American sanctions affect transactions between parties with no presence in the United States. The reach comes from the plumbing of international payments rather than from any claim over foreign territory.
Dollar payments settle through American banks
A payment denominated in dollars ultimately settles between accounts held at American banks, because that is where dollar balances exist as a matter of accounting.
A foreign bank holding dollars holds them in a correspondent account with an American institution. Moving those dollars means instructing that institution to act.
The transaction therefore passes through United States jurisdiction even when the payer and payee are both located abroad and never deal with an American counterparty.
Correspondent banking concentrates the flow
Smaller banks around the world cannot maintain accounts everywhere, so they route payments through a chain of larger correspondents that do.
That chain narrows to a limited number of institutions with direct access to dollar clearing, making the system easy to monitor and to instruct.
Messaging networks carry the instructions between banks, and while messaging and settlement are separate functions, both concentrate through a small number of channels.
Designation lists do the operational work
The Treasury Department maintains lists of designated persons and entities, and American institutions are prohibited from dealing with those named and must block their property.
Compliance software screens every payment against those lists, so a match halts the transaction automatically wherever the screening bank sits in the chain.
Because names, aliases and ownership structures change, screening also involves ownership thresholds under which entities owned by designated parties are treated as designated themselves.
Secondary measures extend the effect further
Some authorities threaten foreign institutions with loss of access to the American financial system if they conduct specified transactions with designated parties.
A bank facing that prospect generally declines the business, since access to dollar clearing is more valuable than any single client relationship.
This produces compliance well beyond the letter of the rules, a caution often described as overcompliance, where banks avoid entire categories of legitimate business.
The system faces slow counterpressure
Governments concerned about exposure have promoted settlement in other currencies, regional payment arrangements and bilateral clearing agreements to reduce dependence.
Progress is limited by network effects. A currency is useful for trade because it is already widely held and freely convertible, conditions that take decades to build.
The dollar's share of reserves and trade invoicing has drifted rather than fallen sharply, so the mechanism remains effective while gradually attracting alternatives.