Secondary Sanctions
Secondary Sanctions in AML/CFT – Key Takeaways
- Secondary sanctions are indirect sanctions or penalties imposed by the government on non-domestic parties for dealing with sanctioned individuals or entities.
- Key risk typologies include misuse of shell companies, beneficial ownership obfuscation, and jurisdictional arbitrage.
- Some of the red flags include sudden counterparty changes, fund routing, and a lack of transparency in payment chains.
- Citadel365 helps in managing secondary sanctions by identifying indirect sanctions risk across customers and counterparties.
Understanding Secondary Sanctions in AML/CFT and Cross-Border Financial Crime Risk
Secondary sanctions are extraterritorial, indirect measures imposed by the government that penalise foreign companies or individuals for doing business with a country, individuals, or sectors that are under primary sanctions.
Secondary sanctions differ from primary sanctions as they target foreign companies or individuals who do business with sanctioned countries, whereas primary sanctions directly target the sanctioned country, businesses, or individuals.
Even if the foreign entities are not under sanctions, they can be penalised if they deal or trade with the sanctioned persons, jurisdictions, or sectors.
Secondary sanctions are highly relevant in AML/CFT because of correspondent banking (using other banks to move money), trade finance (buying and selling goods across borders), and offshore structures (companies set up in another country to manage money), which create sanctions evasion risks by dealing with sanctioned entities or individuals unknowingly.
FATF promotes a risk-based approach, and regulators such as OFAC expect financial institutions to implement strong checks to prevent dealing with sanctioned countries or individuals.
Key Secondary Sanctions Risk Typologies in Financial Crime
Some of the key typologies used in secondary sanctions are as follows:
- The common misuse patterns that trigger indirect sanctions exposure include using intermediaries or third parties for buying goods on behalf of sanctioned countries.
- Using shell companies (companies with no real business activity), beneficial ownership obfuscation (real owner of funds or company is hidden), and jurisdictional arbitrage (routing transactions through countries that have weaker laws and controls), makes sanctioned screening difficult.
- Industries which are at high risk for secondary sanctions include energy, shipping, defence, gaming, crypto, and trade finance, due to their global reach, high value, and hard traceability.
- These typologies enable AML predicate offences, like sanctions evasion, trade-based money laundering, and terrorist financing.
Secondary Sanctions Red Flags and Transaction Monitoring Indicators
Key red flags of secondary sanctions and transaction monitoring indicators:
- Behavioural and transactional indicators include sudden changes in counterparties, routing funds through high-risk jurisdictions, and a lack of transparency in payment chains, hiding the real beneficiary.
- Some of the customer risk signals include nominee directors (hidden UBOs), unusual trade terms, and inconsistent business rationale (when the transactions don’t match the customer profile or known business).
- Financial institutions must implement enhanced due diligence and ongoing monitoring to reduce secondary sanctions risk and third-party sanctions liability, ensuring regulatory compliance.
Regulatory Expectations and Compliance Obligations for Secondary Sanctions
Regulatory expectations and compliance obligations for secondary sanctions are as follows:
- Secondary sanctions extend compliance obligations beyond domestic legal requirements by imposing penalties for dealing with a sanctioned person or jurisdiction.
- Regulators expect financial institutions to implement screening against sanctions, assess risk based on customer profile, and manage risk arising from third parties, to identify indirect exposure to secondary sanctions.
- Regulators are penalising non-US financial institutions for sanction breaches, including trends such as extraterritorial enforcement, monetary fines, and restricting access to the US financial system.
- Financial institutions must implement a risk-based AML/CFT approach to focus more on high-risk, with clear governance and accountability for sanctions risk management.
How Firms Can Identify and Manage Secondary Sanctions Risk with Citadel365
Integrating Secondary Sanctions into the AML Framework
Integrating secondary sanctions into the AML framework helps in:
- Customer due diligence involves enhanced screening to detect exposure to sanctioned jurisdictions or parties.
- Secondary sanctions factors are incorporated into transactions and customer risk scoring, which help in prioritising monitoring and taking action on high-risk customers.
- Ongoing monitoring helps in continuous review of changes in ownership, counterparties, and unusual trade routes to detect evolving risks.
- Centralised documentation and audit-ready reports enable effective governance, support regulatory reviews, and ensure responses to sanctions-related inquiries.
Secondary Sanctions – Frequently Asked AML/CFT Questions
AML controls that are most effective against secondary sanctions risk include enhanced due diligence for high-risk sectors, sanction screening, transaction monitoring, and applying a risk-based approach.
Secondary sanctions impact correspondent banking relationships as they create risk for banks to unknowingly handle transactions linked to sanctioned entities.
Yes, secondary sanctions are considered a sanctions evasion risk under AML regulations because they involve indirect exposure to sanctioned entities.