"In a war with Israel, Iran would need money. Not just to buy weapons and keep its economy afloat, but to re-arm militias such as Hamas and Hizbullah. Many assume that, after years of sanctions, it would struggle. They are wrong. Every year Iran funnels tens of billions of dollars from illicit oil sales to bank accounts all over the world. This huge, secret treasure was used to fund Hamas’s attack on Israel a year ago, and Iran’s own nuclear programme. It has already seeded many crises—and could soon fuel the mother of them all.
To understand how Iran can amass so much cash, zoom in on its petro-economy. Six years ago, when the Trump administration reimposed a blockade, Iran’s exports of crude oil collapsed. Since then, however, they have grown twelve-fold, to 1.8m barrels a day in September. Last year these sales generated $35bn-50bn; petrochemical exports added another $15bn-20bn. Smuggling oil on hundreds of tankers is hard. Covertly laundering billions of dollars via the global banking system is even harder. America keeps a watch on any bank, even foreign, that processes transactions in greenbacks. So how is Iran getting paid? And how does it move, store and spend such large amounts of money?
The Economist has spoken to a range of people with first-hand knowledge of Iran’s oil system. To check and verify what they told us, and flesh out the detail, we then sought information from other sources, including former sanctions officials, Iranian insiders, intelligence professionals and WikiIran, a third-party website soliciting leaks.
Our investigation shows that the country has built sprawling shadow financial channels, which run from its oil rigs to the virtual vaults of its central bank. China, Iran’s main buyer, is an architect of this system, and its chief beneficiary. Global banks and financial hubs, often unknowingly, are used as vital cogs. A source familiar with Iran’s books says that, as of July, it had $53bn, €17bn ($19bn) and smaller pots of other currencies lying abroad.
Although enforcement has weakened in recent years, Iran is subject to the broadest sanctions America has imposed on any country. Aimed at forcing Iran to curb its nuclear enrichment and funding of terrorism, they target swathes of its economy, as well as the government. No other country imposes such stringent sanctions, so, in theory, most can deal with Iran. In practice, few do so openly, as America bans its firms not just from trading with Iran, but also with foreigners that knowingly do so. It is especially tough for Iran to receive and move dollars, as every such transaction, almost anywhere in the world, must eventually be cleared by an American bank.
But our report shows that, with patchy enforcement, determination and help from a greedy partner, a country under a de facto global embargo can end up flouting it on a cosmic scale. Many of Iran’s tactics are reminiscent of those a drug cartel would use to market products and recycle proceeds into other dark enterprises, often via seemingly legitimate businesses. Iran’s subterranean oil system is governed by rules as much as by threats. The task is to construct an elaborate charade that will dupe sanctions-enforcers.
Barrelling about
Most petrostates export oil via a state-owned giant, but Iran is different. The National Iranian Oil Company (NIOC), its state oil firm, has a monopoly over production. NIOC’s Swiss-based subsidiary, Naftiran Intertrade Company (NICO), helps market oil abroad. A growing portion, though, is allocated to Iranian ministries, religious outfits and even pension funds to sell for themselves. “It’s almost medieval,” says a former American official. “The lords are being given pieces of the kingdom.”
In a country that lacks hard currency, crude is an alternative form of liquidity. Iran’s budget last year allowed the armed forces to sell $4.9bn-worth of oil. Allocations also reward loyalists: in 2022 individuals vetted by the regime were offered a combined $3.6bn of petroleum. The Islamic Revolutionary Guard Corps (IRGC), the regime’s praetorian guard, also receives a great deal of oil, often off-book. A former Iranian official says that the Quds Force, the IRGC’s foreign wing, earned $12bn from such sales in 2022.
All these entities have distinct sales channels, though NICO and the IRGC often lend their services to others. Sometimes a front company orchestrates the whole thing. According to the American Treasury, Sahara Thunder, in Iran, runs sales for the armed forces while posing as a private trading firm. Iran regularly outsources sales to a third party abroad, such as ASB, a Turkish firm, according to America’s Department of Justice. But Iran insists on guarantees. Baslam, an ASB subsidiary, transferred 51% of its shares to the Quds Force when it started working for them, according to a leaked contract between ASB and an IRGC commander.
The salesmen’s first task is to find a buyer. Even though China absorbs 95% of Iran’s crude exports, its sanctions-wary state firms do not want to touch the oil. So three or four Iranian front companies must scout the market. Documents shared by a source show that Litamos International Limited and Haosi Trade Limited did this until 2021, when both were dissolved. China has its own brokers, whose clients supply plants the state has authorised to process Iranian oil. Most are small, independent refineries, dubbed “teapots”.
Once a buyer is found, a formal agreement is signed, usually between two front companies. Given the sums—a shipment of Iranian crude can easily cost $50m-100m—business cannot work on trust. Papers specify every detail, from trial runs and inspection schedules to the size of future shipments. The price usually tracks Brent, the global oil benchmark, minus a discount of $10-30 a barrel. Accepted currencies include the dollar and, more rarely, euros, Emirati dirhams or yen.
