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.
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.
For more detailed analysis, read: ARE SECONDARY SANCTIONS AGAINST PYONGYANG REALLY SUCH A GOOD IDEA?
Researchers in Washington and South Korea have identified a number of business transactions that they say show North Korea’s international financing web is more sophisticated than what was widely known previously.