The Long Arm of the Dollar: How America’s Secondary Sanctions Force Foreign Banks to Choose Between Washington and the World
In October 2019, a Manhattan federal grand jury handed down a sweeping indictment against Halkbank, one of Turkey’s largest state-owned financial institutions. The charges were extraordinary: prosecutors alleged the bank had participated in a multi-billion-dollar scheme to help Iran evade U.S. sanctions, laundering oil and gas proceeds through front companies in Turkey, the UAE, and elsewhere. The potential penalty—the revocation of Halkbank’s access to the U.S. financial system—was, in the context of global banking, tantamount to a death sentence for its international operations.
Halkbank had not operated a single illicit transaction on American soil. Its executives had not walked into a U.S. bank branch to move money. Yet Washington was prepared to reach across the Atlantic, grab a sovereign Turkish institution by the collar, and threaten its very existence. This is the essence of secondary sanctions—one of the most audacious, effective, and deeply contested tools in the modern arsenal of American power.
What Secondary Sanctions Actually Are—And Why They’re Different
To understand secondary sanctions, it helps to first grasp the more conventional kind. Primary sanctions are relatively straightforward: the U.S. government prohibits American citizens, companies, and financial institutions from doing business with a designated individual, entity, or country. If you’re an American bank, you cannot process a wire transfer for the Iranian government. If you’re a U.S. company, you cannot sell aircraft components to a Russian defense contractor. The jurisdiction is American; the logic is intuitive.
Secondary sanctions are something else entirely. They target non-American entities for doing business with a U.S.-sanctioned party. A German bank, a Chinese trading company, a Turkish state lender—none of these have any formal legal obligation to comply with American law. Yet under secondary sanctions, if they transact with Iran, Russia, North Korea, or any other designated adversary, they risk being cut off from the U.S. financial system, blacklisted by the Treasury Department’s Office of Foreign Assets Control (OFAC), or subjected to crushing fines that can run into the billions of dollars.
The mechanism is brutal in its elegance. The United States does not need to arrest foreign bankers or physically seize assets in Ankara or Frankfurt. It simply needs to threaten exclusion from the dollar-denominated global financial system—a system so deeply embedded in international commerce that most serious financial institutions around the world cannot function without access to it. Roughly 88% of all international foreign exchange transactions involve the U.S. dollar, according to the Bank for International Settlements’ 2022 Triennial Survey. Correspondent banking relationships with U.S. institutions are not a luxury for most global banks. They are oxygen.
OFAC, the Treasury unit that administers and enforces sanctions, maintains a Specially Designated Nationals (SDN) list containing thousands of individuals, companies, and entities. Being placed on that list, or even being credibly threatened with it, is enough to make most foreign banks capitulate—quietly severing relationships with sanctioned counterparties to protect their U.S. market access.
Iran: The Laboratory for Secondary Sanctions
No case better illustrates the construction and deployment of secondary sanctions than Iran. Since the 1979 revolution, the United States has maintained some form of sanctions on Tehran, but the secondary sanctions architecture that would prove globally coercive was largely built in the 2000s and dramatically expanded under the Obama administration as part of the diplomatic pressure campaign that eventually produced the 2015 Joint Comprehensive Plan of Action (JCPOA).
The Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) of 2010 was a watershed moment. For the first time, Congress codified explicit penalties for foreign financial institutions that maintained correspondent accounts with Iranian banks or processed significant transactions for Iran. The message was unambiguous: do business with Tehran, and we will shut you out of New York.
The results were measurable and severe. Iran’s oil exports, which had hovered around 2.5 million barrels per day before the intensified sanctions campaign, fell to roughly 1 million barrels per day by 2013. The Iranian rial collapsed, losing more than 60% of its value in a single year. International banks—including major European institutions that had maintained Iranian business for decades—began quietly cutting ties. SWIFT, the Belgian-based international payments messaging network, expelled Iranian banks from its system in 2012 under pressure from the EU acting in coordination with Washington, effectively disconnecting Iran from the global financial grid.
The logic was reinforced repeatedly. In 2012, BNP Paribas—a French bank, operating primarily in Europe—was fined $8.9 billion by U.S. authorities for processing dollar transactions on behalf of Sudan, Cuba, and Iran. The bank had not violated French law. It had not violated European Union law. It had, however, moved dollars through the American financial system on behalf of sanctioned parties. That fine remains one of the largest in banking history, and its chilling effect on foreign financial institutions was immediate and profound.
