"I am very happy to be joining an ambitious club like Western United and I want the fans to know I am committed and enthusiastic about the challenge ahead," Sanchez said.
"I want to say thank you to those who have made this move come true. I am extremely grateful for the trust they have shown in me."
A defensive midfielder, Sanchez progressed through Barcelona's youth ranks and made his senior debut in 2008, before playing several games in the squad that won the 2008-09 La Liga and Copa del Rey.
He later had a short stint at Swiss club Neuchatel Xamax before joining Espanyol in 2012, where he remained until relegated this year.
Sanchez is set to join United in training in early December ahead of a campaign where they hope to build on last season's semifinal appearance.
"Victor is the consummate professional. His lengthy experience in Spain's top flight will be a benefit to the club," United's general manager of football Ante Kovacevic said.
"The defensive midfield role is key to a team's defensive and offensive play and adding a La Liga calibre player to our team is a massive coup.
"As a former captain of Espanyol, he will bring natural leadership qualities to the group that will definitely help inspire the team to success, with commitment and passion, to our collective footballing ambitions."