What many contracts do not mention is the oil’s provenance, which is usually stated, falsely, to be Iraqi, Malaysian or Omani. The actual origin is often confirmed in a confidential letter, with the true nature of the export spelt in caps: IRANIAN oil.
More than 100 front companies exist to procure tankers, says a source. Many are decades-old ships flagged in Panama, a permissive harbour, and renamed to confuse trackers. The vessels start by picking up oil at one of Iran’s export terminals. To avoid attention, they often lend transponders to other ships circling the area, or use software to make it look like they are elsewhere. The ships then sail to Iraq or Oman, where their cargo may be transferred to a new vessel. Another transshipment may occur off Malaysia or Singapore, after which the cargo heads to China.
Iranian agents receive reports at every stage. Decisions are referred to senior officials, who may hide behind nicknames (“Roger”, in a recent example of an IRGC commander) in WhatsApp messages and voice notes. False certificates of origin and papers are provided throughout. Even the most secretive parts of the trips are closely managed. One checklist, shared by a source, comprised 24 questions for a transshipment off Malaysia involving Remy, now known as Wilma II, a tanker that tracking information from Kpler, a data firm, suggests has carried Iranian crude.
Sometimes things go wrong. A sale may fall through once a tanker is en route. The cargo sometimes vanishes, triggering threats of violence from IRGC commanders. Some ships are simply abandoned. Usually, though, goods are delivered without a hiccup, and within 45 days payment comes due. This is where Iran’s shadow banking system, the most impressive part of the scheme, comes into play.
Special FX
The story so far shows the extent to which Iran’s economic survival relies on China. The coming chapter underlines this dependence. Iran believes it has found a friend—its most powerful ally in an anti-Western axis. Yet China is mostly interested in a good deal. Taking advantage of Iran’s weak position, it will offer assistance so as long as it does not risk burning important bridges with America, its geopolitical rival but also its biggest trading partner. Thus it creates the perfect conditions for Iran’s smuggling to thrive, without ever appearing, officially, to be involved.
Iran’s shadow-banking system is a feat of bureaucratic brilliance. The country’s largest oil companies, including NIOC and PCC, a major petrochemical exporter controlled by the defence ministry, have big financial departments which act as banks, says a source familiar with them. These units have incorporated firms in Iran, dubbed “money exchanges”, that handle illicit foreign payments not just for oil exporters, but for large parts of Iran’s economy.
Each local exchange has created front companies (known as “trusts”), with the sole purpose of collecting and transferring money. These are based around the world. Most have monikers straight out of random-name generators: “Rainbow International Commercial Company”, say, or “Glorious Global Limited”, both of which are based in Hong Kong. The listed owner’s role is limited to liaising with local authorities and providing powers of attorney to Iranians, or Iranian agents. One former high-ranking Iranian official says around 200 Iranian nationals with dual passports oversee such companies in Europe.
When an oil exporter wants to be paid, it sends an email to its preferred exchange, stating the amount it needs to receive and from whom. The exchange then checks balances across its network to determine where it would rather have the money arrive. Next it will tell the oil firm to inform its client that they should expect an invoice from a named trust. Some payments are made in yuan that Iran recycles within China. But yuan are not convertible, and there is only so much Iran can buy from China. So Iranian firms often ask for hard currency. The same mechanism works in the other direction, too, allowing Iranian firms to pay covertly for imports.
Banks where the front companies have accounts, and which process transfers, provide Iran with access to the international financial system. Many Western experts insist that Iranian fronts are almost entirely banked by provincial Chinese lenders that do no business in the West and are therefore immune to American retribution. Bank of Kunlun, the only Chinese bank placed under Iran-linked sanctions, is registered in Xinjiang, a far-flung province. Off the record, however, some banking-compliance veterans report that big institutions are also used in this way. “There’s a lot of dollars to move,” says one.
Drawing on leaks from an Iranian oil firm, in April last year WikiIran listed the details of 218 bank accounts linked to 71 trusts it found to be managed by Amin, one of Iran’s largest money exchanges. A look at the associated database indicates that just 67 of these accounts were hosted by a small Chinese bank. Of the rest, 99 were at one of China’s top 20 banks. We ran the other account numbers through IBAN Checker, a website that verifies bank details. This indicated that 30 accounts were held in the UAE, including at the country’s two largest lenders; ten were at European banks (CBC, ING, OTP, Commerzbank and three Sparkassen, as Germany’s savings banks are known); and another five were at Turkish banks. Two were at European fintechs—Paysera and Wise—that process cross-border payments.
There is no suggestion any of the banks or fintechs knew that they were dealing with front companies acting on behalf of Iran, and nothing in the documents indicates that they did know. In response to emails from The Economist, CBC and Wise said they could not comment on individual accounts. ING said it launched an internal investigation last year that revealed transactions with entities mentioned on WikiIran and resulted in the closure of accounts at its Belgian unit. OTP said the relevant accounts were closed in August 2019.
