue as a concern for sovereignty, and their allies have opposed the actions. Simply trying to obey these sanctions can cause some businesses to end all relations with customers, regardless of how low their risks may be. The results are less access to foreign markets, reduced ties between countries, and division among financial institutions at the global level. Compliance with these outcomes requires fintechs to have a secure system in place and always watch for sanctions updates.
Knowing primary from secondary sanctions is critical for those working in law, compliance, or policy. Although primary sanctions show a country’s hold over its people and companies, secondary sanctions spread their impact worldwide through economic pressure. Measures taken to alter actions may break up international financial systems and lead to more legal troubles. As the world becomes more connected, dealing with sanctions needs careful planning and a clear knowledge of the law.