When the Trump administration unilaterally withdrew from the JCPOA in 2018 and reimposed sanctions under its “maximum pressure” campaign, European governments were furious. The EU invoked its so-called Blocking Statute—a 1996 regulation updated in 2018 that nominally prohibits European companies from complying with U.S. extraterritorial sanctions and allows them to recover damages incurred by such compliance. It was largely theater. European banks and companies, faced with a binary choice between the Iranian market and the American financial system, overwhelmingly chose America. The Blocking Statute had no enforcement teeth that could match the dollar’s gravitational pull.
The Halkbank Affair: When Sanctions Collide with Geopolitics
The prosecution of Halkbank represents perhaps the most dramatic collision between U.S. secondary sanctions and the sovereignty claims of a major allied nation—and it is still playing out in American courts.
The case originated with the arrest in Miami in 2016 of Reza Zarrab, a gold trader with Turkish and Iranian citizenship who had allegedly orchestrated a scheme to use gold-for-food transactions as a cover for funneling billions of dollars in Iranian oil revenue through Turkish banks, bypassing U.S. sanctions. Zarrab eventually turned government witness, implicating senior Halkbank executives—including Deputy General Manager Hakan Atilla, who was convicted in 2018—and, by extension, the bank itself.
Turkey’s government reacted with outrage. President Recep Tayyip Erdoğan personally intervened, describing the prosecution as a “judicial coup” and a political attack on Turkey. Turkish officials argued that the gold-for-food transactions had been approved by the Turkish government and were consistent with international humanitarian exceptions. The case became entangled with broader U.S.-Turkey tensions, including disputes over the purchase of Russian S-400 missile systems, the status of Kurdish forces in Syria, and Erdoğan’s increasingly fraught relationship with the Trump and Biden administrations.
The legal proceedings produced extraordinary moments. Zarrab’s testimony revealed alleged bribes to Turkish government ministers. American prosecutors argued that Halkbank had facilitated roughly $20 billion in sanctions-evasion transactions. The bank’s lawyers countered that the U.S. courts lacked jurisdiction over a foreign sovereign institution. In June 2023, the Supreme Court ruled unanimously that Halkbank could be prosecuted in federal court, rejecting its jurisdictional arguments—though the substantive criminal case continues.
The Halkbank affair illustrates something critical about secondary sanctions: they are not purely legal instruments. They are geopolitical tools that carry enormous diplomatic weight and risk. The prosecution of a NATO ally’s state-owned bank is not a routine enforcement action. It is a statement of power that strains alliances, provokes retaliation, and forces governments to confront uncomfortable questions about sovereignty and economic dependence.
The Architecture of Compliance: How Foreign Banks Actually Respond
Away from the dramatic court cases and diplomatic confrontations, the real daily operation of secondary sanctions is quieter and more pervasive—a vast compliance apparatus that has reshaped global finance from the inside.
Major international banks now maintain enormous sanctions compliance departments. At institutions like HSBC, Deutsche Bank, Standard Chartered, and Société Générale—all of which have faced major U.S. enforcement actions—hundreds or thousands of compliance officers spend their working days screening transactions against OFAC’s SDN list, monitoring for “red flags” that might indicate involvement with sanctioned parties, and maintaining elaborate documentation systems designed to protect the bank in the event of an investigation.
The costs are staggering. A 2019 study by the Atlantic Council estimated that the global compliance burden associated with financial sanctions runs into the tens of billions of dollars annually. Banks in jurisdictions far from the United States—in Southeast Asia, the Gulf, and sub-Saharan Africa—have been forced to build American-style compliance infrastructure simply to maintain access to dollar clearing.
The phenomenon of “de-risking” has been a significant side effect. Facing the complexity and potential liability of sanctions compliance, many banks have simply chosen to exit entire markets or categories of business rather than risk exposure. Correspondent banking relationships in regions deemed high-risk—including parts of the Middle East, Central Asia, and Africa—have been severed wholesale. The World Bank has documented a significant decline in global correspondent banking relationships, with a 22% reduction between 2011 and 2019. Development economists argue this has left entire populations financially excluded, unable to receive remittances or access basic banking services, as collateral damage of a sanctions regime primarily directed at state adversaries.