Documents we obtained show that, at least at one point since 2021, front companies facilitating or soliciting payments linked to Iran’s oil trade have had accounts at Citibank in Hong Kong, HSBC in Hong Kong and China’s top four banks. Again there is no suggestion that the banks knew they were dealing with front companies acting on behalf of Iran, and nothing in the documents indicates that they did know. (Citi said it found no record of the alleged transaction. HSBC did not reply in time for publication.)
Our investigation nevertheless suggests that a number of front companies are successfully evading screening methods used by banks. Most such accounts, and many of those previously mentioned, are denominated in dollars; others are in euros. Transaction receipts show Iranian fronts use some global lenders as “correspondents”—international banks that clear smaller banks’ foreign-currency transactions through big financial centres.
Chinese banks are often used at the start of a petrodollar’s odyssey. This is where the buyers of oil have their money and arranging a domestic transfer is more discreet than sending the money abroad. The opacity of China’s banking system then allows Iran’s exchanges to shuffle money around on the mainland with less scrutiny. For local bankers, it is akin to “any other type of commodity business”, says Justine Walker of the Association of Certified Anti-Money Laundering Specialists.
Big Chinese banks have another attraction: subsidiaries in Hong Kong, where China’s closed money loop meets global finance. The territory is home to the only sizeable dollar-clearing system outside America. USD CHATS, powered by accounts that banks fund with dollars, allows members to transact with each other in greenbacks without involving institutions in America. All international banks with decent business in Asia, including nine of China’s ten largest, use it. Neither they nor HSBC, which runs the system, are required to report transactions to Uncle Sam.
Under a deal with America, Hong Kong banks must still check that payments they route through CHATS comply with American sanctions, even though Hong Kong does not enforce them. But the fact that America cannot monitor transactions gives room for manoeuvre, says David Asher of the Hudson Institute, a think-tank. Last year the system processed an average of $60bn in payments a day, a volume that makes dubious transactions hard to spot.
Later in their journey Iran’s funds may move via other financial hubs. Documents leaked to WikiIran suggest that, prior to May, the Dubai branch of Banque Misr, an Egyptian bank, hosted as many as 38 front companies used by the finance arm of PCC, the petrochemicals exporter. (Once again, the documents do not indicate it did so knowingly. Bank Misr did not reply to our queries in time for publication.) Exchanges use the UAE to shift money between trusts in order to keep accounts balanced, often after converting dollars into dirhams, a source explains. Wads of banknotes shuttle between banks. Some exchanges maintain “cash lockers” to top up accounts.
Phantom finance
At many banks hosting front companies, signs that should raise red flags are not picked up, say sources. The registered owners may be Filipino or Indian nationals with unsuitable qualifications. On inspection, the accounts’ behaviour may look strange, with the company receiving money from oil trades and making payments for unconnected things. A source familiar with NIOC says that banks which knowingly work with Iran can earn commission of up to 15% of the value of transfers.
Where does the money end up? Some funds stay in or flow back to Asia, the source of many Iranian imports, including weapon parts. Others are hidden in the Levant, where they pay wages for Hamas, Houthi and Hizbullah fighters. Sometimes the money is stored in less obvious places—such as bank branches in Budapest or Aachen, a spa city bordering Germany’s Eifel mountains. London is the world’s sixth-biggest base by number of Iranian-linked entities blacklisted by America.
Iran’s money exchanges keep track by maintaining internal ledgers: huge spreadsheets netting out debits and credits across hundreds of trusts. Their clients—the Iranian companies—settle positions by buying or selling virtual dollars via an online platform, called NIMA, usually at subsidised exchange rates. Although the hard currency stays offshore, it is ultimately the property of Iran’s central bank, which runs NIMA. The bank has its own meta-spreadsheet to record the virtual reserves it is holding abroad, says someone familiar with how the country runs its books.
The system is costly. Inclusive of discounts, rewards for intermediaries and financial fees, Iran receives 30-50% less currency than it would in an open market, estimates a source. Trustees of front companies sometimes disappear with the till.
This wasteful complexity, however, also makes the network resilient. Although American enforcers have unmasked hundreds of Iran-linked firms, new ones quickly crop up. Emails between bosses at PCC show that in 2022, when hundreds of trust accounts were exposed, it took just a few months for the firm to exfiltrate the money and replace most of them. Forcing banks to screen Iranian fronts more diligently, perhaps by punishing egregious cases, could have more impact. Despite warnings that it might do so, the Biden administration is yet to blacklist a single bank.
Proponents of such half-baked enforcement say it does not matter. Sanctions, they argue, are achieving their goal: reducing the revenue Iran earns from sales without hurting global oil supply. The problem is that costs are largely borne by Iranian households, which face double-digit inflation, and independent merchants, who lack the connections to secure imports. Meanwhile, regime loyalists profit and amass missiles, as the country grows closer to building nuclear weapons. Iran’s laundromat is an affront to the West, a boon to China—and a menace to the world." [1]
1. How to defy America. The Economist; London Vol. 453, Iss. 9419, (Oct 19, 2024): 67, 68, 69, 70.
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