Secondary Sanctions Risks and the "Reputational Contagion" Effect: A Structural Assessment for the U.S. Financial System

This independent analytical report examines the structural impact of secondary sanctions risks and the phenomenon of “reputational contagion” within the United States financial system. While U.S. sanctions regimes are designed as targeted policy tools, their indirect effects increasingly extend beyond formally designated entities to a wider network of associated individuals, companies, and counterparties. The study analyzes how automated compliance systems, expanded risk-screening practices, and market sensitivity to sanctions signals may generate disproportionate restrictions for actors not formally subject to sanctions. Particular attention is given to indirect association analysis, defensive compliance behavior, reputational risk accumulation, and the resulting exclusionary effects within financial markets. The report evaluates systemic implications for financial stability, cross-border transactions, and institutional trust, and provides a comparative perspective on approaches adopted in the United States, European Union, and United Kingdom. It also outlines policy-oriented recommendations aimed at improving proportionality, transparency, and regulatory clarity in the management of secondary sanctions risks. Prepared by ARGA Observatory, this report is intended for regulators, financial institutions, compliance professionals, policymakers, legal practitioners, and academic researchers engaged in sanctions governance, financial regulation, and cross-border risk management.