OFAC itself has become more sophisticated in its targeting. The agency now issues detailed guidance on “facilitation”—the principle that a foreign bank can face sanctions exposure not only for directly transacting with a sanctioned party but for knowingly helping a third party do so. This expansive interpretation has made compliance departments deeply cautious about correspondent relationships and has, in effect, extended Washington’s regulatory reach into the internal compliance policies of banks in Singapore, Dubai, and São Paulo.
The Counterarguments: Sovereignty, Effectiveness, and the Emerging Challenge
Secondary sanctions are not without serious critics, and those critics occupy positions across the ideological spectrum.
From a legal standpoint, scholars including Columbia Law professor Katharina Pistor and Johns Hopkins researcher Henry Farrell have argued that secondary sanctions represent a fundamental challenge to the Westphalian order—the principle that states exercise sovereign legal authority within their own borders. When Washington effectively dictates the foreign business relationships of Turkish, German, or Chinese banks, it is exercising a form of regulatory imperialism that has no precedent in international law and no clear limiting principle.
From a strategic standpoint, critics question whether secondary sanctions actually achieve their stated objectives. The Iran case is complex: while sanctions clearly imposed enormous economic pain on the Iranian population, they did not prevent Iran from advancing its nuclear program, nor did they produce the regime change that some U.S. policymakers quietly hoped for. The “maximum pressure” campaign of the Trump era, which applied the most comprehensive secondary sanctions ever deployed against Iran, did not bring Tehran back to the negotiating table on American terms. A 2021 report by the Government Accountability Office noted significant challenges in measuring the effectiveness of sanctions programs across multiple U.S. foreign policy objectives.
More fundamentally, the era of unchallenged dollar dominance that makes secondary sanctions possible may be slowly eroding. China has been systematically developing the Cross-Border Interbank Payment System (CIPS) as an alternative to dollar-based clearing, and the volume processed through CIPS has grown substantially—though it remains a fraction of SWIFT’s capacity. Russia, following the 2022 sanctions imposed after its invasion of Ukraine, has accelerated bilateral trade in non-dollar currencies with China, India, and others. Iran itself has pioneered bilateral barter-style arrangements to circumvent the dollar system entirely.
The BRICS nations—Brazil, Russia, India, China, and South Africa, now expanded with several new members—have periodically discussed the creation of alternative reserve assets, though these discussions remain largely aspirational. The dollar’s share of global reserve holdings has declined gradually from roughly 70% in 2000 to about 59% as of 2023, according to IMF data—still dominant, but no longer unchallenged.
The Future of Financial Coercion in a Multipolar World
The question hanging over secondary sanctions is not whether they work today—they manifestly do, as evidenced by the compliance behavior of virtually every major global bank—but whether they will continue to work as the financial architecture of the world slowly shifts.
The Biden administration’s sweeping sanctions package imposed on Russia following the 2022 invasion of Ukraine represented the most aggressive deployment of secondary sanctions in history, targeting the Russian central bank, major financial institutions, and oligarchs with a speed and scale that surprised even experienced sanctions lawyers. The coordination with European allies—who, unlike in the Iran case, largely moved in lockstep with Washington—demonstrated that secondary sanctions can be even more powerful when wielded multilaterally.
But Russia’s partial survival of those sanctions—maintaining exports to China, India, and much of the Global South, continuing to finance its war, and demonstrating that a large economy can adapt, however painfully, to financial isolation—has also revealed the limits of the tool. Sanctions work best against smaller, more financially integrated economies. Against major powers with large domestic markets and alternative partners, they impose costs without necessarily determining outcomes.
For the United States, the challenge going forward is one of calibration. Secondary sanctions are a finite resource of sorts: every time Washington weaponizes the dollar system, it provides additional incentive for adversaries—and nervous neutrals—to invest in alternatives. The European frustration with extraterritorial reach, the Turkish anger over Halkbank, the Chinese determination to build dollar-independent payment infrastructure—these are not random events. They are responses to a policy that, however effective in the short term, carries long-term costs to the very dollar hegemony that makes it possible.
The history of great financial powers suggests that the tools of economic coercion and the architecture that enables them evolve together. Secondary sanctions, as currently constructed, are a product of a specific historical moment—one in which the dollar’s dominance was so total that exclusion from it was tantamount to exclusion from the global economy itself. As that moment gradually passes, the United States will face a harder question: not how to punish foreign banks without touching them directly, but whether the power to do so will remain as absolute as it once was.
The Halkbank case, still grinding through American courts years after the original indictment, may yet provide an answer.