Dollar Architecture: How U.S. Sanctions Freeze Assets Abroad
The question of how sanctions are connected with frozen dollar assets abroad often causes confusion. How can the United States block funds located, for example, in a Swiss, Chinese, or Dubai bank? The answer lies not in physical control over these banks but in the absolute control of the U.S. over the global infrastructure of dollar settlements.
The answer to the question of whether the US freezes dollars is yes, but they do this by flipping the switch for those who try to use these dollars. Sanctions are not just a political statement; they are a deliberate use of financial infrastructure as a tool of state power. Asset freezing is a direct consequence of how the modern dollar-based world is structured. Understanding this mechanism is critically important for assessing risks in international trade and finance.
Why Does the USA Control All Transactions
To understand how assets are frozen, you first need to understand what the dollar is outside the United States. Dollars held in an account at a non-American bank are essentially not physical banknotes in a safe but digital records. These records represent an obligation (IOU) of that foreign bank to its client.
The value of this obligation entirely depends on the foreign bank’s ability to conduct operations in dollars itself. For this, almost every bank in the world working with dollars must have a so-called correspondent account in an American bank (or in a large international bank with direct access to the U.S. system).
This correspondent account is a bridge or gateway of a foreign bank into the financial system of the United States.
When a bank client in Germany wants to send $100,000 to a bank client in Japan, a complex process occurs:
- A German bank debits $100,000 from a client’s account.
- He gives an instruction to his correspondent bank in the USA (for example, J.P. Morgan Chase or BNY Mellon) to transfer $100,000 from his correspondent account to the correspondent account of the Japanese bank.
- This transfer within the USA goes through one of two main clearing systems: Fedwire (managed by the Federal Reserve System of the USA) or CHIPS (a private clearinghouse).
- Only after the American correspondent bank of the Japanese bank confirms the receipt of funds, the Japanese bank credits $100,000 to the account of the final recipient.
Key takeaway: almost every international dollar transaction, regardless of where it is initiated or completed, physically passes through U.S. jurisdiction. This dependence on the American clearing system is the leverage that the United States uses.
OFAC as a Sanctions Operator: Blocking Mechanism
The main agent for enforcing sanctions is the Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury. OFAC administers and enforces economic and trade sanctions in support of U.S. national security and foreign policy objectives.
The main tool of OFAC is the Specially Designated Nationals and Blocked Persons List (SDN List). This list includes individuals, companies, organizations, economic sectors, and even maritime vessels that, in the opinion of the U.S. government, pose a threat (terrorists, drug traffickers, persons associated with the proliferation of WMDs, or entities from countries under broad sanctions).
When the USA imposes sanctions, the following happens:
- The purpose of SDN: OFAC announces that a specific individual, company, or an entire foreign bank (for example, a major Russian or Iranian bank) is included in the SDN list.
- Obligation of Blocking: U.S. law (for example, IEEPA — International Emergency Economic Powers Act) obligates all U.S. persons — including all American banks — to immediately block (freeze) any property or interests in property of a designated SDN that are in their possession or under their control.
- Execution: At the moment when a foreign bank is added to the SDN, its American correspondent bank (the very J.P. Morgan or BNY Mellon) is legally obligated to immediately freeze all funds in its correspondent account.
This is exactly where the freezing of foreign assets takes place.
The American correspondent bank cuts off the foreign SDN bank’s access to its gateway. All the millions or billions of dollars that this foreign bank held in the US to serve all its clients become immobile.
From this moment, a foreign bank can no longer process any dollar transactions. If it tries to send a payment, the American correspondent bank will reject (reject) or block (block) it. If it is supposed to receive a payment, the funds will be frozen as soon as they enter the American system.
For the end client (a company or an individual) in this foreign bank, this means that their dollars in the account, which were the bank’s obligation, have become unenforceable. The bank can no longer fulfill its obligation to transfer these funds. The client’s assets abroad are effectively frozen, even though the client themselves may not be under sanctions.
The Role of SWIFT in the Freezing Process
There is often confusion between OFAC sanctions and disconnection from SWIFT (Society for Worldwide Interbank Financial Telecommunication). These are not the same, although these tools are often used in tandem to enhance the effect.
SWIFT is not a payment system. It does not move money. SWIFT is a secure messaging system based in Belgium that banks use to send each other payment instructions (similar to encrypted email or a messenger for finance).
OFAC Block (Asset Freeze): This is a halt of transactions. Money cannot physically move through American correspondent accounts.
Disconnection from SWIFT (Communication Isolation): This is the deprivation of a bank’s ability to send or receive payment orders through the standard international channel.
Disconnection from SWIFT in itself does not freeze assets but turns conducting international operations into a logistical nightmare. The bank has to use outdated (telex) or insecure (e-mail) methods to communicate with correspondent banks, which are most likely to refuse to process the transaction anyway due to OFAC sanctions.
When the USA wants to maximally isolate a country (like Iran or some banks in Russia), they use both levers: OFAC blocks correspondent accounts in the USA, and political pressure (through the EU, where SWIFT is based) leads to disconnecting banks from the messaging system.
Frozen Assets of Russia, Iran, and Venezuela
The practice of freezing assets through control over the financial system has many real examples, differing in scale and mechanics.
Russia (Sovereign assets): The most large-scale example is the immobilization of the sovereign assets of the Central Bank of the Russian Federation (CB RF) in 2022. After the start of the conflict in Ukraine, a coalition of G7 countries, including the USA, EU, United Kingdom, and Japan, made an unprecedented decision.
They did not just add the Central Bank of Russia to the SDN list (although the USA did this), they prohibited their central banks and financial institutions from conducting any operations with the Central Bank of Russia.
Approximately $300 billion of Russia’s gold and foreign exchange reserves, which were held in the form of securities and deposits in dollars, euros, pounds, and yen in foreign jurisdictions (in accounts at foreign central banks or in Euroclear), have been immobilized. The Russian Central Bank cannot access them, sell them, or use them to support the ruble because Western financial institutions where these assets are accounted for are obligated to block any transactions with them. This is a classic freezing of assets abroad on a sovereign scale.
Iran (Oil revenues): Iran has been living under strict US sanctions for decades. The mechanism of freezing its assets is often linked to secondary sanctions. The US threatens to cut off any non-American bank from the American financial system if it conducts significant transactions with Iranian banks from the SDN list.
As a result, billions of dollars that Iran earned from the legal (from the buyers’ perspective) sale of oil to countries like South Korea, Japan, or India became stuck. Banks in these countries received payments for the oil but could not transfer the dollars to Iran, fearing U.S. sanctions. These funds ended up frozen in special escrow accounts in these countries. Iran could only use them to purchase humanitarian goods or non-sanctioned products from the same country where the money was stuck but could not freely manage them or transfer them to another jurisdiction.
Venezuela (Corporate assets): In the case of Venezuela, U.S. sanctions were aimed at Nicolás Maduro’s government and, most importantly, at the state oil company PDVSA.
OFAC included PDVSA in the SDN list. This led to two main consequences:
- Blockade in the USA: The assets of the American subsidiary of PDVSA — Citgo Petroleum Corporation — were frozen.
- Blocking abroad: Any international buyers of Venezuelan oil could no longer pay for it in dollars, as these transactions would be immediately blocked when passing through the American clearing system. This deprived Maduro’s government of its main source of hard currency.
Moreover, the political aspect led to the control over some of Venezuela’s foreign assets (for example, gold in the Bank of England) being contested and ultimately frozen until the resolution of the political crisis.
Legal and Political Consequences of Asset Immobilization
The widespread use of sanctions to freeze assets, especially sovereign ones, generates profound legal and long-term political consequences.
Legal Limbo: Frozen vs. ConfiscatedIt is critically important to distinguish between freezing (freezing/blocking) and confiscation (seizure/forfeiture). Frozen assets legally still belong to the original owner (for example, the Central Bank of Russia). However, the owner is deprived of the right to use them — to receive income, transfer, or sell. Confiscation is the permanent seizure of assets and the transfer of ownership rights to another party (for example, the state that imposed sanctions or victims).
The confiscation of sovereign assets is extremely complex from a legal standpoint, as it contradicts the fundamental principle of state (sovereign) immunity, which protects the assets of one state from enforcement measures by another. The current debates in the West about whether frozen Russian assets can be confiscated and transferred to Ukraine are precisely rooted in this legal collision.
Political Effect: Weaponization of the Dollar and De-dollarization Aggressive use of dollar infrastructure as a tool of foreign policy (referred to as weaponization or using the dollar as a weapon) does not go unnoticed.
Countries fearing the risk of falling under US sanctions (primarily China, Russia, Iran, and other Global South countries) are actively seeking ways to reduce their dependence on the dollar. This process has been called de-dollarization.
It includes several directions:
- Increase in the share of settlements in national currencies (for example, trade between Russia and China in rubles and yuan).
- Creation of alternative payment systems (for example, the Russian or the Chinese CIPS).
- Change in the structure of gold and foreign exchange reserves (increase in the share of gold and yuan, decrease in the share of the dollar and euro).
Although the dominance of the dollar is not threatened in the near future due to the depth and liquidity of US markets, the erosion of trust in it as a neutral asset is a direct political consequence of asset freezes.
What Does Asset Freeze Mean for Companies and Individuals
Apart from states, the freezing of assets has direct and often devastating consequences for the private sector.
If a company (for example, an exporter) keeps its dollar revenue in a bank that suddenly falls under OFAC blocking sanctions, its funds are instantly frozen. The company loses access to its working capital, cannot pay international suppliers, or service debts in dollars.
For individuals, the consequences are similar. Dollar savings kept in a sanctioned bank become inaccessible. Transfers from relatives abroad do not go through, as they are blocked by correspondent banks.
This risk also gives rise to a phenomenon known as de-risking. Large international banks, fearing huge fines for sanctions violations, often prefer not just to block SDN accounts but to completely terminate relationships with entire regions or categories of clients that seem high-risk to them. For example, a bank in the UAE may close the accounts of all clients with Russian passports, even if they are not under sanctions, simply to avoid compliance complexities.
Thus, the US sanctions mechanism is a powerful tool based on the central role of the dollar in the global economy. By controlling the clearing system, the US gains the ability with the push of a button to isolate entire countries, banks, and companies from the global financial system, turning their foreign dollar assets into useless digital records.
Contact lawyers specializing in OFAC sanctions cases.
Geopolitical tension has turned jurisdictional risk from a theoretical threat into an everyday operational reality. Assessing where your assets are stored and through which correspondent banks your transactions pass is no longer a secondary task.
Contact our compliance and financial risk specialists to audit your international settlement structure. We will help diversify your jurisdictional risks and protect your assets from potential freezing in a changing world.
